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index drops a specified amount from a print high or low. A break-even stop is exactly what it sounds like. If your trade drops to your entry price, it takes you out of the trade. A break-even stop should be used in conjunction with other stops because if you haven't moved above your entry price, the stop will never be triggered. A trailing % stop is the same as a trailing stop, but it uses a % instead of a specific point amount. All of these types of stops have advantages and disadvantages. You must carefully weigh the system or method you use for trading to determine the type or types of stops that will work. |
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Neal: I know, Doug, that you also trade options. Why? |
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Doug: Leverage is why we trade options in the first place. For those of you who have been following us for a while, you know that we tend to recommend the current month expiration options that cluster around $5. Why do we do this? |
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Over the years, we've learned that our best trades come from the options that have the highest volume. Volume serves several functions. Number 1, it provides us liquidity or a market for our options. Number 2, it provides us with the leverage to overcome the natural tendency of options to lose value over time, or time premium. Number 3, it gives us a fair playing field. The more active an option is, the smaller the spread between the bid and ask, and thus the less likely we are to get a bad fill. Many novice traders are under the misconception that buying options out two or three months will give them safety. In reality, the only way to overcome the deterioration of time premium is to shorten your holding period. As you get closer to expiration, your leverage increases dramatically, as does your risk. As long as you are managing your trades properly, with good money management, your risk/reward far outweighs the inherent risk of trading an option that is expiring soon. |
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Neal: You cannot use a system to trade options, or can you? |
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