Options Trading Zero Sum Game

Juego de suma cero ¿Qué es un juego de suma cero? La suma cero es una situación en la teoría de juegos en la que una persona gana es equivalente a otra pérdida, por lo que el cambio neto en riqueza o beneficio es cero. Un juego de suma cero puede tener tan sólo dos jugadores, o millones de participantes. Los juegos de suma cero se encuentran en la teoría de juegos, pero son menos comunes que los juegos de suma no cero. El poker y el juego son ejemplos populares de juegos de suma cero, ya que la suma de las cantidades ganadas por algunos jugadores equivale a las pérdidas combinadas de los otros. Juegos como ajedrez y tenis, donde hay un ganador y un perdedor, también son juegos de suma cero. En los mercados financieros, las opciones y los futuros son ejemplos de juegos de suma cero, excluyendo los costos de transacción. Para cada persona que gana en un contrato, hay una contraparte que pierde. VIDEO Carga del reproductor. ROMPENDO Juego de suma cero En la teoría de juegos, el juego de los centavos a juego se cita a menudo como ejemplo de un juego de suma cero. El juego involucra a dos jugadores, A y B, colocando simultáneamente un penique sobre la mesa. La recompensa depende de si los peniques coinciden o no. Si ambos centavos son cabezas o colas, el jugador A gana y mantiene al jugador Bs centavo si no coinciden, el jugador B gana y mantiene al jugador como penique. Este es un juego de suma cero porque una ganancia de los jugadores es la pérdida de otros. Los pagos para los Jugadores A y B se muestran en la tabla de abajo, con el primer numeral en las celdas (a) a (d) que representa la recompensa del Jugador como, y el segundo jugador numeral de los Jugadores Bs. Como puede verse, el desempate combinado para A y B en las cuatro celdas es cero. La mayoría de otras estrategias populares de la teoría del juego como el dilema de los presos. Competición de Cournot. Centipede Game y Deadlock son sumas no nulas. Los juegos de suma cero son lo opuesto a las situaciones de ganar-ganar, como un acuerdo comercial que aumenta significativamente el comercio entre dos naciones o situaciones de pérdida-pérdida, como la guerra, por ejemplo. En la vida real, sin embargo, las cosas no siempre son tan claras, y las ganancias y pérdidas son a menudo difíciles de cuantificar. Una idea falsa común sostenida por alguno es que el mercado de acción es un juego de la suma cero. No es así, ya que los inversionistas pueden subirse o bajar los precios de las acciones dependiendo de numerosos factores, como las perspectivas económicas, las previsiones de ganancias y las valoraciones, sin una sola acción cambiando de manos. En última instancia, el mercado de valores está inextricablemente vinculado a la economía real, y ambos son herramientas poderosas de creación de riqueza en lugar de juegos de suma cero. Teoría de juegos de cero-suma La teoría de juegos es un complejo estudio teórico en economía. La teoría de los juegos y el comportamiento económico de 1944, escrita por el matemático norteamericano húngaro John von Neumann y co-escrita por Oskar Morgenstern, es el texto fundacional. La teoría de juegos es el estudio de la toma de decisiones estratégicas entre dos o más partes inteligentes y racionales. La teoría, cuando se aplica a la economía, utiliza fórmulas matemáticas y ecuaciones para predecir los resultados en una transacción, teniendo en cuenta muchos factores diferentes, incluyendo ganancias, pérdidas, optimalidad y comportamientos individuales. La teoría de juegos se puede utilizar en una amplia gama de campos económicos, incluyendo la economía experimental. Que utiliza experimentos en un entorno controlado para probar las teorías económicas con una visión más real del mundo. En teoría, el juego de suma cero se resuelve a través de tres soluciones, quizás la más notable de las cuales es el Equilibrio de Nash. Presentado por John Nash en su 1951 papel Non-Cooperative Games. El equilibrio de Nash afirma que dos o más oponentes en el juego, dado el conocimiento de las opciones de cada uno y que no recibirán ningún beneficio de cambiar su elección, por lo tanto, no se desvían de su elección. Zero-Sum Game amp Economics Cuando se aplica específicamente a la economía hay múltiples factores a considerar cuando se entiende un juego de suma cero. Juego de suma cero supone una versión de competencia perfecta y la información perfecta que es, los dos opositores en el modelo tienen toda la información pertinente para tomar una decisión informada. Para dar un paso atrás, la mayoría de las transacciones o operaciones son intrínsecamente juegos de suma cero porque cuando dos partes acuerdan comerciar lo hacen con el entendimiento de que los bienes o servicios que están recibiendo son más valiosos que los bienes o servicios que están negociando para Después de los costos de transacción. Esto se llama suma positiva, y la mayoría de las transacciones caen bajo esta categoría. El comercio de opciones y futuros es el ejemplo práctico más cercano a un escenario de juego de suma cero. Opciones y futuros son básicamente apuestas informadas sobre lo que el precio futuro de un determinado producto será en un plazo estricto. Si bien esto es una explicación muy simplificada de opciones y futuros, generalmente si el precio de ese producto sube (generalmente contra las expectativas del mercado) dentro de ese plazo, puede vender el contrato de futuros con un beneficio. Por lo tanto, si un inversor hace dinero fuera de esa apuesta, habrá una pérdida correspondiente. Esta es la razón por la que los futuros y las opciones de comercio a menudo viene con renuncias a no ser realizada por los operadores inexpertos. Sin embargo, los futuros y las opciones proporcionan liquidez para los mercados correspondientes y pueden ser muy exitosos para el inversor o la empresa adecuada. Es importante tener en cuenta que el mercado de valores en general se considera a menudo un juego de suma cero, que es un error, junto con otros malentendidos populares. Históricamente y en la cultura contemporánea el mercado de valores es a menudo equiparado con el juego, que es definitivamente un juego de suma cero. Cuando un inversor compra una acción, es una parte de la propiedad de una empresa que da derecho a ese inversor a una fracción de los beneficios de la empresa. El valor de una acción puede subir o bajar dependiendo de la economía y una serie de otros factores, pero en última instancia, la propiedad de ese stock eventualmente resultará en un beneficio o una pérdida que no se basa en el azar o la garantía de alguien más pérdida . En contraste, el juego significa que alguien gana el dinero de otro que lo pierde. Hay otros mitos sobre el mercado de valores, algunos de los cuales incluyen: la caída de las acciones deben subir de nuevo en algún momento y las acciones que suben debe bajar, así como que el mercado de valores es exclusivamente para los muy ricos. Cero juego de la suma La mayoría de la gente considera las opciones de comercio para ser un juego de suma cero. Cuando usted hace un comercio, alguien toma el otro lado y cuando uno de ustedes gana, el otro pierde una cantidad igual. De esa definición es difícil argumentar que el término lsquozero suma gamersquo no se aplica a las opciones, ya la negociación en general. Sin embargo, sí hago ese argumento. Un beneficio en acciones Cuando un comerciante decide vender una participación específica cuando sube a 75 por acción, el comerciante puede hacer una parada mental, o entrar en una orden de venta de GTC (bueno rsquotil cancelado) con su corredor. Cuando la acción se vende, el comerciante está feliz con el resultado. Claro que la acción puede moverse más alto, y se puede argumentar que nuestro comerciante lsquolostrsquo dinero por la venta y que el lsquobuyerrsquo hizo dinero. Con este punto de vista, el comercio es un juego de suma cero. Irsquoll admite que el comprador ganó dinero, pero no a expensas del vendedor. Prefiero mirarlo de esta manera: Nuestro comerciante ganó el beneficio que esperaba ganar, y cuando eso sucedió, él voluntariamente transfirió la propiedad de las acciones a otro comerciante. Una vez que la posición está fuera de la cuenta, el comerciante no hace ni pierde nada. Cualquier cambio en el valor stockrsquos afecta solamente al nuevo propietario. No hay pérdida correspondiente por parte del comerciante que vendió las acciones. Un comerciante hizo una salida elegante, aceptó un beneficio, y ahora un comerciante diferente tiene una nueva inversión. Las opciones son diferentes La mayoría del mundo mira las opciones de manera diferente. Pero yo donrsquot. Si compro una opción de compra y gano un beneficio vendiendo a un precio más alto, no hay razón para creer que el vendedor tomó una pérdida correspondiente a mi ganancia. El vendedor puede haber cubierto el juego y ganado un beneficio aún mayor que yo. La idea de que las opciones representan un juego de suma cero supone que todos los oficios son juegos independientes y que si se beneficia, la otra persona debe haber perdido. Al igual que nuestro comerciante arriba decidió que la transferencia de la propiedad de las acciones a otro inversor sería una buena idea en 75 / share, también lo hace el escritor de llamadas cubiertas. Cuando vendo una llamada cubierta, estoy emocionado cuando la acción rallyes muy por encima del precio de ejercicio. Significa que ganaré mi beneficio deseado. Mejor que ese mdash si la gran manifestación viene pronto, podré salir del comercio con quizás 90 de mi objetivo de efectivo. ¿Por qué es tan bueno cuando los últimos 10 se sacrifica debido al tiempo. Si aún quedan muchas semanas antes de que llegue el día de vencimiento, puedo reinvertir mi dinero en otra posición y usar el mismo dinero para ganar aún más que 10 que queda en la mesa. Puede ser cierto que la persona que compró mi llamada anotó un gran triunfo (si el comercio no fue cubierto), pero thatrsquos no mi pérdida. De hecho, fue mi ganancia adicional (en el escenario presentado). Las opciones fueron diseñadas para transferir el riesgo. En el ejemplo de la llamada cubierta, el vendedor aceptó efectivo para ayudar a alcanzar el beneficio objetivo. Al hacerlo, él / ella voluntariamente tomó efectivo para limitar el potencial de ganancias del comercio. Sin embargo, el punto es que no había ningún beneficio potencial para ser sacrificado. El vendedor de la llamada habría vendido el stock al precio de ejercicio (75) y ganado menos beneficio que el escritor de la cubierta de la llamada, que recogió 75 además de la prima de la opción. El comprador de la opción tomó en el riesgo limitado. Si la acción no subió lo suficientemente lejos o lo suficientemente rápido, que el comprador habría ganado una pérdida. No veo nada parecido a un juego de suma cero en transacciones de opciones cubiertas. Entiendo que otros lo ven como blanco y negro: Si uno ganó, el otro perdió. Pero eso es una simplificación excesiva. Sigue a Mark Wolfinger en su lsquoOptions para Rookiesrsquo blog. mdwoptions Artículo impreso desde InvestorPlace Media, investorplace / 2011/04 / are-options-a-zero-sum-game /.Debunking El mito de la opción de comercio de cero suma Hay una urbana Mito en el comercio de opciones que probablemente es tan antiguo como el propio CBOE: a menudo se dice que el comercio de opciones es un juego de suma cero. En otras palabras, si alguien gana, alguien tiene que perder, derecho Bueno, no. Es verdad que el stock o la opción o el futuro o lo que sea ir hacia arriba o hacia abajo, y sólo uno de nosotros puede estar en lo cierto. Pero eso supone que cada uno de nosotros no hace otra cosa al lado. Vamos a ver algunos escenarios en un comercio de opciones típicas de una acción subyacente. Mito Buster Uno Diga que usted compra una llamada, lo que significa que el creador de mercado le vende la llamada. Si la acción sube, usted hace el dinero y el fabricante del mercado pierde el dinero, derecho derecho. Pero hay más. Cuando un creador de mercado le vende esa llamada, él o ella puede optar por cubrirla inmediatamente comprando la acción para cubrir la llamada corta. Ahora, usted sigue siendo largo la llamada, pero el fabricante de mercado es corto la llamada y ahora de largo la acción. Supongamos que la acción sube, y su llamada sube en valor también. El creador de mercado que corta esa llamada está perdiendo dinero, pero está ganando dinero con la acción larga. Es posible que el beneficio de la acción larga exceda la pérdida en la llamada corta. En ese caso, ganar dinero en su posición, y el creador de mercado hace dinero en su posición, también. En este caso, ambos pueden ganar. Mito Buster Dos dicen que la población baja. El creador de mercado es una llamada corta, y hace dinero en eso porque ella mantiene la prima recibida cuando ella vendió la llamada. Pero también es larga, y pierde dinero en esa cantidad, probablemente más de lo que hizo en la llamada corta. Usted es dueño de esa larga llamada, y usted pierde cuando la acción cae. En este caso, ambos pierden. La diferencia es que el creador de mercado comenzó con lo contrario del comercio que tenía, pero lo cambió en algo más. Una advertencia Por lo tanto, el mercado de opciones no es realmente un juego de suma cero cuando se mira a dos comerciantes independientes que toman lados opuestos de un comercio. Cada uno puede cubrir o ajustar su posición sin que el otro comerciante haga nada. La belleza de las opciones de negociación es que usted puede tomar decisiones de inversión basadas en noticias de mercado, volatilidad, tiempo de vencimiento, movimientos subyacentes, y así sucesivamente, y / o crear diferentes estrategias de opciones para cubrir su comercio o posición inicial en cualquier momento. Si hay una cobertura involucrada en el lado quotloserquot de un comercio, y el resultado neto es una victoria, dos comerciantes pueden net out como ganadores, y el argumento de suma cero sale por la ventana. Sin embargo, si usted mira a todos los comerciantes e inversores por ahí en conjunto, el comercio se convierte en un juego de suma cero. Cuando el fabricante del mercado compra la acción como una cobertura contra su llamada corta, alguien más está vendiendo ese stock a ella. Si la acción sube, la persona que vendió la acción pierde en las ganancias. Por lo tanto, la teoría de la suma cero funciona para el gran esquema de los mercados, pero no necesariamente en el nivel de comerciante contra comerciante. ¿Dónde te deja esto? Elige tus oficios cuidadosamente y asegúrate de que tengan sentido para ti. Considere los cobertores adecuados con sus operaciones de opciones, y dejar que la gente se preocupe de sus propias ratios de ganancias / pérdidas. Sólo tienes que preocuparte por el tuyo. Esta pieza fue originalmente publicada aquí por Rachel Koning Beals el 19 de marzo de 2015. Una opción de opción de compra o de opción larga coloca el costo total de la posición de opción en riesgo. Si una llamada individual larga o una posición de largo plazo expiran sin valor, el costo total de la posición se perdería. Los diferenciales y otras estrategias de opción de opción múltiple pueden implicar costos de transacción sustanciales, incluyendo comisiones múltiples, que pueden afectar cualquier retorno potencial. Un rollover no es su única alternativa cuando se trata de planes de jubilación antiguos. Por favor, haga clic aquí para obtener más información sobre alternativas de refinanciación. El comercio de opciones de futuros y futuros es especulativo y no es adecuado para todos los inversores. Por favor lea la información sobre el riesgo para futuros y opciones antes de negociar productos futuros. La volatilidad del mercado, el volumen y la disponibilidad del sistema pueden retrasar el acceso a la cuenta y las ejecuciones comerciales. El desempeño pasado de un valor o estrategia no garantiza resultados futuros ni éxitos. Las opciones no son adecuadas para todos los inversores, ya que los riesgos especiales inherentes al comercio de opciones pueden exponer a los inversores a pérdidas potencialmente rápidas y sustanciales. Comercio de opciones sujeto a revisión y aprobación de TD Ameritrade. Por favor lea Características y Riesgos de Opciones Estandarizadas antes de invertir en opciones. Documentación de apoyo para cualquier reclamación, comparaciones, estadísticas u otros datos técnicos serán suministrados a petición. La información no pretende ser un asesoramiento de inversión ni interpretarse como una recomendación o aprobación de ninguna inversión o estrategia de inversión en particular, y es sólo con fines ilustrativos. Asegúrese de entender todos los riesgos involucrados con cada estrategia, incluyendo los costos de comisión, antes de intentar colocar cualquier operación. Los clientes deben considerar todos los factores de riesgo relevantes, incluyendo sus propias situaciones financieras personales, antes de negociar. Miembro de TD Ameritrade, Inc. FINRA / SIPC. TD Ameritrade es una marca de propiedad conjunta de TD Ameritrade IP Company, Inc. y The Toronto-Dominion Bank. Copiar 2015 TD Ameritrade IP Company, Inc. Todos los derechos reservados. Se utiliza con permiso. Copia 2016 Benzinga. Benzinga no proporciona asesoramiento de inversión. Todos los derechos reservados. Debunking el mito de la opción-comercio de la suma cero Theres un mito urbano en el comercio de las opciones que es probablemente tan viejo como el CBOE sí mismo: Su dicho a menudo que el negociar de las opciones es un juego de la suma cero. En otras palabras, si alguien gana, alguien tiene que perder, derecho Bueno, no. Es cierto que el stock o opción o futuro o lo que sea subir o bajar, y sólo uno de nosotros puede estar en lo cierto. Pero eso supone que cada uno de nosotros no hace algo más en el lado. Veamos algunos escenarios en un comercio de opciones típicas de una acción subyacente. Mito Buster Uno Diga que usted compra una llamada, lo que significa que el creador de mercado le vende la llamada. Si la acción sube, usted hace el dinero y el fabricante del mercado pierde el dinero, derecho derecho. Pero theres más a ella. Cuando un creador de mercado le vende esa llamada, él o ella puede optar por cubrirla inmediatamente comprando la acción para cubrir la llamada corta. Ahora, youre aún larga la llamada, pero el creador de mercado es corto la llamada y ahora el stock largo. Vamos a suponer que el stock sube, y su llamada sube en valor también. El creador del mercado que corta esa llamada está perdiendo dinero en él, pero está haciendo el dinero en la acción larga. Es posible que el beneficio de la acción larga exceda la pérdida en la llamada corta. En ese caso, ganar dinero en su posición, y el creador de mercado hace dinero en su posición, también. En este caso, ambos pueden ganar. Mito Buster Dos Digamos que la población se cae. El creador de mercado es una llamada corta, y hace dinero en eso porque ella mantiene la prima recibida cuando ella vendió la llamada. Pero también es larga, y pierde dinero en eso, probablemente más de lo que hizo en la llamada corta. Usted es dueño de esa llamada larga, y usted pierde cuando la acción cae. En este caso, ambos pierden. La diferencia es que el creador de mercado comenzó con lo contrario del comercio que tenía, pero lo cambió en algo más. Una advertencia Por lo tanto, el mercado de opciones no es realmente un juego de suma cero cuando se mira a dos comerciantes independientes que toman lados opuestos de un comercio. Cada uno puede cubrir o ajustar su posición sin que el otro comerciante haga nada. La belleza de las opciones de negociación es que usted puede tomar decisiones de inversión basadas en noticias de mercado, volatilidad, tiempo de vencimiento, movimientos subyacentes, y así sucesivamente, y / o crear diferentes estrategias de opciones para cubrir su comercio o posición inicial en cualquier momento. Si hay una cobertura involucrada en el lado perdedor de un comercio, y el resultado neto es una victoria, dos comerciantes pueden net out como ganadores, y el argumento de suma cero sale por la ventana. Sin embargo, si usted mira a todos los comerciantes e inversores por ahí en conjunto, el comercio se convierte en un juego de suma cero. Cuando el fabricante del mercado compra la acción como una cobertura contra su llamada corta, alguien más está vendiendo ese stock a ella. Si la acción sube, la persona que vendió la acción pierde en las ganancias. Por lo tanto, la teoría de la suma cero funciona para el gran esquema de los mercados, pero no necesariamente en el nivel de comerciante versus comerciante. ¿Dónde te deja esto? Elige tus oficios cuidadosamente y asegúrate de que tengan sentido para ti. Considere los cobertores adecuados con sus operaciones de opciones, y dejar que la gente se preocupe de sus propias ratios de ganancias / pérdidas. Sólo tienes que preocuparte por el tuyo. Comience a estar cómodo con las opciones Trade Architect ayuda a las nuevas opciones que los inversionistas exploran estrategias con flujos, gráficos y más personalizables. Opción Inconcebible Guía de Estrategia de Negociación: El Mundo de Opciones Opciones de Negociación: No es un Juego de Cero-Suma Con la posible excepción de los contratos de futuros, el comercio no es un juego de suma cero. En otras palabras, para cada ganador no hay que ser un perdedor. Por lo tanto, debido a que hay tantas combinaciones diferentes y maneras en que las opciones pueden protegerse entre sí, no tiene sentido mirar las cifras globales (por ejemplo, el número de opciones que caducan sin valor) y llegar a conclusiones sobre cuántas personas hicieron o perdieron dinero. Para simplificar, vamos a tomar el caso de una propagación. El hecho de que una persona haya ganado dinero comprando una mariposa no significa automáticamente que alguien perdió. En cambio, la persona que vendió la mariposa puede haber negociado fuera de la posición utilizando spreads o mediante la venta de opciones individuales. Para cada persona que sea larga una mariposa, la llamada separada, puesta la extensión, o lo que, no hay necesariamente la gente que es corta la posición correspondiente. Como tal, la rentabilidad de sus posiciones necesariamente será diferente. Conozca su competencia En muchos aspectos, el comercio de opciones es un juego de estrategia no muy diferente a los deportes competitivos o los torneos de ajedrez. La principal diferencia es que en el comercio hay más jugadores y múltiples agendas. Para tener éxito, es importante tener un conocimiento y apreciación de los otros jugadores. En términos generales, usted debe obtener una apreciación de la conducta y las motivaciones de los diferentes jugadores. En los mercados de opción, los jugadores se dividen en cuatro categorías: Los Intercambios Instituidores Financieros Inversores Individuales (Minoristas) Lo que sigue es una breve descripción de cada grupo junto con información sobre sus objetivos comerciales y estrategias. El intercambio es un lugar en el que los creadores de mercado y los comerciantes se reúnen para comprar y vender acciones, opciones, bonos, futuros y otros instrumentos financieros. Desde 1973, cuando el Chicago Board Options Exchange comenzó a negociar opciones, varios otros jugadores han surgido. Al principio, los intercambios mantenían listas separadas y por lo tanto no negociaban los mismos contratos. En los últimos años esto ha cambiado. Ahora que la EEB y NSE ambos intercambios de la lista y el comercio de los mismos contratos, que compiten entre sí. Sin embargo, aunque una acción puede ser enumerada en intercambios múltiples, un intercambio maneja generalmente la mayor parte del volumen. Esto sería considerado el cambio dominante para esa opción particular. La competencia entre los intercambios ha sido especialmente valiosa para los operadores profesionales que han creado programas informáticos complejos para supervisar las discrepancias de precios entre los intercambios. Estas discrepancias, aunque pequeñas, pueden ser extraordinariamente rentables para los comerciantes con la capacidad y la velocidad para aprovechar. Más a menudo que no, los comerciantes profesionales simplemente utilizan múltiples intercambios para obtener los mejores precios en sus operaciones. Decidir entre los dos sería simplemente una cuestión de elegir el intercambio que hace más comercio en este contrato. Cuanto más volumen el intercambio hace, más líquido el contrato. Mayor liquidez aumenta la probabilidad de que el comercio se llenan al mejor precio. Las instituciones financieras son las empresas de gestión de inversión pbrofessional que suelen caer en varias categorías principales: fondos mutuos, fondos de cobertura, compañías de seguros, fondos de acciones. En cada caso, estos administradores de dinero controlan grandes carteras de acciones, opciones y otros instrumentos financieros. Aunque las estrategias individuales difieren, las instituciones comparten el mismo objetivo: superar al mercado. En un sentido muy real, su sustento depende del rendimiento porque los inversores que componen cualquier fondo tienden a ser un grupo inconstante. Cuando el fondo no realiza, los inversionistas son a menudo rápidos mover el dinero en busca de retornos más altos. Donde los inversionistas individuales podrían ser más propensos a negociar opciones de acciones relacionadas con acciones específicas, los administradores de fondos usan a menudo opciones de índice para aproximar mejor sus carteras globales. Por ejemplo, un fondo que invierte fuertemente en una amplia gama de acciones tecnológicas usará las opciones NSE Nifty Index en lugar de opciones separadas para cada acción de su cartera. Teóricamente, el desempeño de este índice estaría relativamente cerca del desempeño de un subconjunto de acciones de alta tecnología comparables que el administrador del fondo podría tener en su cartera. Los creadores de mercado son los comerciantes en el piso de los intercambios que crean liquidez al proporcionar mercados de dos caras. En cada contador, la competencia entre los creadores de mercado mantiene el diferencial entre la oferta y la oferta relativamente estrecho. Sin embargo, es el spread que compensa parcialmente a los creadores de mercado por el riesgo de tomar voluntariamente ambos lados de un comercio. Para los creadores de mercado, la situación ideal sería el cuero cabelludo de todos los comercios. Más a menudo que no, sin embargo, los creadores de mercado no se benefician de un flujo sin fin de oficios perfectamente compensar el cuero cabelludo. Como resultado, tienen que encontrar otras formas de obtener beneficios. En general, hay cuatro técnicas de negociación que caracterizan cómo diferentes fabricantes de mercado negocian opciones. Cualquiera o todas estas técnicas pueden ser empleadas por el mismo creador de mercado, dependiendo de las condiciones de operación. Los comerciantes de día Los comerciantes de teóricos Los comerciantes de día, dentro o fuera de la pantalla de negociación, tienden a utilizar pequeñas posiciones para capitalizar en el movimiento del mercado intra-día. Dado que su objetivo no es mantener una posición por períodos prolongados, los comerciantes de día en general no cubrir opciones con el stock subyacente. Al mismo tiempo, tienden a preocuparse menos por el delta, el gamma y otros aspectos altamente analíticos del precio de las opciones. Al igual que su nombre indica, los vendedores premium tienden a concentrar sus esfuerzos vendiendo opciones de alto precio y aprovechando el factor de decaimiento del tiempo al comprarlos más tarde a un precio más bajo. Esta estrategia funciona bien en ausencia de grandes e inesperadas oscilaciones de precios, pero puede ser extremadamente riesgoso cuando la volatilidad se dispara. Al igual que otros fabricantes de mercado, los comerciantes dispersos a menudo terminan con posiciones grandes, pero llegan allí centrándose en los diferenciales. De esta manera, incluso la mayor de las posiciones será algo naturalmente cubierto. Difundir los comerciantes emplean una variedad de estrategias de compra de ciertas opciones y la venta de otros para compensar el riesgo. Algunas de estas estrategias, como reversiones, conversiones y cajas, son utilizadas principalmente por los comerciantes de piso porque aprovechan las discrepancias de precios menores que a menudo sólo existen durante segundos. Sin embargo, los comerciantes de la extensión utilizarán estrategias como las mariposas, los cóndores, los spreads de la llamada, y los spreads puestos que pueden ser utilizados muy con eficacia por los inversionistas individuales. Al hacer fácilmente los mercados de dos caras, los fabricantes de mercado a menudo se encuentran con opciones de opciones sustanciales a través de una variedad de meses y precios de ejercicio. Lo mismo ocurre con los comerciantes teóricos que usan modelos matemáticos complejos para vender opciones que están sobrevaloradas y compran opciones que están relativamente subestimadas. De los cuatro grupos, los comerciantes teóricos son a menudo los más analíticos en que están constantemente evaluando su posición para determinar los efectos de los cambios en el precio, la volatilidad y el tiempo. A medida que aumenta el volumen de la opción, el papel de los inversores individuales se vuelve más importante porque representan más de 90 del volumen. Eso es especialmente impresionante cuando se considera que el volumen de la opción en febrero de 2000 fue de 56,2 millones de contratos-un asombroso aumento de 85 en febrero de 1999 La psicología del inversor individual Desde el punto de vista psicológico, los inversores individuales están en grupo interesante porque probablemente hay tantas estrategias y objetivos Ya que hay individuos. Para algunos, las opciones son un medio para generar ingresos adicionales a través de estrategias relativamente conservadoras como las llamadas cubiertas. Para otros, las opciones en forma de protecciones ofrecen una excelente forma de seguro para bloquear los beneficios o evitar pérdidas de nuevas posiciones. Más individuos tolerantes al riesgo usan opciones para el apalancamiento que proporcionan. Estas personas están dispuestas a negociar opciones para obtener un gran porcentaje de ganancias, incluso sabiendo que toda su inversión puede estar en juego. En cierto sentido, tomar una posición en el mercado automáticamente significa que usted está compitiendo con un sinnúmero de inversores de las categorías descritas anteriormente. Si bien eso puede ser cierto, evitar hacer comparaciones directas cuando se trata de sus resultados comerciales. La única persona con la que debe competir es usted mismo. Siempre y cuando usted está aprendiendo, mejorando, y divertirse, no importa cómo el resto del mundo está haciendo. Los comerciantes profesionales (conocidos en la industria como creadores de mercado o operadores del mercado), a menudo piensan que para el inversor principiante, el comercio de opciones debe parecer similar a la elaboración de un rompecabezas sin la ayuda de una imagen. Usted puede encontrar la imagen si usted sabe dónde buscar. Mirar a través de los ojos de un fabricante de mercado profesional es una de las mejores maneras de aprender sobre las opciones de comercio en condiciones reales del mercado. Esta experiencia le ayudará a entender cómo los cambios en el mundo real en las variables de fijación de precios de opciones afectan un valor de opciones y los riesgos asociados con esa opción. Además, debido a que los creadores de mercado son esencialmente responsables de lo que el mercado de opciones parece, usted necesita estar familiarizado con su papel y las estrategias que utilizan para regular un mercado líquido y asegurar su propio beneficio. Vamos a proporcionar una visión general de las prácticas de los creadores de mercado y explorar su mentalidad como los arquitectos de la opción de negocio. En primer lugar, vamos a considerar la logística de las responsabilidades de los creadores de mercado. ¿Cómo responden los creadores de mercado a la oferta y la demanda para asegurar un mercado líquido? ¿Cómo se evalúa el valor de una opción basada en las condiciones y demandas del mercado? En la segunda parte de este capítulo, consideraremos los objetivos de un creador de mercado. ¿Cómo se hace el mercado como cualquier otro negocio? ¿Cómo un ganador del mercado de ganancias ¿Qué significa para cubrir una posición, y cómo un fabricante de mercado utilizar cobertura para minimizar el riesgo Quiénes son los creadores de mercado La imagen de un terminal de comercio electrónico no es desconocido para el Imaginación india, pero mucha gente no puede saber quiénes son los jugadores detrás de la pantalla. Los fabricantes de mercado, los corredores, los gestores de fondos, los comerciantes minoristas y los inversores ocupan terminales comerciales en toda la India. Miles de terminales comerciales en 250 ciudades de la India se combinan, que representan el mercado para el comercio de opciones. El propio intercambio proporciona la ubicación, el órgano regulador, la tecnología informática y el personal necesarios para apoyar y supervisar la actividad comercial. Se dice que los creadores de mercado hacen realmente el mercado de opciones, mientras que los corredores representan las órdenes públicas. En general, los creadores de mercado pueden hacer que los mercados suban 30 o más emisiones y compitan entre sí para las órdenes de compra y venta de clientes en esas emisiones. Los fabricantes de mercado comercian con su propio capital o comercio para una empresa que les suministra capital. La actividad de los creadores de mercado, que se realiza cada vez más a través de la ejecución de la computadora, representa la unidad central de procesamiento de la industria de la opción. Si consideramos el cambio como la espina dorsal de la industria, la acción en las oficinas de corretaje de Mumbais representa el cerebro de la industria y la industria, el corazón. Como un catalizador para el comercio y un especulador en su propio derecho, el rol de los creadores de mercado en la industria vale la pena un examen más detallado. Comerciante individual versus fabricante de mercado La evaluación de un valor de opciones por los comerciantes individuales y los creadores de mercado, respectivamente, es la base del comercio de opciones. El comerciante y el fabricante del mercado igualmente compran y venden los productos que prevean como provechosos. Desde esta perspectiva, no existe diferencia entre un creador de mercado y el operador de opción individual. Más formalmente, sin embargo, la diferencia entre usted y el creador de mercado es responsable de crear la industria de opciones, tal como la conocemos. Esencialmente, los creadores de mercado son profesionales, comerciantes de opción de gran volumen cuyo propio comercio sirve al público mediante la creación de liquidez y profundidad en el mercado. Diariamente, los creadores de mercado representan hasta la mitad de todo el volumen de operaciones de opciones, y gran parte de esta actividad es responsable de crear y asegurar un mercado bilateral formado por las mejores ofertas y ofertas para los clientes públicos. Una actividad de negociación de los market makers se lleva a cabo bajo las condiciones de una relación contractual con un intercambio. Como miembros del intercambio, los creadores de mercado deben pagar cuotas y arrendar o tener un asiento en el piso para poder operar. Más importante aún, una relación de creadores de mercado con el intercambio requiere que él o ella para el comercio todos los temas que se asignan a su hoyo principal en el piso de opción. A cambio, el creador de mercado puede ocupar una posición privilegiada en el mercado de opción - los fabricantes del mercado son los comerciantes en la industria de la opción que están en una posición para crear el mercado (oferta y demanda) y luego comprar en su oferta y vender en Su oferta. La principal diferencia entre un creador de mercado y los comerciantes minoristas es que la posición de los creadores de mercado está dictada principalmente por el flujo de pedidos de clientes. El creador de mercado no tiene el lujo de escoger y elegir su posición. Al igual que los creadores de libros en los casinos de Las Vegas que establecen las probabilidades y luego acomodar a los ganadores individuales que seleccionan qué lado de la apuesta que quieren, un trabajo de los creadores de mercado es proporcionar un mercado en las opciones, una oferta y una oferta, y luego Deje que el público decida si comprar o vender a esos precios, tomando así el otro lado de la apuesta. Como los comerciantes opción oficial, los creadores de mercado están en condiciones de comprar opción al por mayor y venderlos en el comercio minorista. Dicho esto, las dos principales diferencias entre los creadores de mercado y otros comerciantes es que los fabricantes de mercado suelen vender antes de comprar, y el valor de su inventario fluctúa como el precio de las existencias fluctúa. Como con todos los comerciantes, sin embargo, una familiaridad con el producto vale la pena. Los años de experiencia de los fabricantes de mercado con las condiciones del mercado y las prácticas comerciales en general - incluyendo una serie de estrategias comerciales - le permite establecer una ventaja (aunque leve) sobre el mercado. Este borde es la base para la riqueza potencial de los creadores de mercado. Estilos de negociación inteligentes de los operadores del mercado A lo largo del día de negociación, los creadores de mercado generalmente utilizan uno de los dos estilos de negociación: el comercio de scalping o posición. Scalping es un estilo de comercio más simple que un número cada vez menor de los comerciantes utilizan. Posición de comercio, que se divide en una serie de subcategorías, es utilizado por el mayor porcentaje de todos los creadores de mercado. As we have discussed, most market makers position are dictated to them by the publics order flow. Each individual market maker will accumulate and hedge this order flow differently, generally preferring one style of trading over another. A market makers trading style might have to do with a belief that one style is more profitable then another or might be because of a traders general personality and perception of risk. The scalper generally attempts to buy an option on the bid and sell it on the offer (or sell on the offer and buy on the bid) in an effort to capture the difference without creating an option position. Scalpers profit from trading what is referred to as the bid / ask spread, the difference between the bid price and the ask price. For example, if the market on the Nifty July 1130 puts is 15 (bid) - 15.98 (ask), this trader will buy an option order that comes into the trading pit on the bid along with the rest of the crowd. This trader is now focused on selling these puts for a profit, rather than hedging the options and creating a position. Due to the lack of commission paid by market makers, this trader can sell the first 15.20 bid that enters the trading crowd and still make a profit, known in the financial industry as a scalp. The trader has just made a profit without creating a position. Sometimes holding and hedging a position is unavoidable, however. Still this style of trading is generally less risky, because the trader will maintain only small positions with little risk. The scalper is less common these days because the listing of options on more than one exchange (dual listing) has increased competition and decreased the bid/ask spread. The scalper can make money only when customers are buying and selling options in equal amounts. Because customer order-flow is generally one-sided (either customers are just buying or just selling) the ability to scalp options is rare. Scalpers, therefore, are generally found in trading pits trading stocks that have large option order flow. The scalper is a rare breed on the trading floor, and the advent of dual listing and competing exchanges has made scalpers an endangered species. The position trader generally has an option position that is created while accommodating public order flow and hedging the resulting risk. This type of trading is more risky because the market maker might be assuming directional risk, volatility risk, or interest rate risk, to name a few. Correspondingly, market makers can assume a number of positions relative to these variables. Generally the two common types of position traders are either backspreaders or frontspreaders. Essentially, backspreaders are traders who accumulate (buy) more options than they sell and, therefore, have theoretically large or unlimited profit potential. For example, a long straddle would be considered a backspread. In this situation, we purchase the 50 level call and put (an ATM strike would be delta neutral). As the underlying asset declines in value, the call will increases in value. In order for the position to profit, the value of the rising option must increase more than the value of the declining option, or the trader must actively trade stock against the position, scalping stock as the deltas change. The position could also profit from an increase in volatility, which would increase the value of both the call and put. As volatility increases, the trader might sell out the position for a profit or sell options (at the higher volatility) against the ones she owns. The position has large or unlimited profit potential and limited risk. As we know from previous chapters, there is a multitude of risks associated with having an inventory of options. Generally, the greatest risk associated with a backspread is time decay. Vega is also an important factor. If volatility decreases dramatically, a backspreader might be forced to close out his position at less than favorable prices and may sustain a large loss. The backspreader is relying on movement in the underlying asset or an increase in volatility. The opposite of a backspreader, the frontspreader generally sells more options then he or she owns and, therefore, has limited profit potential and unlimited risk. Using the previous example, the frontspreader would be the seller of the 150 level call and put, short the 150 level straddle. In this situation, the market maker would profit from the position if the underlying asset failed to move outside the premium received for the sale prior to expiration. Generally, the frontspreader is looking for a decrease in volatility and/or little to no movement in the underlying asset. The position also could profit from a decrease in volatility, which would decrease the value of both the call and put. As volatility decreases, the trader might buy in the position for a profit or buy options (at the lower volatility) against the ones he or she is short. The position has limited profit potential and unlimited risk. When considering these styles of trading, it is important to recognize that a trader can trade the underlying stock to either create profit or manage risk. The backspreader will purchase stock as the stock decreases in value and sell the stock as the stock increase, thereby scalping the stock for a profit. Scalping the underlying stock, even when the stock is trading within a range less than the premium paid for the position, cannot only pay for the position but can create a profit above the initial investment. Backspreaders are able to do this with minimal risk because their position has positive gamma (curvature). This means that as the underlying asset declines in price, the positions will accumulate negative deltas, and the trader might purchase stock against those deltas. As the underlying asset increases in price, the position will accumulate positive deltas, and the trader might sell stock. Generally, a backspreader will buy and sell stock against his or her delta position to create a positive scalp. Similarly, a frontspreader can use the same technique to manage risk and maintain the profit potential of the position. A frontspread position will have negative gamma (negative curvature). Staying delta neutral can help a frontspreader avoid losses. A diligent frontspreader can descalp (scalping for a loss) the underlying asset and reduce her profits by only a small margin. Barring any gap in the underlying asset, disciplined buying and selling of the underlying asset can keep any loss to a minimum. To complicate matters further, a backspreader or frontspreader might initiate a position that has speculative features. Two examples follow. These traders put on a position that favors one directional move in the underlying asset over another. This trader is speculating that the stock will move either up or down. This type of trading can be extremely risky because the trader favors one direction to the exclusion of protecting the risk that is associated with movement to the other side. For example, a trader who believes that the underlying asset has sold off considerably might buy calls and sell puts. Both of these transactions will profit from a rise in the underlying asset however, if the underlying asset were to continue downward, the position might lose a great deal of money. Volatility traders will generally make an assumption about the direction of the option volatility. For these traders, whether or not to buy or sell a call or put is based on an assessment of option volatility. Forecasting changes in volatility is typically an option traders biggest challenge. As discussed previously, volatility is important because it is one of the principal factors used to estimate an options price. A volatility trader will buy options that are priced below his or her volatility assumption and sell options that are trading above the assumption. If the portfolio is balanced as to the number of options bought and sold (options with similar characteristics such as expiration date and strike), the position will have little vega risk. However, if the trader sells more volatility than he or she buys, or vice versa, the position could lose a great deal of money on a volatility move. HOW MARKET OPERATORS WILL TRAP THE PUBLIC In general, the market maker begins his or her assessment by using a pricing formula to generate a theoretical value for an option and then creating a market around that value. This process entails creating a bid beneath the market makers fair value and an offer above the market makers fair value of the option. Remember that the market maker has a legal responsibility to ensure a liquid marketplace through supplying a bid/risk spread. The trading public then can either purchase or sell the options based on market-maker listings, or it can negotiate with the market maker for a price that is between the posted bid/risk prices (based on his or her respective calculations of the options theoretical value). In most cases, the difference between market maker and individual investor bids and offers are a matter of pennies (what we might consider fractional profits). For the market maker, however, the key is volume. Like a casino, the market maker will manage risk so that she can stay in the game time after time and make a Rs.1 here and a Rs.5 there. These profits add up. Like the casino, a market maker will experience loss occasionally however, through risk management, he or she attempts to stay in the business long enough to win more than he or she loses. Another analogy can be found in the relationship between a buyer and used car dealer. A car dealer might make a bid on a used car for an amount that is less than what he is able to resell the car for in the marketplace. He or she can make a profit by buying the car for one price and selling it for a greater price. When determining the amount that he or she is willing to pay, the dealer must make an assumption of the future value of the car. If he is incorrect about how much someone will purchase the car for, then the dealer will take a loss on the transaction. If correct, however, the dealer stands to make a profit. On the other hand, the owner of the car might reject the dealers original bid for the car and ask for a greater amount of money, thereby coming in between the dealers bid/risk market. If the dealer assesses that the price that the owner is requesting for the car still enables a profit, he or she might buy the car regardless of the higher price. Similarly, when a market maker determines whether he or she will pay (or sell) one price over another, he or she determines not only the theoretical value of the option buy also whether or not the option is a specific fir for risk-management purposes. There might be times when a market maker will forego the theoretical edge or trade for a negative theoretical edge for the sole purpose of risk management. Before proceeding with our discussion of the market makers trading activity in detail, let us again refer to the casino analogy. The house at a casino benefits largely from its familiarity with the business of gambling and the behavior of betters. As an institution, it also benefits from keeping a level head and certainly from being well (if not better) informed than its patrons about the logistics of its games and strategies for winning. Similarly, a market maker must be able to assess at a moments notice how to respond to diverse market conditions that can be as tangible as a change in interest rates or as intangible as an emotional trading frenzy based on a news report. Discipline, education, and experience are a market makers best insurance. We mention this here because, as an individual investor, you can use these guidelines to help you compete wisely with a market maker and to become a successful options trader. Market making as a business In the previous section, we addressed rather conceptually, how a market maker works in relation to the market (and, in particular, in relation to you, the individual trader). A market makers actual practices are dictated by a number of bottom-line business concerns, however, which require constant attention throughout the trading day. Like any business owner, a market maker has to follow business logic, and he or she must consider the wisest uses of his or her capital. There are number of factors that you should consider when assessing whether an option trade is a good or bad business decision. At base, the steps that a market maker takes are as follows: 1. Determining the current theoretical fair value of an option. (As we have discussed, the market maker can perform this task with the use of a mathematical pricing model.) 2. Attempting to determine the future value of an option. Buying the option if you think that it will increase in value or selling the option if you think that it will decreases in value. This is done through the assessment of market factors that may affect the value of an option. These factors include. Interest rates Volatility Dividends Price of the underlying stock 3. Determining whether the capital can be spent better elsewhere. For example, if the interest saved through the purchase of a call (instead of the outright purchase of the stock) exceeds the dividend that would have been received through owning the stock, then it is better to purchase the call. 4. Calculating the long stock interest that is paid for borrowing funds in order to purchase the stocks and considering whether the money used to purchase the underlying stock would be better invested in an interest-bearing account. If so, would buying call options instead of the stock be a better trade 5. Calculating whether the interest received from the sale of short stock is more favorable than purchasing puts on the underlying stock. Is the combination of owning calls and selling the underlying stock a better trade than the outright purchase of puts 6. Checking for arbitrage possibilities. Like the preceding step, this task entails determining whether one trade is better than another. In the section on synthetics, we explored the possibility of creating a position with the same profit/loss characteristics as another by using different components. At times, it will be more cost effective to put on a position synthetically. Arbitrage traders take advantage of price differentials between the same product on different markets or equivalent products on the same market. For example, a differential between an option and the actual underlying stock can be exploited for profit. The three factors to base this decision on are as follows: The level of the underlying asset. The interest rate. For example, if you buy a call option, you save the interest on the money that you would have had to pay for the underlying stock. Conversely, if you purchase a put, you lose the short stock interest that you could be receiving from the sale of the underlying stock. The dividend rate. If you buy a call option, you lose the dividends that you would have earned by actually holding the stock. 7. Finally, determining the risk associated with the option trade. As previously discussed, all of the factors that contribute to the price of the option are potential risk factors to an existing position. As we know, if the factors that determine the price of an option change, then the value of an option will change. This risk associated with these changes can be alleviated through the direct purchase or sale of an offsetting option or the underlying stock. This process is referred to as hedging. A market makers complex positioning As we mentioned earlier, the bulk of a market makers trading is not based on market speculation but on the small edge that can be captured within each trade. Because the market maker must trade in such large volumes in order to capitalize on fractional profits, it is imperative that he or she manage the existing risks of a position. For example, in order to retain the edge associated with the trade, he or she might need to add to the position when necessary by buying or selling shares of an underlying asset or by trading additional options. In fact, it is not uncommon that once the trade has been executed, the trader an opposite market position in the underlying security or in any other available options. Over time, a large position consisting of a multitude of option contracts and a position in the underlying stock is established. The market makers job at this point is to continue to trade for theoretical edge while maintaining a hedged position to alleviate risk. In the following section, we will review the basics of risk management in the form of hedging. Although market makers are the masters of hedging, hedged positions are essential for the risk management for all option traders. It will be equally important for you to understand how to use these strategies. THE TRUMP CARD OF MARKET OPERATORS: HEDGING Thus far, we have overviewed the logistics of the market makers business model and have seen how it functions to both serve the trading public and the market maker simultaneously. Now we will consider how market makers work to secure their edge against the ongoing risks presented to their many positions. An investor who chooses to invest in a particular market is exposed to the risks that are inherent in that market. The specific risk is high if the investor concentrates on one security only. The more a portfolio is diversified, the lesser the specific risk. Hedging is the most basic strategy that an investor can use in order to guard against loss. A hedge position is taken with the specific intent of lowering risk. As we have learned, option positions are susceptible to more than just simple directional price risks, and therefore, a trader must be concerned with more than simple delta neutral trading. There is risk associated with each of the variables that determine an options value (from interest rates to time until expiration). In order to minimize the effect of these risks to an options value, a trader will establish a position with offsetting characteristics. Just as you hedge a bet by betting against your original bet too a lesser degree, market makers try to take on complementary positions (in stock or options) with characteristics that can potentially buffer against exposure to loss. A hedge, then, is a position that is established for the sole purpose of protecting an existing position. Determining what risks an option position might be exposed to is one of the first steps towards determining how best to hedge risk. We have learned that six risks are associated with an option position: Directional risk (delta risk) is the risk that an options value will change as the underlying asset changes in value. All other factors aside, as the price of an underlying asset decreases, the value of a call will decrease while the price of the put will increase. Conversely, as the underlying asset increases in value, a call will increases in value as the put decreases in value. Delta risk can easily be offset through the purchase or sale of an option or stock with opposing directional characteristics. Directional hedges are illustrated in Tables 1 and 2. Table 1: Delta Effects When the Underlying Security . Increase in Value Interest rate risk (rho risk) is negligible to most traders. Its impact can be substantial if a position contains a large amount of long or short stock or long-term options. Decreasing the stock position, replacing stock with options is the most efficient way to reduce rho risk. Remember, longer-term options are more interest rate sensitive. Dividend risk can be offset through the purchase or sale of options or the underlying stock. An increase in the dividend will make the call decrease in value because the holder of the call does not receive the dividend. In this situation, it is more advantageous to own the underlying asset over owning the call. Conversely, the put will increase in value when the dividend is increased because the short stock seller must pay the dividend to the lender of the stock, which makes owning the put more desirable than shorting the underlying asset. Table 4 illustrates the effects of changing input variables on an options theoretical value. Varying market conditions As market conditions change the values of. Rise in price of the underlying. Knowing the risks involved with options trading is the first step to successful trading while hedging these risks to create a profitable position is the second step. We have learned that there are different ways to hedge each trade, providing a market maker with the important task of determining the best hedge possible for each trade he or she executes. Determining which hedge is the best is based on knowing not only the risks of the original trade but also the corresponding risk of the hedge. Observing actual positions under a multitude of conditions is by far the best way to learn the complex nuances of options. The next two chapters will guide the reader through the fundamentals of the marketplace and setting up a trading station, giving the investor the ability to begin trading on his or her own. HOW TO SELECT AN OPTIONS BROKER Once youve made the decision to trade online, its important to identify a brokerage firm that will meet, and preferably exceed, your expectations. This is especially true in the options trading arena because there are potentially many more factors involved than in a straightforward stock transaction. With stocks, once you have determined what stock to trade, it really becomes a question of how much to buy or sell and when. With options, the decision is much more complicated because the following factors must be considered: Will you buy (or sell) calls or puts What strike price(s) What month(s) What is your strategy Given this level of complexity, there are a few important issues to consider before you choose an on-line broker: Real Time Option Quotes Whether an online broker provides real time option quotes is, perhaps, the most important consideration for even semi-serious option traders. On-line brokerage firms, especially those that specialize in stocks, are sometimes lacking in this critical area. While they might be able to provide real time quotes on individual options, the option chains (the charts showing the bid-ask, volume, and other critical information for all strike prices and expirations) are often not accurate. With the efficiency of the exchanges and the standardization of the contracts, there is no longer a reason for option traders to pay higher commissions on option trades vs. stock trades its no more difficult to execute an options trade than it is to execute a stock trade. Access to Analytics Advanced analytical tools like implied volatilities and deltas are important to serious option traders. However, most traditional brokers do not provide customers access to this nformation. Instead, their customers are forced to trade in the dark. Choosing an exchange (i. e. BSE or NSE) When options are traded on multiple exchanges, its often possible to get a slightly better price on one of the exchanges. While these discrepancies dont last very long, 0.50 or 0.25 can make a significant difference on a large block of trade. However, brokerage firms that make it difficult to execute basic spread orders are even less likely to offer customers a choice as to where their trades are executed. In fact, many customers probably arent even aware of potential price discrepancies across exchanges. For investors who make larger trades, this can be a significant issue. Before establishing any position its important to establish a few guidelines for yourself: Are you trading with money you can afford to lose Is the position you intend to put on sufficiently small that it wont have a major impact on your portfolio What is your specific objective for this position What is your exit strategy What is your downside risk Are you trading with money you can afford to lose The importance of this cannot be overstressed. If you have already earmarked the money for another use, it is not advisable to invest it in a risky position--even for a short term trade. Every day the market extracts money from people who cant afford to lose it. Dont be one of them. Is the position you intend to put on sufficiently small that it wont have a major impact on your portfolio This is a guideline novice traders routinely violate. Experienced traders caution people against putting on positions that will have devastating results if the market moves the wrong way. Some traders go so far as to say that positions should be so small that putting them on seems almost meaningless. Typically, the percentage of your portfolio associated with this would be 1/2 to 1. Keep in mind though that this applies to traders more than long-term investors. This is not to say that investors wouldnt benefit from the same advice. They probably would. Its just that a disciplined approach is particularly beneficial to option traders who could easily lose their entire investment. What is your specific objective for this position What is your exit strategy These issues are inter-related so we will examine them together. First, whenever you put on a position, its important to set a price target along with a strategy for what happens when you get there. For example, if you are convinced a particular Internet stock is hugely overvalued (imagine that) and due for a correction, you might decide to buy a long put either at-the-money or slightly out-of-the-money. If the market behaves as you predict and the price drops, you have to decide how far to let your profits run and at what point to take profits. If the stock drops 50 and your put is now deep in-the-money, this might be a good time to take profits. On the other hand, if you think the stock is still overvalued, you could buy a slightly out of the money call and let the put ride. For example, if the stock dropped from 250 to 150 and you own the 240 put, you could lock in your profit by buying a 150 call. This way, if the stock goes back up, what you lose in the put will be made up by the call. If the stock continues to drop as you hope, the put will increase in value and the call will expire worthless. Whatever you decide, its good to have your strategy thought out in advance. This helps to take the emotion out of it. What is your downside risk With option spreads and other advanced strategies, your maximum loss may be more than your initial investment. Before entering into any trade, its important to know your maximum profit, maximum loss, and break-even. Trading surprises are seldom pleasant. Modifying and Managing a Position Depending on market conditions, option investors may need to modify their positions either to lock in profits or protect themselves from adverse moves. Protecting your profits and limiting your losses Taking the easiest example, lets imagine you bought a long call and watched with interest as the stock rallied. How can you protect what is now a paper profit Considering the additional stock commissions involved in exercising the option, well disregard this as a strategy and focus on other alternatives. The dilemma whenever a position makes money is when to take profits and when to let profits ride. By selling the call, you lock in profits, but you may miss additional upside. On the other hand, if you sit tight, the stock could pull back below the strike price. In this case, you would lose your additional investment as well as your paper profit. Fortunately, there are other alternatives. The important point to note is that the riskiest course of action is to do nothing because your initial investment remains at risk along with any paper profits you have generated. SEVEN MYTHS ABOUT STOCK OPTIONS For years, the options market was shrouded in mystery as transactions took place with obscure options dealers who set the prices and terms of options contracts known as Jhota Phatak. The BSE and NSE created listed options that became the standard, and option prices were set in an auction market nearly identical to the stock exchanges. For the first time, this allowed the option holder to choose to sell his contract on the open market before it expired. Trading volume in listed options has exploded in the United States and option trading on more than 1,900 different equities and indices now accounts for the equivalent of 70 million shares of stock trading each day. But many of the myths associated with options have lingered. Unfortunately, these myths have caused many investors to remain on the sidelines while they could be utilizing options profitably or for reducing risk. Myth 1: 90 of Options Expire Worthless This statistic is often bandied about by those who have no experience trading options. According to the CBOE, about 30 of all options expired worthless -- a far cry from 90. Myth 2: Options are Much Riskier Than Stocks or Mutual Funds This assumes that the investor is trading options with the same amount of capital that he would devote to stocks or mutual funds. On a rupee for rupee basis, options are riskier. Here at STOCKWHIZO Research, we never recommend trading options in this manner. Instead we show our subscribers that options are a cheap way to reduce their overall risk. How First, by limiting their total rupee exposure to a fraction of what they would invest in stocks or mutual funds. Second, by diversifying their options portfolio among different underlying equities. And third, by purchasing both call and put options, since put options are profitable when the underlying stock declines in prices. Myth 3: Option Sellers Make Profits at the Expense of Option Buyers Unlike the gambling casino (or the lottery or the race track) which has built-in percentage advantages for the house, option trading is a zero sum game in which option sellers and buyers are always at a standoff in total. Option buying and selling differ only in the distribution of their outcomes, not in their relative profitability. Although option buyers can have more losing than winning trades, they never lose more than their original investment and their profit potential is unlimited. Option sellers profit most of the time but their potential losses are unlimited. STOCKWHIZO has always been dedicated to maximizing profit potential through option buying -- by taking full advantage of the unlimited profit potential and limited risk of this strategy. Myth 4: Options are Too Complicated Nonsense Anyone who is familiar with stocks can easily learn how to trade options. The approach to option trading that we use at STOCKWHIZO is very simple. If we are bullish on a stock, we advise you to buy a call option on that stock. For a fraction of the underlying stock price, you rent any appreciation in the stock above a particular price for a specified time. If we are bearish on a stock, we advise you to buy a put option. Here you rent any decline in the underlying stock below a particular price for a specified time. Its that simple Myth 5: Stockbrokers Dont Understand Options and are not interested in Options Business. While this may have been a problem in the beginning, the brokerage landscape will significantly changed for the better. A number of brokerage firms now specialize exclusively in options. Many large brokers will become option trader friendly. As time passes by with experience. Some traditional full-service firms will developed expertise in options and the desire for options business. While we do not recommend any specific firm, STOCKWHIZO subscribers receive a list of firms that are interested in options business and have the expertise to meet the needs of option traders. Myth 6: You cant Beat the Option Pricing Model. Since options are a zero-sum game, and option prices are based upon a mathematical option pricing model, some say it is impossible to profit from buying options in the long run. WE STRONGLY DISAGREE. First, prices for exchange-listed options are set in the marketplace by buyers and sellers, although the computerized pricing models do exert a strong influence. But more importantly, these models are based upon the mistaken assumption that all stock price movement is random. Clearly, there are always certain stocks that are moving in well-defined price trends, as opposed to moving randomly. If you can identify those stocks whose price trends are likely to continue, you can beat the option pricing model Much of our research has been devoted to developing indicators to determine stocks that will continue moving in such price trends, so our subscribers can profit from buying undervalued options on these stocks. Myth 7: Options Trading Requires Too Much Time Amateurs are rarely successful trading options because they dont have the time, information, expertise or the discipline to compete in this fast-moving market. But STOCKWHIZO subscribers have a big edge over these amateurs. First, our staff of professionals here at STOCKWHIZO Research have the information and expertise to make you a successful options trader. And second, we give you the disciplined trading rules that help you make big money and also minimize your time commitment to your options trading We tell you how much to pay, when, and at what price to sell. And you can often leave these instructions with your broker, so your options portfolio can appreciate on automatic pilot Anyone seriously interested in trading would do well to buy a copy of Jack Schwagers books Market Wizards The New Market Wizards. Through interviews and conversations with Americas top traders, Jack extracts the wisdom that separates successful traders from those who, through their trading, simply add to the wealth of successful traders. Keeping Your Trades Small One of the key factors mentioned by almost every good trader is discipline. Discipline, as you might imagine, takes a variety of forms. For beginning traders, one of the toughest challenges is to keep trades small. Believe it or not, more than a few top traders dont allow any one position to account for more than 1 of their total portfolio. Professionals attribute much of their success to managing risk in this way. Limiting Your Losses Another aspect of trading that involves discipline is limiting your losses. Here, there isnt a magic formula that works for everyone. Instead, you have to determine your own threshold for pain. Whatever you decide, stick to it. One of the biggest mistakes people make is to take a position with the intention that it be a short-term trade. Then, when the position goes against them, they make a seamless and unprofitable transition from trader to long-term investor. More than a few people have gone broke waiting for the trend to reverse so they could get out at break-even. If you are going to trade, you have to be willing to accept losses--and keep them limited Letting Your Profits Run Another mistake novice traders make is getting out of profitable positions too quickly. If the position is going well, it isnt healthy to worry about giving it all back. If thats a concern, you might want to liquidate part of the position or use options to lock in your profit. Then, let the rest of it ride. It isnt uncommon for people to view trading as a fast-paced, exciting endeavor. Fast-paced Absolutely. Exciting Now thats a matter of opinion. The Importance of Remaining Cool-Tempered More than a few traders interviewed in The New Market Wizards emphasize the importance of remaining unemotional and cool-tempered. To these people, trading is a game of strategy that has nothing to do with emotion. Emotion, for these traders, would only cloud their judgment. In the book Jack talks about one trader who was extremely emotional. Although Jack was able to show him how to be less emotional and more detached, it became quickly apparent didnt enjoy being emotionally unattached. He found it boring. Unfortunately, emotion involvement in trading comes at a high price. Before too long, that trader went broke. The morale of the story is simple: If you insist on being emotionally attached to your trading, be prepared to be physically detached from your money. Acceptance and Responsibility One of the biggest mistakes traders can make is to agonize over mistakes. To beat yourself up for something you wish you hadnt done is truly counterproductive in the long run. Accept what happens, learn from it and move on. For the same reason, its absolutely crucial to take responsibility for your trades and your mistakes. If you listen to someone elses advice, remember that you, and you alone, are responsible if you act on the advice. Another Way to View Losses Perhaps the most striking example of emotional distance in trading is a reaction to positions that go against thinking to yourself, Hmmm, look at that. If only we could all be that calm Of all the emotions we could possibly experience, fear and greed are possibly the two most damaging. Of all the emotions that can negatively impact your trading, fear may be the worst. According to many of the traders interviewed in The New Market Wizards, trading with scared money is an absolute recipe for disaster. If you live with the constant fear that the position will go against you, you are committing a cardinal sin of trading. Before long, fear will paralyze your every move. Trading opportunities will be lost and losses will mount. To help deal with your fear, keep in mind what fear is False Evidence Appearing Real The flip side of fear is confidence. This is a quality that all great traders have in abundance. Great traders dont worry about their positions or dwell on short-term losses because they know they will win over the long term. They dont just think theyll win. And they dont just believe theyll win. They KNOW theyll win. It should never bother to lose, because one should always believe that one would make it right back. Thats what it takes. To Talk or Not to Talk For many traders, sharing opinions and taking a particular stance only magnifies the stress. As a result, they begin to fear being wrong as much as they fear losing money. Although it may be one of the hardest lessons to learn, the ability to change your opinion without changing your opinion of yourself is an especially valuable skill to acquire. If thats too hard to do, the alternative may prove much easier: Dont talk about your trades. Greed is a particularly ugly word in trading because it is the root cause of more than a few problems. Its greed that often leads traders to take on positions that are too large or too risky. Its greed that causes people to watch once profitable positions get wiped out because they never locked in profits and instead watched the market take it all back. Part of the remedy for greed is to have, and stick to, a trading plan. If you faithfully set and adjust stop points, you can automate your trading to take the emotion out of the game. For example, lets say you are long the 150 calls in a stock that rises more rapidly than you ever expected. With the stock at 240, the dilemma is fairly obvious. If you sell the calls, you lock in the profit but you eliminate any additional upside potential. Rather than sell the calls, you might buy an equal number of 230 puts. The Rs.90 profit per call that you just locked in will more than offset the cost of the puts. At the same time, youve left yourself open to additional upside profit. Gradual Entry and Exit Another strategy successful traders use is to gradually get in and out of positions. In other words, rather than putting on a large trade all at once, buy a few contracts and see how the position behaves. When its time to get out, you can use the same strategy. Psychologically, the problem people have implementing this strategy is that it takes away the right and wrong of the decision making process. Its impossible to be completely right or completely wrong using this strategy because, by definition, some of the trades will be put on at a better price than others. Awareness and Instincts For professional traders especially, instincts often play a crucial role in trading. To truly appreciate this, just close your eyes and imagine making trades in a fast market with dozens if not hundreds of people screaming around you. In this environment, it becomes absolutely essential to maintain a high level of awareness about everything going on around you. Then, to have the confidence to pull the trigger when necessary, you have to trust your instincts. Its absolutely amazing to see how some professional traders, even in a busy market, know exactly who is making what trades. For these traders, expanded awareness is often a necessary prerequisite to fully developing and trusting their instincts. The same is true for professional traders as well. Watching how markets behave and developing a feel for the price fluctuations is truly time well spent. Unfortunately, in this era of technology, people have become so removed from their natural instincts that many are no longer in touch with their intuition. This is unfortunate because intuition functions as a wonderful inner guidance system for those who know how to use it. One trader interviewed by Jack Schwager in The New Market Wizards relies so heavily on his intuition that he didnt want his name in the book for fear his clients would be uncomfortable with his strategy and move their money elsewhere. Speaking anonymously, he described in detail how he establishes a rhythm and gets in sync with the markets. In this way, he has learned to distinguish between what he wants to happen and what he knows will happen. In his opinion, the intuition knows what will happen. With this knowing, the ideal trade is effortless. If it doesnt feel right, he doesnt do it. When he doesnt feel in sync with the markets, this trader will paper trade until he feels back in rhythm. But even here, he keeps his ego and emotion out of it. His definition of out of sync is completely quantifiable. Being wrong three times in a row is out of sync. Three mistakes and its back to the paper trading. Now theres a strategy almost everyone can benefit from. Trading is a performance-oriented discipline and every great athlete, trader, or Performer will occasionally hit performance blocks. Every Olympic contender trained hard physically, but the difference between the ones who made the Olympic team and those who did not was the emphasis put on mental coaching by the winners. Much of a traders early education is concentrated on strategies and market analysis. But what are the necessary ingredients for peak performance What are the tools for both mastering the mental side of the game and busting out of the inevitable slumps that can occur along the way First - what is the mindset necessary for peak performance How does one ultimately get in the groove There is no better feeling than being in the flow - especially with trading. That is what many of us live for and what keeps us in the game, because trading can be a very tough business with long hours. There are several key common ingredients when you are performing your best, no matter what the field. EXPECT success. It begins initially with your self-talk. Do you get down on yourself when you make a mistake - or do you say to yourself - next time I will do better because I have great trade management and am a superior trader Be your own best motivator and believer in yourself. Positive Self Talk leads to positive BELIEFS. If you believe you can do something, you WILL eventually find a way. When you have a positive belief system that the eventual outcome will be OK, then you are more mentally and physically relaxed. You then have better concentration, which leads to smoother execution, which of course leads to peak performance. Now, on the flip side of the coin, negative self-talk sows seeds of doubt. This lowers self-confidence, which leads to a negative belief system. This then creates anxiety, which leads to disrupted concentration. Now the trader becomes tense and tentative which in turn leads to poor performance. Talk about a vicious cycle SECRETS OF TOP TRADING PERFORMANCE KEY INGREDIENTS TO PERFORMING YOUR BEST You must be passionate about what you are doing and having fun. Passion first, then performance. Top performance comes from having a high degree of confidence. You must have the confidence that you can take control and face adversity. You must also be confident that you will have a favorable outcome over time. Peak performance comes from exceptional CONCENTRATION. You must concentrate on the process, though, not the outcome. A sprinter who is in the lead is thinking about the wind on their face, how relaxed their arms are, feeling the perfect stridethey are totally in the moment. The person who does NOT have the edge is thinking, Oh, that runner is pulling ahead of meI dont know if I have enough wind to catch the leader They are tense and tight because they are thinking about the outcome, not the process. Great performances come from being able to rebound quickly and forget about mistakes. Great performance comes from pushing yourself and trying to overcome limitations. Staying in the safe zone becomes a monkey on your back. Challenge yourself to take that hard trade. Manage it. If it does not work out, so whatyour risk was limited and you can pat yourself on the back for taking the hard trade in the first place. SEE AND DO. DONT THINK Great performance comes from turning off the brain and becoming automatic. This is being in the Zone in the groove. You cant overanalyze the markets during the trading day. When you are relaxed, your reflexes and timing are superior because you are loose. POSITIVE SELF TALK There are some concrete tools to break the cycle and bust out of the slump The number one tool for starters is POSITIVE SELF TALK. We all talk to ourselves in our own head. Be aware of the things you are saying to yourself. The written word is also a powerful tool. Read affirmations and books on positive thinking. Norman Vincent Peale, Napoleon Hill. Arnold Schwarzenaggers autobiography are a few. Richard Marcinko wrote a book called the Rogue Warrior. He talked about the Will to WIN and the belief that ANY circumstances could be overcome. This is a great inspirational book for traders. Next - act like you are already where you want to be. Assume the mannerisms, posture and talk of a top trader. In addition to self-talk and reading written words, develop mental pictures. Visualize what you are going to do with your wealth or how it is that you want to live. Think of the power that money would give you to start any organization you want or to make other peoples lives better. Visualize your dream house. Program your subconscious as though you are already there. Dare to dream. OK - talk, words and pictureswhat is next Look at your environment that you have surrounded yourself with. Your success in trading will also be a product of your environment and I am not just talking about office space. Look at the people you surround yourself with. Do they support your activities Surround yourself with people who believe in you, who smile, and who are enthusiastic in anything they try or do. The top Olympic athletes had friends and family cheering them on every step of the way. BE PREPARED FOR A SURPRISE EVERYDAY All of the above factors deal with external factors and internal belief systems. Now lets get down to the DOING part Every trader should be prepared before the markets open because they already did their homework - right. One of the most impressive points in the Rogue Warrior book was this veteran navy seals obsession for being totally prepared for Mr. Murphy There was always a backup plan for everything and this is what kept him alive. Prepare your daily game plan by looking for both new setups and preparing strategies for managing existing positions. So, assuming that you have done your daily homework as a trader, the next step is to learn how to get into the groove. There is no better tool for this than having routines and rituals. Pre-market rituals help calm the nerves, get you into a rhythm, and also help to turn off the logical part of your brain - the part that wants to overanalyze everything. If you have a chattering monkey sitting behind your ear, routines and rituals are one of the best things to shut that monkey up. Maybe there is an opening sequence of tasks you do before the market opens. Perhaps in the middle of the day you draw swing charts or take periodic readings of the markets action. Maybe you keep a journal and make notes to yourself. At the end of the day, what type of record keeping do you do for your trading activity What do you do to unwind Salesmen are taught to do small rituals before cold calling clients. It controls the anxieties and fears of rejection. Cricket opening Batsmen have a pre-warm up ritual. It calms their minds and puts their body on the autopilot mode. It keeps them involved in the PROCESS and not thinking about the outcome. One of the more common rituals on the trading floors was to wear the same disgusting lucky tie every day. If the mind BELIEVED that the tie was lucky, this was all the traders needed to keep the long term odds in their favor. Here is another helpful factor: A healthy body keeps a healthy mind. EXERCISE This gets oxygen to the brain and keeps the blood flowing. How can you expect to be a peak performer when you are eating junk food and going through insulin swings Or perhaps you drank too much wine the night before or are jittery from drinking too much coffee. How can you concentrate well if you are not getting a full decent nights sleep Sure, most of these are minor factors but they can all add up to major bumps in your performance. One moment of sloppiness can lead to forgetting to place stops or letting a bad trade go too long. Then when damage is done, your confidence gets chipped away. You must treat your confidence level as something to be protected. Good habits will keep your confidence level high. Once you have good habits, it will allow you to increase your trading size. If you want to push yourself to the next level in your trading and are wondering how to increase your size, you MUST have a foundation of good habits. If you are running into a mental block in this area, it is your subconsciouss way of telling you that either you have not done adequate preparation or you are not satisfied with your money management habits. There is one more extremely important thing that contributes to your success and that is GOAL SETTING. When you set your goals, they must be concrete and measurable. You must also break them down into bite size pieces. Perhaps your larger goal is to make 8 digits over the next three years, but how do you get there Put together a more detailed business plan that is NOT Rupee oriented but will help you eventually reach your Rupee-oriented goal. Maybe it includes how many trades you should make per week, how much time you should devote each evening to preparation and studying charts, and plans for controlling risk. Both short term and long term goals help achieve peak performance. You must also have concrete ways to measure those goals. Top cricketers know the splits that they run. They know if they are ON or OFF according to how practice goes. They know their unforced error percentage, their personal best, and their competitions stats. The same should apply to you in your trading. Know your weekly win/loss ratios, your trade frequency, and the average amount of profit or loss each month. Only by having something to measure can you tell if you are improving or not and moving closer to your goal The battleground isnt the markets but whats within you. The more you talk with other traders, the more you realize that everyone goes through various common experiences. Everyone makes many of the same classic mistakes. But what distinguishes the ones who can ultimately overcome them Remember that ATTITUDE is everything. How you frame out an individual experience or event will affect your success in the long run. Do you see a trading loss or bad drawdown period as a major setback, or do you see it as a learning experience from which you can figure out how to be on the RIGHT side of a trade instead of the wrong side the next time around. Many great traders use periods after drawdowns to go back to the drawing board. Some of the best systems and trading ideas have come after periods of adversity. What incentive is there to learn and improve ourselves when everything is smooth sailing and we are fat and happy But when times are tough, that is when we can rise to the occasion and prove that we can overcome any obstacle set down in our path. So many great athletes have been able to come from behind when they are down because they have learned how to seize that one opening or opportunity and CONVERT. They latch on to the tiniest shift in momentum and milk it for all it is worth. Latch on to that next winning trade and convert. The first small moral victory is the first step towards reaching the top of Mt. Everest. And if you keep making small steady steps, you will eventually reach the top. Sometimes for a trader, the greatest feeling in the world can be making back those losses, no matter how long it takes, because once you have done that, you realize you can do anything. The most successful players are the ones who have a burning desire to win Dont check out of the game. Never give up Improve your consistency. Stay active, stay involved, and keep your feet moving. Be patient. Do not force a trade that isnt there. Wait for the play to set up. When you get a good trade, go for it. Manage it. Trail a stop. Dont be too eager to get out. Be flexible - if what you are doing isnt working, change what you are doing When down, get a little rhythm and confidence going. Dont worry about being too ambitious. Stay with your game. Dont let outside distractions bother you. They take energy and break your concentration. Match your particular strengths to the type of market conditions. Hate making stupid mistakes and unforced errors. This includes not getting out of a bad trade when you know you are wrong. Many players will play their best game when they are coming from behind. Copyright 2001 by Hiten Jhaveri, StockWhizo Investments. All rights reserved worldwide.