-- Posted Thursday, 18 October 2007 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Thursday, October 18, 2007
“Phenomenally accurate forecasts”
Even with a crystal ball it would be tough to make money trading options on such popular vehicles as the Diamonds and QQQQs. That’s because, when you are buying puts and calls on these securities, you are trading mainly against very smart machines, not people. If you were to monitor price fluctuations in QQQQ and Diamond (DIA) puts and calls very closely for a day, you might come away with the impression that they were being jockeyed around by traders who could see a minute or two into the future. In fact, a computer algorithm is doing the work, and it can run circles around most human traders.
To take an example, let’s suppose you are trading DIA options on your desktop PC and notice there are a bunch of November 138 calls offered at 2.96 with the underlying trading at 138.27. Let’s also assume there’s trendline resistance at exactly 138.27, and that if the Diamonds exceed that price by even a penny, you are planning to “buy the breakout” by pouncing on the Nov 138 calls. The breakout occurs, and you react with lightning speed, hitting the “buy call options” button on your computer a split second after the 138.28 print. Alas, the options are no longer offered at 2.96, but for 3.01 – too pricey to offer any edge.
How Smart Art They?
Actually, the neural network program that removed the 2.96 offer from harm’s way (harm for the seller, that is) is far more sophisticated, even, than that. Consider another scenario: You were planning to jump on the Nov 138 calls if there was bullish news on the tape concerning some speech Treasury Secretary Paulson was giving at that moment at a Kiwanis luncheon in Los Angeles. But even if you had a friend stationed at the luncheon, reporting details in real time via a cell phone, you would discover that the bids and offers for Nov 138 calls would shift higher seconds before Paulson’s bullish words hit the tape.
Today’s commentary was prompted by our experience yesterday trading the Diamonds. They had been falling steadily all morning and were approaching 138.50 when I disseminated a Hidden Pivot bottoming target at 137.79 to those in the chat room. I suggested buying Nov 138 calls for about 2.60 if the forecast panned out. It did, and the Diamonds staged a very tradable rally after making a low just five cents beneath the predicted 137.79. However, when they were banging out a 137.74 low for the day, the November 138 calls never traded for less than 2.77, nor were they even offered for less than 2.72. We didn’t pay up for them simply because it is impossible to trade options profitably if you give up even a penny or two of “edge” on your trades.
Deck Stacked
To illustrate how heavily the deck is stacked against the retail customer, note that if you had paid 2.72 offer for the calls, you could not have sold them on the bid for that much until the underlying Diamonds had rallied 25 cents.
Bottom line: Options trading in the most popular vehicles is an extremely tough game to beat. If you cannot buy options on the bid and sell them on the offer, you shouldn’t play. And if the competition seems to be breaking this rule, paying up for options, assume it is only because they have already sold options against them for more than they were worth.
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2007, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Thursday, 18 October 2007 | Digg This Article | Source: GoldSeek.com
