Steps To Trading Success
note: Don Fishback is the president of Fishback Management
& Research Inc. in Lexington, KY, and creator of ODDS
If you are serious about treating your trading like a business
-- and you should be because it is -- here are four steps
to trading success and how I approach them:
1. Select a stock with opportunity
Use volatility indicators to select a stock that is likely
to break out. We are looking for a stock where we can make
money in the options regardless of the direction that the
- Look for stocks
that go flat temporarily for no apparent fundamental
reason. Within two or three months after an active stock
goes flat, the share price typically starts to fluctuate
- Use software
that allows you to analyze volatility history and options
prices, along with free Internet news sources to find
stocks where opportunity exists.
- There are low
volatility exceptions. For example, do not use this technique
on stocks whose price is less than $10 because the edge
you get is too small when the price is that low. The
value of an option whose stock is less than $10 will
not change that much, even if the volatility changes
2. Select the right
You want a simple strategy to exploit the opportunity that
exists in the stock you select. The strategies in my arsenal
include call and put purchases (directional), call and put
debit spreads (directional), call and put credit spreads (directional/volatility)
and straddle and strangle purchases (volatility). Strategies
more complex than these are poor choices for individuals.
For every option you buy or sell, there are margin considerations,
bid/ask spreads and commissions.
- Pick three-month
to five-month options.
- Keep your straddle
simple -- use straddles and strangles. If the asset price
is in the middle of two strikes, choose the strangle;
otherwise, choose the straddle.
3. Select the right
Determine an appropriate price to pay for a strategy that
will exploit a stock with opportunity.
- Use a mathematical
method to balance risk, reward and probability properly.
Use the Chicago Board Options Exchange option calculator
to determine the right price to pay for a straddle.
4. Select the right
Look at what prompted you to get into the trade. If you're
right and you haven't hit your target, stay in. If you do
reach your objective, don't get greedy, get out. If you're
wrong, get out!!! Remember, getting out of a trade is what
makes you money. This is, by far, the most overlooked aspect
of option trading, but it is the difference between success
and failure for most traders.
- Have an action
plan and a contingency plan.
- If things go
wrong and a straddle value declines by 50%, exit the
- If things go
right, you can smash a home run:
one of the options hits the purchase price
of the whole position, sell half of the profitable
support and resistance to exit the balance
of the position.
Futures trading involves high-risk with the
potential for substantial losses