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| Michael C. Thomsett on options and paper trading: |
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Many years ago when I began to trade options in my own account, I looked for good, solid, basic information on the topic. I found nothing. The existing literature was too complex, written for technical experts for their peers. From this I came up with the idea of writing a basic book about options for people just like me, those who were just starting out, struggling with terminology, strategies identifying risks, and figuring out what option strategies were suitable for me.
Option investing is thought to be extremely complex and risky. Getting Started in Options is not
complex; it also proves that some forms of option investing are quite
conservative, in spite of the usual high-risk rap.
It is important for
everyone to know all about risk before investing in any product. Options can be
very complicated and risky, but they can also be very low-risk and consistently
high-yielding. In this book I have attempted to explain options for "real
people" and not for high-level traders or for academics.
The book is
currently in its 6th edition and a 7th edition will be published in 2007. To
date, it has sold over 350,000 copies and I think this is so because it is
written with practical uses in mind. I like to define terms as they come up. I
also use a lot of graphs, examples, and "Smart Investor Tip" sidebars. This
makes the book easier to use and highly
visual. About one year ago I was visiting with my editor in New York and I asked her
why she thought the book has done so well. She said it was simple: The book is basic, it explains everything thoroughly and it is visually instructive. In other words, it provides the reader with the basics, nothing more and nothing less.
e-Opts is a sort of online version of the same essential idea. People need to be led through the basics until they are ready to take off the training wheels and make real trades. I have tried to explain the basic aspects to options trading in my book, but the paper trading approach is a good way to test your theories using real stocks and real options -- but without exposing yourself to very real risks. When I started out investing in options, I could have used a site like this. Early on, I entered into a rather complex straddle, sure I would make money. In those days (late 1970s) there was no Internet and anyone wanting to update their quotes had to telephone their broker. After several days of repeated phone calls to check on my straddle, the broker gave me some very good advice: "Close the position and take a small loss. You're worrying about this constantly and it just isn't worth it." I realized at once that he was right, and I took his advice. But it would have been far easier if I'd been paper trading. The lesson I learned back then has stayed with me today. I have discovered that everyone has a different comfort zone; and that you can only learn about that comfort zone by doing a dry run for your option strategies. This is where paper trading is so valuable.
I have always wanted to share what I have learned about options. Because there were no basic books available, I decided to teach myself and then write a book myself. I sold the idea to John Wiley & Sons but I was cautioned that books like this rarely sell very many copies. But I had developed a particular point of view about a conservative strategy and I really didn't see how I could make less than 10 or 20 percent return per year. So I did something I would never advise anyone else to do: I took out a second mortgage on my home for $15,000 (remember, this was in the mid-1980s when $15,000 was a lot of money) and put it to work in the market. Over the next three years my average return from stocks and options was 38%. I have never promised that everyone can do this; in fact, my goal was to test my theories so that I could write the book from an experienced point of view. If I were to do this today, I would paper trade rather than borrow money to test my theories.
Anyhow, the experience led to the first edition of "Getting Started in Options." I have learned a lot over the past 20 years, but never as much as I learned in those first three years when I was a novice options trader seeing my ideas turn into profits. I hope that everyone who reads this will use e-Opts as their personal "dry run" for options trading ideas, and I hope that all of you will exceed the double-digit returns I experienced two decades ago.
My writing philosophy: Keep it simple,
provide examples, define terms, and most of all, respect the
reader.
-- Michael C. Thomsett, author, Getting Started in Options
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Do some paper trading. Decide on a period of time in which you will
restrict yourself to mock trades (no real money involved). After you decide on
a period of time, double it. There is no reason to be in a hurry. There will
always be more money-making opportunities tomorrow. Odds are you will be glad
you weren’t using real money during this training time!
Some doubt the value of paper trading. However, if handled properly, it can
be good practice, and an excellent representation of how you would actually
perform. You obviously have to be honest with yourself. A specific decision to
trade must be accompanied by an immediate entry in the log. No entry – no
trade! Once a trade is entered, you’re stuck with it. No fair using the
eraser! Enter the current date and time with every trade. As for price, to be
conservative, you should enter the “asked” on purchases, the “bid” on sales.
One of the problems people have with paper trading is maintaining their
motivation. Here’s an idea: You might tell yourself that unless you achieve a
certain profit objective during the trial period, you’re not going to allow
yourself to get started with real money. Instead, you’re going to have to go
around again and do another trial period. This creates an incentive to do well
in the trial period.
Select and use good trading tools from the start. Get into the groove with
good software and favorite Internet sites, so that you build confidence to make
sound trading decisions – decisions based on discipline. This will enable you
to make profits regularly, and be in the game for the long run.
A good record keeping system, for example, will make it easy to keep track of
your paper trading, and get you into the habit of good record keeping. A good
record keeping system should also provide you with the mechanism for another
good habit to get into – setting an objective and a stop for every position you
enter. The program should then be able to alert you when any of your positions
hits its objective or stop, so you can take action.
Len Yates - President, OptionVue Systems International.
full article
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...three months is good for introducing you to the daily process and stresses
of decision making. It is not a valid test of any strategy. Only by testing a
strategy over quite a long time of historical data, can you tell if it works.
... Often, people hit a couple good trades in the paper trading stage, and they
are sure they're ready to make it. I think 6 months to 1 year of reading and
paper trading is necessary. Wish I had!!"
Conrad Bowers (cpbow at earthlink.net), J. Johnson
full article
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Disclaimer |
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© Copyright 2002-2005 e-Opts.com. Reproduction Strictly Prohibited. All Rights
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