Options Trading Zero Sum Game

Though you can trade every futures markets, we recommend that you stick to the electronic markets (e.g. E-mini S&P and other indices, Treasury Bonds and Notes, Currencies, etc). Usually these markets are very liquid. You will not have a problem entering and exiting a trade. Another advantage of electronic markets is lower commissions: Expect to pay at least half the commissions you pay on non-electronic markets. Sometimes the difference can be just as high as 75%.

When you take a smaller timeframes (less than 60min) your average profit per trade is usually comparably low. On the other hand you get more trading opportunities. When trading on a larger timeframe your profits per trade will be bigger. However, you’ll have less trading opportunities. It’s up to you to decide which timeframe suits you best.

Smaller timeframes mean smaller profits, but usually smaller risk, too. When you’re beginning with a small trading account, then you may wish to select a small timeframe to make sure that you’re not overtrading your account.

QUESTION: who are the consistent gainers in options trading?
Since options trading is a zero sum-up game, If 90% of the option buyers loos in options trading; 90% of the options sellers must be gaining. Is this high probability of gaining in options selling is true?

  • Most options expire worthless. The parties that sell options tend to win the most.

  • You are right, options are biased towards sellers. Sellers make money more consistently than buyers. Please Join my yahoo group for intraday tips. http://finance.groups.yahoo.com/group/Intraday_Stock_Picks/

  • You are absolutely right. Option writers / sellers do make a lot of money. But this is too dangerous for ordinary / common trader or investor. This requires indepth knowledge of market movement and will to take on unlimited risks. It is utmost important to calculate which strike rate options to sell and then there is question of providing hugh margins required to sell options.

  • First of all options trading is close to a zero sum game before commissions. After commissions, it becomes a negative sum game. Options sellers make money on most of their trades. But when they lose, they often lose big. These big losses usually wipe out all their small gains, and often put them in negative territory. Because of the risk of big losses, selling options has been compared to picking up nickles in front of steamroller. You are doing great until the steamroller runs you over. (Investing in options can be much more complicated than I describe above. However I am describing some of the typical problems with trading options. It is not as easy as it seems. Most people end up losing money. There are no consistent gainers.)

  • Most profitable day trading systems use larger timeframes like daily and weekly. These systems work, too, but, be prepared for less trading action and bigger drawdowns.

    When prices are trading at an extreme (e.g. Upper band of a channel), you sell, and you attempt to catch the small move while prices are moving back into normalcy’. The same applies for selling.

    In my opinion swing trading is actually one of the top trading strategies for the beginning trader to get his or her feet wet. By contrast, trend trading offers greater profit potential if a trader is in a position to catch a major market trend of weeks or months, but few are the traders with sufficient discipline to have a position during that period of time without getting distracted.

    Most indicators that you’ll find in your charting software belong to one of the following two categories: You have either indicators for identifying trends (e.g. Moving Averages) or indicators that define overbought or oversold situations and therefore offer you a trade setup for a short term swing trade.

    So do not become confused by all the chances of entering a trade. Just make sure that you know why you’re using a certain indicator or what the indicator is measuring. An example of a simple swing daytrading strategy can be in the next chapter.

    We do not recommend using a fixed dollar amount, because markets are too different. For example, natural gas changes an average of a small number of thousand dollars per day per contract; however, Eurodollars change an average of a small number of hundred dollars a day per contract. You need to balance and normalize this difference when developing a day trading system and testing it on different markets. That’s why you should always use percentages for stops and profit targets (e.g. 1% stop) or a volatility stop rather than a fixed dollar amount.

    A time stop gets you out of a trade if it isn’t moving in any direction, therefore freeing your capital for other trades.

    The next figure you want to see is the average profit per trade. Make sure this number is greater than slippage and commissions, and that it makes your day trading worthwhile. Day trading is all about risk and reward. You want to make sure you have a decent reward for your risk.

    Take a look at the Profit Factor (Gross Profit / Gross Loss). This will tell you how many dollars you’re likely to win for every dollar you lose. The higher the profit factor the better the day trading system. A system is expected to have a profit factor of 1.5 or more, but watch out when you see profit factors above 3.0, because it would perhaps be that you over-optimized the system.

    Many profitable day trading systems achieve a nice net profit with a rather small winning percentage, sometimes even below 30%. These systems follow the principle Cut your losses short and let your profits run’. However, YOU need to determine whether you can stand 7 losers and only 3 winners in 10 trades. If you ‘d like to be right’ the greater part of the time, then you should pick a system with a high winning percentage.

    Do you need daily action? If you want to look at something happening every day, then you should pick a day trading system with a high number of trades per month. Many profitable day trading systems generate only 2-3 trades per month, but if you’re not patient enough to await it, then you should choose a day trading system with a higher trading frequency.

    Some people get really nervous when they’re in a trade. I have heard of people who cannot even sleep at night once they have an open position. If that’s you, then you should make sure that the average time in a trade is as short as possible. You might want to select a system that doesn’t hold any positions overnight.

    A famous trader once said: If you want your system to double or triple your account, you should expect a drawdown of up to 30 percent on your way to trading riches. ‘ Not every trader can stand a 30% drawdown. Look at the maximum drawdown the system produced so far, and double it. If you can stand this drawdown, then you found the right day trading system. Why doubling? Remember: your worst drawdown is always ahead of you.

    The amount of most consecutive losses has an enormous impact on your trading, especially when you’re using some types of money management techniques. Five or six consecutive losses can cause you a lot of problems when using an aggressive money management.

    In addition this number will allow you to determine whether you have enough discipline to trade the system: Will you still trade the system once you have experienced 10 losses in a row? It’s not unusual for a profitable trading system to have 10-12 losses in a row.

    There is a difference between improving’ and curve-fitting’ a system. You can improve your day trading system by testing different exit methods: If you’re using a fixed stop, try a trailing stop instead. Add a time stop and assess the results again. Don’t look at the net profit only; look also at the profit factor, average profit per trade and maximum drawdown. Many times you’ll find that the net profit slightly decreases when you add different stops. However, the other figures might improve dramatically.

    IF FVE >-1 And Regression Slope (Close, 35) / Close.35 * 100 > -.35 And Regression Slope (Close, 35) / Close.35 * 100 <.4 And Regression Slope (Close, 70) / Close.70 * 100 > -.4 And Regression Slope (Close, 70) / Close.70 * 100 <.4 And Regression Slope (Close, 170) / Close.170 * 100 > -.2 And MACD Diff (Close, 12, 26, 9) > -.003 And Not Tuesday And Not DayOfMonth = 12 and not Month = August and Time > 9:30…

    Though you eliminated all possibilities of losing (during the past) and this trading system is now producing fantastic profits, it’s highly unlikely that it will continue to do so when it hits reality.