Erin Arvedlund and Author Thomas DeMark Chat on Yahoo!

DeMark and Arvedlund chat about how to use day trading techniques when investing in options.
Author:
Publish date:

lpoynter_98:

Hello and welcome to today's chat with

Thomas DeMark

author of

DeMark on Day Trading Options

warriorsheart asks:

What is your thoughts on IPO trading as the only source?

tdemark_thestreet:

There is a lot of value in it I have been in the business for close to 30 years and my first assignment was to secure initial public offering for a large financial institution fortunate enough to receive stock in most new issues

tdemark_thestreet:

Consequently, I followed their activity at the time of issuance for a period of months. I found there to be a number of common denominators. As a result I was able to cover price behavior patterns.

tdemark_thestreet:

Typically a stock will record its high within the first one to three days of the IPO. To calculate the downside price entry level, two ratios could be multiplied times the peak price to arrive at price objective levels.

warriorsheart asks:

What is your thoughts on IPO trading as the only source?

erin_thestreet:

What are those ratios Thom?

tdemark_thestreet:

It's uncanny how well these price ratios have worked in helping to predict the new lows in, Internet Stocks for example by multiplying 61.8% times the peak price the first level of support is identified.

tdemark_thestreet:

AOL, AMZN, NSCP and a number of others decline precisely to 61.8% of the peak price subsequent to the IPO and rallied and made new highs.

tdemark_thestreet:

Markets which are not as volatile seem to find support at 61.8% as well but often times will decline 38.2% of the peak price.

erin_thestreet:

So what you're saying Thom is that Internet stocks are becoming more predictable?

tdemark_thestreet:

It's a observation I've made for close to 30 years because the volatility in some markets is so much greater than It was even a few years ago. The objectives are being hit more quickly and are more predictable.

Johnnyvogue asks:

Realistically, how much money should an individual have available to daytrade options?

erin_thestreet:

Thom this is good point to talk about the disclaimer about options.

erin_thestreet:

Options aren't fit for everyone.

tdemark_thestreet:

Obviously, options are not suited for all traders.

tdemark_thestreet:

Its a risky environment and as a result I recommend only a small portion of ones funds be allocated to trading.

tdemark_thestreet:

As you are probably well aware 90% of options traders lose money.

erin_thestreet:

Can you put a dollar figure on that? What will most retail brokers allow?

tdemark_thestreet:

You would need at least $10,000 to trade options on stocks.

erin_thestreet:

I've heard that 65% of options expire worthless. Is that true?

tdemark_thestreet:

Although the risk is limited to your investment there are ideal option parameters involved. One can buy cheap options but they're cheap for a reason. They will likely expire worthless.

tdemark_thestreet:

About 70% of options expire worthless.

paulester99 asks:

How do you get started?

erin_thestreet:

Jump off a cliff!

tdemark_thestreet:

The requirements differ based on whether you are buying or selling options.

tdemark_thestreet:

The typical option trader is a buyer and the financial institutions are the suppliers, sellers or writers.

erin_thestreet:

That would be Joe Main Street buying most of the options, and Wall Street is selling, or what they call 'writing," options

tdemark_thestreet:

Unfortunately, human emotion dictates when a trader will enter a market either buying or selling.

erin_thestreet:

Back to how we get started... what's the margin usually?

tdemark_thestreet:

Contact you broker and funds would need to be in your account to cover the purchase price.

tdemark_thestreet:

The margin would only apply to financial institutions.

erin_thestreet:

Retail?

MoonRiverMan asks:

Why will my broker let me buy puts and calls but not do straddles?

tdemark_thestreet:

I don't understand why a broker wouldn't.

erin_thestreet:

I've heard of some brokers Thom, who won't allow it because they don't want to take the risk of bailing out a bad decision by a customer.

tdemark_thestreet:

I think its more of a question of prudence. And reasonableness whether the broker thinks its a idea buy and sell a put and a call at the same exercise price.

pace100_1 asks:

This 61.8% figure you site as a ratio, has that been run as a statistical test on the entire internet stock group? Time frame?

tdemark_thestreet:

It has been. I have tested it. My staff has tested it.

tdemark_thestreet:

Its something that has been observed in the past.

erin_thestreet:

Over the life of the stock since it went public?

tdemark_thestreet:

Its an observation, tests have been conducted by my staff and I'm comfortable with the results and in recent years we haven't re-tested. If you're looking to identify an entry price zone this is the best tool to use.

boof157 asks:

Does your new book detail trading strategies that have paid off in the past?

tdemark_thestreet:

Detailed strategies that are applicable to all markets. As your aware nothing is 100% and the market is a game of statistics.

tom0716 asks:

How can I calculate when to go short on an IPO after peak?

tdemark_thestreet:

Once the syndicate which is the group of brokers offering to their clients the original IPO prior to the trading usually the stock will decline.

erin_thestreet:

Back to the question about trading strategies...

tdemark_thestreet:

There is nothing else that we have come up with to determine when the price will peak.

erin_thestreet:

In the summary of your book, you give some good trading tips.

erin_thestreet:

Yes, they had to do with buying puts and calls during market turns and so forth.

tdemark_thestreet:

Back a number of years ago when we began trading options, we determined that it was critical that we control our emotions since options are generally low priced a 50% move in a $2 option.

tdemark_thestreet:

That translates into a $3 price. So every price tick that we can observe is important in performance and profitability.

tdemark_thestreet:

We did not want to be drawn into the market after a trend has been established. We wanted to anticipate a trend, consequently we derived four basic rules for buying puts and calls.

tdemark_thestreet:

Before we would buy a call expecting the market to rally, we required that the overall market be down for the day, that the industry group which the security traded was down for the day as well.

tdemark_thestreet:

The individual stock would be down for the day as well, and finally that the underlying option would be down for the day as well.

erin_thestreet:

You also recommend in your book

Day Trading Options

to limit your purchases to a fraction of what investors pay to own the stock outright.

tdemark_thestreet:

Because there is such a risk in trading options a fraction of one's portfolio should be dedicated to options. The reverse would apply to puts.

MoonRiverMan asks:

When you daytrade options, do you usually settle for a half-point gain or even less?

erin_thestreet:

This is just an example.

erin_thestreet:

Why don't we just assume this is stocks, right?

tdemark_thestreet:

Yes. Depending on the cost of the option. If the option cost $2 and multiply it by ten then possible it would be the price of the underlying security. Now if the underlying stock advanced from $20 to $30 that a 50% gain.

tdemark_thestreet:

Option traders must be content with a comparable gain from $2 to $3. That puts things in perspective. SO seeing an option go from $2 to $10 is exceptional.

tdemark_thestreet:

Although internet options are the exception because of their volatility.

erin_thestreet:

Volatility has been decreasing lately though.

Johnnyvogue asks:

When daytrading options, do you use deep in the money options?... how about LEAPS?

erin_thestreet:

I'll explain that LEAPS stands for Long-Term Equity AnticiPation Securities.

tdemark_thestreet:

My preference has been to trade only the near buy options at or just slightly away from the exercise price. My preference is to trade options within 2 weeks of the expiration at or close to the exercise price.

erin_thestreet:

So you don't trade LEAPs, you trade very short-term options

erin_thestreet:

Why?

erin_thestreet:

In English, LEAPS can go out as far as two and a half years.

tdemark_thestreet:

The true value of the option were a trader to exercise the option and the difference is described as premiums and premiums are a function of volatility of time to expiration.

tdemark_thestreet:

We try to limit the premium value and to accomplish that we try to focus in option within 2 weeks of expiration.

erin_thestreet:

They mean stocks, not options.

beech1997 asks:

Is any one day trading firm better than the others?

erin_thestreet:

Is there a way to day-trade options on the Internet?

tdemark_thestreet:

I'd be more comfortable trading with a firm with a lot of capital and sufficient services to satisfy my needs.

erin_thestreet:

Online I mean?

tdemark_thestreet:

Effectively, the best way in the net is to have a purchase price and exit price in mind beforehand and place those orders at the same time.

erin_thestreet:

But options trading should be limited to brokers?

tdemark_thestreet:

Most of my experience has been with brokers.

hinotell asks:

Tom, when will the options market be cleaned up like nasdaq was?

tdemark_thestreet:

Unfortunately, my opinion is that 1987 was devastating to the options markets. The recovery process is still not complete and I believe Internet trading may help improve liquidity and restore credibility to the markets.

tdemark_thestreet:

And it will require time and consolidation of various option markets.

erin_thestreet:

I think Thom, the question might refer to the scandals going on the floor of the AMEX

tdemark_thestreet:

That's isolated. There was more misbehavior back in the 1970's but we are more aware of it today.

erin_thestreet:

In terms of spreads? Or what sort of misbehavior?

tdemark_thestreet:

The regulation and requirements are such that its difficult to run a scam in the exchanges.

tdemark_thestreet:

The government has installed a number of safeguards for that reason and are able to detect when unusual activity.

erin_thestreet:

That sounds like what they do in the stock market.

tom0716 asks:

I want to do stock filtering such as: midcaps that are at or near 52 week low or below certain moving averages. what software will help me do that as an active daytrader?

tdemark_thestreet:

Any conventional software package will help.

erin_thestreet:

Bloomberg

or any

Reuters

terminal.

tdemark_thestreet:

Bloomberg

or

CQG

.

Reuters

,

Futuresource

would help.

MoonRiverMan asks:

I just started trading options this year. I always buy current month, just out-of-the-money stock options. When they move in the money, I always get just one chance to sell them for a profit. They never go into the money twice. So I guess I should sell as soon as they go into the money, right?

tdemark_thestreet:

No that isn't always the case. You are correct in focusing on the near buy options which are in the money.

tdemark_thestreet:

But that's a moving target, in the money could be a $25 exercise price level which could mature into a $30 price level.

erin_thestreet:

Thom, could do explain or tell us why you stick with current month options, and at-the-money?

erin_thestreet:

Why would that be good for retail investors?

tdemark_thestreet:

As you approach expiration premiums diminish and as you exceed the exercise price premiums diminish as well.

tdemark_thestreet:

If you are correct in the short term direction in the stock in the option should outperform the stock percentage wise.

erin_thestreet:

You're kidding, right?

wolfgangAD asks:

If a stock is trading a mill in volume the second day and drops a point r they selling or buying?

tdemark_thestreet:

For every buyer there a seller.

tdemark_thestreet:

Some argue that the market is in equilibrium and efficient. But the critical consideration is the concession that a seller will give up to execute his trade.

tdemark_thestreet:

Conversely if the stock were up a point on a million shares likewise the buyer is making a concession to pay up to buy the stock. The critical factor is whether the stock is up or down and how aggressive the buyer or seller is.

mxsimms asks:

Tom - re: software....sounds like you are NOT a big fan of the popular Tradestation and OptionStation by Omegaresearch ???

erin_thestreet:

Is this your competition?

tdemark_thestreet:

That is an excellent product but I'm not here to promote any product. My former staff has created software products which they sell as well. But I'm particularly sensitive to promoting.

erin_thestreet:

Can you give us some names?

erin_thestreet:

Just because we're all about promotion here...LOL

tdemark_thestreet:

To not promoting my products as well. There are some good retail products that are relatively cheap. Among them are

Omega Superchart

and

Tradestation

.

tdemark_thestreet:

Equis Metastock

which is owned by Reuters.

tdemark_thestreet:

Also

AIQ

and

Window on Wall Street

.

erin_thestreet:

How much should the average retail investor plunk down for options trading software?

erin_thestreet:

What's reasonable?

tdemark_thestreet:

Deltasoft

which is the cheapest. But the price range for software can run from $600 to $2500.

erin_thestreet:

Whew!

tdemark_thestreet:

Anyone of the sources,

Option Station Option View

or

Deltasoft

are good products.

pace100_1 asks:

What is a source; least expensive, for getting RT quotes on options? Secondly, what resources are available for doing comparisons, and making decisions as to an options value?

tdemark_thestreet:

If one has access to

Aspen Graphics

,

CQG

,

Bloomberg

,

Bridge Data

or

Reuters

. All the information they need is supplied by these services.

erin_thestreet:

Are there any websites Thom, that might have something like that as well?

tdemark_thestreet:

Moore Research

does exceptional work in option analysis as does

Deltasoft

.

erin_thestreet:

I rely heavily on the Chicago Board Options Exchange's website. It's www.cboe.com -- lots of traders tools and market statistics. options chains.

erin_thestreet:

And they have a hotline: 1-800-OPTIONS. Also, I like

optionsource.com,

, run by

Bernie Schaeffer

erin_thestreet:

Lastly, there's www.optionsanalysis.com and for retail,www.1010wallstreet.com

tdemark_thestreet:

You can email

Deltasoft

at dsoft@west.net or

Moore Research

at swm@mrci.com for more information. I am not affiliated with either but they were helpful in assembling information for the book.

erin_thestreet:

We have to wrap up, so we'll take on more question.

NASDAQ_Sniper asks:

Do you play options on stocks that are most volatile?

tdemark_thestreet:

Yes I recommend trading options of stocks that are most volatile.

tdemark_thestreet:

Because the potential for gains is greatest. However, one must be careful that the trader not overpay and to prevent that I refer back to the basic rules for buying options.

erin_thestreet:

Remember, everyone, Thom's a professional. Don't try this at home!

erin_thestreet:

At least without doing some serious research first.

tdemark_thestreet:

And that is the way specialist on the NYSE as well as market makers on the options exchange is to buy calls on weakness and to buy puts when the market is up because the puts will be trading down for the day.

tdemark_thestreet:

One must be conditioned to buy weakness and sell strength.

erin_thestreet:

Words to live by. Remember, as in all investing, caveat emptor...

erin_thestreet:

Thanks Thom.

tdemark_thestreet:

Thank you it was a pleasure.