Combining 'Trend Trading' principles with Options Leverage

[Kruegs]

G'Day Forum readers,

As the title says, I have been interested for quite a while in combining the principles of 'Trend Trading' with the leverage offered by applying basic Put and Call options on the underlying stock.

I dabbled last year but found that my process lacked some of the discipline I would have liked to see myself have! Still made a profit, but looking at some of my 'errors in judgement' I thought it could have been better.

So.. this year I thought I'd have a more fair dinkum crack at it, and have decided to report my analysis, decisions and trading outcomes through a website. I thought that would help me be transparent about my analysis, as well as providing a useful record over time of my trading behaviour.
In addition, I have provided a link to a Blog, where i hope others who have a view on my trading decisions or analysis would be happy to share. All part of the learning process I figure.

Now, I made the website myself, and it's the first one I've ever done, so please don't be too critical of my 'web design' skills. Trading skills - I welcome as much constructive criticism as you've got.

By the way, has anyone else developed a firm strategy in the past for using Options to harvest stock trends? Would be interested to hear how it went, and what you learnt.

Many thanks,.
Mark Krueger

http://www.trendingprofits.com

http://trendingprofits.yourliveblog.com/index.htm

 

[Trembling Hand]

Hello Mark

Will be interesting to see how things go. Its always tough to post all your trades out their for everyone to see. I think it makes the process a lot harder because bad trades get some added pain of being out in the public but still on the other hand its always good to document your actions as a way of learning what does and doesn't work.

Just a question I had a look at the trades you have on and you have 2 longs and 2 shorts but to me the chart patterns are just about the same. that is they are all in down trends with lower lows & lower highs.

 

[Kruegs]

Hi there TremblingHand,

Yeah... I thought putting my bad decisions out there for the world to see would probably be even more useful than just putting out the 'good' decisions.
I bought the ZFX earlier in the month, and on the basis that with it paying a high dividend, it would recover up to the ex-Dividend date. May prove to be wrong on that yet.
Meanwhile, Santos (my other CALL option) I thought was showing a strong recovery, but also looks to be slowing down and possibly heading for a reversal perhaps(!!?).
In both of these cases, I admit I have probably strayed away from the purest use of my system, which was my problem last year.
Thanks for your observations and comments.

Regards,
Mark Krueger

 

[wayneL]

Kreugs,

I see a little bit of conflict between "trend trading" and "option trading".

With straight trend trading (and speaking in options terms) you are trading straight delta. There is no purer delta instrument that straight out shares (or CFDs or futures). With options, there are a number of other considerations in terms of those pesky greeks, namely, Vega, Theta & Gamma & sometimes Rho.

Whether aware of it or not, you are trading these other vectors.

It's not that you can't trend trade with options, but there are three further critical questions one must ask themselves in deciding on a course of action.

1/ What sort of trend am I trading? A creeping trend? A strong trend? A whipsawing trend? An exponential trend?

2/ What is the current option volatility and what is my volatility projection?

3/ What is my short term outlook within the overall trend I'm trading.

The reason is that a straight out put or call may be a suboptimal strategy for the current outlook on the above three questions, and another strategy could be superior. eg a vertical spread.

On the other hand, a straight out call/put could be ideal.

But those questions must be answered first for long term success.

Just something to think about.

 

[Kruegs]

Wayne,

Thanks for your input. Analysing the greeks further, and checking that my selection of options fits the trend is something I want to improve.
I have found in the past sometimes I have bought an option too close to expiry, for example, and hence it can be eroding away value even if the trend is moving in the right direction (but not fast enough!).
Sometimes I have cut profits short as well.
Anyway, I'll keep at it and hopefully learn more on the way and see if I can make this work successfully.

Regards,
Mark Krueger

 

[wayneL]

Kruegs,

Another way to look at this is via synthetics.

Let's suppose you are looking at buying 3 x XYZ April $35 call options (price etc doesn't matter at this point). Ask yourself this question: Would I buy 3000 XYZ stock and 3 x XYZ April $35 put options(Being synthetically equal)?

This sometimes helps to understand exactly which tiger you happen to have by the tail.

BTW how are you position sizing these trades?

Cheers.