From TradeKing’s recent press release, “For over 30 years, broker dealers, option exchanges and market data providers that trade and support option trading have met the challenge of identifying option contracts using 3 to 5 letter symbols. This standard symbol format identified the underlying security with the first 1-3 letters and the expiration month and strike price with the last 2 letters.”

Using letters to serve as options symbols is confusing and nearly impossible to interpret off hand (unless you are a pro of course). So why is the change only finally coming now?

According Options Symbology Initiative (OSI) page on the Options Clearing website, in 2005 the “OCC Board of Directors asked OCC staff to work with industry representatives in defining a reasonable time frame to eliminate the use of OPRA codes in the listed options markets.” OPRA means the current way of listing symbols. Bottom line this has been a long time coming.

OLD WAY
(From TraeKing’s press release) “XYZ DE, in which the letters “XYZ” identify the company XYZ as the underlying stock (and not all options symbols currently have letters that resemble the symbol or name of their underlying stock), and the “D”, for those who know how to de-code the symbology, denotes that this is a Call option expiring on April 17 2010, with the “E” denoting that the strike price of the option is $125.00.

NEW WAY
With the transition to the new options identification, all of that information would appear plain to see, as in this example:  XYZ April 17, 2010 125.00 Call”

Several major industry players have apparently already updated their systems for the changes including Thomson Reuters, Etrade, Charles Schwab, and OptionsXpress amongst others.

All I can say is that it’s about time.

For more information, visit the Options Clearing website.

Jesse Livermore, one of the best traders of all time, and John Paulson, one of the best traders of the last few years, both have a set of rules they follow religiously. Their success serves as your opportunity to expand your investment savviness.

Below are the rules of both Livermore and Paulson alongside a bit more background information on who they are (hat top Minyanville and Wsj).

Jesse Livermore

Jesse Livermore, one of the greatest investors of all time, has been featured in many investment books. The most popular was Reminiscences of a Stock Operator by Edwin Lefevre in 1923. During the course of his life he made and lost millions, going broke several times before committing suicide in 1940. These are his seven greatest trading lessons:

1. Cut your losses quickly.
2. Confirm your judgments before going all in.
3. Watch leading stocks for the best action.
4. Let profits ride until price action dictates otherwise.
5. Buy all-time new highs.
6. Use pivot points to determine trends.
7. Control your emotions.

For those investors wondering if they are emotional, we suggest reading out post 50 Ways You Know You Are An Emotional Investor.

John Paulson

John Paulson, a hedge-fund manager in New York, lead his firm to make $20 billion in profits between 2007 and early 2009. By betting heavily against first the housing market and then later financial stocks, his firm made a killing. Paulson’s success netted him a paycheck of some $4 billion, or more than $10 million a day. His funds during this time had returns of several hundred percent. These are his eight investing lessons:

1. Don’t rely on experts, be skeptical.
2. Always have an exit strategy.
3. Debt markets can do a better job predicting problems than stock markets.
4. Always educate yourself on new investment vehicles.
5. Don’t underestimate insurance (such as put options).
6. Experience counts.
7. Don’t fall in love with any single investment, keep emotions aside.
8. Don’t risk too much on any single trade, diversify risk.

By applying any of the above fifteen lessons you can take your investing game to a new level and become a better trader. Success takes time, and these rules will lead you in the right direction.

For further reading take a look through our stock education archives which houses more than 100 articles on a variety of investment topics.

There are good reasons for not exercising.

1) Paying Fees. Most brokers charge a relatively high fee to exercise. If you then sell the shares you just bought, you must pay another commission. What was the point of exercising? Just sell the option.

2) Paying Interest. When you exercise a call option, you take possession of the shares. That means you must pay for the shares, using cash. If you don’t have the cash on hand, you must borrow it from your broker. In either case, you pay interest to use cash. Current interest rates are low, but they will not always be low. This is a waste of money.

3) Risk of Loss. This is a real danger when you exercise an option prior to expiration, and is something that many investors fail to recognize. If you own a call option and the stock plunges, your loss is limited to the value of the option. But, if you converted your calls to stock, your loss becomes essentially unlimited when the stock declines rapidly.

4) Weekend risk. Some investors exercise the options when expiration arrives, planning on unloading the shares when the market opens the following Monday. This involves an unnecessary risk. Stocks do not always behave as expected and occasionally gap open at a price that differs from the previous day’s closing price. Why take that chance? Sure, the price may be higher and you reap an extra profit. But it’s a gamble. If you plan to sell the shares, don’t exercise. Just sell your calls before the market closes Friday.

5) Nothing to Gain. Each of the problems listed above occurs when you exercise an option. It may pay to accept those costs or risk, if there were something to gain. But exercising the stock and holding it gives you all the risks of a stockholder, with no benefits. If you want to maintain a long position in the same stock, sell your old option and buy another option with a later expiration date.

Mark Wolfinger is a 20 year CBOE options veteran and is the writer for the blog Options for Rookies. He also is the author of the book, The Rookie’s Guide to Options.

Further Reading, Options Trading:

• 9 Easy Tips for Option Trading Success
• Investors Guide to Trading European Options
• 6 Great Option Strategies For Beginners
• 7 Reasons Investors Should Trade Options
• Options Basics Quiz
• Entering an Order to Buy or Sell Options Investor Series, Part I
• Your First Options Trade: Writing Covered Calls

Overview of the Ultimate Technical Analysis Handbook

The eBook goes into the basics of the Elliott Wave Theory and discusses how different technical indicators can help investors make money. The MACD, Moving Averages (50, 100, 200), and Fibonacci Retracements are all covered. Furthermore, the eBook teaches how to draw and use trendlines (Chapter 6 ) which is a must for any investor performing technical analysis. Overall there are probably close to 100 charts, diagrams, and examples to break everything down.

Personally my favorite part is towards the end when Head & Shoulders are covered (Chapter 8 ) and even better yet ways to use stop losses with four kinds of protective stops (Chapter 9 ): parabolic stops, volatility stops, three period high-low channel stops, and  five-period simple moving average stops.

The eBook is only free for a limited time so make sure to download a copy and take advantage of the investor education offered. Go here to download.

The Elliott Wave Theory

If you like the eBook the next step is to check out Bob Prechter’s monthly newsletter the Elliott Wave Theorist. Information is provided once you download the eBook. I am currently a subscriber of the EWT and read it each month religiously.

Also check out his latest book, The Mania Chronicles, which is actually a ridiculously long 700 pages.

Buy to Open

A. An order to buy a specific option
B. You are initiating a new position, or increasing an existing position

Buy to Close

A. An order to buy a specific option
B. You are buying an option that you previously sold
C. You are reducing or exiting (closing) an existing position

Sell to Open

A. An order to sell a specific option
B. You are writing (selling) an option you do not own
C. You are initiating a new position, or increasing an existing position

Sell to Close

A. An order to sell a specific option
B. You are selling an option you bought earlier
C. You are reducing or exiting an existing position

Some brokers require that you specify into which of the four categories your trade falls. Others don’t ask because it’s a simple matter for their computers to gather the information.

When you trade spread, or combination orders, you are entering an order to trade at least two different options simultaneously. The same rules apply. When you initiate the trade, the appropriate boxes to check are: ‘Buy to open’ for the option you buy and ‘sell to open’ for the option you sell.

Some beginners get stuck when entering an order because they have not yet learned which of these four choices applies to a specific order. The purpose of this post is to be certain that you don’t have to be bothered with this annoying request from your broker.

Mark Wolfinger is a 20 year CBOE options veteran and is the writer for the blog Options for Rookies. He also is the author of the book, The Rookie’s Guide to Options.

Further Reading, Options Trading:

• 9 Easy Tips for Option Trading Success
• Investors Guide to Trading European Options
• 6 Great Option Strategies For Beginners
• 7 Reasons Investors Should Trade Options
• Options Basics Quiz
• Entering an Order to Buy or Sell Options Investor Series, Part I
• Your First Options Trade: Writing Covered Calls

With this though comes unseen risks that over time have become more noticeable. ETFs offering double and triple leverage have emerged in the last few years that are great for active day traders but not so good for long term investors. The volatility and complexity of these leveraged instruments have made them much more risky because they do not do fulfill their intended purpose.

To explain why ETF Guide today offers some professional insight:

There is the misconception, however, that the magnified DAILY performance multiplied by a longer period of time, will also result in accurate long term performance mirroring. This is not so.

Due to the compounding effect of leveraged performance, the long-term performance of leveraged ETFs can deviate substantially from the underlying index. According to an in-depth study by ETFguide.com, the performance tracking error becomes particularly pronounced during periods of volatility (available in the April issue of the ETF Profit Strategy Newsletter).

The fourth quarter of 2008 marked such a period of volatility. Even though the Dow Jones (DJI: ^DJI) was essentially range bound, some leveraged short ETFs deviated from their perceived long-term objective by 20% and more.

As much as volatility hurts the performance of leveraged ETFs, especially in combination with a non-directional market, a directional market actually helps the performance of leveraged ETFs. This, once again, is due to the effect leverage has on compounding interest. Once more, timing is key.

Because of this it is highly recommended that traditional, longer term buy and hold investors stay away from leveraged (2x, 3x) ETFs whether they be short or long altogether. After all is said and done even the low management fees cannot save investors from ETFs deviating far from their long term objectives.

Further reading, ETFs:

• 40 Inverse ETFs For Bearish Investors
• 24 Ultra Long ETFs For Bullish Investors
• Triple Leveraged ETFs
• ETFs vs ETNs, the Difference
• US Treasury ETFs

Source:
Short and Leveraged ETFs – 3 Pitfalls You Shouldn’t Ignore
Simon Maierhofer
ETFGuide.com, Aug 19, 2009

When you buy or sell options, there is a market – a system by which market markets name a price (bid) they are willing to pay for any option you want to sell. In addition, they name a price (ask) at which they are willing to sell any option you want to buy.

These bid and ask prices are not chosen at random. They are values based on a mathematical formula, such as the Black-Scholes model. To that model, market makers may decide to add tweaks of their own that depend on the current risk (or lack thereof) of their positions.

The point is that these prices are not chosen at random. The value of an option can be calculated exactly if you know the true number for each of the seven items that go into the equation. In reality, only six of these ways to value options are known, and the seventh (volatility) must be estimated. Volatility plays such an important role in determining the value of an option, that it’s impossible to calculate an options true value. The best anyone can do is to estimate that volatility, which in turn produces an estimated value for the option. And the difficulty of making that estimate is that it’s the future volatility that is used in the model. Specifically the time period is between when the option is traded and expiration.

Ways to Value Options

1. Stock price - Consider a call option. If you want to own an option that gives you the right to buy stock at $50 per share, surely you would pay more for that call if the stock is trading at 49 than when it is trading at $40. The higher the stock price the more a call option is worth. Similarly, the lower the stock price, the more a put option is worth. If you want to have the right to sell stock at $30, you would pay more for that put option when the stock is $29 than when it is $35. The lower the call stock price, the more a put is worth.

2.Strike Price – The price at which the call owner may buy, and the put owner may sell, stock. You would pay more for the right to buy stock at $60 than for the right to pay $70. Thus, calls increase in value as the strike price moves lower. And puts increase in value as the strike price increases (the right to sell at $45 is more valuable than the right to sell at $40)

3. Type of option (there are only two types) – An option’s value depends on whether it is a put or a call.

4. Time before expiration arrives – The more time, the more an option is worth. As the option owner, you want the stock to undergo a favorable move. The more time, the greater the possibility of that favorable move occurring.

5. Interest rates – This is a minor factor in the price of an option. As interest rates rise, call options increase in value. When investors buy calls instead of stock, they have extra cash (not used to buy stock) and that cash can earn interest. When rates are higher, they earn more interest, and thus, are willing to pay more to own call options.

6. Dividends – When a stock goes ex-dividend (trades without the stockholder receiving that dividend), the stock price declines by the amount of that dividend. Thus, call are worth less, and puts are worth more, as the dividend increases.

7. Volatility – Volatility is a measure of how much the stock prices varies from day to day. In other words, it’s a measure of how much the stock price is likely to change over time. Volatile stocks undergo larger and more frequent price changes than non-volatile stocks. Because the option owner is hoping for a big price change, the value of an option on a volatile stock is much greater than the option on a less volatile stock. A small change in the volatility estimate can have a significant impact on the price of an option.

Mark Wolfinger is a 20 year CBOE options veteran and is the writer for the blog Options for Rookies. He also is the author of the book, The Rookie’s Guide to Options.

Further Reading, Options Trading:

• 9 Easy Tips for Option Trading Success
• Investors Guide to Trading European Options
• 6 Great Option Strategies For Beginners
• 7 Reasons Investors Should Trade Options
• Options Basics Quiz
• Entering an Order to Buy or Sell Options Investor Series, Part I
• Your First Options Trade: Writing Covered Calls

Options are the best investment vehicles around. They allow investors to take long, short, or neutral positions. They allow you to manage risk far better than any other investment method. Use them wisely and they will treat you well.

Option Trading Success Tips

Here are nine easy tips for new options traders to follow if they want to be successful.

1. Options are best used as risk-reducing investment tools, not instruments for gambling. (Read my article, why trade options?)

2. Use the options Greeks to measure risk.

3. Manage risk carefully. Do not hold any position than can – in the worst case scenario – cost more than you are willing to lose.

4. Be careful about the number of option contracts you trade. It’s easy to over-trade with inexpensive option contracts – especially when selling.

5. Don’t go broke. Never allow an unexpected event to wipe out your account.

6. Do not expect miracles. Do not buy options that are far out of the money just because they are ‘cheap.’ The chances of success are tiny. Not zero, just tiny.

7. Selling naked options is less risky than buying stock. But, like stock ownership, there is considerable downside risk. Exception: It’s reasonable to sell naked puts – but only if you want to buy the shares, if assigned an exercise notice.

8. Limit losses. The most effective way to accomplish that is to buy one option for every option you sell. That means selling spreads, rather than naked options.

9. Hope is not a strategy. When a position goes bad, consider reducing risk. Doing nothing and hoping for a good outcome is nothing more than gambling.

Mark Wolfinger is a 20 year CBOE options veteran and is the writer for the blog Options for Rookies. He also is the author of the book, The Rookie’s Guide to Options.

Further Reading, Options Trading:

• Investors Guide to Trading European Options
• 6 Great Option Strategies For Beginners
• 7 Reasons Investors Should Trade Options
• Options Basics Quiz
• Entering an Order to Buy or Sell Options Investor Series, Part I
• Your First Options Trade: Writing Covered Calls