Buying calls for a living and arguing with derivman

D

Derivman

Hi, I am new to the site and it looks like a made a few mistakes already. I am sorry if I offended anyone as I did not mean to post off topic in another thread. As a result I have started my own thread as I am looking for some guidance on trading commodities. With all the hype about China and how much coffee they are starting to drink, I thought it might be a good time to start speculating in the coffee market. I will copy over some of my comments from the other thread as I have written them already. I hope I can learn something of value here and also give something back to others who may ask in the future. Cheers.
Derivman
 
Post copied from other thread.Cheers.
Derivman

http://elitetrader.com/vb/showthread.php?s=&threadid=53037&perpage=6&pagenumber=151


04-24-07 04:48 PM



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Quote from Derivman:

Maybe if I post what I am thinking of doing it will show you all that I am serious about this. I am thinking of opening a broker account with a reputable broker like Optionexpress, but I have to check if they do commodities. If not I can always use one of the big names like RJO Futures. I was thinking to start with maybe something along the lines of the following after determining the market levels as mentioned.

Buy To Open 10 contacts which are 3 or 4 months out ATM and then I can always roll them if it goes wrong on me. I will have plenty of cash in account so don't worry about that. I am only interested in learning what to do at the moment and I am prepared for some losses if they happen to me.

I have read about rolling on several other forums and it seems to be something that can be very beneficial in the Options market. Again any advice will be greatly appreciated.
Derivman
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Again my apologies for not paying attention as I should be, for I do not wan't to waste anyones time here. My opening trade will be Buy To Open 10 Long Calls which are 3 or 4 months out ATM.
Derivman
 
Quote from Allmighty1:

The most straightforward way of implementing your viewpoint is to buy contracts, or options on the commodity.

Whether you make money on this concept depends on

1. Whether you are right or not

2. Your ability to enter that market and maintain a position without getting shaken out.

3. You ability to mobilize assets (you account size).


If you are correct and you can long or accrue a position over the right time frame you will make money. If on the other hand you are wrong, too early, get shaken out, or you don't have enough assets (money in your account) it won't matter.

Just my opinion.

A1
More...

Thank you A1 for yout input. At the moment I find the concept of Option trading a little confusing. Many good sites tell you that you can make money with Options regardless of market direction once you use the right strategies. As I am not a child I understand that everything is not as simple as it sounds, no matter how much I might like to think it is. What is eluding me at the moment has a direct relationship to your comments.

1. Whether you are right or not

This is where many good sites say that market direction does not matter once you have the right strategies.

2. Your ability to enter that market and maintain a position without getting shaken out.

I have also read that there are ways to stop you getting shaking out such as rolling over Calls if the market goes against you.

3. You ability to mobilize assets (you account size).

I have this covered and I am also willing to risk some of my money to learn.


Then there is the concept of the Zero Sum Game. This can mean that for every winner you must have a loser and so the sum is zero. One trader will lose $1000 by selling the Call and the other trader will win the $1000 by buying the Call. But what if the buyer and seller makes an adjustment after entering the trade. Surely both buyer and the seller can now make money by the fact that they have made an adjustment to their positions and if we go back to the initial trade it no longer becomes a Zero Sum but a game of shifting risk in the market so that you can make money before the Options expire. This one really has me baffled and if I can work this out I think I will find it much easier to understand the various strategies that can be used. From what I see this type of trading requires good experience in risk management and risk shifting. Maybe I have it all wrong but if I don't start asking then I will never learn anything and I want to try and get in on this Chinese coffee boom that everyone is talking about.Again thanks for your input and it is nice to see that some people will take the time to reply.
Derivman
 
Demand changes in commodities tend to have a VERY long term effect, or potentially none at all. Supply changes have short term effects, and potentially very large ones.

1) What kind of Coffee is China drinking? Robusta? Arabica? One futures contract trades at LIFFE, one at NYBOT.

2) Increased demand doesn't necessarily mean higher prices unless supply doesn't keep pace. Will supply keep pace? At the moment, Arabica Coffee futures have been hurt because Brazil's crop looks really good.

3) Which contract month will benefit the most from China's consumption? Do they import mostly at one time of year? Are there regulations or taxes which would impact demand?

4) Do they import from any particular country, or will they take it from anywhere?

In any case, options probably aren't the best way to speculate on long-term demand changes.
 
Quote from Derivman:

This is where many good sites say that market direction does not matter once you have the right strategies.
Ouch. This is pure hype. In options, you have to have a correct opinion about 3 things:

1) Direction (Up, down, sideways)
2) Timing (How quickly will it move)
3) Volatility (How is the market pricing movement into the options)

You can make money by being right on only two out of three, but the odds are NOT in your favor.

I have also read that there are ways to stop you getting shaking out such as rolling over Calls if the market goes against you.
You're paying a premium to own the calls. Rolling them from month to month is done at the cost of premium. After a few months of paying $1000 for a call option and being wrong each month, you'll find rolling isn't anywhere near as desirable as the hype would have you believe.

But what if the buyer and seller makes an adjustment after entering the trade. Surely both buyer and the seller can now make money
Still a zero-sum game. Whoever bought or sold you the adjustment becomes a part of your equation.
 
Quote from FullyArticulate:

Demand changes in commodities tend to have a VERY long term effect, or potentially none at all. Supply changes have short term effects, and potentially very large ones.

1) What kind of Coffee is China drinking? Robusta? Arabica? One futures contract trades at LIFFE, one at NYBOT.

2) Increased demand doesn't necessarily mean higher prices unless supply doesn't keep pace. Will supply keep pace? At the moment, Arabica Coffee futures have been hurt because Brazil's crop looks really good.

3) Which contract month will benefit the most from China's consumption? Do they import mostly at one time of year? Are there regulations or taxes which would impact demand?

4) Do they import from any particular country, or will they take it from anywhere?

In any case, options probably aren't the best way to speculate on long-term demand changes.
More...

Thank you for your input FullyArticulate. Maybe I need to explain myself a bit more. It comes to my attention that China is starting to drink a lot of coffee. This means to me in the simplest terms that the demand for coffee will be greater as China has a big population. If the number of coffee drinkers in China rises dramatically then the demand for coffee will be greater. If the demand is greater and the supply is not increased to meet the increase in demand then surely the price will rise. A sudden rise in demand will see a sudden rise in price and with this the market may become more volatile. If the market becomes more volatile then I want to look at Options as opposed to Futures as I can limit my risk with buying Options and I can't lose any more than I decide to risk. But according to all the good educational sites you can make money with Options regardless of where the market goes so surely this is the best approach. I suppose what I am trying to grasp is how do I buy Options knowing my limited risk and then convert them into various strategies so that I will make money. Several concepts seem to contradict each other. Do I buy only or do I sell only. Or do I buy and sell. And when do I start off trades. I know a little about Support and Resistance and market ranges but how do I put it all together to get the trades in the market. And more importantly, what do I do if things go wrong. Can I roll over, for I read that you can roll over calls to take in more premium if the market goes against you. But is this the best thing to do and when do you do it if you have positions in the market. It all seems very complicated and going back to the Zero Sum Game may be agood place to start.
I will post the links to the educational sites I have been reading as they explain it better than me. Thanks again for your time.
Derivman
 
Quote from FullyArticulate:

Quote from Derivman:

This is where many good sites say that market direction does not matter once you have the right strategies.
Ouch. This is pure hype. In options, you have to have a correct opinion about 3 things:

1) Direction (Up, down, sideways)
2) Timing (How quickly will it move)
3) Volatility (How is the market pricing movement into the options)

You can make money by being right on only two out of three, but the odds are NOT in your favor.

I have also read that there are ways to stop you getting shaking out such as rolling over Calls if the market goes against you.
You're paying a premium to own the calls. Rolling them from month to month is done at the cost of premium. After a few months of paying $1000 for a call option and being wrong each month, you'll find rolling isn't anywhere near as desirable as the hype would have you believe.

But what if the buyer and seller makes an adjustment after entering the trade. Surely both buyer and the seller can now make money
Still a zero-sum game. Whoever bought or sold you the adjustment becomes a part of your equation.
More...

Thanks again for your input Fully Articulate. I came across the following some time ago and I wrote it down at the time.

Question 1. One Option trader wins $1,000 and five Option traders lose $1,000 between them with $200 each.

Question 2. Five Option traders win $200 each and 5 Option traders lose $200 each.

Which of the 2 questions is a Zero Sum Game ?

I never answered it and now I am curious as to what the correct answer is as there seems to be many conflicting opinions out there?Cheers.
Derivman
 
Quote from Derivman:


Question 1. One Option trader wins $1,000 and five Option traders lose $1,000 between them with $200 each.

Question 2. Five Option traders win $200 each and 5 Option traders lose $200 each.

Which of the 2 questions is a Zero Sum Game ?
More...
They're both zero sum. A total of $1000 is won and a total of $1000 is lost.

In options and futures, there only exists a contract if two sides take opposite positions. As a result, there is a winner and a loser.

In the stock market, the company is the only loser from selling its own stock. Since the company is fully hedged against its own stock price, what does it care? :-) In other words, everyone can make money.
 
Quote from Derivman:

Thanks again for your input Fully Articulate. I came across the following some time ago and I wrote it down at the time.

Question 1. One Option trader wins $1,000 and five Option traders lose $1,000 between them with $200 each.

Question 2. Five Option traders win $200 each and 5 Option traders lose $200 each.

Which of the 2 questions is a Zero Sum Game ?

I never answered it and now I am curious as to what the correct answer is as there seems to be many conflicting opinions out there?Cheers.
Derivman
More...

Here is the link to one of my educational sites.Cheers.
Derivman
 
Quote from FullyArticulate:

They're both zero sum. A total of $1000 is won and a total of $1000 is lost.

In options and futures, there only exists a contract if two sides take opposite positions. As a result, there is a winner and a loser.

In the stock market, the company is the only loser from selling its own stock. Since the company is fully hedged against its own stock price, what does it care? :-) In other words, everyone can make money.
More...

If this is so then why does my educational site say otherwise. This is what confuses me about Options. No disrespect to anyone but how do I know who is right and who is wrong and surely if I am to be successful at trading Options then I need to know the correct answer. Thanks again.
Derivman
 
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