The New Science of Technical Analysis

Chapter 12

Options

When I first entered the investment business, the Chicago Board of Options Exchange (CBOE) did not exist. Options were underwritten by brokers and were traded over the counter. Since that time, however, much literature has been written regarding the topic of options. Unfortunately, most information concentrates on procedure and valuation studies. Although some attention is devoted to methods that evaluate market sentiment and that indicate market direction, the extent of this information is woefully incomplete. All the observations I have made originate from personal experiences acquired as a result of numerous forays in the options markets and are not found in textbooks. As I have stated repeatedly throughout this book, “sweating out” personal trades seems to make a trader more alert to potential pitfalls; it also contributes to indelibly fixating on his memory various strategies and opportunities. I will describe my techniques and rules, and, I hope, impart some wisdom that will reduce the likelihood of your trading failure. These techniques have application to both equity and futures options.

Rather than recite numerous incidents and episodes that affected my options trading life, I will share with you the lessons learned. They were acquired as a result of being taught by the “ultimate market teacher”—trading losses. Psychologists have said that many traders possess an unconscious desire to lose in their investments. I am not one of those individuals. I have ...