Should You Do Virtual / Paper Trading?

9:23 PM killnine

For beginners, before starting real trading, it is recommended that you should prepare yourself first by spending some time to do virtual / paper trading. For those who may be unfamiliar with the term, paper / virtual trading is a trading simulation, where you can �buy� or �sell� a security with real price, but not using real money. You will be given a certain amount of �virtual money� as your �capital�, and you can place a trade through your online broker as if you were really trading.

Perhaps you have read many trading books, attended trading courses, and learnt various trading strategies. Through paper trading, you can implement what you have learnt, practice how to make a trade, and/or trading strategies, without putting your hard earned money at risk.

I know quite a number of articles have discussed the advantages & disadvantages of paper trading. The most well-known advantages of paper trading are: (1) it serves as a great learning tool to give you hands-on training; and (2) no financial risk is involved in paper trading, which means you can�t lose money.
However, many people also suggest that the 2nd advantage can actually be a disadvantage too. Why? Because humans learn from mistakes. We particularly learn more from mistakes that hurt either physically, mentally, or emotionally. When the mistakes don't hurt, it doesn't have the same effect.

Paper trading does not involve emotions, which is in fact one of crucial aspects in trading success. One can be very profitable in paper trading, but may lose money in real trading. Dr. Alexander Elder in his book Come Into My Trading Room: A Complete Guide to Trading said that one reason why this happens is that �good decision is easier to make when your money is not on the line�.
Another possible reason is that ones can do things in paper trading that they would not do with real money. For example, never use stop loss and always wait for the stock price to make a comeback into profitable state.
Why can you do that in paper trading?
Because you don�t need to deal with your emotions, fear and greed, when you are in the process of decision making. In real trades, without a stop lost, how long can you afford to see your trades keep moving against you and accumulating the losses? Depends how strong your stomach is.

Therefore, Dr. Alexander Elder suggested the following:


Still, there is no substitute for trading with real money, because it engages emotions more than any paper trade. It is better to learn by putting on very small real trades than paper trades.

I agree with Dr. Alexander Elder on this. However, I do think that paper trade is also still important, particularly for beginners. Recently, Dr. Brett Steenbarger wrote a post on how one should go about learning to trade. One of the ways to start the trading learning process is through paper trading:


3) Start With Simulation - Yes, yes, I'm very aware that simulated trading (paper trading) is not the same as the real thing. But there's a reason basketball and football players engage in scrimmage games, and there's a reason chess champions practice their game outside of tournaments. Simulation enables you to make your mistakes and learn from them *before* you risk losing in the real performance. It's also helpful to first practice skills without the pressure of making money. If you can't make money in simulated trading, you certainly are not going to succeed going live. Simulation is the bridge between learning and doing; it's an important skills-builder.

So, should you paper trade or not?
In my opinion, paper trading is not only useful, but also necessary, particularly for beginners.

When I first started learning to trade or when I�d like to try new trading system / strategies, I always begin with paper trading. After gaining consistency for quite some times in paper trades, I then try it with small real trades to involve emotions into the system testing.
By doing this, I will not waste my capital to test whether a new system / strategy can work for me. But I do agree that what works in paper trading may not perform well once the emotions are engaged in real trades. So, it�s also important to test it with small, real money as the final step of the testing.

Related Posts:
* Options Trading Basic � Part 2
* Option Greeks
* List of Some Online Stock Option Brokers
* My Online Stock Option Brokers - Sharing My Experience
* 5 Tips For A More Effective Virtual / Paper Trading

Things To Consider Before You Decide To Take A Trading / Investment Course

10:43 PM killnine

When you are interested in learning stock / options trading, you might be considering whether you should take a course or just learn it by yourself. Taking a course might help you to have a jump start in learning. However, some people are better learning it by themselves by reading books or trading websites / blogs. It all depends on your learning style / preference, whether you are the kind of people who can learn on their own, or you are better learning by listening to people (mentors) who teach you in person.

As for me, I mentioned before in the previous post that though I attended paid trading courses, I actually learn much more from all the great investment / trading blogs around than what I got from the paid courses. Reading the blogs has helped me tremendously to grow and improve as a trader.

Should you decide to take a course, you will then have to pick which course you should take.
A few things to consider so that you know what to expect or to avoid from a trading / investment course:

* After you finish the course, sometimes they may come back to you and say that just attending that course is not enough. Then they may offer another �more in-depth� courses, couching/mentoring program, etc. And usually, you will have to pay more money for that.

* In some courses, the trading strategy they teach may require you to use / buy their trading software. Hence, you need to depend on their software and, generally, will have to pay them subscription fee and system enhancement fee (if any). Therefore, before you decide to sign up a course, you should query about this possibility if you�re not interested to always depend on their software.

* A trading course may teach you a very good strategy. However, no matter how good the strategy is, it may not work for you, simply because it doesn�t suit your personality / risk appetite. I personally feel that this is very important. One can be successful in trading only if he can find a strategy that best suits his personality and feel comfortable with it.

* Attending a course is only a start of your learning journey. Don�t expect you can master trading and ready to make big money after attending a-few-days courses. You will still continue to learn from other sources, or need to tweak and adjust the strategy to make it your own. Trading needs hard work and determination. You will not stop learning until you stop trading.

* Don�t believe too much in testimonies. Even though it may be true that some of them get this much of return or that much of dollar for only a short time, that is not the important point. So what if they can make a phenomenal return or dollar, but it�s only one time or a few times, or with the helps / tips from the mentor. You never know if those people who give testimonies are only too happy for a few successful trades. What is more important is the consistency & being independent, particularly if you want to trade for a living.

More Understanding about Options Time Value

10:38 PM killnine

As we know, an option�s price comprises of 2 components: Intrinsic Value + Time Value.
Assuming all other things remain constant (i.e. no changes in the underlying stock price and volatility), the time-value component of an option is affected by 2 variables (both for Call & Put Options):

* Time remaining until expiration.
The longer the time to expiration, the more time value the option will have.

* The closeness of the option Strike Price to the money.
At-The-Money (ATM) options have the maximum level of time value, and the time value decreases as it moves to deeper In-The-Money Options (ITM) and deeper Out-Of-The-Money (OTM) options (like inverted-U curve).
Time value is at its highest level when an option is ATM because the potential for Intrinsic Value to begin to increase is the greatest at this point.

Note:
ATM options have the highest level of time value. Time value decreases as it moves to deeper ITM or OTM options (like inverted-U curve).
This can be understood better if we see the time value as the price that people are willing to pay for the chance / uncertainty as to whether or not an option will finish ITM.
The more uncertain, the higher the time value will be.
An option that is far OTM has almost no chance of finishing ITM. As such, it will not command a high time value.
An option that is already deep ITM is almost certain that it will finish ITM, hence time value is smaller.
But ATM or near ATM options have more uncertainty as to whether or not the options will finish ITM, and therefore these options have a higher time value.



In addition, we know that for both Calls & Puts, the time value component of an option price decreases as expiration is nearing, and the decrease rate is accelerating as it is getting closer to expiration, particularly for At-The-Money (ATM) options. This means that the amount of time value disappearing from the option price per day gets bigger with each passing day.

Please note here that Time Value decrease at an accelerating rate as expiration nears is true only for ATM option. This is because for ATM option, Theta increases as an option get closer to expiration (Please refer back to the previous post here).
For ATM option, time value decreases sharply particularly the last 30 days before expiration.

Nevertheless, for both ITM & OTM options, Theta decreases as an option is approaching expiration. Hence, for both ITM & OTM options, Time Value actually decreases at a decelerating rate as expiration nears.

Sigma Options had a good article about this in �What You Didn�t Know About Time Decay�.

Related Articles:
* In-The-Money, At-The-Money, and Out-Of-The-Money Options
* Option Price Components
* Options Pricing: How Is Option Priced?
* Option Greeks

Firefox Saves My Days

11:37 PM killnine

Few weeks ago, I encountered some problems with New Blogger, such as unable to upload pictures / images in a post, unable to add new page element as the �Add a Page Element� links disappear from the �Layout�, and also cannot edit the existing page element.

After spending some times trying to find the solutions in the Blogger Help Group, I managed to fix the problems. One suggestion from the Blogger Help Group to solve such problems is to change the browsers. For instance, if you use Windows IE, try to change to Mozilla Firefox, and vice versa.

Normally, I used Windows Internet Explorer (IE) as my browser. When I faced those problems, I change the browser to Mozilla Firefox. Quite often, those problems can be fixed simply by changing the browser to Mozilla Firefox. Although this doesn�t work all the time, at least it�s worth trying.

Just sharing my experience about Blogger. Perhaps it can be useful for fellow bloggers who also use Blogger system (Blogspot).

For non-bloggers, check out JMOT�s post on how Firefox has saved his browsing time tremendously. Firefox indeed can improve efficiency in browsing speed. :)

Have a nice day!

OPTION GREEKS

9:42 PM killnine

Option Greeks: RHO

9:37 PM killnine

Rho is a measure of the change in an option's price due to a change in interest rate. Rho estimates how much the option�s price will change when interest rates changes by 1%.
Rho is seldom used because interest rates are normally pretty stable. Therefore, the chance that option�s price will change drastically due to a rise or a drop in interest rate will be quite low.

Example:
The current price of ABC May 50 Call is $3 with a Rho of +0.03 and interest rate at 5%.
If interest rates increase to 6%, the value of ABC May 50 Call will increase to $3.03.
If interest rates decrease to 4%, the value of ABC May 50 Call will decrease to $2.97.

Rho and the position in the market:
Long calls and short puts have positive rho.
Short calls and long puts have negative rho.

Positive rho means the option price increases when the interest rate increases, and decreases when the interest rate decreases.
Negative rho means the option price decreases when the interest rate increases, and increases when the interest rate decreases.

The impact of interest rate on option�s price has something to do with the �carrying cost� of stocks. When you are bullish on a certain stock, instead of buying the stock, you can alternatively buy Call options, as it is much cheaper to buy Call options than the stock itself. The interest cost should you buy the stocks is built into the Call option�s value.

Example:
ABC stock is now trading at $49. If you expect ABC stock to increase in the near future, you could buy 100 shares of ABC for $4,900, or you could buy 2 contracts of ABC May 50 Call (at $2.9 per contract, with delta of 0.47) for $580. The 2 contracts of ABC May 50 Call will give you a position delta of +0.94 (=2 x 0.47), close to the ABC stock position delta of +1.
If you buy the stocks, you would have to spend about 8.4 times the amount spent on the options. That means you would have to borrow money or take cash out of your interest-bearing account to buy the stock. That interest cost is built into the Call option�s price. The higher the interest rate, the more expensive it is to hold a stock position, and as a result, the more expensive the Call options would be.

Some characteristics of Rho:

* An increase in interest rates will increase the value of Call options and decrease the value of Put options.
A decrease in interest rates decreases the value of Call options and increases the value of Put options.

* For both Calls & Puts, the longer the time to expiration, the larger is the impact of the interest rate on the option value (i.e. the higher is the rho).

* Deep OTM (Out-of-the-money) options tend to have low rho, whereas ATM (At-the-money) & Deep ITM (In-the-money) options relatively have a higher rho.

To read about other Option Greeks, go to: Option Greeks.

Related Posts:
* FREE Trading Educational Videos You Should Not Miss
* Understanding Implied Volatility (IV)
* Learning Candlestick Charts
* Options Trading Basic � Part 2
* Difference Between Option�s Volume and Open Interest