Cap's Log - 11/27/05
This is a good opportunity to mention an old technique I used to use when trading options.
I used to trade index options on the OEX a lot, and also used to use covered calls a lot back in the nineties.
One technique I used to use to avoid selling too early was to take money out of the market when the trade was going my way by "rolling up" on calls and "rolling down" on puts. One of the key concepts was that the time value of an option in absolute dollars is always highest when the option is right at the money.
As an example, I would buy out of the money calls on the index (buy when the time value is lower). Then if the index went up, I would wait until the option was right at the money (time value at a maximum). Then I would sell that option and buy another (cheaper) out of the money option. Thus, I would still have my bullish position, but would just have taken some of my cash back out, lowering my overall risk on the trade.
The use of options would be necessary for at least one of the statistical trading methods that I've recently developed for my website. This method involves trades that last only a single day each. During that time, the actual percentage move that you can capture with a high probablility is too low to beat commissions and fees unless you're using options.
For longer term trades I think the use of statistics would be valuable too...a guy named Victor Sparandeo did some work on the probability that a trend would continue as a function of the current duration of the trend. That kind of information might have helped you and maybe even kept you from selling too early.
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