Some tips for derivatives traders...

  1. 1,816 Posts.
    Derivatives are a risky business- very risky.

    I have formulated a few ground rules that i believe are essential for successful trading in warrants/options.

    Having read hundreds of posts on HC re derivatives, it astounds me that so few of you have a solid grasp of what to buy, when to buy, and when to sell. That's what i believe the majority of you secretly loose your capital trading derivatives.

    Here are a few of my guiding principles:

    - Remember that when trading derivatives, what you're really trading are a leveraged instrument that tracks the underlying security/instrument. Thus analysis of the underlying security is essential.

    - It is essential that the odds are stacked in your favour. For this to occur, you must enter a position that's complies with the 'big-picture' trend ie. a bear market.

    This should therefore limit your trades in the current market to only the short side.

    - Secondly, you should short a security that is fundamentally overvalued. By doing this, you're ensuring that the future 'big picture' trend of the stock is in your favour.

    - Thirdly, you should only enter a put position after there has been a significant rally. ALL rallies fizzle out in a bear market, eventually.

    - Lastly, don't jump at every opportunity. Be very selective. Set obscene rally targets for a basket of stocks that suit your criteria, and only enter the trade on the short side when one of these stocks passes your target. This filters 'in' stocks with the following characteristcs:

    > big picture trend down
    > fundamentals point to gross overvaluations
    > short term rally that has over extended, within a bigger picture bear trend.

    If you adopt this philosophy, you are gauranteed to succeed, provided you:
    - are skilled in fundamental and big picture analysis.
    - are contrarian in nature ie. patient enough to short a stock after a significant rally.

    The majority of you who read this post will disregard it, and continue on your loosing ways.

    Hopefully some of you will absorb some of the data, and improve your future trading decisions as a result.
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