Options: Let price come to you
by Jerry Kopf
The average retail trader's first option transaction is often profitableóbut rarely do rookie option
traders know the actual reason behind their profits. Call it beginner's luck. If they win at first, they think
they are walking on water. They annualize one week's return and start planning an early semi-retirement.
Once luck ends, a newcomer's limited experience along with the swiftness of price movement causes a
rash of painful losses. The undeniable fact is there is no quick method to learn to trade well and
consistently be on the plus side. Call it tuition, if you will.
One thing to learn is: don't chase price. From Figure 1 you'll see that often it doesn't pay to chase the
price of an option. Traders who habitually "take shots" and pay up usually overpay for a call or a put
relative to the option's fair value. Chasing forces them to surrender the edge, so the life cycle for 85% of
options chasers is no longer than 18 months.
From Figure 1, recognize that each trading day the intraday price most often ranges one to two points for
most at-the-money front-month options. The price of your fill often makes the difference between a profit
and a loss.