Thursday, March 23, 2006

Hi, the price is down!

An Option Strategy Example 2: QQQQ

During your investment, there are always some time that the market seems go to the undesired direction. When it is happening, what should you do?

You might ask yourself questions such as:
1. Is there any news?
2. Is it caused by the whole market change?
3. Is there any known factor has changed?
4. Is there any factor was missed in you initial analysis?
5. What is your initial investment goal?
6. What is your bottom line for lost?
7. How confident are you for this investment decision?

I can list a lot of questions that each question can be a single topic for discussion. Today, I am going to focus only on the trading related issue.

Like I said in my article “Ready to Surf?”, during whole week the market will be “crazy”. So QQQQ’s behavior for today is not wild at all. Its price range is from $40.82 to $41.22, just $0.40 or 0.97%. Comparing to yesterday, the closing price is down $0.11 or 0.29% to $41.09.

While, the option is completely another story. The two calls that I mentioned yesterday have price range change 35% and 18.75%. At closing, each of them is down 12.5%. Our holding at closing is worth $350, which is down $50 or 12.5%.

That is why people say the option trading is risky!

“A stock’s going up or down after you buy it only tells you that there was somebody who was willing to pay more—or less—for the identical merchandise.”
----<<One Up On Wall Street>> by Peter Lynch

This level of price change for option is normal. An option player should be psychologically strong to overcome any panic for the price change.

Technically, in today’s situation, you should buy little more at the lower price. If your timing is good, your portfolio should be even or at a smaller lost. I would not bother to create another sub case. We will keep track our current holding going forward.

I urge my readers taking action to follow this case. You will learn much more by invest real money, especially your own money.


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