February 31999 Limited Risk

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Basic Position: Long 20 MSFT FEB 145/150/155/160 Condor Plus: 20 FEB 170/175 Bear Spreads

I have read your last email and I get the feeling you want me to trade with only limited risk strategies-so yes, I intend to trade with only limited risk strategies. Yesterday I didn't. I understand about buying the 170 puts to leg out of my exposure. I could also have bought the 175 calls and then sold stock against them when we turned down, Couldn't I? Then I could have either sold the 170 puts to spread off my synthetic long 175 puts, or I could have sold the 175 calls and bought back the stock. Is that correct? I am unclear about whether I can scalp stock or not. Do you want me to not scalp it at all, or to just do it when it is part of a long (premium) option strategy? You also say that I may become a stock day trader. I have been plugging along thinking that I will try every day to make a little money trading stock. When I have an actual market opinion I will implement an option strategy to capitalize on my opinion. I feel more comfortable with the idea of having a spread on 100 times (or 1000 times!), being right with opinion, and profiting handsomely. This to me is much more prudent than scalping stock day after day. I am still not comfortable increasing my spread size since I'm not yet confident in my market opinions. On the other hand, scalping seems to offer a way to make money on small intraday moves that occur almost everyday. I have been approaching this thinking that I need to learn both, long-term spread strategies and daily stock scalping techniques. That is where I thought that I was going. Is this right? What is the next level? Where am I going? I hope I am not sounding defensive. I only wish to convey to you my thoughts and understanding of your lessons.

Ri$kDoctor: February 3, 1999 Re: Limited Risk

Basic Position: Long 20 MSFT FEB 145/150/155/160 Condor Plus: 20 FEB 170/175 Bear Spreads

You are mistaken about the idea of buying the 175 calls first and then selling stock because you start off with a LONG DELTA and it is your aim to get short in the first place. But, of course, if you did do the opposite, subsequently, you would have been liquidating it. However, once long the 175 calls and short stock, you could not sell the 175 calls first and buy back the stock. Selling the calls first would leave you with unprotected NAKED short stock in the interim.

You can scalp stock against long options, i.e. buy stock against long puts to turn it all into synthetic long calls. You may then, if you wish, take the stock off and be in just puts.

All I meant about becoming a stock day trader is that there are immediate results (good or bad) in trading the underlying. With options spreads, you tend to have positions on for a longer time horizon than a scalp.

Where are you going? Your goal is to make money and accumulate the necessary experience to graduate your size and develop your strategies whether they are limited risk strategies, naked stock or options strategies.

Trader:

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