Dear Sanjoy
I have been using DreamTai for a couple months with good success. You have developed a powerful and predictive program. Thank you for an excellent product!
I am primarily a trader of options (calls and puts) on high-volume Nasdaq stocks. I read on the Blog your answer to another option trader, and think your recommendation of 3-month-out options is correct. Regarding stops, do you think option traders should tighten stops on the underlying stock? As you know, the typical at-the-money option will become worthless by the time the DreamTai stop level is hit.
Thank you for DreamTai and for your answers to my questions.
Dear Sir/Madam,
Thank you for your kind words !!
DreamTai is just a tool to help you. I should congratulate you on your investment success, because you had the discipline and determination to manage your risks., which is the most important part of any investment strategy.
The stops in DreamTai are based on the volatility of the stock. We can not tighten the stops because we have to let the stock some room to move around.
What we can do to reduce risk is to buy fewer options.
The total amount to risk in any trade is two percent of the capital.
If you have $100,000 then you risk only $2000 on a single trade.
Assume the worst case senario that the options expire worthless. You should not lose more than 2 percent on this trade.So, if you buy options, buy options worth $2000 ONLY for $100,000 capital.
Keep track of the stop loss price suggested on the day of the trade. If the stock moves below the stop loss price or if the trend changes, sell the options.
We buy at least three months period far away options, because we want to give the stocks some time to move around before the options expire.
Please remember that options are a double edged sword. on one hand, they give you leverage to magnify your profits. On the other had, they decay with time.
Sanjoy
