Dupee With Dr. J: How I Trade Options
Trade with the best. There are few better or faster ways to learn how to trade effectively than to seek out top traders and learn from them. An options pro for 20 years, Jon Najarian is quite simply one of the world’s best options traders.
It is not just his storied career at the world’s premier options exchange, extensive experience trading on and off the floor, gold-plate credentials or nationwide educational presentations that make him such a credible and effective teacher. Najarian possesses the genuine gift of clear communication: the ability to convey at times complex ideas in comprehensible, readily accessible, and memorable language.
Importantly, clear communication is one of the hallmarks of “Dr. J’s” How I Trade Options, part of John Wiley & Sons publication’s “Online Trading For A Living” book series. Jon has given me a personalized tour of the Chicago Board Options Exchange and I was present at his seminar at TradingMarkets2000 at the Venetian, so I am familiar with his communication style. Throughout the read, I felt like Jon was talking to me, articulating the basics, anticipating my questions, making a subject that can be perplexing, eye-opening, and even fun.
I don’t trade options–yet–but this book had the mysterious quality of making me feel ready to do so. Mysterious because it sublimely entered my consciousness, unwittingly rendering me suddenly capable of understanding when and why to employ an Iron Butterfly strategy. Or why never to sell straddles. Or when and why bull call spreads–and bear put spreads–make sense (they get 90% of the profit potential of a naked call or put for half the investment and at only a fraction of the downside risk due to volatility and time decay). Prior to reading this book, questions loomed about options trading–How I Trade Options answered many of them.
How I Trade Options also provides a personal account of Dr. J’s life (the initials on his trading badge were chosen in deference to his famous surgeon father, known by the same acronym). From his high school days with (the artist formerly known as) Prince, to Berkeley, to the Chicago Bears, to the big leagues of trading, to inventor, to his role as one of the de facto trading ambassadors at the CBOE, Jon shares with you an overview of his storied life.
There is something here for longer-term investors as well as traders with shorter time frames, as he shows you readily comprehendible strategies used by institutions on how to add value to existing portfolios, how to take out the equivalent of an insurance policy on your stocks, and how to “repair” or take steps to “make whole” a portfolio ravaged by an untoward move–remember 2000, the Nasdaq’s worst year on record? Also of interest to longer-term stake holders are strategies involving LEAPS, long-term options.
Other things you’ll learn from one of the best minds in the industry:
- The difference between American and European style options.
- What it takes to succeed in trading.
- Low-cost ways to speculate and take advantage of leverage.
- When to do what, and more importantly, why.
- How to play the broad market.
- How to play from the short side.
- How to get the right tools–quotes, software, brokers, and continuing education.
- Myriad details on the inner workings of stock, options, and the players that will enhance your overall comprehension of the broad market.
Barring personalized instruction and perhaps a personalized tour of the CBOE by one of its biggest players, this may be the next best thing.
Excerpts From A Forthcoming Interview With Dr. J.
Marc Dupee: There is a belief and a saying on Wall Street that the month of January sets the tone for the market for the entire year. The Nasdaq 100 has swung both up and down at least 90 points every day so far, and as many as 400 points, and we are only half way through the month. With this kind of volatility, what kind of options strategies do you think might best pay off this year?
Jon Najarian: Marc, this volatility, we are all going to have to get used to it. It’s going to be here because of full disclosure, Reg. FD, single stock futures, and other reasons. The types of trades that investors will be able to employ to profit from the volatility will be anything from simple bull call spreads–or bear put spreads–to more advanced strategies like straddles and back spreads. Positioning yourself to profit from a directional move, or when you can’t decide which way the company might go, you can do by executing a straddle to take advantage of the volatility. We find these strategies most effective three to four weeks ahead of the earnings announcement because that is the time when the firms have to pre-announce because of this Reg. FD., and the best time to put on back spreads or straddles.
Dupee: You cover a variety of options strategies in your book. Do you have a preference for any one or a couple of strategies when trading for your own personal account or for your hedge funds?
Najarian: I would have two, really. If I am looking for that extraordinary move and I want to hit a home run, I’m more likely to do a straddle or a back spread, because the velocity of profit in those trades is greater than in any other trade. The other, the one we use most frequently, is just a directional trade, a bull call spread or the bear put spread. Here, the directional trade can be a better deal, where instead of buying an $80 or $100 stock like IBM, I can buy maybe a 10- or 20-point bull call spread and maybe put only $5 or $10 on the table instead of $100.
Dupee: In your interview with Larry Connors in The Best: Conversations With Top Traders, you mentioned that you monitored block option volume and that it was a good leading indicator of impending stock moves. How can smaller traders get access to that information?
Najarian: Right now I don’t know of a source, which is why we will be putting it up on our site, 1010WallStreet.com.
Dupee: Is there any other surrogate where they might get this indication?
Najarian: If they go to the CBOE’s website, CBOE.com, it will tell them the most active options.
Dupee: Is there anything not covered in the book that you will be teaching at your upcoming seminars for TradingEvents this spring?
Najarian: It seems that because of what’s happened in the markets, Marc, the most popular stuff that folks want to learn about is, “how do I fix what went wrong?” So those repair strategies that we talk about in the book, we cover in great detail at the seminar: you bought a stock, it’s now down 30% or 40%–here is what you can do to fix it if you still believe in the stock.
We are also going to spend a lot more time than I could in the book on LEAPs–long-term options–and how customers can use those as a surrogate to owning straight equities. The LEAP can help them use leverage in their favor and it can also allow them diversification into other stocks so they are not in that thing called “right church, wrong pew,” being in the right sector but wrong stock.
Dupee: Will the seminar present material that traders will be able to walk away with and immediately apply?
Najarian: Yes. We are going to have several traders with me to drill and provide individual attention. We are going to give people good solid information for two days. In the case of the Chicago seminars, we’re actually going to bring them down in the pit and let them do some trading with some “funny money,” rather than having to put real dough on the table. And we think that for the people who want or need it, they’ll be able to consult and design various investment strategies, and we’ll be able to map out strategies with them.
This interview in its entirety will be available on TradingMarkets later this month.