Using the CBOE / OptionMONSTER Paper Trading Account
The CBOE paper-trading platform is from TradeMONSTER - get it set up and spend a few hours learning how to use it. It is important you do this as if you ever trade for real, this might be the platform you use and if not it will be something quite similar, and most importantly -
For example, you will do some or perhaps all of the following at some time -
- enter the wrong expiry date
- the wrong number of contracts
- a call which should have been a put
- a buy that should have been a sell
- enter a multi-leg combination not as a "custom spread" but as individual trades
- failure to analyze the trade properly
- enter in totally dud trades which have no possibility of any type of profit whatsoever, i.e. you will give away free money to the market-maker; this is "inverse arbitrage" and it doesn't half make you feel stupid !
These result in many a "DOH!" / "Homer Simpson"-moment, but after a few hours you will know what you are doing ( ... and if you don't, then the time to quit is now - uninstall StockWave and go back to playing Crysis or Grand Theft Auto.)
How many newbie traders over the years have simply handed over hundreds of bucks to the broker/market maker within a couple of days ? Most of them ?! Many traders will remark about how much their trading education cost them, literally ...
Have a look at the OptionsMONSTER software - it runs inside a browser window - ignore the side panels and just concentrate on the centre, it is quite intimidating to look at first-off, but actually relatively simple and well-laid-out once your eyes have been exposed to it for a while; try the following -
- go to "marketview" and key in some stock symbols of interest, e.g. common ones like AAPL, INTC, MSFT, DELL etc
- click on a symbol in a quote window brings up an order ticket - click on "options", then it will take you to the options page, which will populate quickly - calls on the left, puts on the right, strikes down the middle
- click on the table and again an order ticker comes up - click on "create spread", then on "custom spread"
- you are in the combinations maker where you can add multiple legs - when you've got something you like, click on "analyze" - their spectral analyzer and snapshot analyzer are quite similar to the visuals of StockWave
This all looks pretty good and it's real market data, (- real-time once you open a real account), and a "real" trading platform - so why bother with this "StockWave" rubbish! - but it has an enormous problem with it, and this is quite simply -
For example, a typical stock could have options with 25 strikes available, both calls and puts, both of which can be either bought or sold ("long" or "short") - that's 100 possible trades to make for single option combinations, now think of how many there are for 2-leg combinations, 3-legs and 4-legs. Those of you who know some maths and the formulae for combinations will know how big this is as it involves factorials. Oh dear!
Among all of these possible trades it is possible that there's a nice little trade to be made, with good win probabilities and decent expected return, and without too much risk - it's just that you will never find it ! No chance! - think about it, even those mental calculator people couldn't do it. Hand crafting combinations / "custom spreads" is thus a pointless exercise, and trying things more or less randomly is simply playing a different kind of lottery, and also you must bear in mind that while you are trying to work out what to do, the market prices are moving all the time - so if you do find a nice trade, perhaps it doesn't exist anymore.
StockWave to the rescue ... (or not - why not subscribe to one or a few of the many investment newsletters pushing their independent analysis and hot trades ...?!)
StockWave can search automatically for trades for you - it can do so exhaustively, which will get very slow for 3 or more leg combinations, or it can do so using an optimising global search algorithm to find some good candidates. It will output them on a table and you can rank them by payoff and expected return, then review them back on the Trade Creator window - and if you like it, then it is at this point that you go back into CBOE optionsMONSTER to re-create the same trade over there and check it out - note that you need to check things thoroughly now, that the payoff profile looks the same and the breakeven positions agree - note doubly that the initial prices used in the trade searcher MUST agree with those in optionsMONSTER, if they don't you will simply be wasting CPU cycles to calculate garbage!
Please note that the expected return and success probabilities will not be quite the same as StockWave uses its own custom "pricing model", i.e. the heatmap produced by the monte carlo simulation you did. Be aware StockWave can sometimes find a "100%" profit trade but with a very small return - it is likely this does not really exist and with the real market prices it is instead a "100%" loss.
When you've used the trade searching tool for a while you come to a conclusion - the simple fact of the matter is that most combination trades are absolutely stinking! There are far more dumb ways to lose money than to make it, which implies a weak form of "market efficiency", but there are, hidden among the weeds, good trades to be made. That they are not easy to find, is actually a good thing - otherwise everyone else would be doing it.
Overall, CBOE / tradeMONSTER is a nice platform for getting and displaying prices, for execution and for a basic level of options analysis, but it is very limited in other areas - good for what it does.