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Trading Tools: Use Them or Be One


There's so much free information available in real time -- you just need to tap it.


Let's go to the mailbag to get some user-generated content.

Rick writes:

Professor Smith,

I was hoping you could provide some input on the best way (relatively affordable or inexpensive) to manage an options portfolio in terms of seeing the Greek pricing characteristics in real time.

First let me say that being addressed as Professor Smith makes me feel lost in space. Which I suppose is an accurate description of my state of mind. Now on to the question at hand.

Rick, if you work in an office building that requires spending more than four minutes a day in an elevator, then you might be familiar with the "Captivate" TV screens installed in many of these vertical people-transporters. Captivate leverages people's aversion to making eye contact by offering 15-second snippets of headline news, weather, and the occasional offbeat news story -- trust me, I'm getting to my point -- and through Captivate the other day, I was dismayed to learn that the old saw that "people only use 10% of their brain" is scientifically untrue.

Apparently studies, which include MRIs, CAT scans, and other testing, show that nearly 90% of the brain is always showing some form of activity. This is a blow to those who have tried to get by on the theory that they're sitting on a huge reservoir of brain power, but it's located in difficult-to-tap regions.

The same could be said for the way many of us, myself included, use only a fraction of the trading tools and information placed smack in our frontal lobe, while allowing the rest to lay dormant. It's just a matter of learning what's available; tapping into this information and learning how to use it.

Don't Be a Tool, Use Them

If you have an online account in which you trade options, I'm pretty sure you're receiving real-time prices and have access to position- and portfolio-management tools.

The first place to start is in the option chain. That's the page that shows you all the current quotes -- and they should be live market quotes -- for any given stock. This page typically consists of several columns and even more rows.

Almost every brokerage firm that cares two cents for its option customers offers a variety of ways to view this basic information. Without running through the specific click pattern, I can say that TD Ameritrade (AMTD), Charles Schwab (SCHW), OptionsXpress (OXPS), and privately held TradeMonster all have scroll-down menus that give you a choice of what information is presented.

The typical default mode will be to show bid/ask, last trade, current volume, and prior open interest. But you can easily click on a choice that will show the key Greeks, such as delta, theta and the always-critical implied volatility of an option. There are also choices to view the current market quotes of multi-strike positions, such as a basic vertical spread to more complex trades like butterflies and iron condors.

The ability for these firms to show a market on these types of strategies speaks to how electronic trading has revolutionized the options market. Where there used to be a place on a separate spread book for complex orders to be shopped around, brokers now scan the entire market and take a combination of the best prices to get orders executed at the best price, which often involves buying on one exchange and selling on another to complete the transaction.

But back to the question at hand. Now that the position is established, you need to have a clear picture of the risk/reward. Again, the tools offered by online brokers are more than up to the task of allowing one to not only view key information on a specific position, but also for an entire portfolio.

For active traders that carry several positions, the ability to see the total theta or gamma of a dozen or more positions can be crucial in managing risk. It can be eye-opening to realize that what you thought were a bunch of hedged or spread positions actually add up to incurring thousands of dollars of time decay each day; or what the dollar impact for each percentage increase in implied volatility will be on a given position of the total portfolio.

This information is available. In real time. And for free. You just need to tap it.


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