Staying Alive As A Trader
by Jayanthi Gopalakrishnan
Having spent six years as an option market maker on the floor of the New York Mercantile Exchange, Mt. Vernon Research commodities trading expert Lee Lowell is one of very few privy to the rare insider tips and secrets that the pros use every day to make money. In his new book Get Rich With Options: Four Winning Strategies Straight From The Exchange Floor, he reveals the strategies he uses to churn out profits for him in the option arena. And using real-life examples of actual trades, Lowell shows how to use techniques for the fastest route to riches in the option trading game.
Lowell is also a regular contributor to the Accelerated Profits Report newsletter and the twice-weekly Smart Options eReport, and he is the editor of the Delta Force Trader -- a trading service that specializes in commodity investing. Technical Analysis of STOCKS & COMMODITIES Editor Jayanthi Gopalakrishnan interviewed Lee Lowell via telephone on March 7, 2007.
How did you get into option trading?
My option trading career began in 1991 when I was hired by a Chicago-based option market-making firm that had started a branch in New York City. We traded in the energy markets, specifically crude oil, natural gas, heating oil, and unleaded gasoline options. About a year later I was promoted to option trader.
I worked with this company for about five years as an option market maker, trading those crude oil and natural gas options. Then I went off to trade on my own using my own capital, still trading on the floor of the New York Mercantile Exchange (NYMEX).
I did that for another year, at which point I moved off the floor to trade over the Internet. I realized getting quotes over the Internet was easy. I didn't need to be down in the pits as much, concentrating on only one commodity; I could watch the computer at home and trade different commodities. I could save myself a lot of money on the seat lease I had to pay for the NYMEX.
Once I learned that having a computer and an Internet connection was all I needed, I realized I could work anywhere in the world. I moved myself and my family out to Hawaii for four years, and traded out there over the computer.
That must have been nice!
I had a good time, and that enabled me to hone my skills as a technical analyst. Working on the floor as a market maker, you don't concentrate so much on direction. As a market maker you are interested in capturing the edge in the option market between the bid and ask, and direction is not your first concern. When you get off the floor you are no longer the market maker, so you have to take what the market gives you at that point.
So I needed a better way to make money in trading, and that came down to basic chart-reading and trying to figure out which direction the market would go. Since 1998 I have been trading from home for myself. So it was about six years on the floor and nine years off the floor trading commodity options, stock options, emini options. Basically, I take a look at anything that moves. I concentrate mostly on commodity options. That is my history, about 15 years in a nutshell.
Do you think being on the floor gave you an advantage in terms of understanding the markets when trading online, or are the two so different it doesn't make much of a difference?
The two are extremely different, but learning how options work on the floor helped incredibly. It helped me get an idea of how options work and how they move and how delta, theta, and gamma all come into play on risk factors. Although we do trade them differently on the floor and off, that education helped quite a bit.
Still having connections on the floor can help me today. I can talk to the pit traders and they can alert me to some of the big trades that I can either piggyback on, or I can take a look to see if I want to get involved. They really are two different ways to trade. But like I said, the education was the biggest factor. That has helped me stay in the game for so long.
Now that you are screen trading, you said you do a lot of chart-reading. What do you look for in the charts?
Moving averages. They are a big part of my chart-reading. I use a 20-day, a 50-day, and a 200-day moving average as well as the relative strength index (RSI). And of course I use the support and resistance levels. It doesn't get much more complicated than that for me. I try to keep it simple.
Those few indicators work pretty well for me. I look at daily charts as my main indication of when to get in and out of a trade. I am not an intraday trader, where I try to scalp emini futures. I've tried that; it doesn't work for me. I can't get a handle on those types of moves, so I concentrate on the pit-traded commodities using daily charts. So I use moving averages, the RSI, and support & resistance levels.
...Continued in the May 2007 issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the May 2006 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2006, Technical Analysis, Inc.
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