Your Questions About Paper Trading Options

Ruth asks…

So many false signals in day trading……….?

I use elder’s triple screen to day trade ^HSI options.
I’m a relative beginner, so i did a few hundred paper trades and things seemed to work out well. (about 85% accuracy).

The first 2 weeks of trading were good, then all of a sudden the 3rd week wiped me out.

Is my system flawed?

Screen 1: MACD, Bollinger bands, ADX (5 minute charts)
Screen 2: Stochastics, RSI (1 minute charts)

Are there better combinations to use for day trading?

Parabolic SAR in screen 1 as well.

John answers:

We all go thru the same thing. The secret to success lies in money management – being able to stay in the game long enough for a relatively big winner to pay for a lot of small losers. It’s not about one or two trades – it’s an odds game – over 10 or 20 trades, a good system should win out. That is, as long as you follow Warren Buffets rules number one, “never lose money.” What he means is, never lose a lot of money.

Lots of indicators work well, but sometimes they don’t, and you have to be on a constant vigil and cut the loser quickly. But with options, you have the premium drain of a wasting asset and volatility fluctuation, and can rarely place a stop less than 50% of the entry price. But you can’t ever lose more than that on a single trade, and come back. It takes a 100% gain to overcome that.

Look at what would have happened, had you been unleveraged, or maybe margined 2:1 or 4:1 trading the stock outright. Is it the option premium fluctuation that got you, or the underlying?

You can make a lot more money trading the option (with winners), but you can lose a lot less trading the underlying. My theory is to lose less, stay in the game longer, and build it slower but more surely.

Robert asks…

Share Trading?

. I have one query of which i want your expert advise. I am registered sub broker of NSE. In the last P.Y :2006-07 A.Y: 2007-08 i had incurred a loss of RS 3lakhs in future and option trading in my own personal trading account. This loss my CA did not set off against my commission which i got from my broker and carried forward this loss for this year saying that this loss can be set off only against profit made in F&O.I have read in news paper that i could set off my loss from F&O from my normal income. Now this year i have made a profit of RS 1Lakh in F&O Now I want your expert advise that after setting off 1 lakhprofit i made this year in F&O from my previous year loss of 3lakh in F&O the balance 2lakhs can i deduct from my normal income i.e commission i have earned this year FY2007-08
Waiting For your expert reply

John answers:

Dear Rahul,
I agree with your CA. As far as I know, there was a provision till last year, that F & O was considered as ‘speculative income’. And losses in speculation could be set-off only against income from speculation. So, the losses in F & O Trading could be adjusted only against profit from F & O. However, such loss could be carried forward next year, so that you can set off it against possible profit.
However, this year the provision has changed. From this year, the F & O income will be considered as business income. But this is only for those people, whose main activity is trading. It means, only brokers or sub-brokers could set off such losses from their business income. People earning from salary won’t be able to adjust such losses like you.
But I must tell you, that I am not a CA. I feel it is better to consult your CA as usual for such matters, as he would be more aware of the issues and rules.

Paul asks…

In Turbo Tax Business what is the difference between reporting a “wash” equity sale as a cost or a loss?

If a tax payer is operating a day trading business what is the easiest way to report gains and/or losses in Turbotax Business if the broker is not on the import list? Is filing on paper the only option?

John answers:

I believe so but see if you can get in contact with IRS and ask a rep just to be sure

Lizzie asks…

Taxes on Option writing?

I recently developed a strategy for profiting off of call options writing, which I have proven through backtesting and paper trading, to be highly successful. My concern are the tax implications on my returns. How will I be taxed? I know that profiting from short term premiums off of options is taxed at the short term rate the same way the profit off of a security held less than a year is taxed.

My question is will I pay an additional income tax on top of this capital gains tax?

If you could, here is an example, could you use this as a reference for your answer…

Assume I manage to gross $1,000/wk for a $52,000 annual salary. What will be my net income?

Just so I am not chastised about how there are no “quick and easy profits” in the stock market. Let it be known that I have been an active stock trader for over 8 years. I have a Master’s Degree in Mathematics which I apply towards my studies, my backtesting is thorough and I already understand the concept of accepting losses with gains. Please do not preach to me, all I am asking is a question with regards to taxation of profits. Thanks!
To add on to the previous set of details, I am not ignoring put option writing. I am writing both put and call options. again my strategy is built on a mathematical study my only concern is the taxation on the income. Please what I am really looking for is to understand the tax braacket I would fall in. If someone could please give me an example using the scenario of earning 1K per week (or $52K per year) it would be greatkly appreciated!

John answers:

First, you need to determine if you will be filing taxes as a “trader” instead of an investor. For a discussion of filing as a trader see the guide at

Assuming you will not be filing as a trader, your profits and losses will normally be taxed as gains and losses like any other trades. There are, however, some special rules you should know about.

(1) If an options expires it is considered closed on the expiration date at a price of $0.00.

(2) If an option is exercised, the option premium is used to adjust the price of the underlying.

(3) If you write a covered call it will be considered either a “qualified covered call” or part of what the IRS calls a “straddle.”

(4) If you have offsetting positions (spreads), excluding qualified covered calls, you may have to defer losses you incur until a later tax year.

See pages 56 hrough 61 of IRS Publication 550 at

and/or the brochure at

for more information on these issues.

Mark asks…

how can you sell a car back to the dealer?

i bought a new car 5 months ago and now i can’t afford it. due to job cuts i am having trouble coming up with the payment each month. how can i get rid of this car? i’ve tried selling it in the paper and online with no luck. will the dealer buy it back or trade for a cheaper car? what are my options? i do not want to have it repo’d nor will i file bankrupcy.

John answers:

You’re basically SOL, if you get my drift.

A new car is devalued by at least half once it’s off the car lot.
There’s no way in this world or heaven that a car lot would take it back for the value you have left to pay for it.

You could always just drop it off at the dealership, saying it’s theirs, and leave. But you’d still be responsible for the loan payment.

You might try going and talking to the loan company. Might be a good chance they’d be willing to refinance it, or reduce your monthly payments until you get a job. Sometimes, it’s much easier for a loan company to do that, rather than have to take it back and default on the loan.

Yeah, it’s pretty tough trying to sell a car for the value of the loan left, especially since it’s so new. I feel your pain.

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