Registered: May 2011
09-06-12 11:46 PM
Quote from sle:
All right, people, in response to a few private messages (I have replied, mostly), here is a public announcement. There is no miracle strategy out there that you can trade without understanding the pricing or the risks. You can't just "sell premium for a living" or do "iron fuck-knows-what" and believe that it will make you rich. Sooner or later you will get unlucky and the great evil market will catch up with you. There are two ways to make money with options:
(a) You understand the underlying stock, index or futures contract well enough to predict where and/or well it will move. If you know when and why corn is used to feed the calf instead of soy, you can make tons of money trading conditional spreads on feeds. If you know what if some bio-tech company will pass or fail the FDA test, you can make a ton simply trading puts or calls.
(b) Understand the pricing of risk premiums and be able to identify which risk premium is rich or cheap. This risk premium could be implied volatility, skewness of distribution, or even dynamics of implied volatility. But you have to understand the pricing, the dynamics and be aware of the risks (you know, for any risk premium, it's either a slow bleed or a bullet to the head).
So... experienced people, please treat the newbies with some degree of respect for their money. Newbies, caveat emptor, be careful who you trust. It not only takes years to develop experience but also takes a lot of critical thinking to get through the theory and the practice. Be prepared for it. But there are coins in the fountain, you just have to be ready to dive for them!
Thank you and have a good night!
There is plenty of substance in this comment. I like to say there is no magic.
I do think that there are other ways to make money. For example deep understanding of what a efficient market is and particularly what it is not can make consistent money. Knowledge of what your opponent is doing helps, mathematical bents help, emotional control helps, risk management helps etc.
I have a friend who watches interlisted option quotes and arbs it away. He can watch for hours for a nickle, I like the sunshine and my life more.
I had trouble flying a plane for the first time because there were three directions instead of two like a car. Options are similar compared to stocks.
Many option beginners don't realize how much knowledge you need to play options well. The basics don't help much in my view.
The critical thinking comment is key.
Every trade is a mix of luck and skill. In the long run, luck cancels out leaving only the true measure of your trading skill.