Hey everyone, I've been studying options for about 3-5 months now, depending on what counts as studying , and I think I've got a decent sense of what's what. I'm still studying how to do Technical Analysis, and I'll get there relatively soon, I think. This is not a thread asking about the fundamental rules most traders know (limit losses ALWAYS, do you proper research and due diligence when investigating a stock, etc.), this is more of a thread for specific questions that kept popping up as I was reading. When I was reading up on the various ins and outs, these questions kept recurring: -It seemed important to learn and test strategies before putting money on the line, and I imagine this meant paper trading this and that to see what happens. My question is what sort of software (free is better, but it doesn't have to be) do you guys use to do your analysis, and what have you found has the most intuitive interface? -When creating rules for entering and exiting a trade, and yes I know this has a lot to do with my personal particular requirements and such, what are some typical rules you guys use to determine when to enter and exit a trade. I'm talking specifically about stuff like "Once i have made x% profit on a trade, I get out" or "if an option drops by y%, I get out." -When you do decide to get out, what are the mechanisms by which you go about doing it? (Y'know, which buttons do you click or commands do you give?) -How do taxes work with options? Is there a way to structure one's accounts or entities so that it minimizes the resulting tax burden as much as is legally possible? -What do you consider to be "First Principles" when it comes to trading? First, I think it's generous for anyone here to offer up any of their thoughts, and I don't expect anyone to answer every single question, and that instead answer as many as you feel you would like to. Any thoughts?
-How do taxes work with options? Is there a way to structure one's accounts or entities so that it minimizes the resulting tax burden as much as is legally possible? Taxes are the same as for stocks. Never trade for taxes, trade for profits. If you can make a profit, take it and worry about taxes later. Your biggest problem should be having a 10 million dollar tax bill on your profits of 20 million! -What do you consider to be "First Principles" when it comes to trading? Always learn. Learn WHY you made money (and the answer is not because your are smart), and learn why you lost money. After every trade analyze it as if you were mentoring a new trader on the desk. Imagine you are at a prop desk at a large bank, would they have approved the trade and allowed you to do it? A couple of good articles on options can be found on http://www.optionsweekly.com
A popular view among newbies -- most options expire worthless, so you're better off selling them than buying them! Most of the time the fair market value of an option is somewhere between the bid and ask -- meaning there is no particular advantage to selling or buying them. I think you'll find that most successful option traders both buy and sell options, often doing both in the same combination trade.