No, have no fear. You won't regret biting. Besides, I'm not as confrontational as some of the posters here. I believe everyone's entitled to their opinion. But I've traded options for more than 5 years. It's how I started. Wasn't much of a choice really. back some 14 years ago, if you only had $3k to $5k and you wanted to play in the markets, that was the way to go. I started with stock options then moved to the OEX. I know... lol... my grammar is atrocious during the trading day. Anyway, on the whole, options are far riskier for the "spreadless" buyer than futures are. It's one of those established facts. And to add a note about real world risk management, during 9/11, had I been on the wrong side, I knew pretty much what my risk was sans minor slippage in the E-minis. Straight buyer of an OEX option or whatever knows their risk too. The money they put down on the option. Mmm... you could say that your analogy is incompatible. If one is a buyer of options, like our bud who started this thread, I am assuming that he's doing so in the hopes of capitalizing on the move in the underlying without regard to using a spread. Therefore, he has to worry about the rate in which the move occurs in the underlying. While he might be right on direct, he could be wrong on magnitude which could leave his options veritably worthless long before expiration. Or he could suffer a quick 50 - 70% loss as the option goes from being in-at-out of the money. I remember those times all to well. All true, but no with the same ease as with futures. True again, but your defined risk usually implies defined reward. AKA, limited reward. Our buddy here who started this thread seems to be interested in being able to apply the adage " cut your losses and let your profits run." Not that he can't do that with options. But he might have trouble doing that as the option goes deep in the money. At that point liquidity dries up and he might not be able to get out at the last price depending on his size. LEAPS are relatively illiquid. While in theory you could hold leaps for a long time, how many "players" actually do? Not many given their delta. *which can sometimes be hard to calculate given that fact that many leaps are illiquid. OEX is one of those tight markets along with some high market cap stocks. That's great stuff. Really. Back when I started out with options, the software for real time position management just wasn't there or way out of my price range. So only the simplest of spreads were useable. Today however, there's much available at reasonable prices. But then again, many traders aren't going to take the time to learn all that. It's sort of a steep learning curve. So most traders use options in a linear fashion. Buy calls when they think they're going up. Sell puts when they think it's going down. And statistics have it that option buyers blow out much, much sooner than futures players do. I love writing options. More often than not, it's free money. But the linearity of futures suits my trading style and I think it would suit the trading style of the poster who started this thread. Hate to see new guys blow out using the wrong instrument for their style and mindset. Especially when they have a choice. One of which didn't exist more than a decade ago when I started.
Absolutely agree with you! To be honest, futures just didn't fit my personality--I switched to options because they just "suited" me better. Getting stopped out bothered me. Not knowing the odds bothered me. Watching profits leak away as the price retreats to my profit stop bothered me. Still, your point is a good one--the option learning curve is a steep one. Lots of reward for those who make it, but knowing when you've "arrived" is particularly non-obvious.
Like it has been posted by FullyArticulate, options are in 3D. Options can be as complex or as simple as you want them to be, but what I have found is that most people that get "hurt" with them usually don't have the knowledge or haven't put in the work necessary to make them as profitable as they can be. It's pretty hard to just go into the markets one day cold turkey with little capital and say "I'm going to trade options because they're cheap to do so and I have little capital.". I have found that options are deadliest in the hands of those that already know stocks or the markets in general and want to maximize. Like FullyArticulate said, you can make money with options in sooo many more situations than you can in 2 dimensional stocks/futures, you just have to know which situation you're in and which strategy to employ. To the O.P., if you have a solid knowledge base of stocks and how to trade them, then a natural evolution would be to options or futures. If you're looking to extract profits quickly through rapid trading, options probably aren't going to do it for you. If you like to trade and trade a bunch and have a solid knowledge of technicals and market underpinnings, futures might be more your game. Options and the execution of options strategies are more of a process and cerebral than stocks and futures. Nothing wrong with liking activity (action), and for that stocks and futures are probably better suited for that. I too love options and the markets at large.
all u need to be successful tradin' options is to be able to trade da underlyin' well'n'have a basic knolwedge of da greeks, that's more than enough...all da knowledge in da world ain't gonna help u calls get in to da money.
LOL. I know. In this day and age of Google, it seems like just about anything can be substantiated on demand. So for argument sake, I offer you anecdotal evidence. Of all the brokers I know, the stories have it that option players blow out sooner than futures players. The stat of 80%+ of all options expiring worthless serves to back up their stories and observations. And all the option traders I knew back in the 90's who switched to the Emini S&P are still trading today and doing fairly well. The OEX option bunch, well of the 11 I knew, only 1 is still trading it today. And doing well. And when I meet former option players they tell me that either the point in which they blew out or quit is around 6 months to a year. Former futures players have it around 2 to 4 years or are still at it. In fact all I have to do is mention options and eyes start to roll, smirks and grins start to form, faces go cold. Mention futures or Forex and ears start to perk up or or a crease between the eyebrows. An occasional head shake. My small world.
Thanks. lol . I really thought the cboe had done a study or something, but your story sounds good indeed. I have traded options for several years, and even though I have read many books on all sorts of different strategies that can be used with them, I have not been able to adopt any. It just doesn't click with me. On the other hand, I lost all the money I had made with options when I started trading futures in 2005. Suffice my inquiry. I will soon start a journal for my option trades, which will be on purely directional trades of course. Everybody says is it impossible to make it in the directional business. And that is exactly the reason I have stuck to it for so long. Good luck to you guys !
Quote from ddunbar: The stat of 80%+ of all options expiring worthless serves to back up their stories and observations. This is a commonly quoted stat which CBOE has refuted on their web site. According to them, less than 40% of options expire worthless, the vast majority of contracts are closed prior to expiration. (And really, that makes some sense. Why hold onto an option you sold for $5 when you can close it for .05?) CBOE's ask the Institute
From the link: "Statistics over 30+ years from The Options Clearing Corporation indicate that only 30-40% of options expire worthless. Approximately 10-15% are exercised and the remaining 45-55% of options positions are closed prior to expiration" Okie dokie. It's commonly quoted when discussing option buyers, not writers. The writer who is closing the option he sold for $5 @ .05 as in your above example, is better off letting it expire. But the option Buyer who bought @ $5 and can get .25 near the week of expiration would, if commission is low enough which in most cases today it is, sell it, if he can. In any event, you'd think that the OCC has the final and most convincing word but... most large brokerages, where the statistic of 80% came from many years ago, have extrapolated from their client base and their option activities that this was a reasonable estimate. What they've also found and has yet to be dismissed as a "myth" is that the call and put buyers are generally losers while writers are genrally winners. So in the end, the option buyers may be closing out positions to stop the blood letting of their positions as they go deeper and deeper out of the money before expiration. I'd call that "worthless." Probably what brokerages are considering worthless also. An option that's deep out of the money near expiration has a very low probablity of becoming at or in the money. I recall a few losses where I lost 70%+ on an options position in 2 days and held onto it as the market stalled for two weeks only to sell it @ .50. Hey $100 recouped was better than nothing, but the option was essentially "worthless." AKA, junk. And the 80% is still being perpetuated by brokerages today. Most of which don't sell an options program or offer a managed options account. Why would they still do this if the OCC officially says <40%? Hmmm... I see lots of conflicts of interests here. OCC and the CBOE have one. Brokerages have less of it but it's still there. For the brokerages, I suspect that such a dire warning helps to stave off arbitration claims from the inevitable sore loser in options who blew out his account. The OCC's risk statement is hardly read until it's too late. CBOE's interest in downplaying that stat is obvious.