How much money do you put in option?

Kai:

Let me ask you a question. Would you want someone who just finished 4 years of medical school to perform heart surgery on you?

Would you want to take your first stab at golf by playing on a professional 18-hole course?

Would you be bothered if a newly licensed pilot who only few Cessnas was now flying the 767 you were taking across the Atlantic?

The answer to these questions would seem to be no.

So as a beginner in options, what in the world are you doing putting $20,000 a day at risk day-trading options when options suck for day-trading and even professionals can hardly day-trade?

I just do not understand that approach at all. If you are willing to risk $25,000 to learn to trade options, then cut me a check for $15,000 and I will do it for you. Does not matter how little or discretioanry the $25k is to you, trading that way will teach you nothing but how to have a complete disrespect for risk management.

Phil

 

Holy Smokes!!!! :eek:

 

risk in options is not defined by how much % capital you put in, but by the greeks that you hold.

if you put 100% of your capital into a hedged option position that's pretty delta and vega neutral, that's a lot safer than putting 10% of your capital into a naked position that has maybe, say, 20,000 deltas with minimal or negative gamma.

so you're looking at risk the wrong way.

 

Please Anseld.... he is day-trading $20,000 a day where he could lose $5,000. Please explain to me where is the hedge?

Your answer is technically correct but has no relation to what Kai is actually doing.

Phil

 

i don't think he's hedging at all.

it has nothing to do with what he's doing because he's not doing it yet!

but it has everything to what he's asking, which was "how much money do you put in options?" he's a beginner wanting to learn, so i just gave him basic information on where to really analyze his real risk.

 

Exactlly! That is why I said what I said.

No beginner should be day-trading options with $20,000 of capital at risk. Suffering a 25% loss in one day is a complete lack of risk management and leads to $0 in capital in a short period of time.

My advice to Kai is to put the money, whatever he has left, in a bank and spend $150 on some good option trading books, some time reading the CBOE and OIC websites, asking questions in the forums, and THEN start with about $5,000 trading one or two contracts at a time slowly.

Also he said he is doing it for real.....

Phil

 

I have to disagree strongly. True risk is measured by how much capital you put at risk. If I buy a straddle that is delta neutral for $1,000, are you telling me my risk is $0? No my risk is the maximum capital I could lose- $1,000.

It does not matter if a position has 20,000 deltas or 1 delta, what matters is how much you could lose. 1 Straddle at $1,000 is much riskier than selling a $7.50 strike put and the greeks are not a factor in that, it is the capital at risk.

This is the point I am making. People focus on the trees and forget the forrest of how much $$$$ they could lose. The greeks measure option price sensitivity to changes in stock price. They do not dictate your total risk in a trade.

Even a delta neutral trade is meaningless to some extent. Delta is an instantaneous measure of the effect on the price of an option for a $1 change in the price of a stock. As soon as the stock price moves a little, the position is no longer delta neutral. All delta neutral does is hedge against an initial price shock to your portfolio but it does not prevent you from losing any money. That is why major institutions focus on delta, to provide an initial hedge to their portfolio or to measure daily what amount of money they could lose that day if the market moves. It is a daily measure of portfolio change, not a measure of capital at risk. it is no different than duration for bonds.

Risk managment is the most overlooked skill in trading and is a lesson that Kai needs to learn early before $25k becomes $0k.

Phil

 

depends on your goals and how fast you want to lose it all

 

the full risk is obviously not $0.

you're taking my words and twisting the message all around.

and you have not read my message correctly.

i said it was safer. i never said it was risk-free.

big difference.

 

I am not trying to twist anything, it is what I understood from the statement you made above. I am focusing specifically on the quote you made above. Re-read that quote above.

Risk IS defined by how much capital you put in, to be more exact it is the capital at risk. The greeks do not affect your risk they merely provide some theoretical measures of it at an instant. A delta and vega neutral portfolio of $10,000 is just as risky as a cash secured naked put position of $10,000. The delta and vega neutral investment is not safer if both put $10,000 at risk.
If you want to change the capital at risk for each then one would be safer (Also if there were different probabilities of success, one can imply one is safer).

Phil