I usually avoid posting on public boards, because of trolls, flames and similar reasons. But, reading this board it seems fairly tame. I am new to options. I have been trading for about two months or so. I have about $50,000, in my account and am down about $5000 (2500 of it realized). This is well within my risk tolerance. I have a defined benefit pension plan, got a 401 K (in short terms government bonds) that I don't touch, I can retire in 4 years without worrying about this brokerage account. I don't want to lose it of course, but I want to become good at trading options, because I find it absolutely fascinating and fun. By the time I retire, I want to be proficient at it. I have read or am reading a few books on Options. The best by far is "Options as a Strategic Investment" by Lawrence McMillan. I have a few observations and would appreciate knowledgeable comments. The first is, unless one understands the math and has the aptitude to understand the math, one should probably stay away from options. For example one needs to understand all the greeks and I don't meant just understand what they conceptually mean by definition; I mean you need to understand the formulas inside and out. I am reading Chapter 40 in McMillan's book "Advanced Concepts," and if one doesn't have a clear understanding of those concepts, then s/he shouldn't be in the game. I have a mathematical aptitude, rusty though, because I haven't had any need to use it since college. My career took a different direction. I have taken advanced algebra, advanced calculus, statistics (this I have used recently in my job) and so forth, but that was going on over 30 years ago! Yesterday, I found myself looking up how to solve simultaneous equations, something I learned to do in high school. For those of you who have been at it, please feel free to comment on my observations. Because I also realize there is something called analysis paralysis. Thanks.
I think people put too much weight on the greeks. If you have 50K and carry only a few positions per month, you don't need to calculate and recalculate the greeks. As long as you know how each position reacts to different variables(underlying movement, IV change), you can adjust or close each position on it's own merits. It's like having a BMW engine in a honda civic, good idea but you don't really need it. Traders who carry significant paper is a bit different. If you have multiply strike holdings across multiple underlyings across multiple markets, you can see how managing by the greeks becomes much more of a necessity. This is all JMHO.
you don't need to be a rocket scientist in greeks to trade options. on the same breathe, I am going to tell you the other truth: 1. if you don't know greeks, stay away from options -- why put your real money in something you don't have a grasp on? there are many instruments and methods that can make you good money. 2. if you don't want to deal with volatilities and options pricing, don't trade options. -- all investments/tradings are sucker games. What you don't know won't hurt you, until it is too late.
Most all things with money to some degree or less are sucker games. Options are just two sigmas to the right of the curve. I appreciate your candid points. Thanks.
if you are good with mathmatics... read MacMillan... loves dealing with volatilities and options pricing (I assume that means you have read Natenberg)... then you are ready for the coach's Option Traders Handbook.
Working your own portfolio you learn as you go. Greeks are important to understand but one could spend a decade analyzing and theorizing about just one of them. Even if you know every formula by the book until you practice with real trades it will seem foreign to you. Point being, knowledge is power--knowing the Greeks inside out will help you tremendously--practice as you go along i.e. If you're studying gamma and want to scalp it--try to do this options expiry week. Best of luck.
Thank you for the response. I am having fun doing and learning. I have a lot more to learn. I truly find this area of trading fascinating. I agree, you don't really learn until you put money on the table. I am learning by doing along with study. There has been some tuition cost with this (trading losses). The money I set aside for trading options is about 20 percent of my liquid net worth and a about 5 - 7 percent of my total net worth. Plus I have a defined benefit retirement plan, that doesn't include any of this. I am at a time in my life where I can be involved with this from a perspective of fun and from a perspective of learning (I am 52). I am not sweating out trades. My goal is to be good at it by the time I am eligible to retire in four years and become involved in it even more then. I'd eventually like to be really good at it. I know their are some very savvy, knowledgeable, experienced traders on this board; as well as some professionals who do it for a living either for some firm or financially independent investors trading on their own portfolios. I am very new and I have healthy respect for what I don't know.
If you are going strictly directional,... (ie; no writing) Don't put more than you can afford to lose, financially AND pyschology, in any one position. (Frankly, In the total of your options positions ... ) 90% losses overnight are not uncommon option contracts... Lossing 90% of 20% of your liquid net worth ... could be shattering!!!! Step over into Career Traders forum, look for the thread..."I lost 400k in two months, and I quit...." Guy loaded up on MRVL and BRCM calls, ... lost 10 points over night.. :eek: good luck
Observe actual option prices http://www.prophet.net/quotes/options.jsp and IV http://www.ivolatility.com/ model them with this http://www.hoadley.net/options/demosaddin.aspx apply your knowledge of stats and probability to estimate standard error, outliers, regression, risk of ruin, expectancy etc be creative and go beyond book knowledge