Hey everybody, thanks for the input so far. I am hoping to find a list of tidbits like below. Look for underlyings that are liquid (1 to 2 cent spreads) Trade underlyings with high implied volatility Be a seller of options premium (not a buyer) Sell options in the 60 - 30 day to expiration range Do not listen to others. Don't trade options! Being a K.I.S.S. sort of guy, I appreciate things being distilled down to "Do this", and "Don't do that". Like food. I want to see the "10 foods to avoid", and the "10 foods you should be eating". As some may recall, I'm a mutual fund timer guy. That's like the ambush predator of financial markets. When I see a "good enough" setup, I go for it in size... with my stop at the ready. I have traded the SP futures the same way for years. I'm figuring the same approach to options should work if I get the basic "Do this, don't do that" part right. Also I recall a story. Back in the '87 market crash, I was still a principal of a B/D. I noticed that one of they guys hadn't been at his desk for over a week after the crash. When I asked around, I was told he quit. I was concerned of course that he'd lost big and was despondent. Happily quite the opposite. He'd apparently bought a load of OTM puts and made >$1 Million in the plunge. He took the money and run! Good for him. I'm not even hoping to make such a score, but with the markets nearing a big top, options seem like a good arrow to have in one's quiver. That's why I'm looking into them.
Scataphagos.. options are probably one of the trickiest to trade for there are so many dimensions money is made / lost. One can make bets on direction, duration, magnitude, terminal distribution, and I assume 1 or 2 other additional elements. This fact makes it, IMHO, less appropriate to the 10 do's and don'ts list that you want. Of course there are generalities that hold true like to not trade wide b/a spreads or pay a broker $19.95 for a 1 lot call spread but by and large option trading is "contextual" . A fly purchase in 25 IV is great but horrible in 12 IV,etc. Let's take a simple suggestion of only sell options- that suggestion could be disastrous in this low IV regime we are in! There WAS a "supertrader" who did just that... all the way down to the vix in the low teens. I don't think she is trading anymore. .. just saying
That's my perception and mostly why I've never bothered with them. I can catch the "low hanging fruit" with stocks, ETFs, ES. I'm exploring the worth of options on those trades also. Thanks for your input, however.
This is the wrong assumption to make. Surprisingly, most options don't get unwound. They are liquidated via the underlying product at expiry which has significantly higher volume. If you're not a professional, narrow the products that you trade so the bid/ask spread is fair. I wrote an algorithm that instantly changes my order price based on the underlying and the order book so I am less concerned about the liquidity and trust my server.
As per Tom of Tastytrade, if you don't agree with the strategy, you can do the opposite. Of course he still gets his commission on every trade. I am doing the exact opposite of your strategy. My batting average is only .33 for the year. 33% of my trades are profitable. But my portfolio profits are incredible. Obviously, the bull market helps but if we plunge, my long vega just gets better. My focus is making money on the portfolio and in a low vol environment, long vol is overall profitable cause I have unlimited upside and pay very little in commissions and market spreads. Don't try to pick up pennies in front of the steam roller! End game is making money for the year - not just winning more times than you lose.
I've flipped flopped 2 x on using volume indicators in options as a "tell". I used to think it was a good indicator as it shows commitment of traders to a certain price expectation, then I got talked into by friends of not putting weight on it due to hedging action by the "pro's".. then the more I thought about it, I am back to the original narrative- that option volume/OI matters .. specially after reading a piece about "sticky strikes" which manifests itself expiration week...
Very seldom, I trade options, but when I do, I always adhere to the following two “very simple and yet important” rules: * Buy options when VI is low and sell them when VI is high * In either case, you always have to make sure that the wind is at your back by using Williams’s %R momentum indicator. Good luck
More advice... beware of delta neutral, it's a nice academic concept, but in the real world vega will eat you for breakfast.
Trading options for profit is extremely difficult compared to stocks or futures. It is a "quantum physics" of trading. I consider profitable option traders to be elite of the elite. Just my 2 cents