My Conclusions

Discussion in 'Options' started by luh3417, Jun 15, 2006.

  1. luh3417


    I started trading options because I thought I had an edge. A friend's nephew is in the industry and said "I would not trade options at retail". Following, my experiences and conclusions.

    I read a few academic books about options and its quite interesting. But trading them retail, I found that I would never get an inside fill (inside the bid/ask) and it was hard to get my order filled even at the current bid or ask. For every underlying, there are often dozens of derived options, thus they're not very liquid. Further, the idea of putting on complex positions described in the book (strangles, condors, etc.) just seemed overwhelming. I never tried it, but I felt certain I'd get hurt while struggling against the illiquidity, to leg in or leg out of a synthetic position. It often felt like other people were cutting in line ahead of me.

    I then read the book "Options Market Making" and things got a bit clearer. All that academic stuff does get used... but only by the banks writing the options and the market makers making markets. These people have rooms full of computers and math guys constantly balancing out all their greeks for them. They never speculate, they never take any risk, and they always make money. Furthermore, the market makers, get inside fills all day long. They don't face the liquidity and execution problems we do at retail. The book even advised them to turn an ear towards the nearby futures pit to give them an extra edge. I'm not going to say they're cheating, but they do take home a lot of money, and its a zero-sum game, if you're wondering where you fit in. Let's just say the market maker is not your friend.

    Where that leaves us is that if you trade options at retail, even if you have low commissions like at Interactive Brokers, you still have an uphill struggle to even get in at a decent price, and you still will be paying the bid-ask spread, though of course, 90% of your options will simply expire worthless, so you may not face the second half of that, but you still pay. Where that leaves us is, your options trade is speculating. This is something the big boys never do, and you might speculate on why they never speculate, and its not simply because they do so well using their existing advantages. Even you guys with fancy condors or vega scalping or whatever, and yes, you guys who sell covered calls (which is identical to a selling a naked put, and if you don't know why you shouldn't be trading options).

    Having said that, you may just straight want to speculate. In some sense, even going long stocks is speculation. Maybe, like for me, you feel you know an industry well enough to have an edge, and you want to bet that a certain stock is going to go up or go down. And you want to bet that it will happen fairly soon, bearing in mind that a stock moving means that all the numbskulls who drove INTC down will soon change their minds and drive it up. (It doesn't matter if you're right or wrong, what matters for the stock price is what other people think). My conclusion about the best options strategy: buy a put or buy a call, period. Buy one near the money, because they're a lot more liquid (or can simply be exercised) once they're in the money. And pad your timing with at least an extra month, because the theta will kill you in that last month. And remember that you are speculating. I would also watch it carefully and consider cashing in early rather than late as the market unfolds. This may be built-in to the above, but I would also keep away from options priced less than 50 cents, the bid-ask nickel quantization will hurt you.

    Those are the conclusions I reached. I had a lot of fun doing it, ran my portolio up 30%, then only 15% up, then settled at 20% up, over 2 months, and, you tell me, I learned something too. Would be happy to learn some more if you can reply.

    Right now, I picked up an INTC OCT 17.5 call, because the news on Conroe is going to break in July. I know there are people here who say they are making a lot of money, and I just wonder how you do it, do you create synthetic positions or 2 or 4 options, do you just put in market orders, do you balance your greeks daily? Seems like a long row to hoe but if you're making 6 figures who am I to judge you.
  2. Gustaf


    Hi, I have written a program that scans option trades bases on expectancy and mathematical advantage. (Theory based from an options book).

    It seems every strategy having a good expectancy involves at least one sold option so i personally would disagree with just buying calls or puts.

    I trade SPX, SPY and some occasional stocks.
    Strategies involves mostly bull put spreads, bull call spreads, calendars.

    However these are just my thoughts what works well for me might not turn out to be a good idea for someone else.

    Best regards.
  3. lundy


    if you go to a prop firm specializing in options, u can get alot of things that will give you an advantage. I traded with Vtrader, and it was an excellent experience.

    1. haircut - its like margin, but based on more on real risk.

    2. access to firms that will work your order - not sure if you can get this retail. For example, say I want to do a credit spread. I can just call them up and give them the strikes and how much credit I want it for. they work the order for me by calling other firms, making deals etc. Then they call me back with an update. Usually if its realistic, you can get filled.

    3. training and comraderie - if you hang around guys trying to achieve similiar objectives, you can learn a thing or 2 to advance your trade. I was around some excellent traders/fund managers at Vtrader. A very professional setting. Certainly beats trying to learn this from a book and sitting at home.

    There may be other advantages as well.

    That being said, I am sitting at home (in hawaii) trading a retail account just buying puts and calls looking for underlying moves.

    One thing that you said is true but misrepresents this style of trading. Sure the majority of options expire worthless. But all these options are very tradeable until about 1 week before expiration.

    I usually do a mix of near otm's and far otm's. I think near otms are for when I actually think they will become itm, so its worth the risk of the higher premium outlay. I use far otms because I think they will increase in prem value, not because I think they will become itm.
  4. pattersb

    pattersb Guest

    What do you trade? The same basket of stocks, indexes, etc ...?
    Or just anything that is moving...

    Are you able to make a living at it>?
  5. zdreg


    i am very much use to penny spreads in equities. how does one handle typical option spreads which are usually a minimum of 10 per cent?
  6. luh3417


    It may come to the same, but not only are they ten percent, but they have to end in nickels (or dimes if $3.00 and up). You can try for "price improvement" by routing your order to BOX, though the routing may cost extra. It may be 5 or 10 cents but if the contract costs $2.00 that's not ten percent. Furthermore, how do you calculate a percentage when you have all that leverage.

    Or you can just refuse to play their game. The retail options game is really for people with inside information, so you might play anyway despite the deck being stacked against you.
  7. Why in this modern day are there such ridiculous intervals in the option market? I know why, obviously - it benefits the market makers. I just figure perhaps the client trading community would push for reform in some sense.

    Its either that, .5 intervals at cheap stuff, or .10 deep in the money.

    It seems so obviously rigged.

    As for straight gambling in options, I vow never to do it. I just started trading options a month and a half ago with that attititude. Literally a few days before the 'collapse' of May (and the continued collapse in June), I was buying calls without any protection strategy. And in large amounts, not realizing the risk I was in (i'd never traded options before this). I thought I'd be fine riding a few diversified picks in fairly liquid options [fortune 100/etc]. In the past, I'd only traded stocks, bonds, mutual funds, ETFs. I'd never experienced what true raw leverage can do (both ways).

    I made a few successful trades, all in the several thousand dollar range. After doing that, I felt comfortable and went in deep. I loaded up on nearly $$ (fill in a number, for privacy's sake) worth of options [all calls] and went for gold. We know how this story ended. I realize there is wisdom in the claims of the guys on this board who compare staying power of a studied strategist to all out gamblers that most people (including I, when I started) are when they start option trading.

    Now, I've done my homework, and am afraid to touch calls and puts in unhedged positions. The good, however, to come out of this, is that I've hopefully learned some valuable lessons about portfolio management, and have picked up some tricks. I think continued general market volatility will be a tool I can use to regain some of my losses slowly over the next few months.

    And once we've had a bull run, if we do, I'll be ready to sell some covered calls. In the meantime, a straddle or two at a time, and only on relatively volatile stocks that are traditionally volatile, not just now.

    Its a dangerous tool, but I am happy I learned some discipline in time. And even if I don't regain it in the near term, perhaps that the losses will pay off in better choices from the humility that I've gained recently.

    I'd much rather do 10-20%/year over a lifetime than 400% one year, then total loss the next.
  8. lundy


    Unfortunately I dont make a living at it. Not even close. I am still struggling. Selling premium doesnt suit my risk tolerance, so I am trying my hand at buying premium.

    I cull through about 500 liquid stocks with options. I look at daily charts, hold from 1 -3 weeks. Mostly playing flags that seem to be a reversal rather than consolidation continuation. Like right now I got puts in OMX.

  9. you never mentioned how good is your edge , maybe the problems starts right there ? BTW , 90% of options expire worthless is a myth , NOT on a dollar weighted bases they don't.
    Good luck
  10. It doesn't really matter whether you trade options or stocks or futures. People will fail at any of these if their depth of understanding and experience is insufficient. Trading stocks is not nearly as complex as futures, which in turn are not nearly as complex as options. Options are by far the hardest and most complex to learn (let alone sound money management, psychology etc.) so it's not surprising hearing tales from fairly "inexperienced" option traders about how it's not working for them - they are damn hard! A good stock trader doesn't necessarily make a good options trader.
    Daddy's boy
    #10     Jun 16, 2006