Position sizing

Discussion in 'Options' started by tradebanzai, Apr 22, 2006.

  1. Hi everybody,
    I'm new in option trading. Could anyone help me in understanding how to size my position? When I trade stocks it's relatively simple. For example if I can allow myself $200 for each trade, it's 2 points on each stock contract, 2 contracts - 1 point and so on. And what to do with options? If stock moves 2 points, how much does its option change? Hence, how many contract can I allow myself to buy?
    I know about the greeks, but don't know how to use them practically.
    And another question is how to determine market volatility? Hence how does implied volatility change?
    What book could you advice to read concerning options?

    Thanks in advance
  2. Try the complete guide to option pricing formulas, by espen gaarder haug, and all about derivatives by michael durbin

    It's better to browse haug's book and read through all about derivatives ( it's simple ) than it is to try and figure out options while you trade. A $50-75 investment could end up saving you thousands and enable you to trade like a pro.
  3. Neoxx


    Some brokers (e.g. thinkorswim) factor in option pricing models into their analytical tools, showing you precisely where your break-even for a trade is, and your P&L based on the stock price.
  4. Hi Tradebanzai
    Haug is a little complex for the beginner. Better to read Sheldon Natenberg's "Option volatility and pricing" - your questions will all be answered there. If you are serious about trading options then get yourself some decent software (either buy it or find a broker that supplies it for free, e.g. thinkorswim) for modelling price, volatility etc.. Then you'll know how to determine your position size. It will take you a little while to come to grips with the new concepts, so don't rush. And practice.
    Daddy's boy
  5. Thanks everybody for your reply.
    What do you think about the next books?
    William Gallacher "The Options Edge: Winning the Volatility Game with Options on Futures", Irwin Options Institute "Options.Essential concepts and trading strategies", "McMillan on Options", M.Williams "Fundamentals of the Option Market", R.Kolb "Understanding Options", J.Najarian "How I Trade Options".
    I've tried Thinkorswim program, but it has too short trial period, so I didn't have enough time to familiarize myself with it. Probably I'll need to change my account every 2 weeks.

  6. MTE


    Contact TOS, they may extend the trial period if you're serious enough.
  7. echo MTE...I believe TOS will let you try their softwear for probably a month before xling you...it is very complicated but they have some wonderful video's explaining how to use the softwear. When you do have some time to devote to learning it thats when you should sign up and just let them know you will need more than two weeks. They understand and I have found them to be very flexible.
  8. tos commish are a rip-off...if u don't cancel orders all day long u better off elsewhere.
  9. When buying options do you always pay on the offer?....same thing with commis.....make a 2 sided market. I made a bid and got filled at the bid!
  10. Or should you build options position similar to your average stock trade size, e.g. 500 shares = 5 contracts?
    #10     Apr 24, 2006