I appreciate all the inputs, however, I don't really need lectures on how clueless newbies are, and it will take x number of years to make any money, the fact that I am here seeking mentoring is proof that I know it is not easy, the fact that I want to be mentored is that I don't want to spend one year to start making money, I want to be mentored to not reinvent the wheel and avoid making costly mistakes. However, if these are the types of advice I will be getting, thanks so much, but I don't really need it and no time for it right now.
Some people just have to learn when they step into the furnace. Best of luck -I think you will need it.
My point was you do not start out with profit goals and strategy requirements as your first steps. Forget those and we can start from the beginning. The profit targets will simply blind you to the money and you will not learn anything about the options. I am not lecturing you on the clulelessness of newbies but giving you your first good piece of advice. Forgot profit targets and goals and dreams of 60% - 100% a year returns (5-10% a month or so...). If the pros are not consistently hitting even 60% a year why should you start out with those dreams in mind. It is a stupid cliche but imagine someone starting out in baseball meeting with the hitting coach and asking "Show me how to hit home runs" when the person has not even learned how to hit. Now that you understand my point perhaps we can move past that and leave it behind and get started.
I don't know what it is that attracts the psychos and the mentally crazy people online. Maybe the society around them does not accept them so they all log online?!? You have asked for help and then optioncoach politely answered your request. Then you became all aggressive and weird. Why? God knows. ET board is a place about learning and interacting with other individuals is not a place for you to release your built up aggressiveness. Such stuff posted like you, is like garbage dumped in the middle of someone's lawn. You are taking other people's time and ruining a constructive thread. I don't know, is that what you want? You are trolling to get some attention? If you have issues go seek some professional help.
Ok! You already know what an option in and the basics so I am not going to bore you with that stuff which you can go to www.888options.com to refresh your memory on contracts specifications, expiration policies and the like, as well as the basic strategies. The first part of the lesson is to learn the greeks the right way but mainly DELTA, THETA, GAMMA. Not trying to teach you Black-Scholes or get you bogged down in the numbers but understand the general characteristics of the greeks to understand how to make more informed option trading decisions and choose the best strategies for the right situations. We can cover each one of the above each day so in three days knock it out of the way and move on from there. For you or anyone lurking just follow along and do not assume cause you know the greeks you find this part boring. Most beginners know the definition of the greeks but have no idea how to use them properly to make informed risk/reward balanced decisions. So I will come back and post first lesson on greeks. I ask that all questions be here if possible for shared learning as opposed to PMs. I usually get lazy and forget to check PMs so I do not want to miss any questions.
Thanks Coach. You hit it right on the nail, I use delta a in the past but the other ones, I know them on an intellectual level, but have no experience nor practical understanding of how to use them to actually aid me. I look forward to our 1st lesson.
1st LESSON : Delta. Ok I think you are aware of the basic definition of Delta: Measures the change in the price of the options for a $1.00 increase in the price of the underlying stock. Calls +Delta Puts - Delta GAMMA = amount DELTA will change after $1.00 change in stock price. DELTA is the speed at which the option price changes and GAMMA is the rate of accelration. The main point to understand with respect to Delta and Gamma is that they measure the SENSITIVITY of the option to moves in the underlying. Forget the actual numbers as we only look at the big picture right now. Sensitivity tells us in general how will, or how should, this position react to moves in the underlying. Some of this is basic and you might know already but just follow along as here are the basic characteristics you need to know: -- Delta runs from 0.00 to 1.00 and of course ITM options have higher deltas than OTM options. -- Gamma is highest ATM (looking at front month here) and goes down as you move ITM or OTM like a bell shape curve. Why is this so? Well deep ITM options have deltas like .90 - 1.00 so there is not much more the deltas can increase. These options are moving almost 1:1 with the stock and deltas cannot really increase past 1.00 so the gammas are not important and not big at all. Deep OTM strikes have really small delta and are not going to budge much for a small move in the underlying stock. Likewise the gammas are small as these FOTM options are barely sensitive to the movement of the price of the stock. ATM options have the most sensitivity since deltas are around .50 and the stock can move ITM which would require deltas to get bigger or could move OTM which would reduce sensitivity. So basically gamma peaks ATM and drops off ITM and OTM. -- Delta is a short-cut proxy for the probability that an option will be ITM AT EXPIRATION. Derived from B-S pricing model so not perfect but good enough for back of the envelope understanding. -- Deltas for the same strikes are bigger the further you go out in time. Further out in time options have more time for the options to move ITM so deltas are greater. -- Delta/gamma is the leverage factor in a way and if we understand the sensitivities of options by understanding how deltas/gammas work in general then we can use our understanding of D/G to answer the questions such as: > Which strike price do I choose> > Why is my position gaining as much as not gaining as much as I had expected? > How will my spread react to moves in the market? So our next step is to look at deltas/gammas and use them to make some general observations of risk/reward considerations. [cont...]
[interlude] If you are an experienced option trader, this info is too basic for you so no interruptions please. Lets keep this for begginners.
Delta/Gamma cont... Let us look at the risk/reward trade off that comes with D/G and the moneyness of the strikes selected. We will assume single calls or puts for this portion. ITM strikes Looking at strikes with deltas between .70 - 1.00 we are talking about options ITM by more than a few strikes on average. These options have the most SENSITIVITY to movements of the underlying which means we get the most bang for our buck. They cost more but we are compensated for that cost with more movement in relation to the stock. So we can use ITM options almost as a proxy for the stock when trading to take advantage of that gearing or sensitivity. Let's look at an example or two and then figure out how we can use this understanding of delta/gamma relationship to take advantage of it. Looking at the above (forget the data is old it still makes the point), we see EBAY at $34.11 and looking at its LEAP options with almost 2 years to expiration out. The $20 Call which is DITM has a delta of about .92. The effective price of the $20 Call if exercised is $36.60. SO this means we are paying about $2.50 in time value premium for the right to hold this option for close to 2 years and get just under 1:1 movement in the option. Not a lot of time value premium since it is deep ITM. Now we could pay $3,400 or so for 100 shares of EBAY (no margin) or buy the $20 Call for $1,660 and get almost 1:1 movement (sensitivity). To prove this is not a theoretical exercise look at the chart below: THis graph shows MMM stock price over a year's time charted against one of its DITM call leaps. Notice how the Option price in blue moves pretty much in step with the price of the stock. THe lines are not going to move exactly cause the delta on this one was not 1.00 and also due to errors in the model but for the most part it tracks perfectly. Using this knowledge of deltas and sensitivities we can see what benefits ITM options can provide and how to use that sensitivities to our advantage. We will consider only single options here but we can then see how to apply that to spreads and other strategies later on. [cont...]