If I am not good at judging the mispriced and the movements/directions of the underlying, would short term options then not as forgiving as longer term ones? My actual experiences trading were I made more money when I went longer term than short term. How can I improve my short term outlook? Also, I had tried other leverages like using margins that ended in very bad outcome. What is CFD and would future be better than options for that? Thanks.
You need to know at least what standard deviation is: http://www.mathsisfun.com/data/standard-deviation.html In finance they use the name of volatility for the standard deviation of returns (log returns more exactly). And it is an integral component of option prices. So when option sellers expect the underlying to be very volatile during the lifetime of the option they charge more for the options and vice versa. Options are priced in such a way (we'll at least in theory) that if the realized volatility matches what the price was implying then at expiration neither the buyer or the seller of the option make money at all on that trade (of course in a world of continuous dynamic hedging by both) However in index options, it has been found that the implied volatility in the price is usually substantially higher than the one that is actually realized, it is clear that sellers (option dealers) are padding the price with a risk premium on top of fair price. We call that premium the Variance Risk Premium. It is prevalent in index options and it is very noticeable in SPX puts for instance.
Thanks. I do have the book but only read the first few chapters. I will look up variance and volatility there.
Yes sir. However, I did read McMillan cover to cover. Still don't understand half of what I read and don't remember most of it. That is why I have to keep asking stupid questions here. Cheers.
I never read McMillian. I did read Natenburg. I also read Hull (and did all the math problems). It was more valuable than all the derivatives pricing and finance classes I ever took on options.