Simple questions... or not so simple?

Discussion in 'Options' started by mind_the_gap, Jan 1, 2009.

  1. Happy New Year to everybody!

    I've been trading stocks for several years now and I'd like to expand my strategy to options. I'm familiar with the basic theory (greeks, volatility, etc.), but when it comes to actually trading I realise that I haven't understood the "real problems", so here goes:

    1. The price of an option seems to be the result of supply and demand, so the "fair value" (Black-Scholes for example) doesn't necessarily have anything to do with what I pay for an option, right?

    2. Implied volatility. If the price is dictated by supply and demand, then the implied volatility is actually calculated from the other parameters (strike price, price of the underlying and the option, time until expiration, interest)? If that isn't the case, who gets to decide what the implied volatility for an option will be?

    3. If you buy an option, how do you make sure you're not paying too much for it? How are you using Stop Loss orders with options? Does it make sense to use them with options at all?

    Thanks for your answers,

  3. Mark
  4. spindr0


    This isn't going to answer your questions but here goes anyway...

    I started as an investor a lonnnnnng time ago and ventured into serious day trading 6-7 years ago, trading on the news of the day as well quarterly earnings. Early on it was mostly stocks and eventually it became mostly options, particularly for earnings.

    Outside of being very selective for specific options earnings plays, I now trade mostly stocks. The main reason is that options have so many things to get right (IV change, skew, time decay, wider spreads, liquidity and direction) whereas with stocks you just have to get the direction right.

    So my 2 cents is learn options but concentrate on what works best for you.
  5. Thanks, your post made options a lot clearer for me!