What sets options traders apart from stock traders?

Discussion in 'Options' started by tenebre, Oct 2, 2009.

  1. tenebre

    tenebre

    If someone is successful at swing or day trading, why don't they learn options trading and make a whole lot more money? Options trading magnifies the % moves, right? So there is potential for a great deal profit if done right, no?

    Also losses are magnified too I understand, but it would just be daytrading on steroids?
     
  2. MTE

    MTE

    Actually, it's not that straight-forward. With stocks you are either right or wrong, a stock goes up or down (or stays flat). Options add several other dimensions such as volatility and time, which essentially means that you can be right on direction, but still lose money due to volatility...
     
  3. Trading options on stocks is the eqivalent of packing penny stock level risk into the underlying (and then some). You are adding timing, liquidity, volatility, expiration risk...

    Plus the market makers can really play games with you.
     
  4. options are not for daytrading. Besides lets say a daytrader moves in and out of 50000 shares a day, thats like 500 contracts... So unless you trade you use OH, you will end up paying a mortgage every week to your broker, good luck turning a decent revenue. On the plus side, if you do so, you might get invited to lunch by your broker once in a while ;)
     
  5. In general terms, you're right. But a lot of it has to do with what kind of day trading you're doing. My day/swing trading of stocks yields a mere pittance in return in cents yield per 100 shares traded. However, when you do large volume, it's a good return. Toss in a large B/A spread, time decay and a wild card like volatility, cents per 100 shares disappears quickly.
     
  6. Options are for whatever you can achieve with them.

    Not only do I regularly "pay a mortgage to my broker" but in June and July I gave him just over $1,000 per month in short interest. It's like rent or salaries or other overhead. It's just the cost of doing business.

    But sadly, no lunch. Not even a peck on the cheek :)
     
  7. erol

    erol


    Holy sh.t

    I am such a small fish.
     
  8. When I originally started getting involved in the market about 5 years back I asked a similar question. I asked to trade options would it be better to trade stocks first? The answer is irrelevant.

    Trading stocks is like skiing on snow. You go to the top of the hill, look down the hill and start skiing and hope that you don't fall. With skiing on a groomed hill, what you see is what you get.

    Trading options is like skiing in powder snow. Just because you can ski on snow does not mean you can ski in powder. With powder there is not only skiing, but being able to gauge the quality, depth, and type of powder. Many more moving parts.

    There are people who love skiing on snow, and people who love skiing in powder. For example speed racing is done on snow. Style, grace and love of going down a hill is for powder.

    The advantage with options is that you can play a strategy. If you have a thesis then you can play it. With stocks what you are doing is trying to figure out where things are going so that you can make money.
     
  9. sub0

    sub0

    If you don't have a lot of capital, in my opinion you are far better off trading options to get the leverage you need as you learn to trade. Not only that but most successful stock traders aren't just trading stocks, they are doing a lot of trades per day. Often at least 2+ trades a day, sometimes 20-100+ trades per day. If you don't have the capital, you will get flagged as a pattern daytrader (no more than 3 buy/sells in a day over a rolling 5 business day period, the 4th gets you flagged) so you're trades have to be very selective and worth the effort. Or you will be swing trading positions held overnight.

    However you have to have a significantly higher risk tolerance and pain threshold incase you lose it all. It can literally wipe 50% of your account out in the matter of minutes if you are wrong. You have to seriously know when to sell and take a hit. Or when to hold on through the storm, riding it out and making a profit on your gut instincts. It takes a lot to be able to pull it off and sometimes it can be boring waiting around. Sometimes your option position will be so volatile that it will be swinging in and out of a significant loss as it charts it's way towards a profit. Do you sell out of fear or do you follow it through to where you think it will go and sell at a profit?

    You have to be prepared to lose every gain you take and let them run. Because it will be painful if you take it too soon and you see it run up 300% right after. And you have to learn to take a loss and admit when you are wrong. Otherwise you'll be grabbing quick small profits here and there and will bleed your account fast with commissions.

    Typically when you enter the trade it will go against you, you will instantly see your account drop a few percentage points since it's nearly impossible to buy near the bottom or sell near the top since you are waiting for the right signs to enter the trade. Option traders react very fast, far faster than stock traders. The only way to get near a bottom or go short near a top is to put it in ahead of time and be near the front of the line. Otherwise you are likely going to be ahead of the market to get filled in most cases. Sometimes the spreads can be an instant loss, you have to be careful.

    You then also have to deal with low open interest on certain things. You might be at a profit however nobody is buying contracts at that price. You have to look at the tape to see if contracts are going off at that price, if not it doesn't matter if you are up. You still need the interest.

    There is an excitement that comes with option trading though that you just can't get with stocks. And that excitement is knowing that most options expire worthless! :p
     
  10. linear vs nonlinear
     
    #10     Oct 2, 2009