I'm mostly a futures trader primarily because I really don't have an account big enough to buy 100 shares in like 10-20 companies that would comprise a very well diversified portfolio - although that's how I eventually want to trade - risking a little on each position in a portfolio with a lot of positions. I've always heard of people saying options were riskier and I thought of options as risker because of the added leverage, thinner markets, bigger spreads, eroding premiums, plus commissions. But I'm warming up to options. I think the risks can be worth it if it enables me to build a diversified portfolio which can reduce risk. I'd only consider simple buying call/put strategy as all the other more advanced options strategies befuddle me. Am I entering dangerous waters? Will I end up like NoMoreOptions?
The way I see options is changing. I actually think for a new guy with say 25k, even if he can avoid PDT rule - he's better off with options. That way he can build a diversified portfolio - instead of risking too much on too few positions and he can hold longer for the really big wins.
Well, here's my opinion. If you don't spend the time to really learn options, you will most probably end up like nomoreoptions. Yes, they are befuddling. But if you put enough time in on learning them, they are also facinating. And you'll see a much richer landscape of trading than you presently see. I like to think of the difference between trading the underlying and options as like the difference between checkers and chess. I continue to learn, and always hope to continue to do so. This shouldn't be burdensome, especially if you are presently profitable. Just take your time to learn while you continue to trade your hopefully profitable system. I don't think that simply buying calls and puts will be the way you'll want to trade if you take your time to learn first. You can become unbefuddled. If you wish to trade directionally, simple vertical spreads will often be better trades than buying calls or puts. Unlike just buying a call or a put for instance, you can design a vertical spread that will slowly make money from time decay if the move you expect doesn't happen. You will also have a limited risk (unlike the way you are currently trading) and still be able to make a good profit if the move you expect does happen. What you give up (yes, you have to give up something) is the huge profit you could get from the rare buyouts if you are long and the bankrupcies if you are short. So how to go about learning options? I would suggest you start with a simple book or there are lots of introductory explanations on the internet. Then work your way up. I'll probably get flamed for this, but I found some of the Guy Cohen books helpful. Not to learn how to trade them, but to learn how the the various combinations of options behave. Think or Swim's website also has good explainations of these as well. Get an option simulator program so you can play with these positions as you learn. Then, after you get this far, start reading some more advanced books. Like Natenberg, Baird, Taleb. If you try to read them before you get a good foundation, you'll just befuddle yourself even more. Kind of like trying to run a marathon before you know how to crawl. Unless you're a lot smarter than me, you'll have to read everything more than once to really understand what the authors are saying. Happy trading.
Trading 20 or more option positions at once in my opinion would be extremely hard to watch and monitor. Also options tend to move faster than stock. It also violates my trading plan of having to high of a risk. Since I will only risk 2% of my trading account per trade and with options you have almost 100% risk. That means I would need almost 50 positions to monitor and watch. The only way I have succeed in stock options is to follow and know the stocks fundamentals and use technical analysis to time my entering and leaving the position. So just the time spent screening and learning the fundies on 50 or more positions along with watching 50 charts, then adding in the the other elements of options such as over and under pricing, volatility and running a model. Ouch! I can see a huge draw down waiting in the wings.
Yeah, what donahuedc said. Together McMillian (Options as a Stratigic Investment in particular) and H Roth (LEAPS) have some pretty good basic books about how the different dimensions of options can play out. Caplan as well. I only mention Caplan because of the emphasis he places on IV. It was Caplan who made me see beyond a shadow of a doubt that an option trader MUST include IV in evaluating a position. Peace and gtty, Lar
Well, they must because by choosing any option strategy you're making a volatility forecast whether you know it or not. Another nice thing about verticals is that you can place the strikes to match your vol forecast, where if you buy a call or put, you're stuck long vol. I always highly recommend watching CBOE webcasts here: http://www.cboe.com/LearnCenter/webcast/archive.aspx Anything by Dan Sheridan so far has been excellent. The others are pretty good as well. All in all, I think those are time well spent and the price cannot be beat (free). If you don't have a good understanding of the greeks and what they mean and how they're affected with the various positions, the market will teach it for you (by way of taking your money). I trade options because my risk and reward are well defined. I also can match strategies, strikes, etc to my feeling of the underlying and my IV forecast. For all of the complications, you do get something back from options and that is flexibility. It took me awhile to understand the basics, greeks and strategies, but I'm slow. Can't imagine ever trading equities again though.
I index think options will become "the trade" after penny spreads Jan 29th and margin revisions Apr 2. 1. Mini broad based index contracts with european expiration: XSP, RMN, & MNX 2. Broad based indexes have 60/40 tax treatment. 3. Risk management strategies not available with futures. 4. Sector indexes: not available with futures.
Dave, like you, I'm really interested in seeing how the penny spreads and the new margin rules will impact future trading. Regarding the margin rules, I have a lot of thoughts and a lot of questions, but it is far too soon for me to express either. It is going to be interesting and as you say, might have a significant positive impact on options trading. One thing that does appear evident is that the brokers are going to be making a hell of a lot more margin interest revenue. Unfortunately, the US income tax Code has limitations on the tax benefits on the tax benefit from the deduction of margin interest expense. Anyway, it is exciting and something to look forward to with a great deal of anticipation. Bob
Can someone point me to a website that shows the changes in margin treatment that will occur in April 2007? Thanks in Advance Dave
If I'm buying calls/puts - then the worst that can happen is that the contract expires worthless. So the exactly amount of risk is limited and known right from the start. No use of stop loss orders required. I think you only have unlimited risk if your selling calls/puts which I would never do. I created a thread before on penny options. I'm glad there is a pilot program out there but its just odd why the option exchanges waited this long when they could have made options significantly more attractive as a trading vehicle had they implemented it before.