Hey thanks for the information. I definitely wanted to explore options due to their versatility, not just to be a buyer. It just seemed that the more and more I read about things, the more it seemed just to be a more complicated way of what you could do with a simple outright position. After reading some of the posts here and doing some thinking, I definitely see how there are many, many different ways to utilize options strategies. As far as volatility goes, I had a sense from the beginning that volatility would be the most important thing to understand, and I think that once I settle in to reading Natenberg I should really be able to become more familiar with and eventually internalize the concept. The concepts of some of the basic strategies weren't that interesting to me at first, but when I started looking into the synthetics and how they can be manipulated and utilized, I started becoming more and more interested. One little thing really piques my interest, and then I just go balls to the wall until I figure it out. That's the way I learn. I start reading something, get confused. Walk away for a few minutes, come back read it again. Get confused, read it, walk away and then while I am away it hits me...then I go back and read it again and everything makes sense all of a sudden. I have a weird way of learning, but that is how options have been for me so far. The concepts started out totally foreign to me, and then I would just keep repeating my process until it hit home. Rinse, wash, repeat, until it sticks. Thanks for the info. I have done well in my trading and have become consistent and am very happy with my current methods. I am just very intrigued by options and enjoy trying to figure things out. I am looking forward to learning more about it all. Always a good thing to have more than one way to make money. Thanks again for the information.
My advice is study some basics and after that become familiar with the more complex stuff like the greeks and volatility. Download the Think or Swim papertrader platform if your not a client (its free) it has some really great features for option traders. You can analyze any position you want (risk profiles, greeks, volatility skew etc.) also their back tester lets you get back in time so you can pick a stock for a certainn date, create a position and see what happened to the position as time went by. A picture tells more than a 1000 words so experiment with this software and all the things you read about in the books become much more clear. Just my 2 cents.
Yeah I've been fooling around with the options stuff on ToS's platform. Thanks for the info. Like the saying goes- Get amongst it! Best way to learn!
Here's two reasons I buy options vs outright positions: Reason 1: Leverage. Real Trade example: On 03-19-2008 I bought SPY April 130 puts for 2.25 ($225). Sold them near the close on the same day for 4.25 (+88%). The SPY etf moved 3% (4 points) to generate an 88% option profit. That's Leverage. Reason 2: Limited Risk. Real Trade example: In early March 2000 my buddy bought 400 shares of a company named Cabletron at $47.50 per share. His total purchase price was $19,000. I bought the equivilent amount of shares using options. I bought 4 contracts of the April 47.5 calls for 2.375 ($237.50) per contract. My total purchase price was $950. We were both holding our positions each day as Cabletron steadily climbed from $47.50 to the low $50's. Then suddenly one day after the closing bell, Cabletron announces news that Wall Street hated. Cabletron opened at $19.00 (-60%) the next morning and never went higher. My buddy sold all 400 shares for $19.00 for a total loss of -$11,400. My 4 option contracts (controlling 400 total shares) were a total loss at -$950. His loss represented 31% of his stock trading account. My loss represented 5% of my option trading account. That's Limited Risk. Important Note: You total true risk with the straight buying of options is -100% if you hold stock option trades overnight. So you limit each buy and hold option position to 5% to 10% of the total value of your option trading account. The disasterous overnight holding event that occurred with Cabletron is not an isolated incident. In fact these type of events caused me to switch mainly to index option trades with short hold times.
Risk:Reward dynamics of shorting stock are appalling. Despite potential for thousandfold gains vs 100% for short stock, dynamics of using puts is probably actually mathematically worse i.e. limited gain until in the money, plus you lose 100% if it expires worthless BUT, I find options block off some of my weaknesses like stopping myself out too readily or not holding long enough - Finite loss and a definite date that gets imprinted in my mind helps. Also no parabolic blow off with me short dreams. A way of implementing Livermore's great and overlooked point, hardwire/structure your trading so that it can't get to your psychological weaknesses
jeffalvinson, mokwit and Nanook- Thanks a million for the helpful information. jeffalvinson- Great example, I definitely see the benefits of limited risk! I'm sure your buddy does too. Ouch. mokwit, that's a good idea you mentioned as far as helping to keep yourself in a position. Nanook, Thanks for the links. They ought to keep me busy for a while.
You should also check out some options analysis software. OptionVue currently has excellent option analysis software. While itâs not cheap, ($3,000), it does help you visualize, monitor and manage your positions. They also have some free educational pieces. Itâs worth a look.
Just to say that you can make more than 100% on a short position in stock. The 100% limited gain is not true.