A question for options traders

T

Thunderdog

I know almost nothing about options. Therefore, reading the various explanatory hieroglyphics in the options threads leads me to believe that there is a fairly steep and painful learning curve involved. I seem to be getting by just trading outright the couple of markets I follow. Even so, there is always room for improvement.

As I understand it, to trade options, you generally need to have a directional bias, even if that bias is flat. (Perhaps I’m mistaken. I’m already out of my depth.) So, here’s my question. Knowing what you do about options and how to trade them, how much better do you think your overall trading performance is, all else being equal (including risk), trading options as well as the underlying rather than just the underlying outright? Perhaps my question is naïve, but before I seriously consider investing the time to properly understand options trading, I’m trying to get an idea of what my incremental upside can potentially be, all else being equal (including risk). I realize that it can vary from one skill level to the next. That is why I’m wondering if you think you could ballpark how different your own performance might be with or without options, in terms of annual return. Your various responses would be an interesting reference point.

P.S. I had originally planned to read Natenberg’s book this summer, but somehow never got around to it. Would you folks say that this is the book to read or are there others you prefer?
 
I should point out that I realize trading options provides leverage. However, since I essentially trade only SIFs, I already have all the leverage I need or want. So what is the incremental advantage of trading options in those markets rather than just the underlying?
 
I'll just say this from my own performance and experience, if I did no options trading at all, I probably would have had to have much more capital than was available to me at the time or take on much more risk than I was comfortable with to equal my annual returns and results of the past several years.

You're going to get a wide variety of answers to your question, but one thing I would bet is that most (if not all) the people that are going to respond will admit that options, once learned to a satisfactory level, add a flexibility and dynamic dimension to your trading that those that don't take the time to learn options will never experience.

Personally I don't see how a trader can truly stay successful and profitable for extended periods of time without the employ of options.

Just my .02
 
You like a stock or index, you either buy or short.

With options, you can trade direction in all magnitudes (extremely bullish, slighlty bullish, neutral, slightly bearish extremely bearish), make a trade solely off of volatilities, trade a position while picking where the underlying will not go and therefore have a wider profit potential, use spreads to reduce risks, combine the futures/stock with options to improve returns or hedge (not so true for daytraders)- basically have more choices i how to play the underlying.

But I like options over stocks so one cannot tell you why you should switch trading that which you know and are making money with to another product you know little about. So I doubt you will be convinced of anything really. Options just give you more ways to play the same security but if you are profitable with futures, try not to jump into something new too quickly :)
 
Another 2 cent here...
I also would not be able to generate the monthly income that I have set for myself, without using options.
Leverage is the primary reason most people trade them.
Less up front capital is needed.
I like to set up an amount I would like to earn each month, and with option Credit spreads I have been able to do so...each and every month.
To be able to take advantage of a "Down Trend" you would need an enormous amount of margin to be able to short a stock. Instead you can buy a PUT and take advantage of the down turn.
Same is true for the higher priced stocks...the options allow you to participate in the movement of these stocks too.
 
Leverage is not my reason for using options, so maybe I can add a little value.

I've been in and out of options for years, but over the last year have finally spent the time to really understand them. I think I read Shelley Nat's book a little too soon in the process and got frustrated early on. Now that I understand options a lot more, the book makes a ton of sense and is very helpful.

I'm not sure that I'll ever go back to stocks now. I like the flexibility and the fact that I can be very conservative with options and know what my absolute loss is going in. I don't have to worry about getting hit hard on an earnings gap or accounting scandal. I see the stop/no stop debate here constantly and wonder why people just don't use options where you can limit your loss and not truly be stopped out if the position reverses.

As coach mentioned, you can play your bias whatever it may be with a greater degree of flexibility.

It really didn't click for me until I had a real world need. I stumbled onto Iron Condors on some site and then the SPX Credit Trader thread here and my eyes were opened. I don't use either of those strategies, but seeing ideas exchanged in real life situations helped me to understand ways that I can use options that apply to my bias and my risk tolerance.

I still have a long way to go, but I'm using options with more comfort than ever before. I'm not sure that they're for everyone though. I'm a swing trader and could see the spreads and liquidity issues being murder for a day trader.

Quote from Thunderdog:

I should point out that I realize trading options provides leverage. However, since I essentially trade only SIFs, I already have all the leverage I need or want. So what is the incremental advantage of trading options in those markets rather than just the underlying?
More...
 
Nice thread -- count me in the same boat as thunder. I've only a basic understanding of options, nothing more complicated than butterflies and the basic greeks (that didn't stop me from trying to daytrade them off e-trade's telebroker back when I was in college lol).

Nowadays I would be quite wary of dipping my toe in the water so to speak, if I know that I only have a partial or elementary understanding of the instrument. How deep does one need to go before seriously implementing them? The only decent book on options I've read is a 12-year old edition of McMillan's Options as a Strategic Investment.

As an aside, how liquid are options on currency futures, and are they accessible via IB?
 
I'm no riskarb, optioncoach, momoneythansens, etc, but certainly wouldn't mind sharing what I know and learning more. Feel free to include me in any dialogue.
 
Quote from spreadn00b:

Leverage is not my reason for using options, so maybe I can add a little value.

I've been in and out of options for years, but over the last year have finally spent the time to really understand them. I think I read Shelley Nat's book a little too soon in the process and got frustrated early on. Now that I understand options a lot more, the book makes a ton of sense and is very helpful.

I'm not sure that I'll ever go back to stocks now. I like the flexibility and the fact that I can be very conservative with options and know what my absolute loss is going in. I don't have to worry about getting hit hard on an earnings gap or accounting scandal. I see the stop/no stop debate here constantly and wonder why people just don't use options where you can limit your loss and not truly be stopped out if the position reverses.

As coach mentioned, you can play your bias whatever it may be with a greater degree of flexibility.

It really didn't click for me until I had a real world need. I stumbled onto Iron Condors on some site and then the SPX Credit Trader thread here and my eyes were opened. I don't use either of those strategies, but seeing ideas exchanged in real life situations helped me to understand ways that I can use options that apply to my bias and my risk tolerance.

I still have a long way to go, but I'm using options with more comfort than ever before. I'm not sure that they're for everyone though. I'm a swing trader and could see the spreads and liquidity issues being murder for a day trader.
More...

indeed, trying to day trade options is generaly a bad idea.

Agree, once one masters at least basic mechanics of "complex strategies" (diagonal, vertical & horizontal spreads), options can be very conservative plays.... or as risky and violent as you like.

My 2 cents: learn alot, concentrate on selling time & volatility, but keep present market conditions in mind when defining strategies. One of my mistakes a couple years back was insisting on selling time even when premiums were down to nothing.

For what its worth, I just opened a very simple naked long YM Dec. 12050 put about 3 hours ago ... nothing flashy, but sometimes a plain old long options position is waranted.
 
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