About a quarter of the way through the book "Options, Volatility, and Pricing" by Sheldon Natenburg

[Proof]

So I understand everything I am reading (some sections I've had to reread over and over until they made more sense to me).

Now, where do I begin actually trading options? How do i find opportunities? I have an account already funded at an options broker.

Seems very overwhelming to me especially since it is very easy for me to buy something that immediately becomes worthless (unlike for stock trading where I at least have a 50/50 chance of the stock going up or down and my initial investment is not likely completely worthless if I am wrong).

So, I would like to trade options on equities. I have no idea on how to find opportunities though.

Any help on how I can begin trading options will be greatly appreciated. I feel very intimidated by the prospects of making a mistake my first trade and buying something that starts out worthless, and stays worthless.....

Thanks

 

[Dolemite]

So I understand everything I am reading (some sections I've had to reread over and over until they made more sense to me).

Now, where do I begin actually trading options? How do i find opportunities? I have an account already funded at an options broker.

Seems very overwhelming to me especially since it is very easy for me to buy something that immediately becomes worthless (unlike for stock trading where I at least have a 50/50 chance of the stock going up or down and my initial investment is not likely completely worthless if I am wrong).

So, I would like to trade options on equities. I have no idea on how to find opportunities though.

Any help on how I can begin trading options will be greatly appreciated. I feel very intimidated by the prospects of making a mistake my first trade and buying something that starts out worthless, and stays worthless.....

Thanks

I wouldn't touch a live account until you have some experience paper trading. As for opportunities, you have to figure out what your assumptions are and then make a trade based on that. (ex. volatility high or low, expect stock to move or slow down, earnings play, etc.) I think the easiest trade starting out are verticals debit and credit. Limited risk and simple to execute.

 

[newwurldmn]

Natenburg will teach you the science of trading. Your job is to apply it to find opportunities.

No one will give you (good) ideas.

 

[Brighton]

If you flip to the back of the book, you will see a couple of pages along the lines of "if volatility is low/medium/high and you expect the underlying to go down/stay the same/go up, here is a strategy that is suited for your expectations."

The guidelines are quite broad, but if you're new to options, and have developed expectation X, they can give you a starting point for strategies to further research and test.

It's going to take a lot of education and trial and error before you know what strategies fit the market environment and your personality. Fortunately, there's a shortcut! Just sign up for my $8,995 mentoring package and in no time you'll be buying and selling options with confidence!*

*Just kidding, I don't sell anything. Keep studying and be skeptical of any marketer that claims his mentoring program or trade idea subscription service (esp. the guys touting "easy monthly option income") will put you on the path to prosperity.

 

[drcha]

There is more practical information in McMillan. At some point in your paper trading, you'll have to figure out whether you want to trade direction or volatility (or both). Also you'll need to decide which time frames you are most comfortable with. But not to rush you....read some more, and start trying a few ideas on paper as suggested. For most types of trades, you'll need to execute your paper trades with real-time quotes, not end of day.

 

[xandman]

You have a problem pulling the trigger. That is bad for a trader. Trade something but trade small.

Start with a list of stocks you want to own. Look at their IV vs HV. Analyze the variance and make a forecast.
Do a covered call or cash secured put on what you deem as over priced vol. I recommend covered calls because you limit your premium sales to what you are willing to hold (psychological) and the temptation to further trade and morph the position is low.

If you believe in technical charts, sell a strangle on the continuation of a trading range. Obviously you will monitor pending news. Note that volatilities increase into earnings. Watch how decay accelerates closer to expiration and the decay of delta as well.


These are simple trades that should get your thought process going as you read further.

 

[Proof]

You have a problem pulling the trigger. That is bad for a trader. Trade something but trade small.

Start with a list of stocks you want to own. Look at their IV vs HV. Analyze the variance and make a forecast.
Do a covered call or cash secured put on what you deem as over priced vol. I recommend covered calls because you limit your premium sales to what you are willing to hold (psychological) and the temptation to further trade and morph the position is low.

If you believe in technical charts, sell a strangle on the continuation of a trading range. Obviously you will monitor pending news. Note that volatilities increase into earnings. Watch how decay accelerates closer to expiration and the decay of delta as well.


These are simple trades that should get your thought process going as you read further.

The only reason I have a problem pulling the trigger is because Options, unlike stocks, can expire completely worthless. So the trepidation is more a function of the risk of my investment immediately becoming worth ZERO dollars. lol. So if I make a mistake on my first trade, I can lose it all! With stocks, I could lose a percentage of my initial investment (albeit, a large percentage) but rarely will lose it all on a single trade (if I am trading a cash account, that is, and not using margin).

I thought I would feel more confident after becoming familiar with some of the options strategies out there. But actually putting those strategies to use in the market seems like a tough proposition.

I can have my assumptions about market direction, volatility of an option, and even know which underlying stock I want to buy or sell options on. Even when I have all of these things down, I still have to make the decision as to which expiration month I should use and what strike prices to use. I also have to think about how long I would like each option trade to last: as a stock trader, I tended toward swing trading (i.e. holding positions for days at a time). So I fear that once I get into an options position, I won't know when to get out (do I stay in it until it either becomes profitable or expires worthless? How long should I give a strategy to work? How do I make the right buy and sell decisions to ensure that my strategy is adhering to the "time period for investment" rule that I had in mind (i.e. "I want this option trade to be a four-day trade so how can I ensure that I can be in and out within that time period).

Also, do you guys recommend any kind of options trading software where I can input variables like volatility, strike price, and an assortment of greeks to get theoretical pricing? Any other recommendations for a newbie would be greatly appreciated too. Thanks

 

[justrading]

Options don't become immediately worthless. If that is your understanding revisit the chapter on Greeks. Or better still read McMillan as suggested earlier.

I typically look to enter debit spreads about 21 days to expiration and hold until close to expiration (if profitable) to realise maximum benefit. That is just one approach, others trade very successfully with shorter holding times.

You will have to choose between closing a losing position at a certain percentage loss or sizing your position so that 100% loss is your allowed risk for the trade.

At this stage you have more questions than answers. That is normal. I suggest you read some of the options journals, model the positions and follow each day until expiration, even if the trader closes early. You will then get to see how position value and the Greeks change with time, UL price change and IV changes. Puts a practical perspective on all the theory.

 

[Proof]

There is more practical information in McMillan. At some point in your paper trading, you'll have to figure out whether you want to trade direction or volatility (or both). Also you'll need to decide which time frames you are most comfortable with. But not to rush you....read some more, and start trying a few ideas on paper as suggested. For most types of trades, you'll need to execute your paper trades with real-time quotes, not end of day.

I have an options account that offers me real time quotes. Obviously, I will only be getting real time quotes during market hours. Are you suggesting I can only do my research during market hours? With stock trading, a lot of my research occurred before market hours. I thought I could go into a trading day with a specific idea of the trade I wanted to make after having done research the night before....

 

[Proof]

If you flip to the back of the book, you will see a couple of pages along the lines of "if volatility is low/medium/high and you expect the underlying to go down/stay the same/go up, here is a strategy that is suited for your expectations."

The guidelines are quite broad, but if you're new to options, and have developed expectation X, they can give you a starting point for strategies to further research and test.

It's going to take a lot of education and trial and error before you know what strategies fit the market environment and your personality. Fortunately, there's a shortcut! Just sign up for my $8,995 mentoring package and in no time you'll be buying and selling options with confidence!*

*Just kidding, I don't sell anything. Keep studying and be skeptical of any marketer that claims his mentoring program or trade idea subscription service (esp. the guys touting "easy monthly option income") will put you on the path to prosperity.

That section in the back looks like it will be very helpful. Thanks a lot. And i know that no one will teach me to trade options, that I have to learn for myself and create my own niche. I just wanted a little advice on which strategies a beginner should start with to minimize risk. Thanks