Like others here, I find myself looking for new ways to trade in my IRA. With IB offering options now, I thought I should learn a little about them and see it they were something I could put to good use. Another advantage would be the ability to play the down side of the market. Not having the ability to short, my account has been pretty dormant lately.
The extent of my knowledge consists of reading this board, browsing the books that have been recommended here, and making a few small trades just to get a feel for them. My first impression is that if trading stocks is like a game of checkers, trading options is like a game of chess. There are just a lot more factors to take into account with options. It actually sounds like a fun challenge to learn the game. I am sure learning what questions I even need to ask will take some work, but here are a couple general ones.
-Given the wide spreads, transaction costs, and time decay, is the technique of betting on a stock's direction by buying 'calls' and 'puts' a suckers game or does it work? Does the leverage you get from this technique make your winners powerful enough overcome these costs? (I am sure part of this is how good you are at predicting the price of the underlying
) Should I look into more advaced strategies?
-Do options prices tend to follow the standard models fairly closely? (Black-Scholes, etc) You have the wildcard of 'implied volatility', but in general will they tend to follow their mathematical destiny or do you find that some options are occasionally "mispriced"? (I imagine there are arb players who look very closely for these discrepencies.)
-I have not spent much time studying volatility. I am interested in visually seeing how it will vary with price movement. Are there any web sites which allow you to plot volatility along with stock price?
-I believe 'implied volatility' is the term used for what traders expect the volatility to do. (based on what they expect the price to do). If a stock breaks through a major support or resistance area, will 'implied volatility' make the price of the option go up more as it goes through these price levels? In other words, will the change in the price of the option be greater for a $0.50 drop below support than a $0.50 drop above support? The belief being that a break through these levels can signal a larger move. (Did I make any sense with that one?)
Thanks in advance for any advice. (If you have any suggestion as to what I should ask next, that would be great too!)
The extent of my knowledge consists of reading this board, browsing the books that have been recommended here, and making a few small trades just to get a feel for them. My first impression is that if trading stocks is like a game of checkers, trading options is like a game of chess. There are just a lot more factors to take into account with options. It actually sounds like a fun challenge to learn the game. I am sure learning what questions I even need to ask will take some work, but here are a couple general ones.
-Given the wide spreads, transaction costs, and time decay, is the technique of betting on a stock's direction by buying 'calls' and 'puts' a suckers game or does it work? Does the leverage you get from this technique make your winners powerful enough overcome these costs? (I am sure part of this is how good you are at predicting the price of the underlying
) Should I look into more advaced strategies?-Do options prices tend to follow the standard models fairly closely? (Black-Scholes, etc) You have the wildcard of 'implied volatility', but in general will they tend to follow their mathematical destiny or do you find that some options are occasionally "mispriced"? (I imagine there are arb players who look very closely for these discrepencies.)
-I have not spent much time studying volatility. I am interested in visually seeing how it will vary with price movement. Are there any web sites which allow you to plot volatility along with stock price?
-I believe 'implied volatility' is the term used for what traders expect the volatility to do. (based on what they expect the price to do). If a stock breaks through a major support or resistance area, will 'implied volatility' make the price of the option go up more as it goes through these price levels? In other words, will the change in the price of the option be greater for a $0.50 drop below support than a $0.50 drop above support? The belief being that a break through these levels can signal a larger move. (Did I make any sense with that one?)
Thanks in advance for any advice. (If you have any suggestion as to what I should ask next, that would be great too!)
