Basic Option Question?

B

Baker200

Hey guys so I have found a trading strategy that I think is going to work pretty good, but I have a quick question for you guys... So the other day I got into a trade on demo, and I was right with the direction, but I am still loosing money on demo, even though it keeps going down, which is what I said on the contract... What can cause this? I've heard its cause the Implied Volatility, or the bid and ask price????

And in puts would be appreciated!!!

Thanks guys!

Just to let everyone know I have been doing demo for a couple months, with tons of internet researching just need some help
 
Volatility crush (decline). If you're correct about the trend and incorrect about volatility - you're trade will underperform. Not an issue if you plan to carry into expiration.
 
There are many factors and variables you to have consider if you want to succeed with options trading.
Implied volatility, and Bid/Ask spreads are definitely two factors you have to consider, as you mentioned.

You have to really know and understand your game or underlying instrument...if you want to succeed trading options on those. Otherwise, those options will be like a cancer eroding your trading account.

Here's another tidbit of wisdom, don't generally buy longer term/far out options...those are mainly for hedgers buying insurance. That game tends to fare better for option sellers/writers.
If you plan to buy/trade options, do it nearer expiration.

Mazal tov, and May the Farce be with You,
 
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If the ball falls on black 25 times in a row at the roulette, do you bet on red the 26th time? And if 26 is still black, there's clear mommentum so you bet on black?
 
like @ajacobson said... implied volatility probably had an impact.

Depending on what you did, say you bought a put option and the stock declined, but it was at earnings release... so just before the earnings release the implied volatility of the options are very high... right after the earnings release that comes down quite rapidly/immediately. So, while you made money on the direction (delta short) you've lost money on the vol crush, because you are vega long.

Or... your'e short ATM call at very low IV, stock drops and impl vol spikes up, causing you to lose... or not make as much as you would have thought.

Theta might be playing a big role as well... or dividend... etc.etc.etc.etc.etc
 
lawrence-lugar said:
Here's another tidbit of wisdom, don't generally buy longer term/far out options...those are mainly for hedgers buying insurance. That game tends to fare better for option sellers/writers.
If you plan to buy/trade options, do it nearer expiration.

Mazal tov, and May the Farce be with You,
More...

Do the exact opposite of this. Buy long term options 9-12 months out on stocks you like and make sure you buy deep In the monies. The problem you are most likely running into is not implied volatility, but theta decay. Iv crush usually occurs around times of big news or earnings where the options market prices in a big move before the news, causing higher option prices, and then after the event, the value of the options can plummet.

if you are buying at the money options or out of the money options, these are worthless at expiration. you need to realize that your break even is always the strike + the premium. You can buy options and be right on the move and still lose money because at the money and out of the money options are worthless at expiration. Do yourself a favor and buy deep in the money calls (0.7 delta or higher) on stocks you like for the long term and leave em. You will thank me later.

Demo accounts are absolutely worthless besides for learning how to use the platform. Dont expect live account to remotely mirror demo account results. Theres absolutely zero emotion involved in demo trading. Sounds like you have a lot to learn, so get a live account going and lose some money!!
 
Baker200 said:
Hey guys so I have found a trading strategy that I think is going to work pretty good, but I have a quick question for you guys... So the other day I got into a trade on demo, and I was right with the direction, but I am still loosing money on demo, even though it keeps going down, which is what I said on the contract... What can cause this? I've heard its cause the Implied Volatility, or the bid and ask price????

And in puts would be appreciated!!!

Thanks guys!

Just to let everyone know I have been doing demo for a couple months, with tons of internet researching just need some help
More...
%% Sheldon Natenburg has some good books; compare , many years , to underlying stock trends:caution::cool:
 
Muffhands said:
Do the exact opposite of this. Buy long term options 9-12 months out on stocks you like and make sure you buy deep In the monies. The problem you are most likely running into is not implied volatility, but theta decay. Iv crush usually occurs around times of big news or earnings where the options market prices in a big move before the news, causing higher option prices, and then after the event, the value of the options can plummet.

if you are buying at the money options or out of the money options, these are worthless at expiration. you need to realize that your break even is always the strike + the premium. You can buy options and be right on the move and still lose money because at the money and out of the money options are worthless at expiration. Do yourself a favor and buy deep in the money calls (0.7 delta or higher) on stocks you like for the long term and leave em. You will thank me later.

Demo accounts are absolutely worthless besides for learning how to use the platform. Dont expect live account to remotely mirror demo account results. Theres absolutely zero emotion involved in demo trading. Sounds like you have a lot to learn, so get a live account going and lose some money!!
More...
It depends, buying DITM options is like buying on margin. You have to make sure the premium is less expensive than margin interests. In general, they are not. And you have expiration to deal with whereas buying on margin has no expiration but there is the risk of margin calls.

There is no free lunch.
 
I agree with Muffhands! Nothing worse than being "right" only for time to run out. The theta burn on options under, a month, is insane. You could buy NVDA options, as an example, and 2wks later be down 10% even if the underlying is UP, a few bucks. They eat money like a 3X ETF.lol I trade options almost exclusively, and while I don't go out 9-12mos., I do go out 3mos or more even if it'll only be a few days or few weeks. I usually go 1-3 strikes ITM and if need be sell 1-3 strikes out to make it a spread. For expensive stocks like PCLN, Googl, TSLA, REGN etc. then playing it with options makes sense instead of dropping hundreds of thousands. Good luck!
 
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