College student looking for advice on the best route to start learning options

[newwurldmn]

Start with a class on options. A real university class on option theory.

Then read a practical book.

Then start paper trading different strategies.

If you build a good foundation of option theory, then you will understand the toolbox innately. If you skip this your learning will be by memory and you won't progress to higher levels of understanding.

It will take time to develop understanding. It takes everyone time as vol trading is a competitive field. But if you are smart enough and academic enough you will figure it out.

Start with the class. Learn the assumptions, model deficiencies, synthetic creation, simple pricing models.

 

[wartrace]

Quote from marketsurfer:

Sign up for a free thinkorswim.com account. Use their play money feature and option education with option planet and red option. Great hands on experience without capital risk. surf

Good advice! I would like to add that in the help section they have daily seminars called "Swim lessons" that are very educational. My only "gripe" is they are usually 2 to 3 hours long which eats up a lot of time BUT they are worth it.

 

[justrading]

Atticus, one of the senior members here, made a post a while back which I found inspirational and kept. When the time comes that you are ready to put money on the line, perhaps you might find it helpful as well.

Quote from Atticus;

I have a nephew who is a senior in undergrad. He's on a ride so his expenses are low and his family supports him. He started his freshman year with a loan from his dad for $10k and started in US vanilla equity vol. He's got something approaching $200k now. He's reinvested every dollar (no pulls). I have no doubt that he'll have $250k when he begins med next year. I'll take over the account until he's in residency.

He trades nothing beyond 30-days to expiration. He does the occasional ladder in index puts, but mostly debit positions in flies, calendars and verticals. He trades unbounded on risk-reversals only on the bullish side in ES, and only because the haircut arbitrarily limits his size on price specs.

So no, you're not underfunded. In my experience that is the excuse used to avoid putting money at risk.

 

[riskaddict]

Quote from rtr1129:

All I am saying is options are much higher leveraged than stocks. If you buy a $50 stock and it goes down to $45, life goes on. If you buy an option, that same $5 move can wipe you out.

That is just wrong unless you are talking about selling naked calls. If you buy a call as a proxy for going long you know exactly what your risk is.

 

[riskaddict]

Quote from razvanneagu:

from what I have been reading I would have the possibility to make higher returns with less capital and less risk. [/QUOTE/]
Less capital yes less risk no. Not really sure why people make a big deal about learning option strategies. Once you have a theory apply the strategy that best fits it. Things go up, down and sideways. figure out how vol, time and price will effect you and let it go. A lot of people seem to get started with options because they don't want to be wrong. You still either have to be right more than you're wrong or make more than you lose, both would be better. Don't force a strategy you like on a situation that doesn't warrant it.

 

[sonoma]

Quote from razvanneagu:

...Thank you for reading and any advice is greatly appreciated.

The bottom line is that you'll have to read, study and practice for an impossibly large number of hours before you'll be consistently profitable in a manner that is not attributable to chance. There is plenty of precedence for success, however, so if you've got the patience and persistence, then go for it. It won't be easy and it won't be quick, but paradoxically, after enough bruising, you'll find it's not that hard. After you've done this for awhile, then come back with some questions. In the meantime, lurk. And since you're in school, and if you're the nerdy type, there are plenty of finance papers that highlight inefficiencies in the options space.

 

[Josef K]

Quote from riskaddict:

That is just wrong unless you are talking about selling naked calls. If you buy a call as a proxy for going long you know exactly what your risk is.

Exactly. If you buy options, your risk is just what you paid for the options. By keeping your dollar amount risked the same as what you'd be willing to lose by buying the underlying, the risk is the same.

There's one important exception to this. Options that are in the money at expiration are automatically exercised by your broker unless you instruct your broker to not exercise them. This could lead to significant losses if the underlying then declines in value the following Monday. For example:

http://www.elitetrader.com/vb/showthread.php?s=&threadid=51251

 

[rtr1129]

Quote from riskaddict:

That is just wrong unless you are talking about selling naked calls. If you buy a call as a proxy for going long you know exactly what your risk is.

If you put $10k into one stock, and put $10k into one option, which one does a $5 move affect more? They are not the same. One is much higher leveraged than the other, and one of those trades, if made consistently, will leave you broke. This may be common sense, but it might not be to a beginner. Sure, if you put $1k into options and $9k in cash then you're in a more similar spot to putting $10k into the stock.

 

[riskaddict]

lol guess a new trader might compare dollar value until they actually tried to buy 10k worth of some call option and realize it's 7x the open interest unless he is trading aapl or goog. Guess I should have said delta risk.

Anyway if this kid can actually learn the in's and out of how all this shit works and how it all affects margin it might be helpful when he gets done school to get some type of back office job at a bank preparing daily statements and performing margin calls and shit like that. I live in DE there are many of jobs stating at 20 bucks an hour doing just this. Which for someone just out of school would be pretty good.

 

[jnbadger]

Quote from marketsurfer:

Sign up for a free thinkorswim.com account. Use their play money feature and option education with option planet and red option. Great hands on experience without capital risk. surf

This thread is frustrating to read. Lots of advice from beginners. I agree with Surf. Learn hands on before you leap. Patience will get you there faster.

The quote from atticus is good, but it takes a great mentor, and a lot of learning before you pull the trigger.