For someone starting out

[Donnyboy8]

I have read a few books and I am trying to grasp just the most basic options trading for now to learn slowly. All I read on this board mostly is advanced strategies so I get a bit lost.

How do you feel about trading just plain long call options?

Can you point my research in the directions of some companies that might be a good experience for me?

Thanks for your help.

 

[Eliot Hosewater]

So far I've lost the most money buying simple calls. I hooked up with a guy who was supposed to be an expert at TA, and he had made some amazing calls, like calling exact bottoms and tops. But when I actually started trading on his recos they almost always went the wrong way. That just confirmed my opinion that TA is mostly smoke and mirrors.

I'm having the best success with selling iron condors and buying calendar spreads (**knocks wood, crosses fingers, tosses crow feathers**).

My suggestion, and I am also a relative newby, would be to paper trade some low risk positions, or even do it with one or two contracts with real money.

 

[MTE]

Just to add to Eliot's post above. When you buy calls you need to get exactly right 4 things:
1. Direction
2. Magnitude of the move
3. Timing
4. Volatility (with this one you need to be at least not wrong)

So although buying calls is a very simple transaction in itself, being profitable with it is extremely hard, and particularly so for beginners, who usually have problems with being profitable with a simple stock trade, where you only need 1 element out of 4 mentioned above, i.e. direction.

So educate yourself and start at least papertrading. I'm not a papertrading fan so as Eliot I would suggest trading small with real money.

 

[ryank]

Quote from MTE:

Just to add to Eliot's post above. When you buy calls you need to get exactly right 4 things:
1. Direction
2. Magnitude of the move
3. Timing
4. Volatility (with this one you need to be at least not wrong)

So although buying calls is a very simple transaction in itself, being profitable with it is extremely hard, and particularly so for beginners, who usually have problems with being profitable with a simple stock trade, where you only need 1 element out of 4 mentioned above, i.e. direction.

So educate yourself and start at least papertrading. I'm not a papertrading fan so as Eliot I would suggest trading small with real money.

You hit the nail on the head with those 4 things. I too tried the straight calls or puts and failed miserably even when I was right on direction. I didn't start making any money with options until I went to credit spreads. Now I am much more comfortable with my trading and it shows as my accounts keeps growing.

 

[Hybone]

I will have to disagree with your opinion on paper trading option strategies. I firmly believe that paper trading option strategies is a must, unlike paper trading stock or futures or or FX. Options entail many more variables to get right, and also as you alluded to, not just on directions.

When I first started trading options, I paper traded many strategies (from simple to complex) for a whole year before I commit real capital. It has worked out real well. Paper trading option strategies also allow you to see that many times money is not made till the last week of exp. Have I not see that when I first paper traded, my emotions might get the best of me and close out losing positions prematurely.

In a nutshell, paper trading doesn't help much with pure stock, futures, and FX trades. However, IMHO it's a must for options.

Quote from MTE:

Just to add to Eliot's post above. When you buy calls you need to get exactly right 4 things:
1. Direction
2. Magnitude of the move
3. Timing
4. Volatility (with this one you need to be at least not wrong)

So although buying calls is a very simple transaction in itself, being profitable with it is extremely hard, and particularly so for beginners, who usually have problems with being profitable with a simple stock trade, where you only need 1 element out of 4 mentioned above, i.e. direction.

So educate yourself and start at least papertrading. I'm not a papertrading fan so as Eliot I would suggest trading small with real money.

 

[MajorUrsa]

Quote from Hybone:
I will have to disagree with your opinion on paper trading option strategies. I firmly believe that paper trading option strategies is a must, unlike paper trading stock or futures or or FX. Options entail many more variables to get right, and also as you alluded to, not just on directions.

My 2 cents would be that although paper-trading is a good starting point, it fails to hammer home the very essentials of options and why they are so dangerous. You can papertrade all you want, there will always happen something unexpected with options which stayed below your attention-level when only on paper.
Every important aspect about option trading that I know now became known to me during a 'live' event.

Also, trading options is very tedious in itself, so doing it on paper is beyond (at least my) patience. Maybe some can, but most won't.

What would be helpful for n00bs and veterans alike is a good simulator/modeler. I haven't seen one that meets my (modest) expectations. OptionVue has become too bloaty and expensive and doesn't connect to IB or other feeds but their own, which doesn't include European options (I mean the ones traded in Europe). I now use a self-built spreadsheet but it is still cumbersome to just tryout scenario's.
A tool like that would teach n00bs quickly where the pitfalls are.

Ursa..

 

[ryank]

Quote from MajorUrsa:

What would be helpful for n00bs and veterans alike is a good simulator/modeler. I haven't seen one that meets my (modest) expectations. OptionVue has become too bloaty and expensive and doesn't connect to IB or other feeds but their own, which doesn't include European options (I mean the ones traded in Europe). I now use a self-built spreadsheet but it is still cumbersome to just tryout scenario's.
A tool like that would teach n00bs quickly where the pitfalls are.

Ursa..

Thinkorswim has awesome software that is free with your account. You can try it free for 10 days, then you have to fund your brokerage account. It allows you to model and change tons of things to see what would happen in different situations. If you haven't done so you should check it out.

 

[austinp]

I'll chime in that option trading is much harder to succeed at in reality than new traders imagine. The vagaries of option valuing make a big difference... which can only be negated (never eliminated) thru either spreads or long-term holds.

Option traders who lean towards straight calls and puts (they are exactly the same, with puts often much more profitable than calls) should consider only LEAP contracts traded with daily or weekly chart strategies.

First & foremost, a directional trader MUST be skilled enough to make money on the underlying. Before any trader can make <b>consistent</b> gains in option trading, they must be very adept at doing so with the underlying itself.

**

In my opinion, spread trading options is much easier to succeed at relative to straight long option contracts. Different world entirely, but if I were to trade options again it would be credit spreads structured on euro-settled contracts.

If an option trader "cannot make it there, they cannot make it anywhere" :>)

 

[rallymode]

Quote from austinp:



Option traders who lean towards straight calls and puts (they are exactly the same, with puts often much more profitable than calls) should consider only LEAP contracts traded with daily or weekly chart strategies.

Sorry, but thats just bad advice anyway i look at it. New trader who buys calls/puts only is mostly betting on direction. Doing that with LEAPS will not help them at all as they will be playing vega.


First & foremost, a directional trader MUST be skilled enough to make money on the underlying. Before any trader can make <b>consistent</b> gains in option trading, they must be very adept at doing so with the underlying itself.

Ever heard of delta neutral trading? Why does every option trader need to be directional? While i would agree that knowing the underlying moves is helpful it isnt necessary.

 

[austinp]

If/when a trader becomes skilled enough to trade the underlying with success, long call or put option contracts are very viable.

Any stock trader who is/had been short any of the symbols trending down since mid-May would do even better while holding atm or otm LEAP puts.

But first... said trader has to be skilled enough for directional success in the underlying. That's the rubber on the road. Any successful stock trader who plays daily or weekly charts for long-term swing trades is a good candidate for long option positions.

Anyone else? They need to accomplish the first step, first

Hope this helps
Austin