Going to start trading options soon

J

Johnny Utah

Hello,

I've been paper trading options for about 2 months now. My strategy is simple. I buy puts and calls in place of the actual stocks for swing trades lasting a couple of days to a couple of weeks. I buy near the money options a maximum of a month until expiration. My trades are based on technical analysis from daily charts. I will take profits if I have them or trail a stop. If the trade goes against me, I will sell the option rather than letting it expire. In my two months paper trading, I have turned a profit and I will begin trading a live account in about a week.

I'm looking for a bit of general advice, since I still have much to learn. I'm still getting used to how to evaluate the options price movement in relation to the stock price movement. I did learn that in general, it is better to buy in the money options rather than out of the money options. Is it better to buy options that are deeper in the money? Any other advice on that matter?

Thanks for the help,

Johnny Utah

Note: I'm not interested in any options writing strategies. Thanks.
 
Quote from Johnny Utah:

Is it better to buy options that are deeper in the money? Any other advice on that matter?
More...
It's a question of leverage - as you go OTM leverage increases, ITM leverage decreases. Same with time - as you get closer to expiry leverage increaqses, further out in time leverage decreases.

So it really depends how big a bang for your buck you want...
 
Quote from Profitaker:

It's a question of leverage - as you go OTM leverage increases, ITM leverage decreases. Same with time - as you get closer to expiry leverage increaqses, further out in time leverage decreases.

So it really depends how big a bang for your buck you want...
More...

Aside from the change in leverage, is there any other significant difference? Do farther OTM options mirror the price movements of the stocks more than less OTM options?
 
Quote from Johnny Utah:

Aside from the change in leverage, is there any other significant difference? Do farther OTM options mirror the price movements of the stocks more than less OTM options?
More...

opposite.
 
Johnny

Need to get your head in some option theory books.

Personally I'd hold off trading them until you've a reasonable understanding of how they're priced.

Good luck.
 
Invest your time before you invest you money:
http://www.redoption.com/education.php

Option premium changes with option supply & demand. Like in front of the earning report they will be more expensive.

Whether you should buy ITM/OTM/ATM is depending on your price projection & how soon. Try to add 1 month more time if you are buying options. Thinkorswim software has a theo calculation to help calc what the future premium may be. Unless old timers like me I look at the strikes & months up & down to estimate it. Thanks to the classes that I took.

Some time it makes more sense to buy vertical spread for high price stocks. I personally would buy OTM vertical spreads for trading GOOG most of time. For PFE or MRK I'd buy 1 strike OTM calls with longer time.

Trading options is like cooking in Iron Chef TV shows, you need to know all your tools & food well in order to have a chance to win. Options are your tools in trading. Try 1 option at a time until you are good. Do not over-allocate!
 
If I may make a suggestion, until you have more experience on the behavior of in the money, at the money and out of the money options, it may be beneficial to study their behavior using a spreadsheet and analyzing how different scenarios will affect the option price.

option1rd.jpg


For example this shows how the price of a 100 strike call with 25 trading days till expiry and implied volatility 25% will change if the stock price has moved from 98 to 101 after 10 trading days (15 days till expiry).

Make also scenarios with changing implied volatilities and analyze every ¡what if¢ you can think of.

This will give you a risk free feeling.
 
For a good short guide to getting your hands on the basics, chartbender.com has a free trading manual they released for download as a PDF which goes over the strategies and greeks and volatility. A free resource you should master as well as some other good books before putting real money in.
 
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