How to start in OPTIONS trading?

Eliot Hosewater · Jul 18, 2007

Quote from atticus:

It's an ideal time to enter the option markets. Vols rising and minimal edge loss. 200-wide flies are trading at markets <3.00 wide. 10 years ago the same 4-way would've been 20-wide.

Can you explain what you mean by "200-wide flies are trading at markets <3.00 wide" and give an example or two of how you would trade them?

Thanks.

atticus · Jul 18, 2007

Quote from Eliot Hosewater:

Can you explain what you mean by "200-wide flies are trading at markets <3.00 wide" and give an example or two of how you would trade them?

Thanks.

Simply the reduction of edge loss over the years through liquidity. I was using the 10% wing-spread butterfly as an example. Assuming 2025 on NDX, the 200-wide fly [1800/2000/2200] currently trades a market of 3.00 wide on the bid-offer.

panzerman · Jul 18, 2007

Quote from Eliot Hosewater:

Covered calls are anything but conservative.

Compared to investing in T-bills or CDs, perhaps. However, of all the possible option strategies, CC is probably the most conservative.

El OchoCinco · Jul 18, 2007

Quote from panzerman:

Compared to investing in T-bills or CDs, perhaps. However, of all the possible option strategies, CC is probably the most conservative.

This is a common misperception of options. Covered call strategies have high risk due to stock ownership. I can replicate a covered call strategy with LEAPS and diagonals with much less risk than CC for the most part. Also if one does a CC cause they are neutral or mildly bullish there are still other strategies with way less risk.

CC just reduce the risk of owning stock a tad due to premium. But there are spread strategies that can be used more conservatively for whatever expecation you would have when entereing a CC.

kinggyppo · Jul 18, 2007

Go through the tutorial at IB if they have one. I love how you guys are all 8 miles over his head. Learn how to execute a basic options trade (hopefully on paper), add from there. learn about equivalencies in options, ie long call = short put etc. then you can go for a jelly roll.

deviltrader · Jul 18, 2007

Quote from panzerman:

Compared to investing in T-bills or CDs, perhaps. However, of all the possible option strategies, CC is probably the most conservative.

conversions and reversals are the most conservative. You wouldn't think CCs are conservative if you wrote them in spring 2000.

atticus · Jul 18, 2007

Shorting a put isn't on my short-list of conservative option strategies.

RichardRimes · Jul 18, 2007

Quote from atticus:

Simply the reduction of edge loss over the years through liquidity. I was using the 10% wing-spread butterfly as an example. Assuming 2025 on NDX, the 200-wide fly [1800/2000/2200] currently trades a market of 3.00 wide on the bid-offer.

I'm no momoney but throw this on an analyze page and adjust for volatility, you will notice as volatility goes down the profits go up almost exponentially. Flys are cheap in high vol environments and expensive in low vols so if the VIX drops from almost 17 (today) back down to 12-13 you make big money. very elegant.

edit. perhaps not the way to start your options trading since you do have to have a grasp of volatility, vertical and horizontal spreads

kinggyppo · Jul 18, 2007

Quote from deviltrader:

conversions and reversals are the most conservative. You wouldn't think CCs are conservative if you wrote them in spring 2000.

I had a friend of the family ask for my blessing for his "no way I can lose" covered call writing stategy. I simply explained that if the stock price dropped more than his premium that he could lose money. Think that stopped him? Nay, time for a second mtg and the short path to riches; this was August, 2001. :eek:

panzerman · Jul 18, 2007

Quote from optioncoach:

CC just reduce the risk of owning stock a tad due to premium. But there are spread strategies that can be used more conservatively for whatever expectation you would have when entering a CC.

All other options strategies to reduce risk involve multiple option positions at the same time. This means more commission and chance for slippage that just reduce your profit potential. Perhaps a collar is more conservative, but then again it is two option positions as well.

I would still recommend that if a new trader wants to try their hand at options trading, stick to a hedged position involving the underlying. Wether a covered call, covered put, or perhaps a collar.