How to start in OPTIONS trading?

[Eliot Hosewater]

Would you advise a beginner to start with naked short puts?

it has the same risk as a covered call.

ETA: Plus a naked put has only one commission. A covered call has two.

 

[ajna]

Quote from panzerman:

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. [/B]

The point is that short put/covered call is not a hedged position. Full downside exposure does not equate to a hedged position. If you plan to trade a leveraged position, might as well be a risk controlled one.

 

[El OchoCinco]

Quote from panzerman:

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.

Commissions are of no concern with current cheap brokers out there if you are with the right broker and I think you need to think about what you said.

Bull call spread = long option + short option (2 commissions)

Covered call = long stock + short option (2 commissions)

How is a covered call saving you so much on commissions and slippage?

And talk about reducing profit potential, covered calls fit the bill. Limited reward and significant risk.

CC may only make sense for someone who alreayd has a stock portfolio and want so move into options perhaps. But to recommend someone do a buy write as a conservative strategy shows a slight misunderstanding how options work.

As for hedged, a short call hedges a long stock position as well as a blanket catches a falling elephant unless you go DITM with the call.

 

[panzerman]

Again, if someone is new to options, but doesn't think they are good at predicting short term movement of the underlying, then no strategy will likely be profitable. Therefore, stay the hell away from options.

If you already are long or short some stock, perhaps try a covered strategy. If you still get the direction wrong you will likely lose money whether the underlying is naked or covered.

And for God's sake, don't buy outright puts or calls. If you're hell bent on trading options, at least stick to spreads.

 

[rallymode]

Quote from panzerman:

Again, if someone is new to options, but doesn't think they are good at predicting short term movement of the underlying, then no strategy will likely be profitable. Therefore, stay the hell away from options.

...and what would you recommend they trade since they aren't good at calling short term moves? Stocks? Futures?



I know quite a few good ops guys who never trade direction so i fail to see your point.


OP -> read, read and then trade 1 lots until you can understand and apply everything you've read intuitively would be my suggestion. oc's comment re: understanding riskarb's posts before committing any serious size may sound funny but is actually very true. All this applies even with the existence of some delta or vol "edge".

 

[panzerman]

[QUOTE
...and what would you recommend they trade since they aren't good at calling short term moves? Stocks? Futures?



I know quite a few good ops guys who never trade direction so i fail to see your point.[/QUOTE]

Well, I might suggest that they don't trade at all, and invest in mutual funds or ETFs, and then go live a happy life away from a computer screen.

Also, it's just my opinion that for a retail guy to make money in options, you have to have some directional bias to the strategy, and then get that direction right more often than not. Of course it always helps to get IV right as well.

Picking up pennies in front of a steamroller would not be a sound strategy for someone new to options (or probably anyone.)

 

[jimclark]

Quote from jond83:

Hey JimClark,

I couldn't help but notice that you said you never traded options before but "now I need to." May i kindly ask why?

I getting to the point when I need to hedge my long and short positions with puts.
just FYI, I use QID, DOG for hedging against down trend...but not need to learn 'true options' to trade invidual stocks.

 

[insaneinvestor]

Quote from jimclark:

I appreciate any referennces for starting and anything I need to know about trading through IB.

I've never traded options but now I need to, I started a basic reading 'Get Started in Options' book by can't recall the name but it's been slow and boring so far.

Thanks for any info.

If your looking for excitement, learning options is not the place for you. It takes a lot of time, dedication and even then you will loose a lot when you start.

There is a great book to get ...I can't remember the exact name but it is about as thick as the bible. It will tell you everything that those magic courses that cost buco bucks for about $35. It is NOT exciting read though.

If you want to know, send me a note and I will look in my library, or someone can post it here. It is blue and white cover. Complete options trading, or Ultimate Options Trading.... ($35) WELL worth it!

 

[jessie]

I know I probably sound like a broken record around here, but I just have to say that nobody "needs" to be trading anything, and if you think you do, you are probably doomed from the start. Trading is like anything else, it takes (at least) a few years of hard work, a lot of studying, and a HUGE amount of discipline to become consistently sucessful.

Trading options is how I make my living, and I can pretty confidently say that it adds another big level of complexity to trading outrights, whether on futures, equities, or other. Unlike trading the underlyings, just being right about direction (short or long-term) isn't nearly enough to be consistently profitable in option trading. The upside, though, is that it also allows you to hedge and manuever and trade things like volatility and time in ways that that the underlyings don't permit, but to really take advantage of that, it requires the ability to analyze and understand a complex matrix of variables.

If I were starting again (and I wish I could, I had a lengthy, somewhat punitive and fairly expensive trading education myself), I would probably read McMillan as a starter text on strategies, then go to more advanced stuff (especially involving pricing) from there, but I wouldn't have any real money involved until I at least understood most of that. And then I would start VERY slowly.

It would take you several years of hard work to become a competent plumber or carpenter or barber or electrician or most anything else, and the learning process is often boring and often not at all fun. It's probably not unreasonable to expect to give yourself at least as much time and effort to become a competent and sucessful option trader.

Good luck and good trading!
Jessie

 

[cdowis]

May I suggest that you visit cboe.com and take advantage of their free/low cost training, and spend alot of time on Dan Sheridan's webinars.

Start small, $5-10k, one or two contracts for at least six months to learn the mechanics of trading and forget about profit/loss during this time. Consider your losses as tuition.

Be patient, keep it simple.