Is There A "Do and Don't" List For Option Trading?

Scataphagos

Scataphagos

Like...
"Don't buy options, only sell
Don't pay>$3 for an option
Don't play option unless its open interest is at least _______
Don't buy with < 30-45-60? days until expiration
Close trades 1st week of expiration month
Trade options ITM-ATM-OTM?"

That sort of thing.

I don't really want to learn all of the lessons "the hard way".
 
Last edited:
optiontheta.png


If you're just getting into options, there is one thing that gets served up *all* the time -- and is so grossly inaccurate: theta decay.

Most of the time (>90%?!?), option decay due to time is portrayed like the ATM (red) line above.

Understanding that OTM options decay almost linearly, AND THEN FLATTEN as expiration approaches, is missed -- in my mind, deliberately.

The *implication* of that blue OTM line though .... Woof! It's big! It means that you should really be out of that (net short) position by the time that Θ goes to zero (i.e., "the line flattens"). The red ATM line conveys the opposite thought: "Hold to the bitter end!"

Since your exposure (of margin capital) is unchanged, why would you want to hold onto something worth so little, for so much (relative) risk?

In selling OTM options, you trade the blue line's market. Don't be lured by the ATM decay into holding a dime with $5 or $10 of risk attached. Move that position out!
 
Scataphagos said:
Like...Don't buy options, only sell
More...

Hard to do when trading credit spreads. Which requires that one purchase and sell at the same time.

I recommend that you start your education by reading the following books and visiting the following websites.

Books:

-Option Pricing & Volatility (2nd Edition)..Sheldon Natenberg

-Options as a Strategic Investment (5th Edition)..Lawrence G. McMillan

-The Complete Guide to Option Selling: How Selling Options Can Lead to Stellar Returns in Bull and Bear Markets (3rd Edition).. James Cordier and Michael Gross

- Options, Futures, and Other Derivatives (9th Edition)..John C. Hull

- Getting Started in Options (8th Edition).. Michael C. Thomsett

- Option Spread Trading: A Comprehensive Guide to Strategies and Tactics..Russell Rhoads

- Trading Weekly Options..Russell Rhoads

- Trading Psychology 2.0..Brett Steenbarger

- Options Strategies-Understanding the Market and Avoiding Common Pitfalls..JJ Kinahan


In addition I would visit, at a minimum, the following websites to help further your education;

The Options Industry Council
http://www.optionseducation.org/en.html

The Options Clearing Corporation
http://www.optionsclearing.com/

Chicago Board Options Exchange (CBOE) Education Center
http://www.cboe.com/learncenter/

Chicago Mercantile Exchange Education Center
http://www.cmegroup.com/education.html

NASDAQ
http://www.nasdaq.com/

Financial Industry Regulatory Authority
http://www.finra.org/

National Futures Association
http://www.nfa.futures.org/

Wikipedia
https://en.wikipedia.org/wiki/Option_(finance)

Modern Trader (was, until 2015, Futures and still is on the Web)
http://www.futuresmag.com/

Technical Analysis of Stocks and Commodites
http://www.traders.com

ThinkMoney (online and mostly options oriented)
https://tickertape.tdameritrade.com/thinkmoney


Best
 
As one might imagine.... anyone who shows an interest in options gets deluged with offers from option advisory service. Seems they all want $2,000-$5,000 subscription... for which you are assured of "gains beyond your wildest dreams". Of course there are "introductory" offers... some of which include actually free recommendations for a while. I've been following some of those. But regardless of whether the recs are good or not.... I wonder how one goes about getting a position on with the market so thin. Example... one rec was to buy a 25 call @ $__. I probably wouldn't want to do less than 10 contracts. The open interest on the thing is ~700, but the volume today is <5 for July expiration. As you get close to expiration, there will be much higher volume of course as most will be closing out their exposure. But right now, there is virtually no volume. So... how do you get the position on in the first place?

On another rec, the OI is ~10,000... but today's volume is <40. You just put your bid in there and wait/hope?
 
Last edited:
Well, one thing from your prior trading that transfers over right here: liquidity.
Unless you want to hold to expiration, yeah: do *not* get into something that'll cost you biggly if you want to get out in a hurry.

A second, more subtle thing: work the major strikes. (Look, for example, at an SPX option chain out a month or more. Everything on the 50s or 25s gets much more routine volume than the 10s or 5s. So if you want to sell something OTM, sell a (for example) 2300/2305 put spread. If they don't take your $5 spread later, you can buy back the 2305 (at your leisure) and then have an easier time selling the Main Street 2300 strike as a single leg. Trying to sell a single 2305 is a biiiiiiiii-itch.
 
Scataphagos said:
I wonder how one goes about getting a position on with the market so thin.
More...

Which market? Stocks, Bonds, ETFs, Futures? And how thin? OI of <1, 10, 100, 1000?

Today the SPY (a heavily traded ETF) has traded 2.3 million contracts thus far. And some strikes in the near expiration dates have OI in the thousands, some in the low ten thousands. The XLF symbol has several April strikes with the OI in the 100,000s. All very liquid. On the other had there are some very thinly traded stocks like AFG (American Financial Group) which, thus far today has had a volume of 0 (Zero) and has a total OI of 51 (vice SPY's 2.2 million.) It would be helpful to know what, exactly, you're talking about. Do you have a particular symbol or industry in mind?

Best
 
Last edited:
Of course you can get liquidity in big volume issues and close to expiration. But what about others not so big and not so close to expiration? For example, JNJ. Its OI for the Jun 16 120 Call is 5,000, but only traded 32 today. Let's say I wanted to buy 100 contracts. How do you go about that, or is it impossible without getting hosed?

As I look at the chart, I'm thinking I probably should do that trade. JNJ closed today $125. The $120 Call is $6.20. So... again, how do I get 100 contracts? Keep bidding higher above the last offer until somebody takes it?
 
Last edited:
Scataphagos said:
I don't really want to learn all of the lessons "the hard way".
More...

The road less traveled, is generally the more (potentially) rewarding road :confused: :wtf:

And no so-called Golden Rules in trading should be etched in stone; always keep an Open, and flexible, mind,

Anything worthwhile...you have to learn and explore on your own -- don't expect to simply obtain it from someone so easily or automatically.
Either by asking them and/or paying for it.
 
Last edited:
lawrence-lugar said:
The road less traveled, is generally the more (potentially) rewarding road
More...

LOL! Can't afford the grey matter to become especially enlightened in options. (With my Swiss cheese old brain... when I try to put too much new into it, too much good leaks out.) Looking to make some money of course, but K.I.S.S.

That JNJ trade I described above is my speed.
 
You must log in or register to reply here.
Back
Top