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

Scataphagos said:
Can't afford the grey matter to become especially enlightened in options.

I don't really want to learn all of the lessons "the hard way".
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It doesn't have to be hard but in your case you may want to consider designing yourself a portfolio of stocks, bonds, diversified ETFs and/or Mutual Funds, stick your money in, and check your gains (or losses) on a weekly or monthly basis. Using a robo-advisor (e.g. WealthFront or Betterment) may also suit your needs. Options trading, as well as futures and futures options, does require some effort on the part of the trader. I listed some materials you can access and study, much of it free, to help get you started. As lawrence-lugar pointed out there are no"...Golden Rules in trading..." In the options world, unlike stocks where you can either buy or sell shares, there are about 26 different strategies that you can use to profit in the daily markets. the KISS method might involve just buying a Put or Call. More complicated strategies might involve a Calendar Spread, Protective Collar, Ratio Backspread, etc. You can't buy, and no one is going to tell you, how to find the holy grail of options trading. I have, for example, a written Trading Plan and Strategy Guide which is 50 pages of how I am going to approach the trading of options. Instruments to trade, research that has to be conducted pre and post markets, psychology factors, trading platform requirements, rules for position sizing, entry and exit rules, rolling rules, filters and triggers. There's an old business saying "Fail to plan and you plan to fail." Options trading is no exception.

Best
 
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Scataphagos said:
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".
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Yes.

Do not listen to others.

Don't trade options!
 
Steven Leeds said:
Probably the best advice given thus far.
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Most do not have adequate experience with financial trading, to know that, the best way to limit your risk is to choose the least risky "way" to trade.

Options are not the least risky way to trade, and if you buy far OTM options because they "appear" cheap, then you are just another sucker that has fallen for the "derived" sales pitch!

Even if you listen to the other side, and sell options for premium, again, unless you first identify the least risky "markets" to trade, you are on a road to nowhere.

Of course options can make you money, but the odds of a retail pleb making money trading options is extremely low, so low that it is nearly impossible to find the %.
 
MrScalper said:
Most do not have adequate experience with financial trading, to know that, the best way to limit your risk is to choose the least risky "way" to trade.

Options are not the least risky way to trade, and if you buy far OTM options because they "appear" cheap, then you are just another sucker that has fallen for the "derived" sales pitch!

Even if you listen to the other side, and sell options for premium, again, unless you first identify the least risky "markets" to trade, you are on a road to nowhere.

Of course options can make you money, but the odds of a retail pleb making money trading options is extremely low, so low that it is nearly impossible to find the %.
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Not to mention that selling options exposes you to potentially unlimited downside risks when the underlying moves in the direction of the option but limit you to just the premiums received when you sell the options. It's really not worth it.

At least when buying options, if the underlying moves your way, you are able to enjoy the unlimited profit potential and when the underlying didn't move the way you intended, the maximum loss is just the premium.
 
Study. Take notes. Study some more. Start watching tastytrade.com (especially the market measure segments). Develop a trading plan with rules and permissions. Rules are strict, but give yourself permission to do or trade a certain way. Paper trade your strategy and refine, refine, refine. Once you are comfortable and consistently being profitable in a paper account, then you can move into real money.

Here are a few of my rules:
Look for underlyings that are liquid (1 to 2 cent spreads)
Trade underlyings with high implied volatility
Be a seller of options premium (not a buyer)
Manage winners early and let losers run a bit (I close my losers at a loss equal to 2 times the initial credit received)
Maintain a daily theta of between 1/10% and 1/2% of your net liq.
Always maintain negative delta
Sell options in the 60 - 30 day to expiration range
Close them out a few weeks prior to expiration regardless of profit or loss
Maintain a delta/vega ratio of about -1 delta to -2 vega
Strive for a theta/vega ratio greater than 0.20
Use a minimum of 35% of my buying power but no more than 50%


As for permissions, I give myself permission to do the following:
Close all positions after a 5% decrease in my net liq
Buy calendar spreads in low volatility
Roll positions (as long as I get a credit of at least 25% of my initial premium)

Now, start a spreadsheet and track EVERY trade you make. This is important. Don't try to wing it. The information you gain will be invaluable. Track your daily net liq, each trade, your daily theta, delta, vega, buying power, etc. Review and refine. What did you do right? What did you do wrong? What did you learn? What can you do better the next time.

Toss the charts and quit trying to guess direction. You know nothing and you won't know anything. Options trading is just math and probabilities. Put the odds in your favor and let the law of large numbers work in your favor. Stay mechanical and stick to your rules! This helps to take the emotion out of your trading. Greed and fear are powerful forces. When you develop your plan, you know exactly what you're going to do when things go against you. You don't panic. When things are really going well, you know when to exit and you won't get greedy.

I am currently batting .780 for the year. 78% of my trades have been profitable. How do I know that? I track every trade.

Best wishes on your trading. You have a lot of work to do and so do I.

Sweet Bobby
 
Even if you listen to the other side, and sell options for premium, again, unless you first identify the least risky "markets" to trade, you are on a road to nowhere.
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OR identify a stock that you want to buy anyway...sell an ATM or OTM put. In that case, you're taking on less risk than buying the underlying.

At least when buying options, if the underlying moves your way, you are able to enjoy the unlimited profit potential and when the underlying didn't move the way you intended, the maximum loss is just the premium.
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Just like lottery tickets.

Advice on buying options: The best traders buy options. They know how to use the leverage. Only buy options if you know what you're doing because you have to be right on timing and well as direction in order to make money. Most people including myself often struggle with getting half of those two factors correct.

I'll probably get chewed out over this recommendation, but checkout TastyTrade. I think their philosophy makes sense. Not sure about their earnings plays, but I think they seem honest and don't charge anything for their advice.
 
ET180 said:
OR identify a stock that you want to buy anyway...sell an ATM or OTM put. In that case, you're taking on less risk than buying the underlying.
The best traders do NOT buy options unless they are closing a position.


Just like lottery tickets.

Advice on buying options: The best traders buy options. They know how to use the leverage. Only buy options if you know what you're doing because you have to be right on timing and well as direction in order to make money. Most people including myself often struggle with getting half of those two factors correct.

I'll probably get chewed out over this recommendation, but checkout TastyTrade. I think their philosophy makes sense. Not sure about their earnings plays, but I think they seem honest and don't charge anything for their advice.
More...
 
1) Read Option 101 books by S. Natenburg, L . McMillan
2)venture into Options 102 by looking up C. Cottle.
3) Get yourself Excel and Peter Hoadleys plugin and create your own scanner/modeler
4) Read Market Wizards by J Schwager specifically John Bender's interview.
5) Stay away from tickers that have big spreads and start with 1 lots.
 
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