Newbie questions for live trading

[Neyo]

hi guys,
so I've been trading on the demo for quite some time now and am about ready to start trading on a live account but still have some questions that i can't solve via the demo account. So i figured better to ask rookie questions than get burned for real money right
since i have quite a few i'll rather post them all in one topic instead of starting a bunch of new ones, keep the forum nice and clean.

1. Implied Volatility: since the major part of the option price is dependant on the implied volatility i don't know which one to look at? i found the IV from the specific option contract(ie: Jan 200 Call or Feb 300 Put and such...) or the general IV from the stock? or is it best to compare the the stocks IV to the specific options contract IV to find the relatively ''cheap'' option?

2. Order types: i know that i cannot affect the price i get if i put in a market order, yet on the other hand i can't affect if my order will get excersized if i put in a limit order. Can my market order be filled by somebody elses limit order?(i'm asking so if i put in a market order, and the stocks price is ie. 25, can my order get trough for 30 for someone elses limit order and i get sold a stock by a much higher price) also, if i want to specify that i am willing to buy for the price of ie. 25 or lower but not higher, what type of order would be best to use in a live account? or how could i avoid the above example scenario?

3. Option excersises: if i'm short an american style option and it gets excersized, will i be short the stock immediately when it gets excersized(as in, right that second) or will i be short the option the next day/end of day? also, is it possible to set up that if i have a, let's say, calendar spread set up with a longer period short than long option, that my long option will be excersized immediately that the short option gets excersized?


i know that the questions are a bit much, but i would be gratefull even if you take the time to answer only one of them. I'm asking those who are already trading live because these are the things i can't figure out alone in the demo account.

thank you for the answers in advance guys!

 

[1245]

Quote from Neyo:

hi guys,
so I've been trading on the demo for quite some time now and am about ready to start trading on a live account but still have some questions that i can't solve via the demo account. So i figured better to ask rookie questions than get burned for real money right
since i have quite a few i'll rather post them all in one topic instead of starting a bunch of new ones, keep the forum nice and clean.

1. Implied Volatility: since the major part of the option price is dependant on the implied volatility i don't know which one to look at? i found the IV from the specific option contract(ie: Jan 200 Call or Feb 300 Put and such...) or the general IV from the stock? or is it best to compare the the stocks IV to the specific options contract IV to find the relatively ''cheap'' option?

2. Order types: i know that i cannot affect the price i get if i put in a market order, yet on the other hand i can't affect if my order will get excersized if i put in a limit order. Can my market order be filled by somebody elses limit order?(i'm asking so if i put in a market order, and the stocks price is ie. 25, can my order get trough for 30 for someone elses limit order and i get sold a stock by a much higher price) also, if i want to specify that i am willing to buy for the price of ie. 25 or lower but not higher, what type of order would be best to use in a live account? or how could i avoid the above example scenario?

3. Option excersises: if i'm short an american style option and it gets excersized, will i be short the stock immediately when it gets excersized(as in, right that second) or will i be short the option the next day/end of day? also, is it possible to set up that if i have a, let's say, calendar spread set up with a longer period short than long option, that my long option will be excersized immediately that the short option gets excersized?


i know that the questions are a bit much, but i would be gratefull even if you take the time to answer only one of them. I'm asking those who are already trading live because these are the things i can't figure out alone in the demo account.

thank you for the answers in advance guys!

1.If you care about implied vol, monitor the stock actual vol, the vol of ATM options vs the OTM options or skew. Also the difference from month to month.

2.If does not matter whom you trade with. The markets on the screen are either a professional market maker, trader or customer. Just enter your order (always limit orders) at the price you want to enter or exit the trade. Adjust as you see fit.

3. If you're short options and assigned early, you will be alerted by your broker the next morning.

 

[Neyo]

Quote from 1245:

1.If you care about implied vol, monitor the stock actual vol, the vol of ATM options vs the OTM options or skew. Also the difference from month to month.

2.If does not matter whom you trade with. The markets on the screen are either a professional market maker, trader or customer. Just enter your order (always limit orders) at the price you want to enter or exit the trade. Adjust as you see fit.

3. If you're short options and assigned early, you will be alerted by your broker the next morning.

1. so for example if the stocks actual vol is at 20%, stocks IV is at 10% and we're looking at a smile skew that could be considered that the ATM options are relatively cheap whilst OTM options are relatively more expensive?

2. but if i enter a limit order for a stock at let's say 26$, stocks current price is 25$ and someone enters a market order will he get his market order filled with my 26$ limit?
and can my limit order at 26$ even get filled with a lower price than 26$?

3. so even if the other party excersizes the contract at ie. 10:00AM i will take the stock short position the next morning? or will i take the stock position immediately and just get notified the next morning?

 

[1245]

Quote from Neyo:

1. so for example if the stocks actual vol is at 20%, stocks IV is at 10% and we're looking at a smile skew that could be considered that the ATM options are relatively cheap whilst OTM options are relatively more expensive?

2. but if i enter a limit order for a stock at let's say 26$, stocks current price is 25$ and someone enters a market order will he get his market order filled with my 26$ limit?
and can my limit order at 26$ even get filled with a lower price than 26$?

3. so even if the other party excersizes the contract at ie. 10:00AM i will take the stock short position the next morning? or will i take the stock position immediately and just get notified the next morning?

1-Skew and historical vol vs current Ivol are two different items, and unrelated. You will find it difficult to buy vol in a stock for a great deal less then current movement. If it's too low, where you can see it, their might be a reason. Buying vol under current activity is a difficult thing to do with all the algos running. In general because of dispersion theory, which you can look up on your own, these global equity. option algos look to buy stock vol cheap and sell index vol against it. It is much easier to find stock vol that turned out to be too high, because of fear or expectations.

2-you are use a very big spread in your example and the markets are very simple when it come to price. There is a current NBBO-National Best Bid Offer before you enter your order. If you order does not pair off with another order at your price, and your order is better than the current market, your bid or offer would narrow the spread for the world to see. If you bid above the current market or offer below the current bid, your order will execute at the better price, as long as that bid/offer is at least the same size as your order and is still there at the time your order is in the system.

-3 exercises are submitted to the OCC at end of day, processed after the close. Then your broker is given a list of options that have be assigned and your broker splits those assignments in a predetermined manner over the shorts on their books. Then the accounts are told before the open the next day. Remember, all these positions are held in street name, not yours. The broker has bookkeeping entries to keep track.

I think you are getting held up with questions that tell me you might need a mentor or close friend that has entered order before and understands the basics of equities and options that needs to spend some time with you before you start trading options. You need to understand the basic function of the markets and nature of options before you start. That way you can concentrate on looking for strategies that make money and not thinking about the mechanics of trading.

Good Luck........1245