Newbie questions

M

masonyes

I recently learned about options and it's a very broad field or so it seems. The wise thing seems to be to learn a basic foundation of investments and investment principals/fundamentals and I've checked out several books. The intelligent investor, security analysis, Common Stocks and Uncommon Profits and Trading options by john wiley.
What little I've read so far in intelligent investor seems to stress the importance of valuing companies based upon competent management, attractive numbers, ability to grow, competitive savvy, et cetra and that you should NEVER base your picks on speculation.
My question is how does this translate into options which is short-term and seems to be based on speculation. If I make picks based on the tenets is it useless because the driving force is speculation? So then how do I use objective information to use options?
Also how long has it taken for you to learn how to trade options? Do most of you hold degrees or do you just do it for supplemental income? What makes a good trader from a bad?
Thanks for taking the time to read my post and for those who answer.
 
Who told you that options have to be short-term and can only be used for speculative purposes?

Options are just instruments, like futures, except with a few more moving parts. Thus there's no reason why options cannot be used to express your fundamental view, whatever it might be. Obviously, you need to understand what you're getting with options and what fee you're going to be paying/recving for the advantages/drawbacks of using options.

As to your other question, I am not sure I can answer them. There's a whole lot of discussions all over ET about what makes a good trader. I am certainly not arrogant enough to suggest that I know the answer.
 
As you can tell by reading posts most people here did not make it past 6th grade, some even took the short bus to school, so no you do not need a degree, what you do need is patience and to realize that it will take you a year or two to begin to grasp what trading really is [so, don't blow your account just yet], read a lot of books on the subject (check posts for recommended readings) ask a lot of questions, ignore the fear-mongers here, and open a small account at a prop firm where you can trade 25 shares at a time, once you're profitable for a couple of weeks in a row increase your share size and off you go.



Quote from masonyes:

I recently learned about options and it's a very broad field or so it seems. The wise thing seems to be to learn a basic foundation of investments and investment principals/fundamentals and I've checked out several books. The intelligent investor, security analysis, Common Stocks and Uncommon Profits and Trading options by john wiley.
What little I've read so far in intelligent investor seems to stress the importance of valuing companies based upon competent management, attractive numbers, ability to grow, competitive savvy, et cetra and that you should NEVER base your picks on speculation.
My question is how does this translate into options which is short-term and seems to be based on speculation. If I make picks based on the tenets is it useless because the driving force is speculation? So then how do I use objective information to use options?
Also how long has it taken for you to learn how to trade options? Do most of you hold degrees or do you just do it for supplemental income? What makes a good trader from a bad?
Thanks for taking the time to read my post and for those who answer.
More...
 
Quote from masonyes:

I recently learned about options and it's a very broad field or so it seems. The wise thing seems to be to learn a basic foundation of investments and investment principals/fundamentals and I've checked out several books. The intelligent investor, security analysis, Common Stocks and Uncommon Profits and Trading options by john wiley.
What little I've read so far in intelligent investor seems to stress the importance of valuing companies based upon competent management, attractive numbers, ability to grow, competitive savvy, et cetra and that you should NEVER base your picks on speculation.
My question is how does this translate into options which is short-term and seems to be based on speculation. If I make picks based on the tenets is it useless because the driving force is speculation? So then how do I use objective information to use options?
Also how long has it taken for you to learn how to trade options? Do most of you hold degrees or do you just do it for supplemental income? What makes a good trader from a bad?
Thanks for taking the time to read my post and for those who answer.
More...

Options are a terrible starting point for newbies. Buying them causes time decay, so even if you are right you can lose money. Writing them is a hyped way to "earn income from expiring options" which really requires deep pockets and is prone to sudden blowups.

In addition, they have a lot more complexities ("the Greeks") than straightforward things like stocks or futures.
 
All investment instruments can be speculative. You can research and pick the best companies and still be wrong (see Nov 2007 to March 2009). Options can be used as speculative vehicles or as hedging vehicles or a combination of both. You need to read and read and read to understand all the aspects of options. Options are four-dimensional, and it is important to understand each dimension (delta--directionality; gamma--change in delta with respect to time; vega--volatility; theta--time decay). For example, how many investment vehicles make money when the market is closed over the weekend? One, if you are short options. Time decay is ongoing; it doesn't stop just because the market is closed.

Personally, I am self taught. Because of a spinal injury, I retired from dental practice in 2001. By the end of 2002, I began learning about options and trading small amounts (first as an option buyer, then as an option writer; currently, I am a spec/hedger). The problem with being self-taught is that you pay for your mistakes (tuition). It is nice if you can find a mentor ( a live person) to guide you.
 
Two errors, jw...

1) Gamma is not "change in delta with respect to time"
2) Strictly speaking, all investments that have unrealized future cashflows "make money when mkt is closed over the weekend".
 
Quote from masonyes:

What little I've read so far in intelligent investor seems to stress the importance of valuing companies based upon competent management, attractive numbers, ability to grow, competitive savvy, et cetra and that you should NEVER base your picks on speculation.

Options enable you to fine tune the risk profile of a position. You can be an investor as per your above criteria, you can be a speculator, you can chase direction, non-direction, time decay, volatatility, as nauseum. Orrrr, you can be an option rock star on ET :)


What makes a good trader from a bad?

MAKING MONEY :D :eek:
More...
 
Thanks for all the tips; I do plan to wait quite some time before I actually trade options; and additional advice would be appreciated as well. One last question I read about purchasing stocks specifically for the purposes of writing calls(according to your own advice not those "recommendations"). What do you guys think about that?
 
Quote from masonyes:

I recently learned about options and it's a very broad field or so it seems. The wise thing seems to be to learn a basic foundation of investments and investment principals/fundamentals and I've checked out several books. The intelligent investor, security analysis, Common Stocks and Uncommon Profits and Trading options by john wiley.
What little I've read so far in intelligent investor seems to stress the importance of valuing companies based upon competent management, attractive numbers, ability to grow, competitive savvy, et cetra and that you should NEVER base your picks on speculation.
My question is how does this translate into options which is short-term and seems to be based on speculation. If I make picks based on the tenets is it useless because the driving force is speculation? So then how do I use objective information to use options?
Also how long has it taken for you to learn how to trade options? Do most of you hold degrees or do you just do it for supplemental income? What makes a good trader from a bad?
Thanks for taking the time to read my post and for those who answer.
More...

IMO options have a place in value investing.

If you own a company, you like this company, and you're following them as meticulously as Common Stocks, security analysis or Intelligent Investor would want, then you can use options as a hedge against any temporary difficulties (buy puts).

With regard to how long its taking...

though I have a degree it has nothing to do with finance, I started reading in December 2008, and I felt comfortable enough to trade simple strategies in a couple of months.

I'm still learning, but mostly the trading/risk management side now.
 
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