Options: advantages/disadvantages?

Quote from weewilly:

btw did you ever hear the joke about the efficient market theory economist walking down the street with his wife? she sees a dollar on the sidewalk and says "look, there's a dollar on the sidewalk." the economist says "no, there can't be a dollar on the sidewalk because someone would have picked it up already."

so much for theories....

:)

wee
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As long as you brought up efficient market theory...

I did my graduate work at U of Chicago and got a good dose of it. I even went to the library and read Fama's doctoral dissertation where he laid it out.

News flash: the efficient market hypothesis only refers to the expectation of price change, namely that it is essentially zero. There is never a claim with respect to variance (or its square root standard deviation which plays the role of volatility in the BS formula). Simply put, efficient market theory (at least in its original formulation) never says that the market is efficient with respect to volatility.

One of Fama's advisors was Benoit Mandelbrot who invented fractal geometry. Mandelbrot showed that changes in stock prices were distributed according to a symmetric distribution...thus Fama's claim that E(price change) = 0. But Mandelbrot also showed that the distribution is typically not Normal and in fact that the variance is not defined for most price change distributions. When you try to compute it the equations blow up.

Three important implications: 1 ) price changes can be discontinuous; 2) distributions will have fat tails and 3) BS results are only approximations. All of this was pre-1987. Mandelbrot correctly predicted the failure of so-called portfolio insurance.

So what, you might say. Well, there is room in efficient market theory for systematically making money from options. So the economist in your joke should have said "ah, a short straddle" and pocketed the buck...all the while making sure he wasn't about to get run over by a truck.
 
"There are very good reasons why government regulatory agencies require virtually every exchange and broker involved in options to display disclaimers regarding the "Serious Risk" of options trading. " Professional options traders dont USE THE BROKERS YOU SPEAK OF.

"It is a very high risk game with a huge advantage for the house, that is only appropriate for select individuals and institutional money. To say otherwise is to display an obvious lack of experience and knowledge of the real risks involved for a new trader." BULLSHIT, NO DIFFRENT DEGREE OF RISK THAN MANY OTHER MARKETS> SURE THERE ARE MORE VARIABLES TO THE RISK ASSOCIATED WITH OPTIONS< BUT NOT MORE RISKY>>>lol


First of all, i dont use a "BROKER" for my options trading, I trade through SLK utilizing redi platform. Second "serious risk" of options trading is no more serious than the risk of equties, in fact, some options strag. are less risky and require less capital, compaired to the equities traders that are leveraged 10:1....or so.

You dont trade options for a living, You sound like some broker or Complience officer......so save your bullshit for your corporations news letter.
 
"And for each trader you know who went directly to options trading (SERIOUSLY doubt they were trading their own account privately), I will show you 20 who busted out. "

THIS STATEMENT MEANS NOTHING. I as well can show you the same ratio of those who went straight to trading Futures, Equites, bonds, etc., with out ever trading options.....THIS POINT IS MEANINGLESS.

"It is a very high risk game with a huge advantage for the house, that is only appropriate for select individuals and institutional money. To say otherwise is to display an obvious lack of experience and knowledge of the real risks involved for a new trader."

WHAT IS THIS NONESENSE STATEMENT> Huge advantage for the House....what house to you speak of? there are six exchanges now. SO YOUR SAYING ALL SIX EXCHANGES HAVE HUGE ADVANTAGE? WHAT?

WHAT THE HELL IS A "SELECT INDIVIDUAL".....another stupid statement. Like the basic of options is so hard to grasp for a new trader? WHAT? HELL even brokers like you have options on ur 7 test.

NEW TRADERS HAVE RISK IN ANY MARKET THEY ENTER>>>>>>PERIOD.

SO STEP UP TO THE PLATE and GIVE ME SOME EXAMPLES of what ur talking about and stop reading the articles about options and their dangers from the WALLSTREET URNAL>
 
Quote from ertrader1:

"There are very good reasons why government regulatory agencies require virtually every exchange and broker involved in options to display disclaimers regarding the "Serious Risk" of options trading. " Professional options traders dont USE THE BROKERS YOU SPEAK OF.
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Really? I never mentioned any particular brokers, and I am certainly not a broker myself.

But name for us a broker that does NOT require that you read a risk disclosure before trading options.

Any idea at all why that's the case?
Would you like to share it with us?
 
Quote from ertrader1:

"There are very good reasons why government regulatory agencies require virtually every exchange and broker involved in options to display disclaimers regarding the "Serious Risk" of options trading. " Professional options traders dont USE THE BROKERS YOU SPEAK OF.

"It .
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ertrader,
brokers I use/have used: like tradestation and IB do have more stringent requirements for option trading than for equities..
has Lindq got a point that they are more difficult ?
 
"brokers I use/have used: like tradestation and IB do have more stringent requirements for option trading than for equities..
has Lindq got a point that they are more difficult ?"

I dont think they are. I mean there can be difficult strag. based on say, theoritcal applications, like Prof. Scholes from UofC and his theory. But, i really dont know many options trades, who trade for a living "unwind marry puts" as that commerical for idiots speaks of.

I mean Brokers, those pain in the arse people who cold call are told by complience that Options are VERY RISKY and have to have some bullshit RISK DISCLOSURE STATEMENT for propsect clients.

And i Belive Warrne Buffet warned how "derivatives" could put banks at risk......whooooooooo....so scary.

But I think the true lack of knowledge about Derivatives spooks the Pundits and so called professionals like LINDQ. LOL

Now, thats not saying there is no RISK....but MORE RISK...nonsense. I think the most dangerous things to an option trader is themselves.

Options are also an easyer way to make a trade with less capital. For example, (im out of this trade so i can speak of it.) I shorted NGEN calls. I was short 500 NGEN calls around 13, as an average short price where the underlyer was. It cost me less to short 500 calls, than to short 50,000 shares of out right NGEN. (of course NGEN you could not short outright shares because there was really no borrowing stock at the time i was shorting. it was unshortable outright, anyways)

Now, i was short a few diffrent months, however besides that, how is the short 500 calls MORE RISKY than shorting 50,000 stock????????? Theta played a small role in risk due to the way I spaced the Calls, Deltas played somewhat of a role, but nothing REAL RISKY, because i keep control on my Positions. I did hedge somewhat by buying NGEN stock at like the price of 10.00 but only 10,000 shares but thats a hedge and kinda off the subject.

My point is, explain to me, without just throwing around the idea of theta, gamma, and delta, HOW IS THAT MORE RISKY THAN SHORTING OUTRIGHT?

I cant wait to read LINDQs response on this example, by the way, Im out of all the calls in NGEN as of today, So i no longer have NGEN short.




I
 
I dont use IB to trade options, I clear through SLK directly and they also have risk disclosure statement on options. But, they dont have any more strigent rules...margin requirements are not more harsh.

I will say this, it may be easyer just to buy dell shares for many traders than to figuer out if they should by calls or short puts, which is one in the same for a directional trade.

I also think options are not used by many "non-professional", meaning, very few average joes trade options, they tend to trade stock. Just like the average joe tends to go long than to short.

but i really dont belive your at risk more in options to blow out than you are in any other trade.....there is just more definitions to learn, more terminology to learn with options....thats it.
 
Quote from ertrader1:

"brokers I use/have used: like tradestation and IB do have more stringent requirements for option trading than for equities..
has Lindq got a point that they are more difficult ?"

I dont think they are. I mean there can be difficult strag. based on say, theoritcal applications, like Prof. Scholes from UofC and his theory. But, i really dont know many options trades, who trade for a living "unwind marry puts" as that commerical for idiots speaks of.

I mean Brokers, those pain in the arse people who cold call are told by complience that Options are VERY RISKY and have to have some bullshit RISK DISCLOSURE STATEMENT for propsect clients.

And i Belive Warrne Buffet warned how "derivatives" could put banks at risk......whooooooooo....so scary.

But I think the true lack of knowledge about Derivatives spooks the Pundits and so called professionals like LINDQ. LOL

Now, thats not saying there is no RISK....but MORE RISK...nonsense. I think the most dangerous things to an option trader is themselves.

Options are also an easyer way to make a trade with less capital. For example, (im out of this trade so i can speak of it.) I shorted NGEN calls. I was short 500 NGEN calls around 13, as an average short price where the underlyer was. It cost me less to short 500 calls, than to short 50,000 shares of out right NGEN. (of course NGEN you could not short outright shares because there was really no borrowing stock at the time i was shorting. it was unshortable outright, anyways)

Now, i was short a few diffrent months, however besides that, how is the short 500 calls MORE RISKY than shorting 50,000 stock????????? Theta played a small role in risk due to the way I spaced the Calls, Deltas played somewhat of a role, but nothing REAL RISKY, because i keep control on my Positions. I did hedge somewhat by buying NGEN stock at like the price of 10.00 but only 10,000 shares but thats a hedge and kinda off the subject.

My point is, explain to me, without just throwing around the idea of theta, gamma, and delta, HOW IS THAT MORE RISKY THAN SHORTING OUTRIGHT?

I cant wait to read LINDQs response on this example, by the way, Im out of all the calls in NGEN as of today, So i no longer have NGEN short.




I
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You don't need to wait for Lindq... your risk is greater than delta and gamma... your vega could KILL you w/o a move in the underlying shares, in fact, you could've experience a fall in the stock and still have lost on the short calls had volty exploded.

If you don't believe it, then take a look at the recent implied volty in SEPR shares. Another example, the many short gamma traders in SPX who blew-up while being SHORT CALLS into the crash.

I find it EXTREMELY hard to believe that you were short 500 equity option calls with your options knowledge. If so, good for ya, but you need to learn a bit.

This isn't a flame, just constructive criticism.


riskarb
 
Would I be wrong to assume that most of the guys here advocating the use of options, mainly SELL options for the premium?

If it's so profitable for Joe 6-pack to BUY options, there should be large money managers out there who ONLY BUY options as is usually advocated by many sellers.

After all, many retail accounts of option traders don't have the required 25K to be a seller.
 
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