Options Noob... 1st 100 trades completed

[ironchef]

Maybe the quote should be "the rare options trader makes money with long option-only trades..."

Let's see, if you are like me, mom and pop retail, my longs (calls and puts) are like hitting the lottery and my shorts (calls and puts) are like free money?

I am kidding, the reality is we lose money in drips going long and occasionally in big chunks going short, both feeding the professional traders' bank accounts.

 

[Muffhands]

I love options! If you are losing money consistently buying options, its because you are buying cheap atm or otm options and trying to hit big every time. Instead of buying cheap at the money or out of the money options buy some deep in the money options with a delta +/-0.7. Cheap options are lotto tickets. Stop trying to load up on 100 contracts of cheap soon to expire options and maybe just buy 5-10 deep in the money quality options 9-12 months out.

 

[beerntrading]

When you look at them enough, options tell you what the underlying will do about 80% of the time. All you have to do is enter the order correctly (harder than it sounds...apparently). The problem is the learning curve for these is steep and most people judge them by their early experience in trading them. If you're really lucky, you learn the same way I did, with a consistent losing strategy (to the tune of more than double your commissions), and just flip to the other side of the market. From there you learn enough from experience to know when the other side of the market is right.

The biggest problem I've seen in others is the belief that you should hold till the bitter end. Really you should learn how to lose with these so your winners stay winners and your losers are closed before they hit the maximum. Also appropriately capitalize on one hand and hedge on the other so when it hits the fan, you still have enough to get back in tomorrow (or next week, or next month).

 

[sle]

How do I know if an option is expensive or cheap?

There is a garden variety of methods to guess if the option is rich or cheap, from simple IR/RV comparison to more complex stuff. Most options are statistically rich, since a rational player would always prefer to be long convexity and should be willing to pay a premium for it. Ultimately, you do not know if the option is rich or cheap until it has expired. Anyone that tells you otherwise is either full of shit or trying to sell you something.

 

[ironchef]

Most options are statistically rich, since a rational player would always prefer to be long convexity and should be willing to pay a premium for it.

Thank you for taking the time to answer.

If the above statement is correct, does it means seller generally has an advantage and that shorting calls/puts is a better strategy in general?

 

[ironchef]

If you're really lucky, you learn the same way I did, with a consistent losing strategy (to the tune of more than double your commissions), and just flip to the other side of the market. From there you learn enough from experience to know when the other side of the market is right.

+1 Very interesting approach. Thanks for the suggestion.

 

[beerntrading]

If the above statement is correct, does it means seller generally has an advantage and that shorting calls/puts is a better strategy in general?

There's some truth to that. In reality, a seller has the theoretical advantage on the ask, and a buyer has it on the bid...because selling premium is high percentage, low return, high absolute risk. Conversely, longs are low percentage, high return, low absolute risk.

 

[lovethetrade]

I anyways thought you needed to understand the strategies and how it applies to different market scenarios to be good at trading options.

http://www.theoptionsguide.com/option-trading-strategies.aspx

I will definitely get back into options at some stage. I think they can be a lot of fun.

 

[beerntrading]

I anyways thought you needed to understand the strategies and how it applies to different market scenarios to be good at trading options.

http://www.theoptionsguide.com/option-trading-strategies.aspx

True enough. Different strategies for different market conditions and different time frames too. You also need to have a very good idea of where the market it going and when to trade effectively on net long strategies, and at least the short (or for the duration of your option) term direction to trade net short strategies.

 

[sle]

If the above statement is correct, does it means seller generally has an advantage and that shorting calls/puts is a better strategy in general?

Well, a seller has a positive statistical expectation, but he pays for it with asymmetrical return profile. Simply said, an option seller is getting paid for talking on other people's pain.