Options only to understand us securities

[Ivano]

Disclaimer: options newbe post, please feel free to skip if you do not have time!

I met few really successful stock/future traders in all the time-frames, that have constant edge and trade for a living and they do not know nothing about options, although they are often open to learn always from books, traders and market.

My studies brought me to infer the following facts: 40 per cent of the trades are executed in alternative trade systems, market makers intrinsically use options to achieve delta neutrality, some hedge funds use options as directional bets, multi legged strategies and hedging.

My case is the following: As a 90 per cent technical believer I want to study options and ATS, so to understand what is the real volume and high probability reverse points(bottom and extended) of indexes and individual stocks so to have an edge that support my decisions based on Technical Analysis.

I tried so far to apply this germinal know-how to my trades but the results are mixed.

With my laughable capital and difficulties, I do not want to trade with options at the moment, but only understanding from the experts if all the efforts i am doing in the last months to understand greeks, implied volatility, market makers dealer mentality may help me in the long run to execute stock strategies at the right moment, or
1) I am losing energies and focus in the wrong direction, options will not help my stock edge.
2) Knowing Market structure is really useful but too utopically complex to be understood from an inexperienced retailer.
3) Is worthy to take the effort, because at a certain point i may see correlations not so obvious.
4) The two fields are almost unrelated in real life, stick to back-testing my technical idea.

 

[earth_imperator]

Interesting.
I would advise to study constructs where the loss is capped, like in options spreads, butterfly, condor etc.
Ie. where the PnL diagram is like a Z or a pyramid, or the mirror image of it,
for example such ones: https://optioncreator.com/bull-call-spread
Rationale behind it: capping losses, and b/c such a spread construct is cheaper than a single leg as the description of the above construct also explains:

The Bull Call Spread is an options strategy involving the purchase of a Call with a lower strike and the selling of a Call with a higher strike.

The motivation of the strategy is to generate a profit if the stock rises, but make the strategy cheaper than simply buying a call option.

However, the Profit / Loss of a Bull Call Spread is limited (whereas the one of a plain call is unlimited).

On the other hand: the most important thing is to correctly predict the future direction of the underlying... and/or of the IV...

 

[Real Money]

I trade rate and index futures and spreads. No options, even though I have more than 100k brokerage.

I did a lot of reading and studying -- options trading, market making, microstructure, quant finance, statistics, banking, finance, economics, etc. I have a degree in mathematics. I can program software...

For an index, there is the tradable volatility of the index, and there is also the tradable (via straddles, strangles, spreads, etc.) volatility of index constituents available to the market.

Both of these can influence the direction of the index and the magnitude of its movement.

So my advice is to learn how vol trades, and to know how trading in the underlying affects it, and to also understand how dealers trade in the underlying to manage their exposure.

 

[Scataphagos]

On the other hand: the most important thing is to correctly predict the future direction of the underlying...

YES! Learn Price TA. When you get a good setup, you can execute with the option instead of the underlying if you choose. The key to success is the underlying setup. You don't have much control over the "slop" you have pay for, so go for the good setup and the slop won't make a material diff.

KISS, baby!

 

[newwurldmn]

i think it's super rare that options are driving stock prices.

People who peddle gamma reports are just selling snake oil.

Disclaimer: options newbe post, please feel free to skip if you do not have time!

I met few really successful stock/future traders in all the time-frames, that have constant edge and trade for a living and they do not know nothing about options, although they are often open to learn always from books, traders and market.

My studies brought me to infer the following facts: 40 per cent of the trades are executed in alternative trade systems, market makers intrinsically use options to achieve delta neutrality, some hedge funds use options as directional bets, multi legged strategies and hedging.

My case is the following: As a 90 per cent technical believer I want to study options and ATS, so to understand what is the real volume and high probability reverse points(bottom and extended) of indexes and individual stocks so to have an edge that support my decisions based on Technical Analysis.

I tried so far to apply this germinal know-how to my trades but the results are mixed.

With my laughable capital and difficulties, I do not want to trade with options at the moment, but only understanding from the experts if all the efforts i am doing in the last months to understand greeks, implied volatility, market makers dealer mentality may help me in the long run to execute stock strategies at the right moment, or
1) I am losing energies and focus in the wrong direction, options will not help my stock edge.
2) Knowing Market structure is really useful but too utopically complex to be understood from an inexperienced retailer.
3) Is worthy to take the effort, because at a certain point i may see correlations not so obvious.
4) The two fields are almost unrelated in real life, stick to back-testing my technical idea.

 

[murray t turtle]

Disclaimer: options newbe post, please feel free to skip if you do not have time!

I met few really successful stock/future traders in all the time-frames, that have constant edge and trade for a living and they do not know nothing about options, although they are often open to learn always from books, traders and market.

My studies brought me to infer the following facts: 40 per cent of the trades are executed in alternative trade systems, market makers intrinsically use options to achieve delta neutrality, some hedge funds use options as directional bets, multi legged strategies and hedging.

My case is the following: As a 90 per cent technical believer I want to study options and ATS, so to understand what is the real volume and high probability reverse points(bottom and extended) of indexes and individual stocks so to have an edge that support my decisions based on Technical Analysis.

I tried so far to apply this germinal know-how to my trades but the results are mixed.

With my laughable capital and difficulties, I do not want to trade with options at the moment, but only understanding from the experts if all the efforts i am doing in the last months to understand greeks, implied volatility, market makers dealer mentality may help me in the long run to execute stock strategies at the right moment, or
1) I am losing energies and focus in the wrong direction, options will not help my stock edge.
2) Knowing Market structure is really useful but too utopically complex to be understood from an inexperienced retailer.
3) Is worthy to take the effort, because at a certain point i may see correlations not so obvious.
4) The two fields are almost unrelated in real life, stick to back-testing my technical idea.

%%
Market Makers Edge , book by Joshua Lukeman [MM]may very well help you much more than trying to follow a market makers business plan.
Options or insurance risk /reward study may help a bit;
State Farm left FLA= too much risk.
Also strange/ how many small insure companies a, big co owns[My auto insure co has a page or 2 or smaller insure companies it owns= strange, but good. ]
Bid\ask spread on most options= so wide;
Buy or borrow that book noted + Investors Business Daily books, all of his...................................................................................Wisdom is profitable to direct.

 

[Ivano]

i think it's super rare that options are driving stock prices.

People who peddle gamma reports are just selling snake oil.

thank you everybody, and i like the book reccomended by @murray t turtle

Please @newwurldmn could you expand over the concept of rarity about correlation between options and price of stocks?

I am ignoring indexes because the strong hedging function of the options make as a different game to understand, not even considering VIX.

So focusing on stocks I notice that there are some individual stocks that show milions of premium, and are clearly bullish/bearish, as a put sold( ask) and from the same operator calls bought at bid, and after that i see days after big changes in major stocks, and i am reasonably confident are not debit credit spreads or other even more complex strategies, not too mention that i am studying correlation with implied volatility, relationship between spot and price, volume and open interest and so on.

Gamma looks as an interesting greek to me because of his influencing function on delta, and my empirical experience show some visible results, but still working hard to master greeks.

Of course I am a newbe and cannot be exact and logic with your folks level that use options every day, but i would like to comprehend, so to understand if I am losing time or not studying options to determine price changes in stock prices

 

[ET180]

YES! Learn Price TA. When you get a good setup, you can execute with the option instead of the underlying if you choose. The key to success is the underlying setup. You don't have much control over the "slop" you have pay for, so go for the good setup and the slop won't make a material diff.

KISS, baby!

If you can predict the movement of the underlying with high accuracy, you don't need options. The only thing they would provide is leverage. But, again, if you can predict the movement of the underlying, you will compound your returns very quickly and won't really need the leverage.

 

[Scataphagos]

If you can predict the movement of the underlying with high accuracy, you don't need options. The only thing they would provide is leverage. But, again, if you can predict the movement of the underlying, you will compound your returns very quickly and won't really need the leverage.

Not really a matter of needing options (nobody needs options), but you still need the market/issue to move in your favor (or what you believe is the most likely/important leg). So, you might "strategize" or leverage with options.

 

[newwurldmn]

Option markets aren’t that big compare to cash markets especially when you consider how many options are purely vol trades (no change in demand/supply of delta)

thank you everybody, and i like the book reccomended by @murray t turtle

Please @newwurldmn could you expand over the concept of rarity about correlation between options and price of stocks?

I am ignoring indexes because the strong hedging function of the options make as a different game to understand, not even considering VIX.

So focusing on stocks I notice that there are some individual stocks that show milions of premium, and are clearly bullish/bearish, as a put sold( ask) and from the same operator calls bought at bid, and after that i see days after big changes in major stocks, and i am reasonably confident are not debit credit spreads or other even more complex strategies, not too mention that i am studying correlation with implied volatility, relationship between spot and price, volume and open interest and so on.

Gamma looks as an interesting greek to me because of his influencing function on delta, and my empirical experience show some visible results, but still working hard to master greeks.

Of course I am a newbe and cannot be exact and logic with your folks level that use options every day, but i would like to comprehend, so to understand if I am losing time or not studying options to determine price changes in stock prices