'Philosophical Approach to Options Trading

[pete57]

I'm fairly new to options but am keen to learn as they suit my personality (I'm the type of person who is good at strategy games, the more complex the better).

I have already learnt alot about various 'basic' combos (verticals, calendars, condors, butterflies, diagonals, ratios, straddles, strangles etc) and what gamma, delta, theta and vega mean in terms of additional risk/reward on a position. (gradually absorbing Cottle's book).

I am in the process of investigating trading strategies to match view on underlying with option trade. A question I had for the forum was on overall approach and I would be interested to hear how people trade.

An example to explain my question. I could use a system that scans optionable stocks for technical (or fundamental) signals on 'likely direction'. Then look at potential options plays (eg straight call/put, credit spread, debit spread, OTM calendar etc etc) that offer the best risk/reward.

Second approach could be to pick 10-20 stocks that have high options volume (hence better range of strikes, expiry months, liquidity and spread prices) and 'play' these adapting my position as the stocks move up down and consolidate.

I understand the impact of vega but don't intend to focus on trading vega per se (other than skews for calendars where I can get a wide breakeven and low debit).

How do folks on the forum marry underlying to options strategies ?

 

[lindq]

Quote from pete57:

I'm fairly new to options but am keen to learn as they suit my personality (I'm the type of person who is good at strategy games, the more complex the better).

I have already learnt alot about various 'basic' combos (verticals, calendars, condors, butterflies, diagonals, ratios, straddles, strangles etc) and what gamma, delta, theta and vega mean in terms of additional risk/reward on a position. (gradually absorbing Cottle's book).

I am in the process of investigating trading strategies to match view on underlying with option trade. A question I had for the forum was on overall approach and I would be interested to hear how people trade.

An example to explain my question. I could use a system that scans optionable stocks for technical (or fundamental) signals on 'likely direction'. Then look at potential options plays (eg straight call/put, credit spread, debit spread, OTM calendar etc etc) that offer the best risk/reward.

Second approach could be to pick 10-20 stocks that have high options volume (hence better range of strikes, expiry months, liquidity and spread prices) and 'play' these adapting my position as the stocks move up down and consolidate. I understand the impact of vega but don't intend to focus on trading vega per se (other than skews for calendars where I can get a wide breakeven and low debit).

How do folks on the forum marry underlying to options strategies ?

To a newbie, options often seem to have some intrinsic value to themselves, if nothing more than the challenge of putting them in place and making a few bucks. But remember that they are nothing more than derivative of the underyling stock, no matter how attractive on PAPER some strategies may look. In order to be even modestly successful with any option strategy, you must first be able to consistently predict the movement of the underlying.

If you are currently successful trading stocks, I would advise that you continue to focus on what is working for you instead of taking on the additional risk of options. Because in my considerable experience, the risk is seldom worth the reward.

If you are not currently successful trading stocks, then you will simply accelerate the destruction of your trading account.

 

[pete57]

Lindq, thanks for the post.

Re your comment 'options are just a derivative.'

Yes of course. That is the whole reason behind my post.

I don't believe you can successfully trade options without a view on the underlying.

But the relationship between the option price and the underlying is more complex than some derivatives.

If you had a system that captured short term 2-3% swings I would be surprised if you could make anything using this system with options, whereas with stocks or futures you may.

Hence the crucial interdependence between the options strategies and the 'underlying strategies'.

Your other comments seem to say - don't trade options no one makes money on them.

While I'm sure 95% lose, that is true of all trading and gearing just accelerates the destruction of trading accounts. So whatever market and vehicle you choose you must learn the necessary skills.....I accept these may be harder with options but the principle is the same.

 

[TempusFugit]

Quote from pete57:

Lindq, thanks for the post.

Re your comment 'options are just a derivative.'

Yes of course. That is the whole reason behind my post.

I don't believe you can successfully trade options without a view on the underlying.

But the relationship between the option price and the underlying is more complex than some derivatives.

If you had a system that captured short term 2-3% swings I would be surprised if you could make anything using this system with options, whereas with stocks or futures you may.

Hence the crucial interdependence between the options strategies and the 'underlying strategies'.

Your other comments seem to say - don't trade options no one makes money on them.

While I'm sure 95% lose, that is true of all trading and gearing just accelerates the destruction of trading accounts. So whatever market and vehicle you choose you must learn the necessary skills.....I accept these may be harder with options but the principle is the same.

People do make money on options. You might want to have a look at The Options Edge by William R. Gallacher, which looks at the issue from the perspective of the option writer.

One would have to agree with your statement "I don't believe you can successfully trade options without a view on the underlying" and I would go further and note that the view need not be directional; indeed some of the best options strategies I've seen tend towards delta neutral and take advantage of changes in IV and/or harvest front-month time decay.

By my handle you can probably guess which one I favor.

Good luck,

TF

 

[pete57]

TempusFugit, thanks for the post.

Yes I like the idea of time working for me by selling front month premium.

In fact this thinking was part of what's behind my question.

For example, if I were long term bullish on, say INTC (just as an example), I could look at buying something with Jan05 expiry, at a time of lower IV. But ultimately I don't want to pay for it (just mean I guess), so I would then be looking at opportunites to sell against the longer term position with the shorter term swings, and/or capture IV change. This is an example of what I meant by 'playing' a few stocks, adjusting the position.

Keep em coming folks....