Recommended options strategies for beginners

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morganpbrown

I tried asking this question earlier, but I think I asked it wrong...

Even though I've been messing with options for a couple years in my spare time, these forums have made it abundandly clear that I am a beginner. And I have taken that to heart. I have some DIY tools that allow me to test & understand the risk/reward of a position and stress the P&L as a function of exogenous variables (share price & IV). Great, so here's my problem...

...there is an infinite (or seemingly infinite) number of potential options combinations that you could employ on a given underlying at a given time.

Could you recommend a short list of strategies, for testing/gaining intuition/trading purposes, that you consider appropriate for a beginner?

(FWIW: So far I have looked closely at short iron condors and calendar spreads as non-directional, mostly-greek-neutral approaches. Both seem to have merit)
 
Hi morganpbrown- The is the best advice I can give to the beginner option trader. Equity Options are a derivative of the equity. Learn to trade the equity first. Find a process to determine where a stock will trade over a time period, or where it won't. Then learn more than the basics of options. Then use options to mimic your opinion on the stock, not the other way around. Don't do a spread because you leaned what it was.
 
Get a good handle on verticals...Flys,condors,split flys etc are different combinations of verticals..Start with verticals.

I have a slightly different view than Robert but do agree if you are a decent trader of the underlying,you should be that much better as an option trader. If you are really good directionally,you should crush it trading options..

With that said,you can do pretty well by picking your spots and putting on spreads with "edge" while being fairly inept at direction..
 
@Robert Morse and @taowave thank you for the replies. One thing I like about options is that even a putz can cheaply make a negative directional bet. With stocks, don't I have to sell shares short? (For some reason, shorting has always intimidated me, but maybe it need not?)

Also, I'm having trouble wrapping my head around how you would make a "neutral" bet with shares(???). And I am fairly inept at direction. Since I have a day job, I can't adequately monitor markets to make intraday bets.

I do like to make bets on volatility without buying a VIX ETF, and options seem a fairly easy way to do so.
 
mervyn said:
Covered call for part time beginner
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I should have mentioned that I've been trading the poor man's covered call (just a diagonal call spread with a long-dated deep ITM long leg) for a year or so, in two $25K test accounts. Mainly trade the PMCC on index & sector ETFs. My results have been middling; by that, I mean that I don't seem to have an upside edge (in fact, probably the opposite), though there is definitely some "crash" protection.

Of course, if I could reliably pick the direction of the underlying...well, I'd sell ITM covered calls if I knew the underlying was going down, and wouldn't sell covered calls at all if I knew it was going up. I guess in the end...this mirrors what the others have said: those who can pick direction can win at any game they play.
 
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morganpbrown said:
I should have mentioned that I've been trading the poor man's covered call (just a diagonal call spread with a long-dated deep ITM long leg) for a year or so, in two $25K test accounts. Mainly trade the PMCC on index & sector ETFs. My results have been middling; by that, I mean that I don't seem to have an upside edge, though there is definitely some "crash" protection.

Of course, if I could reliably pick the direction of the underlying...well, I'd sell ITM covered calls if I knew the underlying was going down, and wouldn't sell covered calls at all if I knew it was going up. I guess in the end...this mirrors what the others have said: those who can pick direction can win at any game they play.
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how can you not make money on covered calls in the past five years? Any big name tech stocks would do. I was going to suggest the calendar spread. Whenever there was a period of uncertainty and market crashed, buy 2 year out atm leap calls and sell weekly calls to offset the premium paid.
 
morganpbrown said:
Could you recommend a short list of strategies, for testing/gaining intuition/trading purposes, that you consider appropriate for a beginner?
More...

@taowave nailed it. I don't have anything like his experience in the market, but everything I've learned on my own hide (and given our earlier exchanges about having to try things out in order to really understand them, that's everything I've learned about trading) reflects what he says 100%.

I won't claim to be the best trader in the world, but I'd say I'm doing reasonably well (despite having a long way to go) - and I don't have anything resembling directional ability. I would do amazingly well if I did, but despite trying everything I've ever heard of, it's... minuscule at best. Stocks are just a way for me to kill my account, period. With stock, I can bet on it going up - or down... and then waste my time hoping that it'll move in the right direction. No thanks.

With options, however, I can bet on vol - something I find much more predictable - and play several different aspects of it. I can make directional trades with a built-in buffer, take a risk across a narrow price band for a unlimited return to one side or the other (or on both sides, if the vol makes the right move), bet on gradual or fast non-directional drops or rallies in either price or vol, make bets on the price staying in one place - or doing so for a while and then rallying or dropping... almost infinite possibilities.

If it wasn't for options, I would have given up on trading, period.

To echo taowave's advice: learn verticals. Just start with that, and nothing but that. If you can get really comfortable with just the basic four and really, really get everything pertinent to them - debit vs. credit, synthetic equivalents (and where they're not equivalent), the greeks that you want to have (or minimize) for each type, and their ATM/OTM positioning for different purposes/theses on vol/price movement, you'll have a very, very solid basis for anything else that you want to expand into. Developing whatever directional ability you can will help a lot - not that you have to, because a condor is just a pair of spreads, but there's little that stock trading can teach you that trading spreads won't.
 
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