Retail options trading as a business/any advice for beginners?

R

RandomZen

Hi guys,

I am relatively new to options trading: I’ve collected some premium, have read a couple of books, but it would be interesting to learn from people who are consistently profitable, or, at least, confident in their options trading. What works and what doesn’t?

Is there a relatively painless way to trade options?

If you have a view on at least one item from 1-6 below, please let me know. Many thanks!!!!

1. BUYING OPTIONS (spreads) vs SELLING OPTIONS (spreads). From what I’ve read, the pros don’t really make directional bets that often, in any event they’re always hedged one way or the other.

I use Hoadley Tools - http://www.hoadley.net/options/barrierprobs.aspx? - to get a feel for likely price ranges. It’s an effective tool, and the approximation for price moves is surprisingly effective, in a large number of cases.

But it’s not precise enough to make me sleep well at night, when selling options. We know there are price breakouts in either direction, not caught by simulators based on normal distribution.

2. DELTA-NEUTRAL STRATEGIES (e.g., various ratio backspreads etc): can a retail trader profit from these, more or less consistently? The pros seem to be doing dynamic hedging, to stay-delta neutral, i.e. constantly rebalancing their positions to keep delta close to zero. But it’s too costly for retail traders, because of transaction costs. Is this dynamics things absolutely necessary?

3. PLATFORM/BROKER. I like Interactive Brokers because of their low commissions, and we know transaction costs can kill even a sound trading approach. Which options software hooks up well with IB, and is it an important factor? (maybe use separate tools for backtesting and IB for actual trading)

How about OptionVue as a platform?

4. VARIOUS TRADEFINDER TOOLS in options software packages. Any comments on how effective these are, what are the pitfalls etc? If you have a lot of trade alternatives, you actually have to THINK, and that may not always be desirable.

5. BACKTESTING. Any inexpensive/cost-effective way to backtest various option things, e.g. spreads etc.

6. “GAMMA SCALPING”. Can anyone explain this in one sentence or two, in human language? Among other things, it would be interesting to know if it actually works.

Is there a relatively painless way to trade options? If you have a view on at least one item from 1-6 above, please let me know. Many thanks!!!!!!!

RandomZen

P.S. FOR THOSE OF YOU WHO ARE ALWAYS IRONIC AND/OR ARROGANT, can you pls save your irony and/or arrogance for other threads. In the alternative, if you feel you have the right to sound snobbish for some reason, please attach your trading P/L for 2008.

Seriously, some people (like, for example, Tim Knight of Slope of Hope) can afford such a tone, because they are fully transparent in what they do, and their advice is useful.
 
Is there a relatively painless way to trade options?

Well, that depends on how you define "painless"!? If you mean risk-free then, no, without risk there's no return. If, on the other hand, you mean limited risk then, yes, options allow you you define your risk in advance.

All of the questions you raised have been discussed here ad nauseam, so I suggest you use the search button.

1. There's no edge per se in buying options vs. selling them.

You don't have to sell naked options to profit from a range, you can use limited risk strategies such as iron condors, which have been receiving a great deal of attention here lately.

2. Again, delta neutral strategies per se don't have a built-in edge, neither does dynamic hedging. However, it is possible to trade them profitably, you just have to find a way to do it.

3. For brokers/platforms check out the reviews as well as the search button. Everything has been discussed here already, including Optionvue. In my opinion, optionvue is overpriced.

4. Once again no tradefinder has a built-in edge. It's just a tool to help you find trade ideas.

5. Thinkorswim has a backtesting tool, which is free if you open an account with them.

6. Gamma scalping - buying a straddle and then using the underlying to delta-hedge it.

Use the search button, really!
 
1) Is there a relatively painless way to trade options?

Yes, trade on a simulator.


2) If you have a view on at least one item from 1-6 below, please let me know. Many thanks!!!!

Read what MTE said, again.
 
Quote from RandomZen:

Ok, thanks MTE !

Sounds like you have to know what you're doing. This may not be appropriate for everyone :mad:
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What did you expect?

Options trading is no different from anything else in life - you have to know what you're doing!
 
There is no painless way to trade options for a living. Trading for a living is a bitch. Very hard work, and unavoidably there are times when nothing goes right and you take losses. If you know everything there is to know about options, that just gets your foot in the door - it's the minimum. Then you get to compete with platoons of MIT grads with infinite teraflops of computer power at their disposal. That's not to say you can't find opportunities they've overlooked or even created. But don't expect it to be easy.

I posted an article recently on scalping gammas. Here it is again: http://www.elitetrader.com/vb/attachment.php?s=&postid=2013852 It's more than a sentence or two but if anyone is not willing to take the time to read such articles and mull them over and understand them, then option trading is probably not for them.

To be clear - scalping gammas IS NOT a stand-alone approach to consistent profits in options. Neither is any other approach or strategy. They are each no more than a tool in the toolbox, to be left alone most of the time and to be taken out and used only when appropriate.
 
DMO and MTE

I have been trading with thinkorswim for some 2+ years now and the platform is great. But the commissions prevent you from gamma scalping profitably and limits your ability to delta hedge in a tight band.

I've tracked my gross versus net P&L and the commission picture is pretty ugly.

If we could have the technoogy of thinkorswim combined with the commissions of IB it would be amazing.

I'm guessing you guys trade in some sort of professional/prop type of environment, yes?
 
DMO, thanks for your thoughts!!!!

Yes, I have seen your posts on scalping gammas, very interesting.

I've downloaded the article earlier. Options nomenclature is a little intimidating, it took me almost a year to "get" delta, let alone "gamma". I will study the article, though, because I do want to learn more about options, an exciting way to trade.

Trading for a living: I agree.

'Trading for a living' may well be a myth, although a very persistent and tempting one. In any event, it's probably a good idea to have some independent cash flow, other than trading, to be confident in your trading.

It may well be (although I'm not 100% sure) that in trading - be it options, futures or stocks - the odds are stacked against you, over the long run. Your chances are better, if you are trading in the direction of the trend, and not day trading.

Options: I don't know, that's why I'm asking :p

Very strong evidence in support of that is what's happening to the hedge fund industry. A lot of VERY sophisticated speculators with tremendous firepower, are blowing up.

I'm not saying they didn't make money, they did (although, they speculated with other people's money, not their own). But it has a limited life-cycle, looks like.

One notable exception is Linda Raschke, who does day trading, among other things, and she's been in the business for a long time. It looks like she's still pretty successful. It's probably a matter of intuition: she knows what works, and what doesn't, a large percent of the time.

I don't know how she does it, I just don't know . ..

RandomZen
 
Quote from Diamond Geezer:

DMO and MTE

I have been trading with thinkorswim for some 2+ years now and the platform is great. But the commissions prevent you from gamma scalping profitably and limits your ability to delta hedge in a tight band.

I've tracked my gross versus net P&L and the commission picture is pretty ugly.

If we could have the technoogy of thinkorswim combined with the commissions of IB it would be amazing.

I'm guessing you guys trade in some sort of professional/prop type of environment, yes?
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Most of the information tools I use are Excel spreadsheets using Hoadley add-in functions and sometimes XLQ functions as well.

When I first came to ET I read some of the messages and thought wow, I guess I'm the only one who finds trading to be a challenge. I really have xflat to thank for opening my eyes to the strange phenomenon of "internet strut" - people claiming effortless profitability that is probably exaggerated at best. He kept pointing out you can't believe everything you read here - and that is undoubtedly true.
 
Quote from RandomZen:



'Trading for a living' may well be a myth, although a very persistent and tempting one. In any event, it's probably a good idea to have some independent cash flow, other than trading, to be confident in your trading.

Very strong evidence in support of that is what's happening to the hedge fund industry. A lot of VERY sophisticated speculators with tremendous firepower, are blowing up.

One notable exception is Linda Raschke, who does day trading, among other things, and she's been in the business for a long time. It looks like she's still pretty successful. It's probably a matter of intuition: she knows what works, and what doesn't, a large percent of the time.

I don't know how she does it, I just don't know . ..

RandomZen
More...

Are you absolutely certain she does? Unless she calls out all her orders as she puts them in, then count me a skeptic. I once checked out a trading room of a day trader who is probably much better than the average - but still, he often refused to show his orders ahead of time. After the futures went his way a few ticks, he informed us what he had done. If I could get retroactive fills now and then, my performance would be a better too!

I second your point about hedge funds. And keep in mind that the fact that Bernie Madoff claimed consistent profits with a relatively simple strategy was enough to convince many smart people that, with certainty, he was a fraud.
 
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