success in stocks = success in options?

cashmoney69 · May 19, 2009

If someone is rather successfull in trading stocks, will trading options come easy, or easier, or is it a whole new game entirely?

what are the best 5 strategies for new option traders?

thanks cm

spindr0 · May 19, 2009

There's no simple answer. Trading is trading but options are different than equities (IV, delta, tiime decay, leverage, et.) so there's a learning curve. Some find it easier, some find it harder.

IMHO, one thing is for sure... active trading experience with equities (or anything else) is a big plus to have under your belt if you're going to tackle options.

I believe directional trading of stocks is a lot cleaner and removes a lot of the aforementioned hassles but options enable you to really fine tune your P&L objectives.

There's no best option strategy unless you consider making money one (g). Each strategy performs best under certain market conditions so it's the selection process that's the key. And obviously, regardless of the strategy chosen, money management is paramount.

IV_Trader · May 19, 2009

Quote from cashmoney69:

If someone is rather successfull in trading stocks, will trading options come easy, or easier, or is it a whole new game entirely?

what are the best 5 strategies for new option traders?

thanks cm

If you hitting a win/loss rate of 53/47 ( on 1:1 R/R) or higher , look into old riskarbâs posts. When XYZ is at 52.5 , short 50 straddle 1 to 1 ( not delta neutral) if you are bearishâ¦you will make great if stock hits 50 OR lose less if stock goes to 55

dagnyt · May 19, 2009

Quote from cashmoney69:

If someone is rather successfull in trading stocks, will trading options come easy, or easier, or is it a whole new game entirely?

what are the best 5 strategies for new option traders?

thanks cm

SPIN is right in that trading is trading, but you use a whole different set of information to trade options. You must understand that options do not always behave as you anticipate. For example, how would you like to own calls, see the stock jump form 50 to 55 overnight and still lose money on your calls? It happens far too often.

You want to understand how options work before getting involved.

Mark
http://blog.mdwoptions.com/

cashmoney69 · Aug 5, 2009

i talked to trade king. i can open an options account but only get approved for simple calls and puts. nothing fancy.

My trading has still been going well sinse my first post but i have some more q's.

1. how does a option traders figure out how much time they need to buy in order for the trade to work?... for example, I'm bullish on FSLR. I think it can easly go back up to 170.00 however how do i figure out WHEN?

2. I decided to check dec calls for fslr and to my surprise 170 calls have the highest open interest. Are calls/puts with the highest open interest always the best bets, as this means that most people think that 170 is the top

3. How do people manage stops with options?

4. are the greeks REALLY that important? as long as your trade gets to or above the strike in the givin time, you win. Are there any successfull traders here that dont watch the greeks?

thanks.

dagnyt · Aug 5, 2009

Quote from cashmoney69:

i talked to trade king. i can open an options account but only get approved for simple calls and puts. nothing fancy.

That is very limiting. You will not like it. Buying options and profiting is a very, very difficult proposition. You MUST learn far morea bout options before being ready to trade them. Honest.

.

1. how does a option traders figure out how much time they need to buy in order for the trade to work?... for example, I'm bullish on FSLR. I think it can easly go back up to 170.00 however how do i figure out WHEN?

Anyone who knows the answer to this question is already a billionaire.

2. Are calls/puts with the highest open interest always the best bets, as this means that most people think that 170 is the top

OI tells you nothing important.
No, it's not always the best bet. maybe it's the best bet for a seller. Maybe for a buyer. Probably neither.

3. How do people manage stops with options?

Very difficult. I suggest a stop order on the stock, not the option price. Even then, you will sell 'ata the market' and get a horrible fill

4. are the greeks REALLY that important? as long as your trade gets to or above the strike in the givin time, you win. Are there any successfull traders here that dont watch the greeks?

The Greeks are used to measure risk. And manage risk. If you don't care about risk, fine. But that is shortsighted. The whole power behind trading options is the ability to manage risk

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Mark
http://blog.mdwoptions.com

Wilt · Aug 5, 2009

Quote from cashmoney69:

i talked to trade king. i can open an options account but only get approved for simple calls and puts. nothing fancy.

My trading has still been going well sinse my first post but i have some more q's.

1. how does a option traders figure out how much time they need to buy in order for the trade to work?... for example, I'm bullish on FSLR. I think it can easly go back up to 170.00 however how do i figure out WHEN?

2. I decided to check dec calls for fslr and to my surprise 170 calls have the highest open interest. Are calls/puts with the highest open interest always the best bets, as this means that most people think that 170 is the top

3. How do people manage stops with options?

4. are the greeks REALLY that important? as long as your trade gets to or above the strike in the givin time, you win. Are there any successfull traders here that dont watch the greeks?

thanks.

If you can trade options, you can trade stocks; not the other way around. The two are inextricably linked and options are the more important of the two.

1. Backtest your strategy.
2. Don't know. Never seen any consistency with high open interest strikes. Sometimes they end up well, sometimes they're made worthless. Open interest doesn't really matter anyway. If the market makers are showing reasonable size and spreads, you will get filled.
3. Down 50% will rarely be just a headfake. Just cut and move on. Good positions don't make you eat shit, period. You should be weary if you're resolve is severely tested. (Over 30% drawdown)
4. The greeks are important. Mainly Delta and Theta. You need them to decide if the price of the option is reasonable based on your expected stock move.

BTW, I'm speaking from a long calls/puts perspective only. I only play options on sure things and am not floating around the market hoping with a general thesis. I don't know how to hedge with options and that would take the fun and return out of options trading. If you want to not have to be right, trade the stock, it doesn't expire.

Wilt

spindr0 · Aug 5, 2009

Quote from cashmoney69:

1. how does a option traders figure out how much time they need to buy in order for the trade to work?... for example, I'm bullish on FSLR. I think it can easly go back up to 170.00 however how do i figure out WHEN?

You do that just like you figure out the winner of the Kentucky Derby or the final score of the Steeler's game or this week's winning lottery numbers

Really, if someone actually knew how to do that, do you think they'd share it?

2. I decided to check dec calls for fslr and to my surprise 170 calls have the highest open interest. Are calls/puts with the highest open interest always the best bets, as this means that most people think that 170 is the top

No, it means that FSLR spent some time around 170 and a lot of clever people sold those calls and a lot of bagholders bot em. OI predicts nothing.

3. How do people manage stops with options?

I dunno, I don't use em. The people that use em probably open up the STOP ORDER window, click that appropriate boxes, enter a price and submit it

4. are the greeks REALLY that important? as long as your trade gets to or above the strike in the givin time, you win. Are there any successfull traders here that dont watch the greeks?

I'm primarily a volume stock trader but when I do earnings plays, I am aware of IV and delta for the set up but I don't use them once it's on. I think and trade in the price domain.

erol · Aug 5, 2009

i would say long call give yourself minimum 3 months to be right, sell 1 month left no matter where the underlying is.

if you're buying OTM, it has to really move for you to make money...

the more time passes, the higher your break-even price is...

Other bullish strategies include ITM calls, or Bull call spreads.

aside - WARNING, PERSONAL OPINION:
with FSLR's rebate program, and the aggressive pricing from chinese manufacturers, I would say any bet on direction is speculation at this point... hard to say! They beat earnings estimates, but shares still took a beating.

JohnGreen · Aug 5, 2009

IMHO, options are much more complex than stocks, probably by an order of magnitude or more, simply because for every stock that has options listed for it, there are a multitude of options available with different "types" (calls and puts), strikes, and time frames. The possibilities are enormous. If you want, you can easily make a position that basically duplicates the stock returns or set up payoff and risk profiles that involve multiple strikes, ratios and expiry dates, as well as mixing puts and calls in a huge number of strategies, some of which are commonly used and have names and many others that do not. There are literally thousands of possibilities for every stock or index.

The time factor makes being outright long options a pretty tricky business because the stock or index must rise within that time frame in order to make money, and sometimes even that is not enough. If the options are OTM, then often the time decay wipes out the potential gains if the stock is rising slowly. Changes in IV also can dramatically affect the prices as well. It is been often observed that as stocks and indexes rise, IV typically falls, making owning calls even more risky than a newby might expect them to be. (Check out dmo's video on this. He has also posted an impressive graph fairly recently showing the relationship between the VIX and the SPX price over time)

The options trade also involves significantly more care in the purchase and sale (Bid-ask) dimensions. Unless the options are heavily traded (and this only applies to a select few stock options like Apple), the bid-ask spread can be a large percentage of the purchase price, making it even more difficult to be profitable. Options traders need patience and better nerves for that reason alone.

I don't say this to discourage people because I personally find options fascinating and they are also profitable for me, but I don't want people to think that they can be treated lightly. Most good option traders have put a great deal of time and effort into the process and use their knowledge to effectively position themselves for success.

Study and learn. There are many good books out there and lots of free stuff on the internet. Start with the CBOE, and have a good look at Mark's site. Do not pay thousands of dollars for seminars! There is no magical formula that guarantees success in this business. Best wishes.