Thanks, and how long did it take you to become consistently profitable.
Swing trading using options
- Thread starter Pkay
- Start date
Ok thanks, really appreciate the time you've taken to help me out. I've learnt plenty.
"For example there is a man who is quite well know who says that options is the easiest way for newbies to get started for 3 reasons:"
1. Low entry cost - Yeah, you're basically borrowing someone else's money to place the trade. Since no one lets you put a lot of money at risk for free, the cost of insuring that money is built into the option premium.
2. Leverage - Related to point 1, that leverage isn't free.
3. Risk is limited and known at the onset (if you are buying options) - There's a cost for that limited risk.
I trade options a lot more than I trade stock. In fact, I mostly just buy or sell stock to hedge my option positions. But keep in mind that in order to make money selling options, you must be able to generate returns in excess of the premium paid or premium lost due to theta decay and volatility contraction during the time the trade was on. If you buy options, you're basically trading a lower probability of profit for leverage or capped risk. If you short options, you're doing the opposite -- taking on a lot more risk (potentially unlimited risk for short calls), but raising your probability of making money.
If I only had $2000 to trade with...I wouldn't trade it. I'd focus on my job and wait until I had more money saved up. When I had enough money saved up, I'd start selling naked cash-secured put spreads and covered calls. Maybe some credit spreads / iron condors if I can find something with really high implied volatility.
1. Low entry cost - Yeah, you're basically borrowing someone else's money to place the trade. Since no one lets you put a lot of money at risk for free, the cost of insuring that money is built into the option premium.
2. Leverage - Related to point 1, that leverage isn't free.
3. Risk is limited and known at the onset (if you are buying options) - There's a cost for that limited risk.
I trade options a lot more than I trade stock. In fact, I mostly just buy or sell stock to hedge my option positions. But keep in mind that in order to make money selling options, you must be able to generate returns in excess of the premium paid or premium lost due to theta decay and volatility contraction during the time the trade was on. If you buy options, you're basically trading a lower probability of profit for leverage or capped risk. If you short options, you're doing the opposite -- taking on a lot more risk (potentially unlimited risk for short calls), but raising your probability of making money.
If I only had $2000 to trade with...I wouldn't trade it. I'd focus on my job and wait until I had more money saved up. When I had enough money saved up, I'd start selling naked cash-secured put spreads and covered calls. Maybe some credit spreads / iron condors if I can find something with really high implied volatility.
Good advice for OP.
I think this question would be interesting if it was asked in a different way. If you're experienced enough and profitable, could you trade with a $2000 account and still be profitable?Good advice for OP.
I realize the post started out with options, but futures have been mentioned so I will continue using futures for the example. If we assume a futures broker who had a $500 margin, this would leave $1,500 to play with before you go bust. So now the question is, could any of the traders here trade in such a way that they could double the account before losing the $1500?
If we look at the math of this problem, $1,500 is 30 ES points. Some people may very well trade with a 2 point stop, so this would allow at least 15 trades to be put on, even if each of them stops out for 2 points. Assuming we are dealing with a profitable trader, its highly unlikely that you would hit 15 losers in a row. In fact, I would suspect that most profitable traders are hitting at least a 40% win rate on a hopefully much bigger profit vs. loss. Sure you can have 3 or 4 losers in a row, but I don't think its unreasonable to say that most profitable traders are profitable after 15 trades.
Now of course you aren't going to get rich from this, especially since you're perhaps only averaging a few ticks profit per trade (averaged out over many trades including wins and losses) But the point is that theoretically, if you knew what you were doing already, its not an impossible task.
Of course, for a beginner, even if you're doing well in sim and then go live you will more than likely lose, and if you have no idea what you're doing but have beginners luck you will also more than likely lose. So the odds are really stacked up against you. But mathematically, its not an impossible task.
Thanks, this is great advice and l really appreciate it. I hear what you are saying about trading options as both a newbie and small account holder.
Weighing it all up l think that I'll trade micro spot forex live. This way I can learn in a live environment and keep risk low.
Profitable every year, but it was not due to skill or edge. In this bull market I just used options as leverage. Like Warren Buffett said: Only when the tide goes out do you discover who is swimming naked; it is me.
I am trying very very very hard to learn how to trade volatility/nondirectional instead of delta/theta.
A 2000$ investment to learn is not a bad idea, build up from there profitably from day one is extremely difficult.
My two cents if you still want to give it a go:
Buy itm, not ditm but to a strike where delta is not so low, so that you can profit from movement before expiration.
Buy time. I think that if you want to swing trade with option you should buy some extra time, and plan to close at least 1 month before expiration. Stay on most liquid options so that even the spread is not too high. Trade the option itself like if it was a stock or spot trade, using a decent risk/reward and risk allocation.
Your capital is low and you will probably have to risk 5-10% per trade to be on liquid options itm for a few months expiry. Good luck
Ps: don't short any with that sort of capital.
My two cents if you still want to give it a go:
Buy itm, not ditm but to a strike where delta is not so low, so that you can profit from movement before expiration.
Buy time. I think that if you want to swing trade with option you should buy some extra time, and plan to close at least 1 month before expiration. Stay on most liquid options so that even the spread is not too high. Trade the option itself like if it was a stock or spot trade, using a decent risk/reward and risk allocation.
Your capital is low and you will probably have to risk 5-10% per trade to be on liquid options itm for a few months expiry. Good luck
Ps: don't short any with that sort of capital.
Last edited:
Thanks @cesfx this is really fantastic advice, I really appreciate it.
What you advocate makes plenty of sense but also shows me just Howe much l have to learn as I am not too clued up on terms like delta.
For instance, why should I look to buy delta that is not too low?
Since you didn't get a reply I'll chime in real quick. I'm far from an experienced trader and I fell victim to the trap of logic that is slewed about by people selling subscriptions or benefiting from the trades they recommend. You absolutely need to read about Option Greeks, you need to understand them and how they work, how they will change as the underlying changes, how time changes, and how volatility changes. There are MANY strategies and ways Options can be used/deployed.
Delta, in short, is how much a given option will change in price with a $1 move in the stock. Most people with small accounts will try to purchase options that are far OTM (read Out of the Money, i.e. far from the stocks price) because they are cheap but this gives you very little room for success. A lot of things can work against you (you'll understand once you read up on the greeks) like time and volatility, so buying an option that is ITM, (read In the Money, above or below the stocks price in the PROPER direction) which will have a higher delta level due to gamma and stock movement. When you buy a call, as the stock moves up, delta increases the options value and gamma will increase the delta's value, so it compounds on itself. When you buy an ITM option, delta is already going to be above 50, so you'll get over 50% of the movement in the stock and it will have less time value so time decay will not affect you as much. Normally it is recommended to purchase around .7-.8 delta (this is subjective) but with $2k cesfx is probably recommending around a .6 delta since it will be cheaper but still hold a lot of the same characteristics.
I'd recommend you open up a ThinkorSwim PaperMoney account to Sim Trade on while you learn about options. While you sim, try as best you can to imagine it's your real money, but also play like it's not, put on a lot of trades as mentioned earlier, good, bad, ugly. Develop a strategy for identifying trades, closing trades, and if you're wrong how to manage a trade. With long options a stop loss will be hard and I've seen it recommended to be comfortable taking a 100% loss on your investment. If you can't do that, your size is too big, and that will be a real concern with only a $2k account... I know from experience. You can also look into Debit spreads which will reduce your debit to get in, reduce your profit, but allow you to live longer.