Trading philosophy: Options are just different, Why?

O

OddTrader

Options requires different trading philosophy, Why? What are they?

Here is one: You can be right on direction, and you still lose money! Why?
 
I don't think options require a different trading philosophy, they just have additional variables that other instruments don't have and which must be taken into account when trading them.ž

These additional variables (i.e. volatility, time,...) are precisely the reason you can be right on the direction and still lose money.
 
Quote from OddTrader:

Options requires different trading philosophy, Why? What are they?

Here is one: You can be right on direction, and you still lose money! Why?
More...

You can also be wrong on the direction and still make money!

Joe.
 
Quote from OddTrader:

Options requires different trading philosophy, Why? What are they?

Here is one: You can be right on direction, and you still lose money! Why?
More...

When you trade stocks, you buy stuff you think is moving higher. It's not complicated.

Timing, or which stocks to buy, or how much to pay are equally important no matter whether you trade stocks or options.

But options trading involves so much more. That's because the price of an option depends on other factors, besides the stock price. This is a concept that rookies miss - and as a result, often choose the wrong strike price or pay far too much for an option.

That overpayment can readily result in a call buyer taking a loss when the stock moves higher. Or the call buyer loses when it takes too long for the stock to make its move.

If you don't understand how options work, then it's very foolish to trade them.

The philosophy of trading also differs because options allow the trader to magage risk far more carefully than the stock trader can.

I've blogged about some of my option philosophy ideas. the series is still ongoing.

Mark
http://blog.mdwoptions.com/options_for_rookies/2009/06/philosophy-of-options-trading.html
 
When you take your options skills to a higher level more often then not you wont be trading direction or trying to time the markets from a directional standpoint
 
Trading stocks or futures is two-dimensional. It goes up or it goes down. You're either long or you're short, right or wrong.

Options have multiple added dimensions. Direction of the underlying is just one dimension; IV, time and gamma are additional dimensions.

So I don't think the underlying philosophy is different - success is still based on discipline, patience and risk management. But the options game is far more complex, with many more dimensions and aspects to each trade and each position
 
I find that options give me better metrics to work with than a stock by itself does. I can get a better feeling for risk, reward and time frames. I also find it much easier to be emotionally detached.

- Ray
 
Thanks Fellows.

Would like to hear your comments on the following:
http://www.elitetrader.com/vb/showthread.php?s=&postid=2474205#post2474205

Quote from ContangoJoe:

Most people who successfully trade options on futures do it as part of a more complex strategy; not just buying/selling calls and puts. I have traded a lot of options but the penalty for being wrong is pretty high due to the cost of paying the spread as a percentage of the cost of the trade; and due to the time decay factor that you mentioned. If you trade the actual contract then you can limit your losses more effectively and live to trade another day.

The more complex strategies I mentioned often include something like buying index puts while being long in stock. It allows you to to go to near zero reserve cash if you want to make a big bet, but still hedge with a much smaller amount of cash.
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I look at trading options this way. Options are like insurance policies. You can either be the person buying the insurance, or your can be the insurance company selling the options. I prefer to be the insurance company in this case.
 
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