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Trading Options... What I've learned (the hard way)

  • #21
  • Aug 31, 2008 8:24am Aug 31, 2008 8:24am
Quoting shahrukhkhan
I have zero expirience in options trading,,,,,i am going to try the demo of TOS and read options course buy geroge fontalis,,,,,

honestly i dont think i will understand untill i try and burn some paper money,,,,

there are too many factors,,,,deltas,,,IVs,, so this is nothing like forex,,,
Hey shahrukhkhan,

If you're just starting, good luck man!!

- Read the book you mentioned. Remember, it's ONLY a reference. Each book will give you something, but it represents the ideas of the author. Your style could be completely different. FIND YOUR STYLE.

-Go to CBOE and view their online tutorials. Read about contract specs, familiarize with options lingo.

-As soon as you read your book, and are comfortable with the lingo, bookmark a page like optionmonster (or the cboe page). Check out the options for different underlying assets, and see how they are priced.

-Start papertrading IMMEDIATELY. Get prices from previous post sources, and papertrade your strategy. See what happens. Remember: YOUR STRATEGY IS THE MOST IMPORTAND FACTOR (ok, along with your ego).

-Do NOT get into much detail with deltas, thetas, IV and all of that. They ARE important but not for now. For a newcomer, the most important figures are OpenInterest (you need liquid contracts), and Expiration. When you are proficient in trading, you will have the ability to decide how big part of your strategy will IV and greeks will be.

famagusta
  • #22
  • Sep 1, 2008 7:54am Sep 1, 2008 7:54am
Famagusta,,,,,,,can u tell me whihc stock screener to use? how to difrenciate the up trending stock and downtrending stocks,,,,,,

what do u think is best to do,,,,,,,,,,buy 6 months options and take a limit for take profit only 0,1 to 0,2 with many contracts ,,,or look for 1 dollar take profit but 1 contract,,,,
  • #23
  • Sep 3, 2008 10:49pm Sep 3, 2008 10:49pm
I have been trading U.S. stock options with mixed success, and here's what I've learned along the way:

1. Do not bother trading options if all you have to play with is $2K - try your luck at online poker instead.

2. Do not bother trading options if all you know how to do is going long on calls and puts. As the thread starter correctly pointed out, options expire at a predefined date, and their time value component deteriorates as that date approaches. If the underlying doesn't go your way soon enough, your best hope on a long option position will be breaking even. Take the time to understand option spread strategies, wingspreads, buy-write combos etc. Buying and holding long calls/puts hoping the underlying goes your way is NOT proper risk management when it comes to options!

3. As far as identifying a losing trade - I remember jumping out of my trades with a loss all too often thinking the option is a loser, only to see the stock drop like a rock (or skyrocket) a week later, which would have made the position profitable if I had held on to it longer!!! This is why it is important to learn to be the option seller, not just a buyer, because when you're writing options time is working for you, and not against!

4. In terms of the absolute lowest risk strategy, you could start out by picking a stock you are confident in (long term), going long or short on it, and writing an out of money option in the opposite direction. This way, you pocket the option's premium, while limiting your risk to being wrong on the stock's direction ONLY. The obvious advantage here is that stocks don't expire, unlike options, so even if you're wrong in the short term (by option's expiration), you have decent chances of still making money on the trade (and the written option's premium is yours to keep!). If the stock happens to bring the written option into the money - no big deal, your profit is = stock sale price - stock purchase price + option premium.

5. Finally, if you get into option writing, you do need a margin account to trade this way (regardless of whether you write naked contracts or not).
  • #24
  • Sep 5, 2008 3:16am Sep 5, 2008 3:16am
Quoting Subdude
I have been trading U.S. stock options with mixed success, and here's what I've learned along the way:

1. Do not bother trading options if all you have to play with is $2K - try your luck at online poker instead.

2. Do not bother trading options if all you know how to do is going long on calls and puts. As the thread starter correctly pointed out, options expire at a predefined date, and their time value component deteriorates as that date approaches. If the underlying doesn't go your way soon enough, your best hope on a long option position will be breaking even. Take the time to understand option spread strategies, wingspreads, buy-write combos etc. Buying and holding long calls/puts hoping the underlying goes your way is NOT proper risk management when it comes to options!

3. As far as identifying a losing trade - I remember jumping out of my trades with a loss all too often thinking the option is a loser, only to see the stock drop like a rock (or skyrocket) a week later, which would have made the position profitable if I had held on to it longer!!! This is why it is important to learn to be the option seller, not just a buyer, because when you're writing options time is working for you, and not against!

4. In terms of the absolute lowest risk strategy, you could start out by picking a stock you are confident in (long term), going long or short on it, and writing an out of money option in the opposite direction. This way, you pocket the option's premium, while limiting your risk to being wrong on the stock's direction ONLY. The obvious advantage here is that stocks don't expire, unlike options, so even if you're wrong in the short term (by option's expiration), you have decent chances of still making money on the trade (and the written option's premium is yours to keep!). If the stock happens to bring the written option into the money - no big deal, your profit is = stock sale price - stock purchase price + option premium.

5. Finally, if you get into option writing, you do need a margin account to trade this way (regardless of whether you write naked contracts or not).
Good post subdude,

Option writing is a very good way to make money. After all, at the end of the day the dealer has always more money than the players!!

Judging from your experience (as you mention in your post), you propose a "writing" (selling) option strategy. I agree that writing options is a much safer strategy. I also agree that plain vanilla is much more dangerous.

Remember though, I am trying to speak primarily to people just starting trading options. Such a trader, has to understand first the mechanics of an option to proceed to more complex strategies. When I say "understand", I don't mean to just read a book or a post, and know the definition of a play. I mean literally putting their money in an actual trade, and manage the position. This (as you know) is way different from paper trading.

A starter must understand how fast his contract value diminishes after a bad call. He must learn money management to protect his cash. Most importantly of all, he must understand that in order to be a successful options trader one must have A PROVEN AND SUCCESSFUL METHOD of picking up trends in any market. You see, option writing gives a novice a "false" impression in the sence that he gets money in his account immediately, in contrast to option buying where he "pays" money to buy. This impression, makes novices more relaxed and more careless (in my experience). It makes them delay their decisions, because they simply have some premium in their accounts. The results are most of the time CATASTROPHIC.I have seen traders losing much more than they can afford from option writing, houses bank accounts, their quality of life.

A trader must learn how to walk before learning to fly. Therefore, a trader must learn to be VERY STRICT in his/her decisions and CUT immediately a bad position. This is why I don't reccomend option writing for a novice. It's that false sence of security that the premium gives, and the nature of man who is many times unwilling to admit that a position is going the other way.

Other than that, YES option writing is a successful way to trade. I personally use credit spreads for many of my trades. But not for a novice, in my opinion.

famagusta
  • #25
  • Sep 5, 2008 3:58am Sep 5, 2008 3:58am
A few days ago, I received a PM from a guy asking about a trading system a company sells. Without mentioning names, I'd like to post my answer here, as I think would serve us better.
I cannot tell you what to do. I can only tell you my opinion. Most of gurus make their living from selling their product. Most of them do not care about making you rich. I can tell you "I have a bulletproof system that can give you 80% success rate, but I want 2000 dollars for it". You pay me and I tell you "OK, this is what you will do. Take a chart, and plot the 200 EMA (exponential moving aveage) on it. Each time the bar closes below it, you sell (or short). Each time a bar closes above it, you buy. By the way, thanks for the 2000USD you sent me. I needed a new mast for my sailing boat!!"

You see, the problem with most of these cases is that even if the strategy is actually profitable, NOBODY says that you will make money.
- You might pick a trend, but enter too soon or too late and be killed by the time factor.

-You might buy too expensive.

-You might buy a short term strategy, but fail because you are a longer time-frame trader.

Last but not least, be very careful when you see a site with photos of people clapping, too many "thank you" comments from Joe D. from Los Angeles ( who is that guy anyway), and people who GUARANTEE winning percentages. This is a red flag, because IMHO, guarantees and derivatives don't mix.

famagusta
  • #26
  • Sep 5, 2008 12:01pm Sep 5, 2008 12:01pm
Thanks for posting about Stock Options. This is my REAL BREAD and BUTTER trading. I have traded FOREX from time to time, but the most income I make is off Options.
I use two methods: First is Credit Spreads (once a month), Second is Day trade the NDX right after the opening of the market has setteled down.

On the Credit Spreads I have mainly traded GOOG. I know it is expensive, but, if you start on a Thursday or Friday of the first week of the month, and look out 50 points from the current price, you can see some good opportunities.
Just avoid this during an earning release month.
(Todays ex. GOOG trading at 445, the 500c option is 1.10 and the 510c is at .65) With 10 contracts that will give you approx $350 profit at exp.
This is a rather safe way to trade.

The NDX trading, I usually will look at the market to see if it gaps at the open. The gap will "almost always" fill back in during the day.
I will watch the market for about 20-40 min waiting for some support and resistance to show itself. Place a FIB Retracement on those 2 points and then I will have my target ranges for when to buy my call or put.
I always try to buy 10 options on the rebound off one of the FIBs. Cash it out once it is in positive territory, and before it hits the next FIB level.

Just a side note...I do not use the FIB Retracement like most others.
Instead of the "0" on the LOW and the "100" on the HIGH, I will streach it beyond that. Place "0" on the LOW and place the 38% line on the HIGH.
It will give you a projection of where the next likly S/R point will be so you can plan your exit before it hit that.
Just my 2 cent here....Good Trading to all.
  • #27
  • Sep 5, 2008 12:24pm Sep 5, 2008 12:24pm
Quoting jimbo61
Thanks for posting about Stock Options. This is my REAL BREAD and BUTTER trading. I have traded FOREX from time to time, but the most income I make is off Options.
I use two methods: First is Credit Spreads (once a month), Second is Day trade the NDX right after the opening of the market has setteled down.

On the Credit Spreads I have mainly traded GOOG. I know it is expensive, but, if you start on a Thursday or Friday of the first week of the month, and look out 50 points from the current price, you can see some good opportunities.
Just avoid this during an earning release month.
(Todays ex. GOOG trading at 445, the 500c option is 1.10 and the 510c is at .65) With 10 contracts that will give you approx $350 profit at exp.
This is a rather safe way to trade.

The NDX trading, I usually will look at the market to see if it gaps at the open. The gap will "almost always" fill back in during the day.
I will watch the market for about 20-40 min waiting for some support and resistance to show itself. Place a FIB Retracement on those 2 points and then I will have my target ranges for when to buy my call or put.
I always try to buy 10 options on the rebound off one of the FIBs. Cash it out once it is in positive territory, and before it hits the next FIB level.

Just a side note...I do not use the FIB Retracement like most others.
Instead of the "0" on the LOW and the "100" on the HIGH, I will streach it beyond that. Place "0" on the LOW and place the 38% line on the HIGH.
It will give you a projection of where the next likly S/R point will be so you can plan your exit before it hit that.
Just my 2 cent here....Good Trading to all.
Thanks for posting here,

As the thread is meant to have an introductory nature for those starting with options, I plan to go gradually from elementary into more advanced plays.

I hope I have the time and motivation to do so.

famagusta
  • #28
  • Edited 12:34pm Sep 5, 2008 12:31pm | Edited 12:34pm
One last post with todays trade I did.
Just an FYI..

http://i38.tinypic.com/1693wbc.jpg

http://i34.tinypic.com/2nh2lo0.jpg
  • #29
  • Sep 5, 2008 1:12pm Sep 5, 2008 1:12pm
Since you post an intraday chart, here's a different perspective for the same underlying.

- Enter at 19 or 20 August when the lines cross. Buy (long) put from 1910 to 1950 (depending on your style or ability).
- Strike of put 100-200 points below THE CROSS OF THE LINES (not below the price you purchased).
-Today, your contract is becoming at-the-money if you bought 200points below strike price. If you bought 100 points below strike price you are already almost 100 pts in-the-money.

Question: How much would you have made from 1 contract only?


http://i516.photobucket.com/albums/u...avas/1copy.jpg
  • #30
  • Sep 5, 2008 2:27pm Sep 5, 2008 2:27pm
Quoting famagusta
Since you post an intraday chart, here's a different perspective for the same underlying.

- Enter at 19 or 20 August when the lines cross. Buy (long) put from 1910 to 1950 (depending on your style or ability).
- Strike of put 100-200 points below THE CROSS OF THE LINES (not below the price you purchased).
-Today, your contract is becoming at-the-money if you bought 200points below strike price. If you bought 100 points below strike price you are already almost 100 pts in-the-money.

Question: How much would you have made from 1 contract only?


http://i516.photobucket.com/albums/u...avas/1copy.jpg
I made $1360 on the 10 contracts today. That would be only $100 after commissions.($19.98 each way).
I have a 20K account to work with.
  • #31
  • Sep 8, 2008 9:49am Sep 8, 2008 9:49am
Today was another day with the same opening pattern that would have a profitable morning. Same sceneroi...just waited until the S/R showed it self and placed the "Streched" Fib at the two points for my targets.
This just shows how you can pick out the option opportunities that the market gives you.

http://i35.tinypic.com/2wqy6x1.jpg

http://i38.tinypic.com/29xxmdj.jpg

$660 profit after comm.
  • #32
  • Sep 8, 2008 2:01pm Sep 8, 2008 2:01pm
Quoting jimbo61
I made $1360 on the 10 contracts today. That would be only $100 after commissions.($19.98 each way).
I have a 20K account to work with.
The question was not referring to your system jimbo. The question was rhetorical and was referring to the daily play I posted with the graph.

Easy on the options "slang". This is NOT an advanced options thread.

famagusta
  • #33
  • Nov 12, 2015 10:34pm Nov 12, 2015 10:34pm
Great information for the beginner in option trading (me, in this case ). I have been thinking about diversifying into other markets and this is just what I needed to start learning options.

Especially the 12 tips on the first page - great stuff. Some of it makes sense instinctively after so many years on Forex but seeing it laid out, knowing it is the result of hundreds of hours - if not thousands - in front of the options market is just a-m-a-z-i-n-g for me.

My only regret is that I am six years too late to have a conversation with famagusta.

Now to climb the learning curve...
  • #34
  • Apr 2, 2016 4:35am Apr 2, 2016 4:35am
Options Trading 101: source - 16 Free Stock Market eBooks - http://www.swing-trade-stocks.com/e-books.html
Attached Image (click to enlarge)
Click to Enlarge Name: Option Trading 101.PNG Size: 53 KB
Attached File(s)
File Type: pdf Options Trading 101.pdf   703 KB | 6,157 downloads
TSLA: 30-Dec-22 123.18 // 16-Jun-23 260.54 **111.51%**
  • #35
  • Apr 2, 2016 12:20pm Apr 2, 2016 12:20pm
Quoting alexpi
Great information for the beginner in option trading (me, in this case ). I have been thinking about diversifying into other markets and this is just what I needed to start learning options....
anyone can learn to trade options, but it takes some time to get good at it. Check out dough.com and tastytrade.com for tons of content for the active options trader.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #36
  • Apr 10, 2016 6:35pm Apr 10, 2016 6:35pm
hello famagusta
i have traded before without proper knowledge of binary option and lost everything
i then marked binary option like no go area and refused to believe that people can earn money
from binary option, i thought is a game of luck.

I really want to know how to trade binary option, i have been reading education materials online about how to trade binary but it is too
hard for me to understand. i which God could send someone like you to coach me on binary option.
i will be very glad if we can communicate with whatsap or bbm
  • #37
  • Edited Apr 16, 2016 12:41pm Apr 15, 2016 4:59pm | Edited Apr 16, 2016 12:41pm
Free Options Education - http://www.optionseducation.org/content/oic/en/options_education/program_overview.htm
Attached Images
TSLA: 30-Dec-22 123.18 // 16-Jun-23 260.54 **111.51%**
  • #38
  • Apr 16, 2016 1:32am Apr 16, 2016 1:32am
Thanks Phylo. It was helpful
  • #39
  • Apr 17, 2016 2:37pm Apr 17, 2016 2:37pm
Quoting presino
Thanks Phylo. It was helpful
Welcome
TSLA: 30-Dec-22 123.18 // 16-Jun-23 260.54 **111.51%**
  • #40
  • Mar 15, 2017 7:31am Mar 15, 2017 7:31am
Quoting presino
hello famagusta i have traded before without proper knowledge of binary option and lost everything i then marked binary option like no go area and refused to believe that people can earn money from binary option, i thought is a game of luck. I really want to know how to trade binary option, i have been reading education materials online about how to trade binary but it is too hard for me to understand. i which God could send someone like you to coach me on binary option. i will be very glad if we can communicate with whatsap or bbm
Hey Presino,

A small advice to you, binary options is a losing game for anyone to play, so stay away from it. It's pure gambling, so you'd better take your money to a casino. The odds in a Casino are better than binary options (They are still against you, with the exception of very few games requiring skill), but binary options, you are guaranteed to lose and never win at all in the long run.

To convince you, simple math, in binary options, the average payoff I have seen so far is around 75-80%. Let's say 80%. If we are talking about very short term moves (Like 1 minute or 5 minutes), the movements are highly random, so there is a 50-50 chance that the price of the instrument will go up or go down, from the price you hit to fix & enter the binary option trade.

50-50 chance and you get paid 80% profit if you are right and lose 100% if you are wrong. Do the math, the expectation would be 0.5x0.8 - 0.5x1.0 = -0.1. That means that in the long run, you are expected to keep losing 10% of your capital as you go. The casino advantage in roulette is 2.7% or 5.2% (Depending on the type of the game).

The more you go longer term, the more predictability you can have and the more trends you can follow & capture and the less the random moves, however, because all the binary options operators know this, they don't allow you to do binary options for long term and those who allow you to do that, they compensate that by lowering the payoff rate.

In a nutshell, they make the rules, so they will not lose, they might lose on 1 trade, but they will be winners in the long run, so stay away from those if you want to save your money. Trade something credible.

Nader
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