# How to learn about options...



## wayneL (8 September 2006)

...or anything, for that matter.

Broadly, there are 4 stages people move through as they learn about something, in this case because it is in the derivatives forum, options. 

1/ Unconscious Incompetent
2/ Conscious Incompetent
3/ Conscious Competent
4/ Unconscious Competent

1/ Unconscious Incompetent

This is the stage where you don't know anything. You don't even know what you don't know. Propbably most people who attempt to trade options never actually get out of this stage before quitting, having had their @rse handed to them on a platter.

Amazingly, there are a lot of options courses out there that don't take their students anywhere past this stage. In fact, I know of several that actively DIScourage folks from further learning, with the catchcry of KISS. To avoid the possibility of spending the next several years as a litigant, said educators shall remain nameless  

2/ Conscious Incompetent

This is the stage where you realise you know nothing, and if you have any capital left you go about the process of learning. (you can always try to get a refund from J..... oops better not say  )

This is a difficult stage to be in, because all option educators claim to be exclusive purveyors of truth and option enlightenment, and because you are still an incompetent, you are not able to discern the truth from the NLP laden marketing.

A great start is to read the several tomes that are almost universally recommended by long term survivors of option trading.

From novice to advanced;
Options by Guy Bower
Options as a Strategic Investment by Larry McMillan
Options Volatility and Pricing by Sheldon Natenburg

These are all available from Joe's bookshop

In addition, I like
Trading Options to Win by SA Johnston (available from Joe)
Options: The Hidden Reality by Charles Cottle (available from www.riskdoctor.com)

There are a couple of good courses around as well, but the absolutey best one is still in development  

3/ Conscious Competent

The transition to this stage is gradual and a grey area. Competency will arrive, but you will still be thinking about all the factors conciously, and you may still be incompetent in certain areas where you will have to refer back to your books, course materials and/or mentor.

I think the transition from stage 2 to stage three is; and is best viewed as as an oscillation process. You will find yourself clear on one concept, and fuzzy on another. Clarification on a new concept, could make you fuzzy on something you thought you were clear on.

You are not dumb! This is normal! If you immerse yourself in it, get comfortable with the lingo, talk the lingo at every opportunity eventually you will get competent. At this point you will be well on the way to being the....

4/ Unconscious Competent

This is the point where most things are second nature. If someone is speaking "greek" you will understand without having to think about it. There are always areas where you have to revert back to the "concious" stage, particularly if something is outside of your normal approach or style, or even a different instrument. (eg index options skew to the downside whereas many commodity options skew to the upside.

But generally you act without having to think to hard. This can only come with time and lots of trading... and of course survival.

Hope it helps.


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## swingstar (8 September 2006)

I was going to post this to happytrader in the other thread, but it's probably more appropriate here... 

_That's what intrigues me about options. I don't understand much of the lingo in this thread, but I'm sure in a year or even a few months from now I'll be able to participate in such conversations. I only have to look at other areas that I've self-developed skills in where to the unitiated, conversations like the one in this thread appear to be in a foreign language. _

Once you learn something fairly complex, other areas will still seem quite intimidating at first, but you'll know that it can be learnt and it only takes indepth study and experience - or time and effort.


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## dutchie (8 September 2006)

It would certainly help people trying to learn options to have a site which gave implied volatility (charts) and the greeks on Oz options - at a reasonable cost.

They would get my patronage.

Cheers

Dutchie


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## wayneL (9 September 2006)

dutchie said:
			
		

> It would certainly help people trying to learn options to have a site which gave implied volatility (charts) and the greeks on Oz options - at a reasonable cost.
> 
> They would get my patronage.
> 
> ...




Well, I can help with Futures IV charts http://sigmaoptions.netfirms.com/IVcharts/IV.htm

and US stock IV/SV charts http://sigmaoptions.netfirms.com/IVcharts/stockIV.htm

but unfortunately I haven't found a way to hack into any Aus sources


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## dutchie (9 September 2006)

Thanks for that Wayne - very nifty.

Why can't the ASX do as the CBOT - I'm sure it would pay off for them with greater turnover etc.

Cheers

Dutchie


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## dutchie (9 September 2006)

Just emailed ASX in regard to supplying IV and Greeks in downloadable form.

Others might like to do same to mount pressure.

Cheers

Dutchie


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## dutchie (12 September 2006)

Reply from ASX:

"We have a project to do exactly that however it is approx. 12 months
away."


Cheers

Dutchie


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## Timmy (15 January 2008)

Really informative OP thanks wayneL.

Dutchie, any progress reports from the ASX re your query?


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## VolTracker (21 January 2008)

Timmy,
While I'm mindful not to blatantly plug my own site, you should find this site useful. It provides the IV's & greeks you are looking for.

http://www.impliedvolatility.com.au

Here is the most recent 90 day BHP IV/HV chart.  IV's are getting up towards uncharted territory.







cheers


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## chops_a_must (22 January 2008)

wayneL said:


> A great start is to read the several tomes that are almost universally recommended by long term survivors of option trading.
> 
> From novice to advanced;
> Options by Guy Bower
> ...



I have quite a lot of dollar value held in free carried shares and am wanting to write options on them, as I don't want to sell them, but do want to earn some money off them. So I'm looking to write options over them.

Over the next 2 weeks on holidays (terrible timing I know), I'm looking to read two books on the subject. 'The Secret of Writing Options' by Louise Bedford and 'The Art of Options Trading in Australia' by Chris Tate, both raided from the Dad's library. I'm not sure how much value the second will have for writing options, but I'm hoping all this will tie into my long term goal in this bear market of being literate and competent in all things options.

So Wayne, and anyone else, I'm wondering if that will be sufficient for learning about writing options. And if not, what else would you recommend for that side of thing? 

I will get onto those other books after I am done. Thanks a heap.


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## wayneL (22 January 2008)

chops_a_must said:


> I have quite a lot of dollar value held in free carried shares and am wanting to write options on them, as I don't want to sell them, but do want to earn some money off them. So I'm looking to write options over them.
> 
> Over the next 2 weeks on holidays (terrible timing I know), I'm looking to read two books on the subject. 'The Secret of Writing Options' by Louise Bedford and 'The Art of Options Trading in Australia' by Chris Tate, both raided from the Dad's library. I'm not sure how much value the second will have for writing options, but I'm hoping all this will tie into my long term goal in this bear market of being literate and competent in all things options.
> 
> ...



They're probably ok as primers, but would definitely move on to McMillans book. It will include a lot of stuff you don't want to know right now, but will help in your total understanding. 

With your academic background, it should be an easy, even though lengthy read.


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## Buffettology (6 February 2008)

Man, options are a confusing topic to get my head around and apparently the book I am reading is the easy version 

Have any of you read "Get Rich with OPTIONS" by Lee Lowell?  And any comments/opinions on it?

Ive just begun, so as these terms and concepts sink in it should be a lot easier, but for now, Im definately at the incompetent incompetent phase!  If that exists!  

I also bought "CHART TRADING" by Daryl Guppy to learn a bit about technical analysis.  Need to build on my all-around knowledge of these fields as I will be working with one of the big investment banks soon.  

Currently I am a buff on Fundamental analysis, stocks and economics, but thats about as far as my skills take me!


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## wayneL (6 February 2008)

I flicked through it at the book shop.

It's OK. A bit hyped up, I mean the title is a put off straight away, but it is not badly written for what it is.

The book details four strategies which generally are the bread and butter of some option traders, but it is incomplete in that it doesn't cover the greeks extensively or even mention other low risk strategies. This may be OK for a kick off into options, but you really need to know the complete picture.

Don't worry though, it's confusing to everybody at the beginning. Take your time in learning it all, and it does take a bit of time to get your head around.

Not a bad one for the bookshelf, but one of the more serious textbooks is an absolute must in the long run... e.g. McMillan's Options as a strategic investment.


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## Buffettology (6 February 2008)

Excellent, I will make sure I read and re-read this one to get my head around the basics before I even begin to understand the more complex books!

What do you trade the most and find makes you the best returns?  Is it through simple stocks or do you prefer options?  

Thanks Wayne, I have to go back and read the first couple chapters again now, just to get the basics downpat so I dont have to conciously think of what he is talking about when he throws out all the lingo!


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## wayneL (6 February 2008)

Buffettology said:


> What do you trade the most and find makes you the best returns?  Is it through simple stocks or do you prefer options?




It depends what I'm trying to do.

If I just want a straight out directional, short term trade, most of the time, the basic share or future is hard to beat... unless there is some unacceptable black swan risk lurking about, or I think the options are really cheap (in volatility terms).

An example is that I would never go to bed with a straight out short on gold or oil because of the possibility of an account destroying spike to the upside. Likewise, being long the stock market carries humungous black swan risk.

These are situations where options are ideal to limit risk.

Also with options you have the flexibility to trade the individual greeks if I have a view on them e.g. going long on vega/gamma etc

Don't worry if that is double dutch at the moment, it sinks in over time.

If I can put it this way, options are better for more strategic type trades, whereas stocks/futures are better for little mercenary forays, long term trend trading systems and buy and hold.


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## Buffettology (7 February 2008)

Thanks heaps Wayne.  That makes pretty good sense.  In a time like now, with such high volatility, do you think options are by far the best method of trading?  

Its exciting learning it all at first, but like when I first begun economics over 10 years ago, it takes a long time to sink in to be able to just grasp the concepts! 

Back to my book!


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## Buffettology (7 February 2008)

Quick question,

For whoever trades options on stocks on the ASX, what do you use as your options calculator and where do you find the stocks volatility %?  Also, what do you use as your probability calculator?  

Do you use free or paid websites to calculate these things for you?  Or a software program you pay for and install on your computer?  

The free sites which provide options calculators or probability calculators look a little dodgy and I cant find anywhere which calculates an options chain or volatility in which you can see if there is a skew.  

Cheers

Matt

P.S  Hope this makes sense, ha ha, Im still getting used to these terms!


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## sails (8 February 2008)

Buffettology said:


> Quick question,
> 
> For whoever trades options on stocks on the ASX, what do you use as your options calculator and where do you find the stocks volatility %?  Also, what do you use as your probability calculator?
> 
> ...




Hi Matt - have traded ASX options for about five years and have used the tools from the Hoadley site:  http://www.hoadley.net/options/options.htm.  A wealth of info in there incl. plenty of demos.  He puts out a free version of the Options Strategy Evaluation Tool with restricted functions - but to get the add-in was $99 last time I paid for it.

My Oz broker uses WebIress for trading options and that also has IV charts (just type the code+IV in a chart window eg. BHPIV).  A link to a demo of WebIress can be found on this web page:  http://www.traderdealer.com.au/how-we-do-it/web-iress.php

Then, more recently, an ASF forum member VolTracker has started a website with a lot of relevant ASX options data - http://www.impliedvolatility.com.au/index.htm

Hope this helps!


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## dutchie (8 February 2008)

G'day WayneL

"Don't worry if that is double dutch at the moment, it sinks in over time."

Its triple dutch for me 

Cheers

Dutchie


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## Buffettology (8 February 2008)

sails said:


> Hi Matt - have traded ASX options for about five years and have used the tools from the Hoadley site:  http://www.hoadley.net/options/options.htm.  A wealth of info in there incl. plenty of demos.  He puts out a free version of the Options Strategy Evaluation Tool with restricted functions - but to get the add-in was $99 last time I paid for it.
> 
> My Oz broker uses WebIress for trading options and that also has IV charts (just type the code+IV in a chart window eg. BHPIV).  A link to a demo of WebIress can be found on this web page:  http://www.traderdealer.com.au/how-we-do-it/web-iress.php
> 
> ...




Thanks sails, 

I will take a look at them.  Damn that impliedvolatility website must have taken some time to make for one member!  But it looks like as it develops, it could really be something!

Hoadley does look like a good site also!


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## wayneL (8 February 2008)

Buffettology said:


> Thanks sails,
> 
> I will take a look at them.  Damn that impliedvolatility website must have taken some time to make for one member!  But it looks like as it develops, it could really be something!
> 
> Hoadley does look like a good site also!



If your a person than can learn using visual props, there is no better tool than Hoadley's modeler that sails mentioned (or similar software).

For me, it was the one single thing that broke the greek enigma and helped me understand what they really are and how one can trade them. You can play with it for hours... easier than Rubik's cube too.

Caution: There is a risk that it can turn you into an options nerd who speaks with strange words.


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## Buffettology (8 February 2008)

wayneL said:


> If your a person than can learn using visual props, there is no better tool than Hoadley's modeler that sails mentioned (or similar software).
> 
> For me, it was the one single thing that broke the greek enigma and helped me understand what they really are and how one can trade them. You can play with it for hours... easier than Rubik's cube too.
> 
> Caution: There is a risk that it can turn you into an options nerd who speaks with strange words.




ha ha, just reading the website does my head in!  So many words and tools I have NO CLUE about!

I still only understand the few tools I came accross in my book that I asked about in my previous post. This Options Strategy Evaluation Tool (OSET) appers to incorporate some of those things (volatility chains/probability calculator) and some other things of which I am not sure exactly of what they are.............

Think I need to really invest some time into that website and go through all the demos and tutorials!


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## Tinpusher (11 February 2008)

Hi,

I've just returned from 5 years in Nth America where I used to trade derivatives (CME) when not on shift moving metal.

I'm trying to get a feel for Australian Share volatility to go back to trading options since I can't seem to find anything locally equivalent of the CMEs Emini S&P 500 and found this site from page 1 superb.. http://www.impliedvolatility.com.au/.

A quick question for Aussie option gurus: I'm Bearish on a few stocks and fond of the risk management of vertical spreads, what works better for you Bear Call Spreads (credit) where both contracts end up OTM or Bear Put Spreads (debit) where both end up ITM? And why?

The Hoadley download has a default Bear Put Spread, but you have to put in the Bear Call Spread manually if anyone cares to play with the concept on that tool BTW.

Thanks,
TinP


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## sails (11 February 2008)

Tinpusher said:


> Hi,
> 
> I've just returned from 5 years in Nth America where I used to trade derivatives (CME) when not on shift moving metal.
> 
> ...




Welcome, Tinpusher!

Definately whatever finishes OTM - reason is fees and slippage to close an ITM side.  Oz fees are not user friendly - and then when it's only you and the MM, slippage can widen considerably.  Also, if ITM, high probability of being assigned on the short - and not necessarily the whole lot.  The times I have been assigned has usually only been in 1 or 2 lots and so one ends up paying full minimum fees while still managing the remainder of the unassigned position.  So letting them expire worthless when OTM is definately preferable.

Didn't realise the Hoadley tool had the ability to search for spreads - will check it out!  But then I'm currently checking out the US options market since our MMs here decided to quit qiving quotes during the recent volatility which co-incided with our expiry - wasn't impressed!

Cheers


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## Tinpusher (11 February 2008)

Thanks for the advice Sails!

Twas my thinking (ie most options expire worthless) thanks for the confirmation.

Also, on the anticipated 'big' move what do you think of 'backspreads' in the stock option market (bullish...write a call ATM or even ITM and long 2 calls JOTM, hopefully revenue neutral)? The problem as I see it, is the move has to be a big 'un and may be more suited to 'news' reactive markets such as futures (??).

I've never done it in anger but the concept of limited loss potential and no limit on gains and the mathematics looks good.

_PS Thanks for the welcome_.


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## sails (12 February 2008)

Tinpusher said:


> Thanks for the advice Sails!
> 
> Twas my thinking (ie most options expire worthless) thanks for the confirmation.



LOL not advice - only my opinion!

Actually, I disagree that most options expire worthless - this generally only applies to OTMs as most traders will sell anything with intrinsic value.  ITMs  are usually either closed out before expiry or are exercised.  Just check the course of sales the day after ETO expiry and you will see all remaining ITMs being exercised - usually with the code of EP or EC.



> Also, on the anticipated 'big' move what do you think of 'backspreads' in the stock option market (bullish...write a call ATM or even ITM and long 2 calls JOTM, hopefully revenue neutral)? The problem as I see it, is the move has to be a big 'un and may be more suited to 'news' reactive markets such as futures (??).
> 
> I've never done it in anger but the concept of limited loss potential and no limit on gains and the mathematics looks good.




Yes, backspreads do need a big move - but they can also be hurt by falling IV.  The short call doesn't neutralise the vega of the two long calls.  Although it can be put on for a credit in a low IV environment, margin will be required - meaning back spreads are not risk free.  These can rapidly move into their loss area as expiry approaches and if the underlying is trading between the two strikes and for this reason, they are usually better to have some time on their side.

I like to break these types of strategies up eg. the call backspread is simply a bear call spread with an extra long call - helps to understand where the risks are lurking.

Personally, I have found them more useful on the put side provided IV is at low levels when entering and they can do very well with strong down moves due to the movement plus IV increasing as well.  However, they are simply another tool in the option tool-box.

IMO, they are not a set-and-forget strategy - unless the market moves strongly away and remains well clear of your strikes and you get to keep any initial credit.


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## Tinpusher (12 February 2008)

> unless the market moves strongly away and remains well clear of your strikes and you get to keep any initial credit.




I was only thinking of it in a big move to hedge against a sentiment spike that could see my stops hit but I can ride the bow wave.

Thanks again mate.


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## itakacs (30 April 2011)

Guys,

I'm at the "_1/ Unconscious Incompetent_" stage of learning Options trading for fun,  pleasure and excitement. I've read a few books, most of them were recommended on this forum and never attended any seminars to keep the purity of my soul.

What concerns me is that I could not find any Australian option trading step-by-step kind of guide that would help me through the basics. I still don't understand how someone finds a cheap option, monitors it on a daily basis, etc.
Is there any software that can download Options data from ASX or from data providers and run pre-set rules on the data to filter out meaningless noise from value?
Or is it a fully manual process to collect the data of all the avail. Options, the IV, etc. from ASX and other web sites?

I heard about some applications like OptionVue that can be used for something like that, but the pricing has scared me away.

Can you please recommend some books, training materials, etc. that would explain me these steps? What I learned so far about the process is the following in some simplified steps:

1. find a stock that is trending and sends a buy signal
2. check the ASX web site for available options
3. GAP here
4. buy the option
5. monitor the stock
6. use your exit strategy to get out

I have a big gap in my knowledge at step 3. I have read books about Options, but they are only about the theory and not about the physical selection process especially on the Australian market (not if it was any different to other markets I guess).

Thanks in advance.


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## wayneL (30 April 2011)

The GAP is in only considering buying purportedly "cheap" options as a directional strategy, probably as a means of leverage.

Get that out of your mind for a start and you'll have half a chance.


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