Hoping to provide a unique perspective here on this topic. I was first introduced to options from a company I worked at, had an options trading desk and options research subdivision and immediately took an interest. I was able to see from the other side how people traded, strategies and what the winners did well.
Having traded options for about 5 years, lost a lot, won a little over in the US, I'm fortunate enough to recently secure a position with a group of guys who previously had built risk management systems for the Full-Service derivatives advisors here in AUS, now only this year released a proper retail options offering for ASX ETOs. No question that people get deterred from ASX options due to the terrible infrastructure, high fees and lack of information by big brokers. (By no means am I here to promote this system, just to scratch my options addiction and hopefully provide a different insight. Maybe a topic for another thread if there's interest at all).
Now I have the benefit of interviewing Full-Service Options advisors via our education portal (selfishly that's great for my education and knowledge) and seeing how many of our sophisticated client's trade.
I'll get the bad out of the way first, how most people lose - speculate. Low expiry dates, OTM (out-of-the-money) options, low probabilities (PoP), you have it coming for you and it never ends well; may as well go to Crown (or the local casino). High risk behavior. This is why when you talk with someone about options they say "its a high risk, high leveraged, gambling tools." Maybe you see that post on WSB that made millions, but all very unlikely.
Think about how the institutions use options then I think you're on the right track. They hedge, they manage risk, they adjust their portfolios using the Greeks, they have a plan. Great example is
@Gunnerguy above ^ - very similar to how a fund would gain some alpha from the market.
@ducati916 your scoring system is new to me but would love to learn more about it, looks very interesting! find something that works for you.
Warren Buffett uses Options at Berkshire Hathaway. They sell cash-secured puts on stocks they want to buy at the valuation they want to buy at. This might not get you that 3% a month but might add 4-5% (or more) a year above what a buy and hold portfolio does. Can turn into some serious $ over the time he's been investing.
Especially if, like me, you don't know which way the market will go tomorrow, you can trade fear (Implied Volatility) and Theta (time decay) which is amazing once you know how options work. Candlesticks are not my friend. Every stock I've ever bought has had a big sell-off the days after I buy. I'm a sucker for catching the falling knife.
What I've seen new traders often miss:
- Implied Volatility - maybe the most important Options factor. significantly affects the premium on options - and usually mean reverting to the underlying's historical volatility average. Buy options when IV is low, sell options when IV is high (as a general rule)
- trying to close positions at 0-3 DTE (days to expiry) - if you're at a loss and you leave it to the last week, the market makers will eat your lunch - they know you'll do anything to avoid assignment and will capitalize on your weakness
-trade options that have good liquidity, ASX top 20 ETO Class have 5 market makers each (on Monthly expiries) - you'll more often than not get a fair price.
- Not having a plan - when to buy, when to sell, manage early (without overtrading and paying too many fees) understanding and managing portfolio risk.
It's good to see some interest on ASX ETO's. No question they're useful instruments for portfolio management - look at US and India. Might be our turn soon.
I'm still working on my own strategies here, but also prefer market neutral, theta positive and optimize with Covered calls when appropriately