Learn options trading from books or the internet?

[nerdzkilla]

I have been reading Guy Bower’s book Options trading for aussie investors and almost done reading it. The reason I thought this book was great was because it has practise test questions towards the end of each chapter and answers towards the end of the book.

I find this to be the best way (for me at least) to learn something new. That’s how I learned things growing up at school, college, uni


I have had people say the Internet is the best place to learn about options trading. But I have found that not to be true .That is how I got into learning about options trading and it’s something I would not recommend to anyone wanting to learn about options . reading too many random articles gave me mixed messages about what to do what not to do and at times i just ended up confused and not reading all together. reading books with plain theory hasnt helped either..

Wayne, VillageIdiot and some of the other option trading gurus on this forum what would you recommend? Do you guys know of any other books similar to the one mentioned above i.e. with practise test questions that target the option greeks? Is there an exam or a test or a certificate for us noobs?

 

[nerdzkilla]

136 views and no reply

 

[dutchie]

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Hi nerdzkilla

You might like to look at books by these authors:

Option Volatility & Pricing by Sheldon Natenberg

McMillan on Options by LAWRENCE G. McMILLAN

Personally I have learned a lot from the internet. The more you learn and read,the better you are able to filter the good and the bad. The internet is free , the books are expensive.

But how you best learn is a factor. Each to his own in that regard.

Best of luck in your journey.

Cheers

dutchie

 

[wayneL]

Nerdz,

Guy's book is a good primer, but the books Dutchie mentioned are regarded as the "bibles" of option trading.

In addition I would recommend Charles Cottle's Options Trading: The Hidden Reality.

The internet is also a good source, but the ability to discern good info from rubbish is paramount. Hence I think the books are a good investment...

...and one helluva a lot cheaper than the diabolical bullshyte promulgated by 99% of the seminar clowns out there.

 

[nerdzkilla]

Thanks guys i will check them out.

 

[00Hank]

+1 to McMillan and Natenberg's books. Another one I would add to the stack is Cottle's "Options: Perception and Deception"

Aside from technical analysis, market making is a crucial section of the entire art-science of trading that one should research - Cottle's book synergizes the 'street-smart' tactics of it with the options strategies.

Some of the more pragmatic aspects of options literature (e.g. the Greeks) should be broken down into quick & dirty street-smart rules-of-thumb as well so they more easily relate to other aspects of your personal system. For example, you can play the Greeks game all day long (and hope that your IV values have at least a minor relation to reality), but know how to manage theta bleed through your holding periods, how far in/out of the money your options are, and position size.

IMO, the IV models leave a LOT to be desired. Intertwined cash flows amongst various asset classes make the conventional fare too simplistic. Learn how to get the analysis that will "satisfice" and scrap out the base hits like the market makers.

 

[mazzatelli]

IMO, the IV models leave a LOT to be desired.

What IV models are you referring to?

 

[00Hank]

What IV models are you referring to?

Aside from the Newton-Raphson, Brenner-Subrahmanyam methods in academic journals...

a commonly-assumed IV for American options is 0.2; many references on the web use this for sake of demonstrating the Black-Scholes pricing model.

It seems, from a retail trader's standpoint, that one of the primary initiatives to be had from using a pricing model is to determine if the market has mispriced one or several options, and use this perspective for arbitrage or to follow a changing undercurrent in the trend.

Nassim Taleb's book Dynamic Hedging goes over some of the shortcomings of conventional option pricing models (assuming Brownian motion in the underlying, etc).

Long story short, it just seems to me that, unless you are willing to spend more than several hours each day adjusting your theoretical pricing by analyzing the underlying's deviation from the mean price (which is always changing as cashflows cash), and back-checking this to all of the other available technical and fundamental data... it's best to just go with short-term momentum in the underlying and buy/sell options accordingly for brief hold times, and get in & out of the market several times each day. Combing over the changes in Open Interest from the options chain and seeing where the big pockets of liquidity reside, and using some basic math to put this distribution into a more localized context with spot price, would be most practical.

I could be flawed on a count or two here, feel free to shoot down my plane . It depends on your strategy and just how much you really know about the fundamentals of the market as to how much faith to put in the model pricing.

 

[wayneL]

In addition I would recommend Charles Cottle's Options Trading: The Hidden Reality.

Another one I would add to the stack is Cottle's "Options: Perception and Deception"

Hank The Hidden Reality is an expanded revision of Perception and Deception. I'd go with the update... cheaper too.

 

[wayneL]

Long story short, it just seems to me that, unless you are willing to spend more than several hours each day adjusting your theoretical pricing by analyzing the underlying's deviation from the mean price (which is always changing as cashflows cash), and back-checking this to all of the other available technical and fundamental data... it's best to just go with short-term momentum in the underlying and buy/sell options accordingly for brief hold times, and get in & out of the market several times each day. Combing over the changes in Open Interest from the options chain and seeing where the big pockets of liquidity reside, and using some basic math to put this distribution into a more localized context with spot price, would be most practical.

It seems to me that options are an inefficient means of short term momentum plays.

Delta for delta, the underlying is far more efficient in terms of spread, commish and slippage.

I like options to skin an entirely different cat.

BWTFDIK

 

[00Hank]

Delta for delta, the underlying is far more efficient in terms of spread, commish and slippage.

Depends on the animal - what the underlying is, how much volatility/"beta" is there, the moneyness of the option strikes you choose, the average volume of the underlying, the market cap, etc.

For a low volatility mining conglomerate stock in a gentle trend, I agree with you.

For an extremely liquid tech stock (e.g. AAPL) with weekly options, I disagree.

 

[wayneL]

Depends on the animal - what the underlying is, how much volatility/"beta" is there, the moneyness of the option strikes you choose, the average volume of the underlying, the market cap, etc.

For a low volatility mining conglomerate stock in a gentle trend, I agree with you.

For an extremely liquid tech stock (e.g. AAPL) with weekly options, I disagree.

I'm all ears Hank. Why would weekly AAPL options be better? For now we have to factor in theta.

I guess you've got +ve gamma, but are you trading moves where delta changes will outweigh the above?

Can you give a worked example?

 

[00Hank]

Weeklies are where the 'front line' trench warfare traders go - monthlies for, say, March may have much more total Open Interest than that of the weeklies which expire on February 24, but the volume flowrate (both in opening and closing contracts) of weeklies is important to watch for the monthlies traders.

If you have an account with IB cleared for U.S. options market access, stay up one evening and pull up some weekly options, both calls and puts, 1-2 strikes out of the money for both classes, and watch the inside bid and ask prices and lot sizes...I will definitely agree that at least some of the frenzy is just quote stuffing (no matter what the SEC says about having made that illegal ), especially going into the Eastern U.S. noon timeframe (Europe & UK markets are closing around 11:30am each weekday, so volume thins some). But, volume flowrate as seen on a barchart follows a U-shaped profile, so 9:30-11:30am, and 2-4pm are good times to watch.

IMO, how far OTM you're going should be minded the most for Theta...and yes, +ive gamma with new intraday/2-day high/low hits need to be happening. Also, don't trade options on expiration Fridays after lunch.

No prepared example, but if you'd been watching AAPL 500 puts last Friday at 11am U.S. Eastern (guess that would be 00:00 Saturday Sydney time), the size on the table for puts was more than enough for even big hitters to get a good fill w/ little slippage. Percentage-basis moves for options like these are always more lucrative (and risky) than trading the underlying.

Of course, it need not be AAPL, or be a weekly option, either - an optioned stock with a multi-billion market cap, high average daily volume (say, >1M) and a good directional trend can be gamed with monthlies for a good R:R trade. Volume is key, otherwise, yeah, slippage will be quite pronounced.

 

[00Hank]

Bringing it back to killa's question...

understanding the established discourse from books is good, and better to start here. Trying to learn options trading from top-o-the-crop weeklies is near mind-numbing, but looking at options for an Aussie stock like Wesfarmers or the like would be like watching paint dry, and very slow learning.

I'm still trying to break into a good niche in the ASX myself, and thus far only BHP, Iluka, and a few others seem to have the flow I need.

My is to get exposure to all you can - Aussies, American...maybe some Brit & German (some weeklies e.g. Daimler here, too). Read, watch, learn, adapt. Rinse & repeat.

 

[wayneL]

Hank

I am probably this forum's leaving options cheerleader. But I remain unconvinced that Options are the best vehicle for short term momentum trading . If you don't mind me saying it seems to me that your view on options trading is rather 1 dimensional, To the point of rendering unnecessary the Reading of the options tomes mentioned above.

Just saying

 

[nerdzkilla]

Hi Wayne & Dutchie,

I looked up the book you mentioned Option Volatility and Pricing by Sheldon Natenberg It is quite old dating back to 1994. Is there a new edition or will the old version cover what i need to know?Thanks

Also the book mcmilin on options there is a second edition and also an old edition dating back to 1996. Which one should i get?

Cheers,

 

[mazzatelli]

Aside from the Newton-Raphson, Brenner-Subrahmanyam methods in academic journals...

Nassim Taleb's book Dynamic Hedging goes over some of the shortcomings of conventional option pricing models (assuming Brownian motion in the underlying, etc).

What you've described here is only using numerical methods to back out implied vols from Black-Scholes model for vanilla ops. For example you could also use Heston stoch vol model to calibrate the vol surface rather than obtaining BSM vol which is constant or calc model free implied vol (similar to how the VIX is calculated)

Have you ever worked with these models before?

It seems, from a retail trader's standpoint, that one of the primary initiatives to be had from using a pricing model is to determine if the market has mispriced one or several options, and use this perspective for arbitrage or to follow a changing undercurrent in the trend.

imo retail should't be trying to look for arbs unless its exotics, but even then the question is how to execute large enough size to make it worthwhile.

w.r.t to swing trading using ops or alternative methods, that really depends on vol and/or directional signals developed by the trader.

 

[00Hank]

Hank

I remain unconvinced that Options are the best vehicle for short term momentum trading . If you don't mind me saying it seems to me that your view on options trading is rather 1 dimensional, To the point of rendering unnecessary the Reading of the options tomes mentioned above.

IMO, if the underlying has a usual daily range such that 2 or more option strike levels are breached, a large number of shares change hands daily, and it shows steady directional trends intraday, or multi-day for swinging, options are superior, simply because the % return is greater, due to the non-linearity of gamma when you are trading OTM options.Selection of 1-3 of the most 'ripe' underlying stocks for your daily watchlist is the lynch pin here.

As for being 1-dimensional, yea I can see how it looks that way...I've read several texts on options theory. As a daytrader, where you are making second-to-second decisions on stocks that are tied to the major indexes, finding harmony amongst the Greeks seems cumbersome to me...although I'd bet many veteran option traders simply have rough & dirty ratios for the Greeks, which they wait for realization of before entering/exiting a position.

Trading options on an low-volume small cap stock with 2.5 or 5pt strike spacing, even with good daily range, yea it's a money pit until some major catalyst for it comes along.

Options on a very low-volatility mid- or large-cap, same thing, money pit due to theta bleed...more for hedging.

Pull some option price charts on 1-3 OTM strikes for U.S. stocks PCLN, NFLX, AAPL sometime. If you like trading intraday momentum, you'll see what the niche idea is here.

 

[00Hank]

...Black-Scholes model for vanilla ops. For example you could also use Heston stoch vol model to calibrate the vol surface rather than obtaining BSM vol which is constant or calc model...
Have you ever worked with these models before?

Only BSM. For non-indexed stocks it seems sufficient, but getting into indexed stocks where the cashflows are more complex, it seems quite limited from a retail trader's vantage point. I simply reverse engineer what the market makers are showing in the chain with respect to what the stock's price action has been up to.

As for Heston: no, haven't tried that one...sounds like some homework.

imo retail should't be trying to look for arbs unless its exotics, but even then the question is how to execute large enough size to make it worthwhile.

Sorry, wasn't advocating arb as a venue to try. Def next to naught for a small fry.

w.r.t to swing trading using ops or alternative methods, that really depends on vol and/or directional signals developed by the trader.

Agreed. Having a consistent trend in one direction, without pullbacks to levels seen earlier in the session, I have confidence in swinging an option. But, in the markets lately with the Euro situation, overnight gaps can be a killer.