Options - where to start?

[silence]

Hi everyone.

I'm looking at getting started in options trading (or investing if the concept is possible with something as volatile), I have a read a few books on it and I believe I understand the pricing, volatility, risks and benefits of options.

I've been into shares (mostly investing, but a little bit of trading on the side too) for around a year, which may sound like a short amount of time and thus inexperience but I believe I have the right mindset. I'm not the sort of person who buys a stock when the newspaper has an article about how good the company is and the price has already leapt to a high.

My trading account is ready and I have bought a cheap telstra call (5.19 Sep 05) because I believe the price might go up a bit more before time decay sets in too badly.

But I'm not sure what to do next. The main thing I am worried about is how to predict the movement of a share price during the period of the option contract. So can you guys recommend any good books/websites, I assume charting and other trading books would also apply to options?


My idea is to start with a long dated (1 year or so) at-the-money call for one of the big banks which I plan to buy at the best possible price. One of these, I assume, would keep the volatility down and give plenty of time to sell to stop a loss or realise a gain without a sudden movement in the stock reducing the value of the option to nothing as it might with a shorter term.


Any tips?

 

[money tree]

picking direction is a mugs game

 

[RichKid]

There is a lot of material in the Derivatives forum. Maybe you should start reading through it as a starter. Be aware that none of it should be considered as financial advice as no one here is able to give such advice. Good luck!

 

[RLN]

Rule 1 - Volatility If its low, look at buy strategies. If its high, look for sell strategies. The death of a new options trader is not understanding volatility.

Buy this book:

Option Pricing and Volatility by Sheldon Natenberg. Easy to read and is all you will ever need.

I'm not sure if I mentioned volatility?

 

[wayneL]

Rule 1 - Volatility If its low, look at buy strategies. If its high, look for sell strategies. The death of a new options trader is not understanding volatility.

Buy this book:

Option Pricing and Volatility by Sheldon Natenberg. Easy to read and is all you will ever need.

I'm not sure if I mentioned volatility?

Could not agree more.

The only thing I would add is to be sure to have Implied Volatility history over at least the last 12 months. Why? Volatility is relative.

20% IV may be a very high number for ABC; but a very low number for XYZ.

Enjoy the "journey"

Cheers

 

[seaurchin]

hi..i have not read all of your post but i think my inPUT may help...i like you are new to options...however i've either got very good crystal ball or my charting technical skills are adequate enough to make money...like I've traded 10 options..calls and puts mainly XJO index. last 2months abouts with one loss...only...and I must add that if i held Anz puts for another week longer would have made money near 30%...but sold with loss in fear of the expiry date coming.
So try make evrything simple and try not get caught up in too much technical
option theories..stick to one or 2.
try to write your reason for entering and selling and yur emotions @ time .
try to record inraday minute the uderlyung share /index is at when you prchase ..and I feel most important at this stage is to read books on option..
or this Forum is good with those trader you see write helpful things..
IF YOU CANNOT UNDERSTAND CHARTING & SIGNALS THAT CHARTING GIVES YOU THEN DON'T EXPLORE OPTION JUST YET ...CHARTING IS MY MAIN ''MAP OF DIRECTION '' EITHER UP OR DOWN ,SHORT OR LONG.OK THERE MUCH MORE BUT SORRY I HAVE TO GO NOW. bye...hpe it helps you.

 

[wayneL]

So try make evrything simple and try not get caught up in too much technical
option theories..stick to one or 2.

This is a tough one sea'. With all other things to do with trading, I would agree with the KISS approach.

With options, I'm going to have to disagree with yor statement above.

You've had a great start with 9 wins from 10. But believe me, you will go through periods of 9 losses from 10. It is possible to even get the direction right, but still lose...go figure.

It's easy to poo-hoo all the technicalities of options at the beginning. Most people do this and I was no exception. But one of two things happen with option traders.

1/ They quit, having been fleeced by the pros (95%)

2/ They learn the greeks and how to use them and are long term profitable. (5%)

You can't learn it all at once, but you have to make a start and I'm glad you've done well so far. But the trick is not to get cocky and believe you are smarter than the market. The market has a habit of humbling all of us when we deserve it. LOL

Cheers

 

[DTM]

You've had a great start with 9 wins from 10. But believe me, you will go through periods of 9 losses from 10. It is possible to even get the direction right, but still lose...go figure.

Cheers

Sheesh..., tell me about it. Last week I bought OTM BHP July $18.50 puts when share price was $18.77 and the price dropped maybe 20 cents in three days and I had to sell out at a loss because the put values were decreasing faster than the call options.

 

[sam21poddy]

What online brokers can you trade options on (apart from Sanford). I closed my account with Sanford because they have a monthly fee just for keeping the account open and I rarely used them. Any others that don't have a monthly fee?

 

[RLN]

DTM - that was because you most likey bought with high volatility. even if you get the market dirction right, high volatility will decay the option value if prices return to normal.

The best thing and first to do, even before looking at the charts, is scour the options universe for low implied vol. and as Wayne has said, compare it to historical (I use 200 day personally).

List the stocks for low vol, then list the stocks with high vol

Next, all stocks with low vol, look at the charts and look for buying strategies. All stocks with high vol, look for option writing strategies.

WARNING - If you are new to options trading seek advice before trading - especially writing because they can have unlimited risk.

If you want to sell vol. always use come type of a covered strategy - such as selling an in-the-money spread.

 

[RodC]

What online brokers can you trade options on (apart from Sanford). I closed my account with Sanford because they have a monthly fee just for keeping the account open and I rarely used them. Any others that don't have a monthly fee?

Comsec,

You need protrader to do it though. there is a fee for this. But it's free if you do at least 1 options trade every 3 months.

Rod.

 

[sails]

What online brokers can you trade options on (apart from Sanford). I closed my account with Sanford because they have a monthly fee just for keeping the account open and I rarely used them. Any others that don't have a monthly fee?

Here are a few links to some other brokers that I know of and all have options available. Some have monthly fees for data which are often reduced or even waived if you complete a certain number of trades per month - just really depends on what suits you best.

https://www.optionsexpress.com.au/welcome/commissions.aspx
http://www.morrisonsecurities.com/Commissions.htm
http://www.avcol.com.au/brokerage.asp
https://www.etradeaustralia.com.au/Application/Index.asp?
www.comsec.com.au

 

[It's Snake Pliskin]

What is a good options book that teaches strategies, tactics etc.

I have sufficient material on the basics and fundamentals.
I appreciate your help.
Thanks :sheep:

 

[denl]

DTM - that was because you most likey bought with high volatility. even if you get the market dirction right, high volatility will decay the option value if prices return to normal.

The best thing and first to do, even before looking at the charts, is scour the options universe for low implied vol. and as Wayne has said, compare it to historical (I use 200 day personally).

List the stocks for low vol, then list the stocks with high vol

Next, all stocks with low vol, look at the charts and look for buying strategies. All stocks with high vol, look for option writing strategies.

WARNING - If you are new to options trading seek advice before trading - especially writing because they can have unlimited risk.

If you want to sell vol. always use come type of a covered strategy - such as selling an in-the-money spread.

Hi
Can you tell me how I scour the option universe (USA and AUST) for low and high implied volatility? I use metastock.
Thanks...

 

[happytrader]

Hi there

I dont think most people are really prepared for the emotional side of trading. This game is 90 percent psychology. The rest is a numbers game. Nevertheless there are some excellent performers about and with the track record to prove it. www.meridianline.com.au They will provide you with a free 3 day trial where they will email you with what option to trade at what price and they will email you with the exit profit or loss. These trades are typically short term as you will notice on their performance record. These guys originally started www.australianstockreport.com.au. and walk the walk.

Cheers

 

[MultiFinanceIT]

1. Note that the price is determined by supply and demand and may deviate more or less from the fair value.

2. Be aware of liquidity.

3. My favourite link: http://www.in-the-money.com/

4. Good Australian resources: http://www.elliottician.com/showpage.asp?p=21

 

[wayneL]

Hi
Can you tell me how I scour the option universe (USA and AUST) for low and high implied volatility? I use metastock.
Thanks...

Hi denl,

I didn't see your post before now.

Here are a couple of free resources

www.optionetics.com they have a free daily scan for both statistical and implied vol levels. You can subscribe to their platinum service, but not necessary IMO

http://biz.yahoo.com/opt/ but note that the info comes from optionetics anyway

Cheers

 

[happytrader]

Hi everyone.

I'm looking at getting started in options trading (or investing if the concept is possible with something as volatile), I have a read a few books on it and I believe I understand the pricing, volatility, risks and benefits of options.

I've been into shares (mostly investing, but a little bit of trading on the side too) for around a year, which may sound like a short amount of time and thus inexperience but I believe I have the right mindset. I'm not the sort of person who buys a stock when the newspaper has an article about how good the company is and the price has already leapt to a high.

My trading account is ready and I have bought a cheap telstra call (5.19 Sep 05) because I believe the price might go up a bit more before time decay sets in too badly.

But I'm not sure what to do next. The main thing I am worried about is how to predict the movement of a share price during the period of the option contract. So can you guys recommend any good books/websites, I assume charting and other trading books would also apply to options?


My idea is to start with a long dated (1 year or so) at-the-money call for one of the big banks which I plan to buy at the best possible price. One of these, I assume, would keep the volatility down and give plenty of time to sell to stop a loss or realise a gain without a sudden movement in the stock reducing the value of the option to nothing as it might with a shorter term.


Any tips?

Hi there Silence

Just a thought. If your stop loss is triggered you need to have plenty of open interest or other players in that option to take up your order otherwise you could get stuck with it. The same can occur when you realise a profit and want to cash in. The only difference in this case is you might have to settle for less than you anticipated. This wouldnt be a problem if you were to exercise your option and buy the underlying share.

Happytrader

 

[MultiFinanceIT]

Happytrader wrote:
I dont think most people are really prepared for the emotional side of trading. This game is 90 percent psychology. The rest is a numbers game.

Fully agree. I am not an active trader.

Good Books: Search for James B. Bittman on Amazon.com. His books are supplied with educational software. He works at CBOE.

More theoretical:
John C. Hull: "Options, futures, and other derivative securities."
John C. Cox and Mark Rubinstein: "Options Markets."

 

[happytrader]

Hello Everyone

I know there are plenty of excellent books and websites already mentioned on this site but I thought I might add some others not yet mentioned and that I have found useful.

'A beginners guide to short-term trading' by Toni Turner. www.toniturner.com

Louise Bedfords hero - Linda Bradford Raschke www.lbrgroup.com

Most importantly to dissolve and refute any of that twaddle about being poor and Godly which I've noticed people consciously and unconsciously believe and act out (ultimately sabotaging their own efforts) - 'Financial Excellence' A treasury of Wisdom and Inspiration by John Avanzini

Cheers
Happytrader

I do not stand to benefit financially in any way from mentioning these references. My goal is to shortcut the steep learning curve beginning trader often face.