Trading Options

[SilverHawkMember]

Does anyone have any good strategies they use for trading options?  Anyone have any “Don’t Do’s” they learned from?  Thanks.

[UglyDogMember]

SilverHawk….Only trade options with money you are prepared to lose.  The only pretty much surefire options strategy is selling covered calls.  You’re not going to win big, but you win something.  Your only risk is the underlying equity risk in your long position.

[jj83Member]

Hm can’t seem to post up.

 

Testing.

[jj83Member]

Posting in parts, doesn’t seem to like long posts:

 

Ask yourself why you want to trade/buy options first… if you are trading, hedging, “shorting”, expecting stock to go up, etc

(Note, when looking up the options price, the dollar amount is not the price of the entire contract.  Multiply by 100 as 1 contract = 100 shares. ie. $2 contract x 100 = $200 to purchase.)

Basic definitions:
Writer: Person who created the contract and is selling it to you/whomever.
Buying a Put: Price you can sell to the writer
Buying a Call: Price you can buy from the writer

Every now and then I trade a few for fun when I see an interesting stock movement or event for large caps.  Options are great because you can limit the amount that you can lose and have magnified potential for gains with less skin in the game.  ie.  Say you buy one $2 Call contract for a $10 stock (meaning $2 x 100 = $200) the most you can lose is $200+commission.  Looking at the more positive side, you have the potential to use less cash until a future date.  So, the effective stock  purchase price after exercising is $12, but you don’ t need the cash straight up until you do want it.

[jj83Member]

Look at the bid/ask spreads, open interest, and volume… some are very hard to buy/sell at the price you want.  (ie. not liquid) However, you can make some massive % gains in a short amount of time.  Take note of the commissions.

The worry about options is that you add the expiration element.  (I think it is called Theta or Decay. ) Something like 90% of options expire worthless and as the expiration date nears, the value of the option will drop as well.  So don’t hold for too long.  As a reflection of this, the further out the expiration date, the more the options will cost.  I’ve had some options where the underlying stock turned the wrong way for me and I either had to sell at a terrible price or let expire.  Lol… example – I bought about 10 Puts (expiring same month) on MFC for like $0.20 (10 contracts = 1,000 shares) so I spent about $200 betting that it would go down (I was expecting market to go down a lot), but the stock price never went below the strike price.  As it was 1 week until expiration, I wasn’t able to recover any of the money by selling the contracts as it was around $0.05 and the commission alone would have cost more than the buying price.  (and there were no buyers out there except at $0.01 or $0.00)

[jj83Member]

cont

[jj83Member]

Anyways, definitely something worthwhile to explore for your investment toolkit.  Do a few small trades to get an idea of how it feels.  Just by the way I have been playing with Options, it is more akin to gambling.

Derivatives are a zero sum game, one person loses in the very end.

[AGXIIKMember]

Silver Hawk  I got into trading covered calls about 12 years ago.  After studying the subject and getting training in writing calls I jumped in with both feet. The problem I found was two fold

1.  I would write calls against falling stocks and options will never replaced the losses on the underlying stocks

2.  I failed to realize that this market is manipulated like most and the large investors loved to kill off the smallers investors just like the small shorts and longs are forced to give up their position in the precious metals markets.

I am totally out of paper  My two main reasons are that I proved to be pretty poor at the system despite the fact that I made some great money.  Bigger fish were better at it that me.  When I  found out the markets were rigged, I decided to get out of the fight and go into physical silver and gold. 

while the attraction to this gold mine cash flow slot machine is still strong, the addiction to trading was bad for my financial health.  IMO

[SilverHawkMember]

SilverHawk….Only trade options with money you are prepared to lose. The only pretty much surefire options strategy is selling covered calls. You’re not going to win big, but you win something. Your only risk is the underlying equity risk in your long position.

 

Oh, not right now.  I’m starting to research it so when the reset button is pushed, and the markets hopefully get back to lawfulness, I can get back to day trading in an honest casino.

[SilverHawkMember]

Thanks jj83

 

Yeah, I’ve played a little and know the basics.  I’ve learned not to buy the nearest contract because of time.  I wonder if there is a footprint successful traders use, like always buy 2 months out, get a Put to cover the Call.  Use this ratio…  look at this info over here…

 

[SilverHawkMember]

Silver Hawk I got into trading covered calls about 12 years ago. After studying the subject and getting training in writing calls I jumped in with both feet. The problem I found was two fold

1. I would write calls against falling stocks and options will never replaced the losses on the underlying stocks

2. I failed to realize that this market is manipulated like most and the large investors loved to kill off the smallers investors just like the small shorts and longs are forced to give up their position in the precious metals markets.

—————————————————–

OK.  Covered Contracts looks like the direction the compass points in.  In the back of my mind I simulate a Call covered by a 10:3 ratio, where when one or the other posts a profit big enough to cover the loss of the other and then some.  But it would have to be in a moving market, I would play this game.   I don’t mess with anything that doesn’t move from day to day.

Thanks again.

[mageofmapleMember]

Another problem with covered calls is that if the stock really rallies, you lose your shares – they get “called away” at less than they are currently worth.  You still made money, but not as much as you would have, and if you still want to own that stock, you need to buy back in again at the higher price (which will almost certainly cost you more than you got from the sale of the stocks + the sale of the options.)

So, if the stock does really well, your gains are mitigated, sometimes significantly.  If the stock does badly, you losses are also mitigated, but probably not very significantly.  So really covered calls are best when the market is stagnant.  Buy really stable, high-dividend stocks (like Coke, for example), and sell the call options to further goose your returns.

Other type of options trading, as mentioned, is pure gambling.  Don’t do it!  Go to Vegas and play Craps.  The odds are better!

As an aside, I’m reading a book now called “Dark Pools” about the history of electronic trading, high-frequency trading, the algo wars, etc.  It’s very well written and absolutely fascinating.  It really reads like a work of fiction.  Too bad it isn’t!  Anyway, to anyone who wants to gamble on the markets, you should read this book.  It’s good to know what sharks infest those waters…

[SilverOneMember]

No question AGXIIK that the market is rigged and I like your suggestion of not playing the trading options game.  The only way to play is to predict what the big banks are going to do next.  Since we are approaching the end game, we are getting closer to the day when the banks lose their stranglehold on the market and SHTF.

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