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>wondering if you would be willing to give me some advise as to where to get
some good solid information and or education on Stock Options.
Hopefully some of this will help. There is a lot of literature available,
mostly for free, and that is sufficient for someone starting out. Practising
what one learns is essential to - in turn - relearn what one thought one
learnt. Any single strategy, consistently applied across the multitude of
stocks that one can trade these days - will teach one the subtleties of each
strategy. There are plenty of strategies and plenty of stocks and plenty of
market situations, so it is not going to be a question of whether one can
trade options, but which ones, when and why.
At the end, one needs to find out how a particular method or choice of
instrument can make money / how much more or less as compared to the trading
of the stock by itself.
A spreadsheet or a calculator will help, regardless of who invented it.
Once needs to arrive at an understanding of how fast what moves, and how
much, in the desired direction - at the light-tunnel end of it all.
This is what I did, in sequence:
a/ Attended a few CBOE seminars. The basic ones were/are free, the advanced
ones were $100. I attended multiple times either because I was still
learning and had unanswered q'ns, or because I wanted to refresh the
concepts or needed explanations to some issues that came up in my trading
experiences relative to what the seminar instructors had expounded on. The
most consistent input came from the person formally known as The Doctor - a
fellow listmember and ex-CBOE VP. The Options Industry Council has free
literature which also has an educational bent.
The www.cboe.com website has an exhaustive Education section. I would start
there.
Follow-up work included
- trading the concepts learnt, and comparing real life experiences with
classroom notes.
- ordering every free video & understanding every strategy in the free
videos released by any exchange (eg one gets a bunch from CBOE and CBOT).
- reading up on the strategy notes at each exchange's website, or that of
the Options Industry Council.
- CBOE also has a free CD-ROM/downloadable program that gets you the
concepts published in the books referenced below.
b/ Read up & digested every word in 2 books:
- Option Volatility & Pricing - Sheldon Natenberg --> core book.
- Options as a Strategic Investment - Larry MacMillan --> ancillary book.
c/ Read up on all the Lessons & strategy updates published by Robert Pisani
and later Len Yates at www.tradingmarkets.com - the site has everything
archived is commercial but this is NOT an advertisement.
d/ Made spreadsheets that created "pictures" of what an option position does
to the P&L. Played with what-if scenarios of changing underlying price,
keeping every other variable constant, and then changing each variable
(mostly volatility & interest rates) with the same & different underlying
prices. Memorized each strategy-picture combination.
Traded to build those pictures which met my risk/reward conditions.
e/ Kept exhaustive notes on each trade taken, regardless of whether I
understood what I was doing or not (eg - wrote down the Vega & the Theta
numbers even though, at one time, I didn't understand why they mattered to
my style of trading).
Revisiting these notes before & after a seminar, or during a vacation
basically helped me understand what/when/where/why/how my p&l got impacted.
f/ Cumulatively, I am still learning - as markets change, new opportunity
opens up to use some strategy filed away somewhere - as my account value
changes, I get an understanding of my own appetite for risk / reward per new
strategy trade taken.
Its not anything new under the sun.
I guess the above tells you what you wanted to know re the where to go and
what to look for.
The understanding of strategies gets better as the trading account gets
larger - and surprisingly, this aspect is never addressed in any educational
material. A lot of the lower-risk strategies are capital-intensive.
One tends to forget that lowered risk - usually - brings lowered rewards;
and yet options are often viewed as a proxy for a margin account on steroids
so automatically builds in expectations of low-risk high-reward trading
outcomes.
The latter is more a function of the trader and less of the instrument
employed.
Second fallacy is treating lowered capital outlays as lowered risk.
Eg - "I'm only committing $400 to buy this call, so my risk is only $400 in
my $25,000 account".
True, the risk is "only $400" + $78 commissions.
You just DEFINED the risk, the risk of losing $478 remained the same as if
you had invested the entire $25,000 on that trade.
This low-risk blah blah tends to create the psychology that "it is ok to
lose $478", how many consecutive $478's will one's psychology take before it
realizes that low risk or not, the loss was the loss, and cumulated over 10
trades, took away 20% of the account, etc...
Those strategies that can be executed with lower capital outlays need to
have a large element of directional accuracy and outsized directional moves
to be meaningfully profitable or they have a lower probability of consistent
profitability (or they don't make sense trading in a small sized $25,000
retail brokerage account charging $75 round turn per trade).
If one believes one has the ability to predict, with reasonable consistency,
the direction of the stock/index, but one doesn't have a lot of money to
trade with, it is best to restrict one's learning & implementation to long
calls, long puts, what volatility is and what it does to that call/put, what
bull spreads & bear spreads are and how they can be used in place of long
calls/long puts.
Trending or trading range, one has to be good at that basic craft that tells
one to change stripes.
Options can become the proxy for being long short with defined loss
protection.
The weakness?
One is sometimes better off just trading the underlying and forgetting about
the leverage AND the defined risk if one cannot understand how volatility
made the call shrink in value EVEN THOUGH the direction was right and the
stock went up weeks before its options expired.
Hence it is necessary to understand the role of volatility in an options'
pricing mechanism.
The combined understanding of volatility + leverage is a process that takes
time & experience. Most of everything else follows rather rapidly.
Over time, I came to a few conclusions:
- I don't need indicators to trade options. I found increasingly that I
could get by on price charts, a couple moving averages, maybe an ADX here &
there, and an understanding of how options impacted my P&L.
What a relief, and what a blasphemous statement to make on this list.... all
of the above functionality is possible in any homegrown spreadsheet ! But I
digress, and I have to admit, once an indicatoritis junkie, always a junkie.
- One can be directional & make money, or have non-directional positions &
still make money. It is a question of how fast & how much, not a question of
whether or not. This makes it a game of managing expectations relative to
one's account size and relative to a market's intention & ability to move
within those expectations.
- There is a time to be directional, and a time to be non-directional. IT IS
OKAY TO BE DIRECTIONAL even though it is sometimes less stressful being
non-directional.
- Not everything in the books gives an answer for current market conditions,
because the sequence the market followed to get here is not necessarily the
same sequence one gets in the book's chapters or layout. The trick is in
figuring out what chapter to skip to in order to understand the current
market, and then which chapter to skip back to in order to understand the
pre-requisites of the strategy this chapter specifies.
- There are. almost always, three, four or more ways to trade the same
setup. Confusion over understanding which one choice to use sometimes
results in a passed up trade. However, each trade has its own spicy
implications concurrently and down the road so it is well worth one's while
just taking the one choice that one most understands, and paper-trading the
competing choices so that one learns.
- Towards the lower account capitalization extremes, the choice of
instrument doesn't matter (leveraged or not) - and has the same dramatic
implications of being "blown out" as any other instrument or system. If one
is going to get blown out anyway, why not get blown slowly by trading the
slower moving underlying stock. The longer the torture, the greater the
pleasure of the self-examination, and the greater the probability of one's
ability to regroup, research, and recover.
In this feature, trading "is" a business, because the more undercapitalized
the business, the faster it folds - regardless of the quality of the product
(your indicator or your choice of options) or of the manager running it (the
person calling/clicking in the trade).
Gitanshu
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