Questions for experienced option traders

[JamieSorres]

Dear forum participants,

I am new to options trading and would like to know your - more experienced - opinion on a couple of strategies I have been looking at. Firstly, I am looking at an option position which is equivalent to owning a stock position. Secondly, the straddle strategy.

So, I am wonderring what software I should use as well as what website I should subscribe to. In order to get closer to my solution I have already looked at OptionVue 5, OptionSimulator RT 3.4, TradeStation2000i, and TS8, and Derivatives Add-in for Excel by Peter Hoadley. I have also considered the following websites: Yahoo-OptionCentre, Prophet.net, Optionetics.com with Options Backtesting feature, and Ivolatility.com which has Options Scanner as well as strategy search.

The questions are...
1) what resources should I choose for my subsequent analysis, and if resources that I already have looked at are right places to find the info on my questions (sites, software)?
2) what services would you recommend that can provide me with best cost/value (I am a student and currently cannot afford to pay too much)?

Thank you in advance for your help,

Jamie.

 

[Robertral]

An option position that equivelent to the stock positon??!?!?!?!? you mean outright delta (delta=100%)...why would you want to do that??? why not just trade the underlying???

Straddle -> take advantage of moves in either direction (vol trade if you delta hedge)

What are you trying to do exactly???
try www.liffe.com and www.numa.com

 

[The General]

Program it yourself in excel and learn how the instrument works intrinsically....

 

[TheBramble]

An option position that equivelent to the stock positon??!?!?!?!? you mean outright delta (delta=100%)...why would you want to do that??? why not just trade the underlying???

Wouldn't buying massively deep in-the-money Calls be cheaper than buying the underlying and have close to a delta of 100%?

 

[RogerM]

Jamie - first of all have a look at the T2W Guide to trading options. This will answer many of these questions.
http://www.trade2win.com/boards/showthread.php?t=8414

As Robertral has said, why do you want to have a stock equivalent position? Why not just trade the stock and have a tighter spread and only one (smaller) commission?

Straddles are fine (long and short), but you need to watch them and be prepared to leg out of them, and/or to delta hedge them if short.

For software, the free excel plugin from Peter Hoadley is brilliant and will provide most of what you need. If you are new to options I would suggest sticking with index options until you are familiar with a range of strategies.

OptionVue and Optionetics are both very good, but expensive unless you are going to be doing a lot of trading. Their websites are well worth reading regularly as they both contain a wealth of info. You can teach yourself alot from books and playing endless "what if's" in Hoadley.

 

[JamieSorres]

Dear forum participants: Robertral, The General, The Bramble and RogerM,

Thanks a whole lot for you participation and help. It really helps at this point. Special THANKS to RogerM's for your comprehensive answer and your time! I will go through all te resources you've mentioned and will post here with new questions.

AS for what I am trying to do is to get an objective view on options trading. The thing is that I have been mainly looking at stocks analysis. i ahve also touched on some a.i. stuff and all kinds of different analysis techniques but I am cirtainly new to options.

Thank you a whole lot for you responses, it's pleasure to participate in such a forum,

Jamie.

 

[stevet]

options for professional traders are very profitable - the spread will kill an amateur

 

[anley]

Jamie

Your best bet is to forget about options. The only people that make money over time are the option market makers. Of course there are always exceptions to the rule but as stevet says the cost of doing business is almost too expensive to overcome overtime.

 

[RogerM]

Jamie - if you are new to trading, starting with options is not the way to do it. You need to learn how to trade shares first. Wouldn't hurt to run some ghost option positions in Hoadley just for a giggle. If you look through these threads, you'll find several cases of people starting options by buying a deep OTM put thinking that they will clean up if the market falls, and in EVERY case the option has expired worthless - i.e. there has been a 100% loss on the investment. Sad really, because invariably the money to be made is by selling options as part of a multi-leg strategy - not by a simple purchase of a call or put. If you MUST be a buyer, at least spread it by using vertical or calendar spreads, or butterflies etc.

 

[Robertral]

Wouldn't buying massively deep in-the-money Calls be cheaper than buying the underlying and have close to a delta of 100%?

Why would deep ITM options be less than intrinsic????

K<<S => C>=S for all t

Where am I going wrong then?

 

[nazzdack]

For what it's worth..............................

(1) Options can become worth less than intrinsic value depending on the level of interest rates with respect to the dividend yield. An ITM option may "seem" cheap but in reality you won't profit because of carrying costs, bid-ask spreads and lack of dividend income. (2) A different way to have an option position that behaves similar to a stock position is to buy two medium-dated, at-the-money calls instead of having a 100-share position. You get a delta ~100% and a better risk profile. Ideally the underlying moves higher and you get more bang for your buck compared to having stock. (3) Straddles are a tough game. If you sell them, you can expect to make small profits a majority of the time and suffer larger losses for the remainder. It turns out to be a break-even. (4) Checkout optionscentral.com, 888options.com, riskdoctor.com and cashflowheaven.com for additional info. (5) There's no "free money" to be made from the upcoming Microsoft $3 dividend in November. Wear a titanium collar around your neck if you believe otherwise.

 

[Robertral]

(1) Options can become worth less than intrinsic value depending on the level of interest rates with respect to the dividend yield. An ITM option may "seem" cheap but in reality you won't profit because of carrying costs, bid-ask spreads and lack of dividend income. (2) A different way to have an option position that behaves similar to a stock position is to buy two medium-dated, at-the-money calls instead of having a 100-share position. You get a delta ~100% and a better risk profile. Ideally the underlying moves higher and you get more bang for your buck compared to having stock. (3) Straddles are a tough game. If you sell them, you can expect to make small profits a majority of the time and suffer larger losses for the remainder. It turns out to be a break-even. (4) Checkout optionscentral.com, 888options.com, riskdoctor.com and cashflowheaven.com for additional info. (5) There's no "free money" to be made from the upcoming Microsoft $3 dividend in November. Wear a titanium collar around your neck if you believe otherwise.

Has anyone ever seen the effect mentioned in (1) above????

 

[TheBramble]

Why would deep ITM options be less than intrinsic????

K<<S => C>=S for all t

Where am I going wrong then?

I'm sure you're not RR - I was asking.

If these forums were only for you experts - who would ask the questions?

 

[euroderivatives]

carrying costs are for futures....

 

[euroderivatives]

@Robert no I haven't.
For options, implied and historical volatility, interest rates and dividends play a big role.
@ the rookies in options trading, start with trading plain positions, like long calls.
Trading a straddle or a strangle right away would be like a new swimmer trying to break an olympic record.

 

[euroderivatives]

@Jamie, why don't you open an Optionsxpress account, and go to its papertrading section online and try out some trades.

 

[henry766]

i agree with stevet , pros and banks with constantly updated prices on a wide spread seem to make all the money , inherent " terrible liquidity " by splitting whatever genuine( not spread plays)participents in the market 5 ways to sunday , just glad i don't have to trade these beasts anymore!!

 

[one2watch]

I've been doing some paper trading lately in options and I found writing far out call or put options have become more profitable for me except you always have to deal with high margin calls.What I want to know from you guys although writing options can be very dangerous it can be turned to one's advantage if controlled with strict discipline with stoploss etc is this sort of trading common in the industry?
Many thanks for replies

 

[luckyd1976]

Wouldn't buying massively deep in-the-money Calls be cheaper than buying the underlying and have close to a delta of 100%?

Yep,

When I want to Speculate I play the D-ITM deltas @ 90 (FUN MONEY) More explosive and Cheaper...

 

[luckyd1976]

I've been doing some paper trading lately in options and I found writing far out call or put options have become more profitable for me except you always have to deal with high margin calls.

Naked Puts- Yes profitable, high % returns only when your doing them wrong, though. Naked Puts can be done conservatively for good returns. The trick is only write NPuts on the stock you WANT TO OWN. To determine the max amount of Contracts (if your wanting to stay conservative) and buying on margin...

(Account Value Risked x 2) / (Strike Price x 100) = # on options you can write.

You will find though, that when using the more conservative writing standards in the formula, % Returns come down even below Iron Condor trades where your risks are defined.

What I want to know from you guys although writing options can be very dangerous it can be turned to one's advantage if controlled with strict discipline with stoploss etc is this sort of trading common in the industry?
Many thanks for replies

Yes its common.

If you stick to the Formula, It will tell you the max Cash Covered NPuts you can write. If you have the cash covered, avoid earnings, and have a plan for ownership NPuts can be very profitable.