What is the point in options?

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SanMiguel

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What is the benefit of using options?
Why pay for the privilege to buy/sell at a certain point when you could just simply set an alarm and then buy/sell at that actual point?
 
Leverage - a small outlay can get big returns IF the underlying security makes a big move. Most of the time this does not happen, of course, and the option value decays over time (and decays quickly near the end of the option's lifetime).
 
gc1 said:
Leverage - a small outlay can get big returns IF the underlying security makes a big move. Most of the time this does not happen, of course, and the option value decays over time (and decays quickly near the end of the option's lifetime).
Click to expand...

Is the leverage more than what can obtained by simply using margin accounts and issuing buy/sells of stocks?
 
Well you can also make money trading volatility. In fact, in wholesale markets that is a far greater part of options trading than simply using them as a leveraged outright bet. Most options in interbank / wholesale markets are traded delta neutral.
 
The points:

1 - Hedge your stock bets without using stops.
2 - If trading only options, you can make money in up, down or (the important part) sideways markets.
3 - Leverage, as noted, although novices tend to get caught up in this and then get killed.

That's the short story. The long story, as noted, is very long.
 
SanMiguel said:
What is the benefit of using options?
Why pay for the privilege to buy/sell at a certain point when you could just simply set an alarm and then buy/sell at that actual point?
Click to expand...

Many, if not most, option traders trade the option itself, without ever being interested in exercising the option, since that would mean buying the underlying, ie. investing more capital. Ie. they are mainly interested in trading just the option premium itself... :)
In this case a table like in the following posting can explain the real power behind option trading; it's the leverage effect on the option premium when the underlying moves some points...:
http://www.trade2win.com/boards/tra...a-traderum-using-demo-acct-4.html#post1013934

That is: if you are sure about the direction of the underlying then instead of buying the underlying
you can buy options, and if your prediction was right then you will get rewarded multifold (cf. the said table above).
As said you would normally not exercise the options, instead sell them before expiration...
 
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traderum said:
Many, if not most, option traders trade the option itself, without ever being interested in excercising the option, since that would mean buying the underlying, ie. investing more capital. Ie. they are mainly interested in trading just the option premium itself... :)
In this case a table like in the following posting can explain the real power behind option trading; it's the leverage effect on the option premium when the underlying moves some points...:
http://www.trade2win.com/boards/tra...a-traderum-using-demo-acct-4.html#post1013934
Click to expand...

You will never see those profits in real life. As I said, novices get caught up in the leverage aspect. You will be eaten alive if you try buying options looking to get that leverage without hedging your position somehow.
Straight-up options trading is really for folks who like to define the precise risk they want to take on a trade ahead of time, without the worry that, for instance, a stop may prove ineffectual because of a gap on the open.
At minimum, you should do vertical spreads to help out with theta and to precisely define your risk/reward. Of course, once you do, you will introduce yourself to the problem of multiple commissions and bid/ask spreads. Options trading isn't simple or easy.
 
Benton D Struckcheon said:
You will never see those profits in real life. As I said, novices get caught up in the leverage aspect. You will be eaten alive if you try buying options looking to get that leverage without hedging your position somehow.
Straight-up options trading is really for folks who like to define the precise risk they want to take on a trade ahead of time, without the worry that, for instance, a stop may prove ineffectual because of a gap on the open.
At minimum, you should do vertical spreads to help out with theta and to precisely define your risk/reward. Of course, once you do, you will introduce yourself to the problem of multiple commissions and bid/ask spreads. Options trading isn't simple or easy.
Click to expand...

I use vanilla options, and usually into one direction only, ie. my hedging looks very much differrent from what others do:
I simply accumulate more at certain drawdown points :),
and not neccessarily just the same one strike :)...
And sometimes I short a Put instead of buying a Call; it depends on the spread... :) Ie. doing the unexpected... :)
 
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Why options trading is better than trading the underlying stock

Why options trading is better than trading the underlying stock

Suppose you want invest 100k into a stock that you have throughly analyzed
and of which you expect that it should rise about 5% in the next 1 or 2 weeks.
You are so confident in your prediction that you even accept a temporary drawdown
of 5%, ie. your risk is equal to the expected reward (5%).

If you buy the stock and things go well you make a profit of 5%,
but if you are stopped out you make a loss of 5%.

Now let me present an alternative:

Instead of investing 100k for buying the stock better invest just 5k into Call options of that stock.
If the underlying stock rises say on the 5th day say just 3% relative to when the position was opened
then the options make a profit of 34%.
Let's say the underlying moves up 5% on that day, then the profit is even 69%.
[even more is possible if one uses a Strike that makes the option "Out-of-the-Money", OTM]
If things go against you then the maximum you can lose is what you paid for the options, ie. the 5k.
(cf. an options calculator or see this table:
http://www.trade2win.com/boards/tra...a-traderum-using-demo-acct-4.html#post1013934 )

Ergo: we used the same risk (5% = 5k), but the reward with options is a multifold better (69% vs 5%) than buying the underlying stock.

Anybody disagree?
 
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Re: Why options trading is better than trading the underlying stock

traderum said:
Why options trading is better than trading the underlying stock

Suppose you want invest 100k into a stock that you have throughly analyzed
and of which you expect that it should rise about 5% in the next 1 or 2 weeks.
You are so confident in your prediction that you even accept a temporary drawdown
of 5%, ie. your risk is equal to the expected reward (5%).

If you buy the stock and things go well you make a profit of 5%,
but if you are stopped out you make a loss of 5%.

Now let me present an alternative:

Instead of investing 100k for buying the stock better invest just 5k into Call options of that stock.
If the underlying stock rises say on the 5th day say just 3% relative to when the position was opened
then the options make a profit of 34%.
Let's say the underlying moves up 5% on that day, then the profit is even 69%.
[even more is possible if one uses a Strike that makes the option "Out-of-the-Money", OTM]
If things go against you then the maximum you can lose is what you paid for the options, ie. the 5k.
(cf. an options calculator or see this table:
http://www.trade2win.com/boards/tra...a-traderum-using-demo-acct-4.html#post1013934 )

Ergo: we used the same risk (5% = 5k), but the reward with options is a multifold better (69% vs 5%) than buying the underlying stock.

Anybody disagree?
Click to expand...

Yes.
That's theory. Reality will vary.
If you go at options with this logic, one of two things will happen:

1 - You will lose your account over time, a year at most.
2 - You will make a bunch, then lose your account. Because of the initial win, it might take a bit longer than a year. Might. Not likely, but anything is possible.

Go to The Options Guide. Read up. Paper trade for a year, adjusting for realistic bid/ask and commission if what you're using doesn't do this. Then do single options trades at a time in a real account, including single verticals: buy one call, sell another simultaneously. Buy one put, sell another simultaneously. Do this not just for this but for whatever other strategy interests you. Observe what happens. Crank up the size slowly.
Don't buy or sell options naked, that is, without hedging.
Don't short gamma.
Repeat: don't short gamma.
 
There a couple of reasons why someone should trade options.
Portfolio Insurance "Put options" allow you to hedge your stock positions at a certain price. Leverage in directional trading and spreads(determing where the market won't go). There are many more reasons and strategies, perhaps a book?:clap:
 
gooseman said:
Ha-work. Where else buddy?! :)

Same to you. Here's to 2010 steepening. Please!
Click to expand...

Personally I asked Santa for the breakup of the Euro. 3 reasons;

1) Simple job security for fx traders

2) Old gits who can remember trading mark/paris will suddenly be cool again (just like Clint Eastwood in Space Cowboys, in my mind at least)

3) I was clearing out my desk drawers and I found an IEP 10 note the other day, so I'd like to be able to turn that into a guinness or three in Dublin next time I'm there.
 
ha nice. IEP 10 won't go too far if Eire get booted out of the single currency. Not that GBP will stretch too far if Gordo manages a hung parliament. i am actively seeking ways to leave the UK.
 
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