Anyone an options trader?

[brimic]

I've been reading up on trading options as a way to try to minimize investment risks and get more return out of my money. I just haven't gotten my feet wet yet as I'm not entirely sure I know everything I need to know about it. Does anyone know of any good websites or training resources or books to learn more about this type of trading?

[Felonious Monk/Fignozzle]

I'm on the way out the door, but I've done a lot of research and a little trading.  I'll email you when I get back.

[Werewolf]

You make money off of options based on a financial term called leverage. Look it up.

I'm a financial analyst. I make my living in the finance industry. That said - here's the short version:

Yes you can make money in options - if your'e lucky. For the every day average guy you'd have a better chance of winning in Vegas. NOTE: this wasn't true back in the 80's during the hey day of speculative options trading. The personal computer and the super computers developed in the 90's changed the game.

Long version:

As a personal options trader you're pitting your human skill against the skill of financial firms that have extremely powerful computers online, constantly watching the markets and plugging their very complicated option pricing models with numerous variables and doing it in real time. Making money on options is often a matter of recognizing an out of balance situation and taking advantage of it. Unfortunately those situations come and go in seconds. Computers can recognize them and execute trades fast enough to profit from them humans cannot - at least not normal humans. Which leaves you with profiting on long term trends and if you're gonna do that then you might as well trade in stocks.

Remember Leverage! With high returns comes HIGH risk!

Unlike the stock market in the options market TECHNICAL ANALYSIS  works and computers are ready made to do technical analysis. It's tough to compete against powerful computers and firms that buy 100's of millions of dollars worth of stock options at a time. Some folks have an intuitive grasp of options and how they work - they are rare - real rare.

If you think that options are for you get a college level text on Financial Derivatives. Study the technical analysis of options (pay particular attention to the Black-Scholes option pricing formula - then understand that that it is just the tip of the ice berg). If you've got a few 1000 bucks that you wouldn't mind tossing into the crapper then open an options account and go for it. Who knows you may be one of the lucky few that can successfully compete with the wall street firms.

But I wouldn't count on it!

[...has left the building.]

Here is my take...

Short Version: Options will kick your ass.

Long Version: You will do a ton of research, come up with a strategy, then options will kick your ass. Like Werewolf says:  "As a personal options trader you're pitting your human skill against the skill of financial firms that have extremely powerful computers online, constantly watching the markets and plugging their very complicated option pricing models with numerous variables and doing it in real time. Making money on options is often a matter of recognizing an out of balance situation and taking advantage of it. Unfortunately those situations come and go in seconds. Computers can recognize them and execute trades fast enough to profit from them humans cannot - at least not normal humans. Which leaves you with profiting on long term trends and if you're gonna do that then you might as well trade in stocks." Bingo.

[The Rabbi]

I have made money in options.  I have lost money in options.  I haven't checked but think I am still way ahead.
Options have two main uses: to make money and to hedge risk.
On the making money part, they are valuable if you want to just take a gamble with a small amount of money.  I bought a couple of Google options while it was going up.  I made maybe $100 or so.  If it had gone down I would have lost maybe $300.  NBD.  But I sure wasnt going to buy the stock at $200+.
On the risk management side, they are not a money making item but a way to mitigate losses.  I might take a big downside position (1k, for me thats big) in PF Changs but being the nervous type I will buy some call options just in case I am wrong.  If the stock goes south I have made money on the position and the option was just insurance.  If it goes north I lose money on the position but it is mitigated with the options.
They are not for beginners or get rich quick artists.

[280plus]

With high returns comes HIGH risk!

+1

[Werewolf]

Rabbi mentioned something that I should have but - well - just plain forgot.

Historically options were created as a means of reducing risk in the stock market. Thru the appropriate use of puts and calls one can theoretically almost eliminate risk in any stock transaction if done correctly. But along with risk reduction one also reduces return.

The options market does need speculators. The speculators increase liquidity. However, options trading by speculators has been likened to legalized gambling by finance gurus a lot smarter and way more experienced than me.

If you really want to get into a venture where you can make big bucks real quick and have a chance at competing with the big boys look into futures. Money and commodity. IMO currency futures are safer than commodities  but commodity futures (with some basic understanding of how commodity markets work and where the commodities actually come from along with a macro and micro view of world markets plus a little luck) can literally make you rich over night. Then again always remembere - with big returns come big risks.

[The Rabbi]

You could be right about currency futures.  However, Warren Buffet, the most succesful and shrewd investor probably in history, has just lost a bundle over the last 6 months betting on the dollar's decline.  Now he can afford to lose $260M or so.  But if he can go so wrong what about the rest of us??

[Monkeyleg]

Another piece of advice to add to the sage wisdom offered above: paper trade. That means setting up an "account" that doesn't really exist, and trading as if you were actually using real money. Do it exactly as if you  were risking your money. Once you're feeling comfortable, open a small account (if you decide to continue) that you can afford to lose completely.

I paper traded commodities and options for three years before trading a $10,000 account for another three years.

In the end, I broke even, which my broker said was good. But I was spending a lot of time trading, and not making much, nor losing much. My broker said that I was being too conservative.

It was a good learning experience, though, and if I didn't have a "real" job that required my time, I would have continued.

I know people who do very well at this, and I know people who've lost everything they own.

[...has left the building.]

The Lycanthrope is on a roll.

On the making money part, they are valuable if you want to just take a gamble with a small amount of money.  I bought a couple of Google options while it was going up.  I made maybe $100 or so.  If it had gone down I would have lost maybe $300.  NBD.  But I sure wasnt going to buy the stock at $200+.

Didn't you tell me I was a fool on another thread for betting relatively small sums on high risk/return items?

[The Rabbi]

The Lycanthrope is on a roll.

On the making money part, they are valuable if you want to just take a gamble with a small amount of money.  I bought a couple of Google options while it was going up.  I made maybe $100 or so.  If it had gone down I would have lost maybe $300.  NBD.  But I sure wasnt going to buy the stock at $200+.

Didn't you tell me I was a fool on another thread for betting relatively small sums on high risk/return items?

Probably.  And I stick by that too.

[brimic]

Mostly what I'm looking for are methods to insuring the stocks I own.
 Having 20K in walmart and watching it take a big dooker over the last month has got me rethinking what what I'm doing insofar as taking a more active role in my investments instead of just taking money out of my paycheck and splitting it among a handful of stocks and index funds and holding logterm. This last year I've been pretty much hands off with managing my stocks, and I've been bleeding money.

So far, I've been to this website : http://www.cboe.com/ and spent a few hours going through their online tutorials, and I'll probably go over them again just to make sure everything has sunken in. They make it sound really easy, but of course they have a vested interest in getting people to trade options.

[Felonious Monk/Fignozzle]

Boy, walk away for a while, come back and it's all been said.
brimic, take a look here:
http://www.optioninvestor.com/default.aspx

[MaterDei]

My only experience is with energy options and I don't think that what you're interested in.  If I'm wrong let me know and I'll give you some tips.

[MaterDei]

Didn't you tell me I was a fool on another thread for betting relatively small sums on high risk/return items?

That was totally out of line if he did.  However, if you really do like rap, now that is a different type of foolishness entirely.

[...has left the building.]

The Lycanthrope is on a roll.

On the making money part, they are valuable if you want to just take a gamble with a small amount of money.  I bought a couple of Google options while it was going up.  I made maybe $100 or so.  If it had gone down I would have lost maybe $300.  NBD.  But I sure wasnt going to buy the stock at $200+.

Didn't you tell me I was a fool on another thread for betting relatively small sums on high risk/return items?

Probably.  And I stick by that too.

Don't ever let anyone tell you that you're not charming.

[The Rabbi]

The Lycanthrope is on a roll.


Didn't you tell me I was a fool on another thread for betting relatively small sums on high risk/return items?

Probably.  And I stick by that too.

Don't ever let anyone tell you that you're not charming.

There is a distinct difference between "playing" options trading just for speculative fun and using the model of high-risk/high return as the cornerstone of one's investment.  My options trading is probably like 1% of my total portfolio, maybe less.  All of my risky speculation, short selling, options, day trading, probably amounts to like 2%.  I would probably do better by sticking with my "real" strategy of searching out undervalued companies and holding them long term but that takes discipline.  So a very small amount of money I can well afford to lose goes into speculative stuff.
It is the difference between the guy who goes to Vegas once a year or three and the professional gambler.

[Werewolf]

I would probably do better by sticking with my "real" strategy of searching out undervalued companies and holding them long term but that takes discipline.

YEA - VERILY - SAYETH THE LORD!

Truly that is the way to go but it only works for folks who can think and act in the long term. Some of us (meaning me) are of a different type who require instant feedback and tend to think in the short term. For those of us like that day trading, futures and options are a way to go.

I spent the better part of a year as a day trader - made a living at it too - though not a great one. It's not hard but it can be nerve wracking. As a fellow day trader told me once - day trading causes stress and adrenaline levels as close to being in combat as one can get without actually being in combat. I whole heartedly agree with that sentiment.

For anyone that is investing for the future - and not to make a living - a long term strategy is best and fairly easy to implement. I know more than one person (just regular folk earning regular salaries) who started investing in the long term back in the 80's and are today multi-millionaires (not me though - took me forever to learn the patience required to be a long term investor - and by then it was really too late). I'm not sure that can be done today but one could get close.

[...has left the building.]

Rabbi- I must have missed the part where I showed you my portfolio.