Understanding options

What works what doesn't
Do you have a strategy that you believe performs better than another
How do you calculate the optimum time to enter n exit with maximum profits n reducing the risk of loss :-$

Let's discuss day trading strategies

if I understand your request correctly, you have some money burning holes in your pocket and would like to get rid of it quickly under the guise of 'investing' and 'day trading'. is that correct?

Vegas, baby!

Maybe but I'm also genuinely interested in learning from these discussions. You know to becomEe a better trader/investor.
In past, I have lost money because I wasn't very active. Any share that starts to go down is very likely because I started buying it.
I'm hoping to pick up some insight into the whole trade-like-a-warren-buffet-deciple world.
Any and all tips n tricks, that we know from experience work, are welcome.

TIA,

Donot know about options. But if you want to learn trading, TA(technical analysis), try to read the following books.

Technical Analysis of the Financial Markets by John Murphy,
Also books by Pring, Mark Douglas, James chen. etc.
Re-read the books few times too. And goodluck. (I take it back. No luck in trading. It is calculative risk taking with discipline! ).

1. Buffett can move markets. I can move you and you can move me, thats it.
2. Stick to what you know best - you might keenly watch debates about 4" inseam shorts for Spring versus 9" inseams to decipher the stock price movement of clothing brands based on their catalog choices.
3. Program your google ok glass to recognize mall storefronts, box office queue length and airport lounges to algorithmically enter trades with stop loss orders.
4. Pray fervently! And workout using wello! Trade with quantopian.

seven wrote:Maybe but I'm also genuinely interested in learning from these discussions. You know to becomEe a better trader/investor.
In past, I have lost money because I wasn't very active. Any share that starts to go down is very likely because I started buying it.
I'm hoping to pick up some insight into the whole trade-like-a-warren-buffet-deciple world.
Any and all tips n tricks, that we know from experience work, are welcome.

TIA,

firstly, warren buffet doesnt trade...he takes very long term positions in companies at extremely favorable conditions (to him).

if you think you've lost money by being a passive investor, then you'll lose much more by being an active one. best is to do passive indexing or buy some lost cost mutual funds

Propagandhi711 wrote:

seven wrote:Maybe but I'm also genuinely interested in learning from these discussions. You know to becomEe a better trader/investor.
In past, I have lost money because I wasn't very active. Any share that starts to go down is very likely because I started buying it.
I'm hoping to pick up some insight into the whole trade-like-a-warren-buffet-deciple world.
Any and all tips n tricks, that we know from experience work, are welcome.

TIA,

firstly, warren buffet doesnt trade...he takes very long term positions in companies at extremely favorable conditions (to him).

if you think you've lost money by being a passive investor, then you'll lose much more by being an active one. best is to do passive indexing or buy some lost cost mutual funds

That's good advice. But I'm determined to make up for the losses n make some profit too. If noone here shares what to do to make profits (fast, not mutual funds) then I'll read flute holders books n read other blogs on the Internet.

atcg wrote:1. Buffett can move markets. I can move you and you can move me, thats it.
2. Stick to what you know best - you might keenly watch debates about 4" inseam shorts for Spring versus 9" inseams to decipher the stock price movement of clothing brands based on their catalog choices.
3. Program your google ok glass to recognize mall storefronts, box office queue length and airport lounges to algorithmically enter trades with stop loss orders.
4. Pray fervently! And workout using wello! Trade with quantopian.

Lol n will do.

FluteHolder wrote:Donot know about options. But if you want to learn trading, TA(technical analysis), try to read the following books.

Technical Analysis of the Financial Markets by John Murphy,
Also books by Pring, Mark Douglas, James chen. etc.
Re-read the books few times too. And goodluck. (I take it back. No luck in trading. It is calculative risk taking with discipline! ).

How do these compare to fidelity's research?

If you are new to trading, don't go anywhere near options. Start with mutual funds, and stocks in companies that you know well and think will do well.

seven wrote:

FluteHolder wrote:Donot know about options. But if you want to learn trading, TA(technical analysis), try to read the following books.

Technical Analysis of the Financial Markets by John Murphy,
Also books by Pring, Mark Douglas, James chen. etc.
Re-read the books few times too. And goodluck. (I take it back. No luck in trading. It is calculative risk taking with discipline! ).

How do these compare to fidelity's research?

I donot know about fidelity. I was suggesting the above in terms of learning.

panini press wrote:If you are new to trading, don't go anywhere near options. Start with mutual funds, and stocks in companies that you know well and think will do well.

well not very new if you count trading with virtual money account. I believe options are less risky than stocks/equities. i think i want to do options and risk less (but gain some) and i want it to be more than what MFs pay you.

will keep updating this thread to tell how i'm doing. and share tips as n when i learn them and if they work.

FluteHolder wrote:

seven wrote:

FluteHolder wrote:Donot know about options. But if you want to learn trading, TA(technical analysis), try to read the following books.

Technical Analysis of the Financial Markets by John Murphy,
Also books by Pring, Mark Douglas, James chen. etc.
Re-read the books few times too. And goodluck. (I take it back. No luck in trading. It is calculative risk taking with discipline! ).

How do these compare to fidelity's research?

I donot know about fidelity. I was suggesting the above in terms of learning.

thats what i meant to ask. if it makes sense to learn how to do the analysis when you can use ready to use analysis done by fidelity on how different stocks performed in say last 3,5, more years...

The right way to do this is to be a 'beard' for Nate Silver - http://www.newyorker.com/humor/2012/11/19/121119sh_shouts_rudnick

He knows!

atcg wrote:The right way to do this is to be a 'beard' for Nate Silver - http://www.newyorker.com/humor/2012/11/19/121119sh_shouts_rudnick

He knows!

iAgree!

he does know nearly 120%!\m/:-bd:You-Rock!:

Playing the options is not advisable unless you have money that you don't care to lose completely. Regardless of how many books you read and what formulas you follow, the market's vicissitudes are unpredictable within the time frames of options. Stock trading involves less risk and the returns in the long run would be better.

nearly all my retirement income is in index funds. i own a few individual stocks that i bought when i rolled over an IRA ten years ago. i have done very little trading. before you get into options and derivatives please do yourself a favor and read these books:

-- http://www.amazon.com/Bogle-Mutual-Funds-Perspectives-Intelligent/dp/0440506824

-- http://www.amazon.com/Random-Walk-Down-Wall-Street/dp/0393330338/ref=sr_1_2?s=books&ie=UTF8&qid=1361760023&sr=1-2&keywords=a+random+walk+down+wall+street

-- http://www.amazon.com/One-Up-On-Wall-Street/dp/0743200403/ref=pd_bxgy_b_img_z

--http://www.amazon.com/Uncommon-Profits-Writings-Investment-Classics/dp/0471445509/ref=sr_1_1?s=books&ie=UTF8&qid=1361760192&sr=1-1&keywords=common+stocks+and+uncommon+profits+by+philip+fisher

also warren buffett's size prevents him from buying too many equities. when he wants to buy something he thinks is of value, he generally ends up buying the whole company.

buffet often buys s&p options to.play the direction of market but mostly to protect his investment.
prop put it correctly.
if you have to read one book only, read max's suggestion random walk .....
seriously, options are very risky and one can lose all capital.
if you are asking for advice on this forum, you are not yet ready for options.
i am joining the chorus and suggest, please don't do that.

thnx for posting

will read tomorrow

thnx to the academy
thank you all
my crew and the entire cast

seven wrote:thnx to the academy
thank you all
my crew and the entire cast

i see the problem is you guys are focusing on losing money while i am talking about losing opportunities!

i originally typed, i'll put trading options on hold for now. but as i was typing my response, got a text from the friend who introduced me to the benefits of trading options. now, the text wasn't about this but it's still a sign. so here's what i'm going to do. allocate a small percentage of total portfolio to option trading.

will post updates as i learn more and maybe we all can retire rich 10 years from now $-)

seven wrote:i see the problem is you guys are focusing on losing money while i am talking about losing opportunities!

i originally typed, i'll put trading options on hold for now. but as i was typing my response, got a text from the friend who introduced me to the benefits of trading options. now, the text wasn't about this but it's still a sign. so here's what i'm going to do. allocate a small percentage of total portfolio to option trading.

will post updates as i learn more and maybe we all can retire rich 10 years from now $-)

you sound like you've been to a seminar. ARE YOU TIRED OF WORKING FOR YOUR LIVING? DO YOU FEEL LIKE YOU NEED MORE IN LIFE? ARE YOU READY TO TAKE THAT NEXT LEAP INTO WEALTH? IF SO, HAVE I GOT A BUSINESS OPPORTUNITY FOR YOU? FOR $225 ANNUAL MEMBERSHIP AND A SMALL MONTHLY FEE, YOU HAVE UNLIMITED ACCESS TO MY EXPERTISE AND TRADING TOOLS. CALL NOW, OPERATORS STANDING BY!!!!

LOL you're funny

seven wrote:i see the problem is you guys are focusing on losing money while i am talking about losing opportunities!

i originally typed, i'll put trading options on hold for now. but as i was typing my response, got a text from the friend who introduced me to the benefits of trading options. now, the text wasn't about this but it's still a sign. so here's what i'm going to do. allocate a small percentage of total portfolio to option trading.

will post updates as i learn more and maybe we all can retire rich 10 years from now $-)

I was expecting DesiChatter, but looks like he is not logged in.

Since you have decided to take the plunge. My comments are below. If in a year's time, my comments were helpful to you , do let me know. I would be glad, I was able to actually contribute with my posts, compared to the usual time wasting, inane stuff.


Somebody else here gave sound advice. Options are NOT for the faint hear-ted. Always be prepared to lose money and first imagine yourself having lost the money. Can you deal with the stress of that loss ? Even if one loses 3K, it is big money and one needs to work for a few months to save that much. Only surplus money that can be earned back through your normal work (before you actually need them) should be invested in options. Options are VERY HIGH RISK/ high returns trading instruments.


CBOE is a very good site to understand options.
http://www.cboe.com/LearnCenter/Concepts/default.aspx

My list is a little long. But I really do not think I can cut them down.

Main Worries
a) Folks always say, that the only thing you will lose in options, is your premium. This is only applicable for Out of the Money options. For in the money options that expire, you can get screwed, wiping out your entire portfolio (not just what you invested in options). Thus, there is NOTHING called allocating small portfolio in options, unless you make it a point to sell, all your "in the money" options, before they expire.
Let us take an example: You bought 20 contracts GOOG Mar 16 $820 options for 2 dollar in premium. This means
you have the right to buy Google share at $820 on Mar 15, immediately after Market Close. On Mar 14th GOOG closes at $800. Your options are worthless and you could not sell them. You also think on Mar 15, your options are going to expire worthless. So you are prepared to lose 20*100*2 = $4000 + 30$(commission). However, GOOG share closes on Mar 15 at $821.
Suddenly your options were in the money. On Mar 15 before 1.30 PM your brokerage will excersize your options and will buy 2000 GOOG shares. i.e. 1.64 Million $. They would expect you to have the 1.64 Million dollar ready to cover the purchase.
You can actually request preventing the excersize of shares if you call before 1.10 PM, but there is no guarantee.
On Monday morning you are aghast and want to sell the shares. Unfortunately Monday morning GOOG opened at 805 and went down to 800, before you could sell it. Now you would have lost $40040 instead of $4030.
In addition, before brokerage use their own money, they will liquidate your entire portfolio to get money for the $1.64 million, and could charge you margin interest for the rest. If you do not sell by settling period, they could go after your other assets.

b) Options can generate you fantastic returns, if you basically know when to buy low and sell high (call options), OR sell short (put options) before the stock goes down. It could amplify the profits by 3 to 4 times (compare to stocks), but also make you lose every single dime you invested. If we do not know, when to pick a stock at a favorable point in its trend OR if the stock does not change in price, Options will basically lose money at a drastic rate, and before you even know it, you will be left with 0$.

c) You have to REMEMBER, the exact expiry date for monthly options (mostly second or third friday of every month) and keep track
of its price, if it is closer to expiry for the reasons mentioned in (a).

d) Sometimes, the options expiry friday co-incides with the day after thanksgiving or some other important day, and the market can end up closing earlier than usual and if you forget to sell your in the money options, you are in trouble.

e) Another big concern is that, you have all these options and there is an emergency, but you still have to sell before expiry. There should be a second person (may be your spouse/close friend) who also has access to the account, and can remember the deadlines and sell all the options, in case you do not have internet access OR pre-occupied with something else.

f) Options involves high cost commissions, and brokerage companies get rich at your benefit. If you were paying $10-$20 for each stock trade, now you will be paying $10 + 1c per share approximately. So buying 30 contracts will set you back by $40, and during selling another $40.

g ) Options make taxes a bigger nightmare than what it already is, unless your trading company gives you cost basis info and p/l statement. Especially with wash sales it is even more daunting.

Strategy suggestions
1) Buy options with a 3-6 or even 12 month horizon. (shorter horizon like 2 months only if you are sure of big movements > 10% within that period).
2 ) Have a fixed goal for how much you want to get out of it. For example let us say you want to aim for 50%. Once you get 30%, pull out the original principal + 15% and only invest the rest 15%. Otherwise the Market's vagaries will catch up with you. This way you at least got 15%, even if you lose the remaining 15%.
3 ) When you buy a call or put, make sure that you are not paying a big premium over the intrinsic value of the option, which keeps reducing every, passing day by design. Some good trading platforms give you this intrinsic value info.
4 ) Remember, options trading involves buying and also selling within a finite time period, without excersizing. So you need folks to sell it to. So stay away from Low options volume, stocks. Only buy options where there is high volume open interest.
5 ) You can reduce your premium by actually placing a buy to open and pair up with a corresponding sell to open. This limits your gains, but reduces loss when the stock moves in the direction opposite to the one you intended. But, it comes with its own complications when you want to sell the options to close the transaction. So would not recommend this for newbies.
6 ) Options lose value as the days get closer to expiry date. So, investing in options on stocks which do not move around much, is a money losing proposition, as even if the price does not change, the value of your options portfolio is trending down to zero (good stock for options for example HON/BRCM, if you can predict how it will move, bad stock AT&T).
7 ) Always sell at least a week before the expiry date. Stocks are prone to manipulation by the biggies, around the options expiry dates.
8 ) Stay away from weekly options (it is basically gambling in another form).
9 ) Sell the options once their value goes below 80% of original price, unless you are very sure that the stock will change direction and recover your 20%. Considering that this rarely happens, a simple strategy of always selling once it hits 20% loss, limits your risk.
10) Option prices can vary a lot within the hour, so stop limit /market orders can result in heavy losses, which will be more than anticipated.

some very good suggestions, RE. I was thinking about this other strategy where i could write a call option at a higher price and collect some cash now (assuming the money is higher than the transaction fee).

and then write a put option for a lesser amount, in case the shares drop and i want to buy. just as long the transaction fee is less and i am making some money...what have i got to lose? my peace of mind ofcoz!

i am starting to realize this is too much work (not to mention risk) for little more profit (if u minus the brokerage transaction fee).

the little more profit is not worth all the trouble. i always go shopping on black friday ...its no big deal...just saying. i will learn to be happy with watever dividents my shares pay (for now).