How to trade stock options

[dfresh1988]

I'm looking for educational material or websites from which I can learn to trade stock options. Does anybody have a good place for me to go to learn the principles of this topic?

[Naples09]

A good place to start is investopedia dot com. However, I will warn you that you can lose money very quickly with options. I assume you want to trade uncovered calls/puts, which is very risky.

[dfresh1988]

I've read the articles on investopedia. I've got a basic understanding of what they are and the jargon that goes along with them. I was looking more for strategies and hedging purposes.

[bjl584]

Do you know anything about basic investing? Stocks? Mutual funds? Etc?

If not, I wouldn't get involved in options. Options trading really isn't investing. It's more akin to gambling. You can lose everything really quick if you aren't careful and don't know what you are doing.

[dfresh1988]

Yes, I've had an IRA for 5 years now that I have been investing in mutual funds and stocks. I've read a dozen or so books on investing, but none that have gotten into detail on options. I am aware of the risk of options and would never just jump into them unknowingly. That is why I am looking for material to learn about them.

[jpg7n16]

Everything you need to know: The Options Industry Council - Giving You the Power of Options

They offer 5 different ways to learn:

• Online classes
• Online webcasts
• A virutal trading center
• Live seminars
• Audio & Video podcasts

What has you interested in options?

Yeh, they're cool, but they're not for everyone.

[KTP]

The only option trades I have made significant money on are buying microsoft Jan calls in the late summer when the stock is in the mid 20s and selling them in Jan when it is close to 30. This one trade has made up for the other 10 option trades where I lost money...every year lol.

I do have one strategy I am trying out for the month of Feb., but on a very small scale. I bought 2 CMG Feb $370 call contracts for $10.10 and sold 2 CMG Feb $360 call contracts for $16.30. I netted $1240 into my account and get to keep it if CMG falls below $360 after Feb earnings (I think very likely because of the nosebleed valuation). I have $760 at risk in this trade.

Other than that, I am going to stick with just the one option trade each year on microsoft from now on.

[pdweaver]

I traded options with Etrade and Interactive Brokers.

Etrade provides tons of great how to videos on trading options, as well as all the strategies.

Interactive brokers also had videos. These guys have much cheaper commissions by the way.

You tube has some great how to articles on strategies. Be careful though, try and watch only the videos that have the most views, as well as the highest rating to ensure you are receiving the best advice.

[rvtraveler]

tastytrade.com

These guys know what they are doing.

[KTP]

Originally Posted by pdweaver

I traded options with Etrade and Interactive Brokers.

Etrade provides tons of great how to videos on trading options, as well as all the strategies.

Interactive brokers also had videos. These guys have much cheaper commissions by the way.

You tube has some great how to articles on strategies. Be careful though, try and watch only the videos that have the most views, as well as the highest rating to ensure you are receiving the best advice.

Etrade is *ok* (I have one IRA with them that I am too lazy to move), but Optionshouse has been far far cheaper for me, both on stock and option trades.

Aside from the fact that Optionshouse gives you 100 free option trades when you open an account (that alone is worth at least $500), they charge $5 per trade for up to 5 contracts or $8.50 plus $0.15 per contract for unlimited. Etrade charges $9.95 plus like $0.75 per contract.

This is a big deal when you are buying 400 Microsoft Feb $29 calls for $0.28 and selling them for $0.70 a few days later. Etrade commmisson on that is like $300, optionshouse is under $70

[aditi]

there are many ways for learning about options like online you can take help of experts, institutes are there to help u how it works in stock market, you can join conferences to learn about options.

[kv968]

Originally Posted by KTP

I do have one strategy I am trying out for the month of Feb., but on a very small scale. I bought 2 CMG Feb $370 call contracts for $10.10 and sold 2 CMG Feb $360 call contracts for $16.30. I netted $1240 into my account and get to keep it if CMG falls below $360 after Feb earnings (I think very likely because of the nosebleed valuation). I have $760 at risk in this trade.

You might want to close that spread out KTP if you haven't already. I think CMG is overvalued too but it seems as if it can do no wrong at least for now.

[KTP]

Originally Posted by kv968

You might want to close that spread out KTP if you haven't already. I think CMG is overvalued too but it seems as if it can do no wrong at least for now.

Yeah, I was totally wrong. I still have the spread but it is looking like heading toward a total loss as the CMG bubble just keeps inflating. Oh well. In that same account I have an Apple spread and some BAC stock that more than make up for the loss...can't be right all the time.

[kv968]

Originally Posted by KTP

Yeah, I was totally wrong. I still have the spread but it is looking like heading toward a total loss as the CMG bubble just keeps inflating. Oh well. In that same account I have an Apple spread and some BAC stock that more than make up for the loss...can't be right all the time.

You're right, can't win 'em all but it was good thinking though since I'm sure it'll drop pretty good at some point. I hate it when the overall thinking is right but the timing is off which is amplified with options.

I would think you would want to close the postitions or at the very least the Feb $360. Aren't you worried about possibly getting assigned? And the theta is going to really start killing you on the 370. Or am I thinking about it wrong?

[gambler2075]

Ahh... options. I never have traded an option in my life and don't plan to. Well, at least I don't plan to trade any options naked.

(For those who don't trade options: Naked Option Definition | Investopedia)

For me, the risk of ruin
Risk Of Ruin Definition | Investopedia
is just too much, and I don't think most new traders understand it.

This past week I was snowboarding with another new trader who had been trading aapl calls. He was a fairly new trader (2 years of experience) and had an account of about 7K$. Well, he was fortunate to have bought 5 Mar aapl 455 calls about 1 month ago, which had tripled in value. On thursday morning, due to AAPL's massive move in the past month, they were worth about 20K$. Awesome trade you could say, however, of course it is not a profit until you sell. And to go even further, it is not a profit until you take the money out of etrade fantasy-land (ETFL) and spend it on something.

Anyway, I saw a little of myself 5 years ago in this new trader (I consider anyone who has traded less than 3 years or maybe 500 trades "new"). First, he violated the first rule of trading "You don't talk about trading around non-traders".

You can tell when someone is a noob in trading, because they will be in a public place and say something like "Man, I can't believe I left 1500$ on the table this morning with my aapl calls"... or something like that, knowing that other people can hear them. It is kind of an attempt to subconsciously gain reassurance that you are a successful trader, and it comes out involuntarily. I guess noob traders want to feel validated in their trading and want others to think they are some sort of trading high-roller. I admit that I was a little embarrassed to be associated with him at that moment. It's also silly to do this, for two reasons. First, when people hear something like that, they assume "Ah, this person just got into trading, and just got lucky... It is just a matter of time before he blows up"... and they chuckle to themselves a bit. And rightfully so, as the fraction of people who are actually successful in trading is like 1%, and they are not the ones talking about trading. My friend has clear flaws in risk management that are extremely likely to result in him blowing up in the future (that I will get into later). The second reason not to talk about trading is that even if other people would believe that you are profitable (doubtful) then they would actually start to dislike you. I ran into this problem when I had so many people at work asking me about trading after I told one friend... ONE PERSON that I had paid 200K$ in taxes from trading profits, who I thought would keep quiet about this. I was pestered with trading questions mercilessly after this, and as a result I decided to give a 1hr lecture on my techniques, which was a bad idea, because afterwards, a few people cornered me and said "Well, what are you contributing to society by trading? I mean, how does it help the world?" I replied, "Well, I paid a ton of taxes, and nothing is guaranteed. I mean, I could lose all my money next week".

Anyway, it was a dumb idea to talk about trading, and I learned my lesson.

But anyway, back to the topic at hand, trading options. So my friend who has those aapl calls (which he has not sold yet, btw, thinking AAPL breaks through 500) has some severe risk management weaknesses that will very likely result in his downfall.

This weakness is one that all traders face at some point, and typically results in them blowing up their accounts at some point. Most traders start out completely terrible at trading, maybe spending a few years blowing up their accounts buying high and selling low. After a while, they get a little better, maybe able to lose money at a slower rate
Maybe they even are slightly profitable and have a slightly positive expectancy
Trading 101: Expectancy — TraderMike.net
However, they take on trades where they have the potential to wipe out the account. This could be something like going on 4X margin (been there, done that, got the margin call ) or buying naked options.

Think about it this way. Let's say you have a trade where you have an 80% chance of being right and doubling your money. And a 20% chance of blowing up completely and losing all your money. Now, you could take that trade a few times, and get lucky, but eventually probability will catch up with you and you will land in the 20% that blows you up. If you are trading with your entire account, it doesn't matter what your account value is, but it will still go to 0. Even if we change 80-20 to 95-5, it is still inevitable (with enough trades) that you will blow up. This is where risk management comes into play. You never want to be in a trade where an extremely unlikely (but possible) result could blow you up. This is where my AAPL friend is... if he had a bad AAPL gap down, the calls would have been wiped out and he would have been to 0. Or maybe 500$ or something like that. And the fact that he is trading that way is why I consider him a noob.

Options have the ability to make you a ton of money, but a non-zero chance to wipe you out. And that is why I avoid them.

Sorry for the verbose post.

g

[kv968]

Originally Posted by gambler2075

However, they take on trades where they have the potential to wipe out the account. This could be something like going on 4X margin (been there, done that, got the margin call ) or buying naked options.

Options have the ability to make you a ton of money, but a non-zero chance to wipe you out. And that is why I avoid them.

Sorry for the verbose post.

g

Great post. Although let me just say BUYING naked options isn't like going on margin since you're not obligated to do anything. The most you risk to lose is whatever you paid for the option. SELLING a option naked or not being hedged could cause you a REAL world of hurt.

I personally just dabble in options here and there and not quite into the "multi-legged" contract type stuff. Mostly just directional stuff which would probably be better if I did spreads more often instead.

You're right though, options do have a chance to make you a whole lot of money but also a real good chance of wiping you out too if not done properly. Even if done properly sometimes for that matter.

As far as talking about trading, I really don't to non-traders. A lot of people at work ask me what I think is a good buy every now and then just because I'm one of the only people they know who do it, but my response to them is basically, "I don't know, just buy low and sell high".

[gambler2075]

Of course selling (naked) options is a world away from buying options. I would say that selling options is like buying options on TZA or any of the triply leveraged ETF's

But my friend has serious risk management issues because he went ALL IN while buying his aapl calls.
Now I am just waiting for when he texts me "I'm starting over... changed my paycheck to direct deposit on Etrade"... which is coming. The only question about when he blows his portfolio up (again) is the timing. If I could buy some puts on his portfolio balance I would

g

[KTP]

Guys, we are talking about an option trade (CMG) worth 0.13% of my portfolio, so it isn't going to kill me to have the spread collapse

Options are about the only way I know to short a stock and take on a defined amount of risk, so if you want to go short, you need options. The question then becomes how far out do you short? I picked poorly. I really think this stock (CMG) is going to do a Krispy Kreme soon, but when? Could be another year or two. I played earnings and lost. I bought BAC at $5.20 when everyone was running scared...I won there (BAC friday was over $8).

Salesforce (CRM) is another stock that I think is going to tank, and it could happen after earnings this Feb 22. I will not be shorting it though because my CMG experiment has shown me the market is acting too bullish right now.

[ukgaz]

Originally Posted by KTP

Guys, we are talking about an option trade (CMG) worth 0.13% of my portfolio, so it isn't going to kill me to have the spread collapse

Options are about the only way I know to short a stock and take on a defined amount of risk, so if you want to go short, you need options. The question then becomes how far out do you short? I picked poorly. I really think this stock (CMG) is going to do a Krispy Kreme soon, but when? Could be another year or two. I played earnings and lost. I bought BAC at $5.20 when everyone was running scared...I won there (BAC friday was over $8).

Salesforce (CRM) is another stock that I think is going to tank, and it could happen after earnings this Feb 22. I will not be shorting it though because my CMG experiment has shown me the market is acting too bullish right now.

I brought BAC just after you at $5.28 with a covered call (strike price $7.50)

[Mr Nice Guy]

Originally Posted by gambler2075

If I could buy some puts on his portfolio balance I would

LMAO!!!