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Beginner's questions on options trading
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Beginner's questions on options trading

  #11 (permalink)
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If you want to make directional trades intraday then either use futures or 50 Delta or higher calls or puts. If your time frame is longer then you can add more sophisticated option spreads but every time you stray from the underlying with options, you add to the slippage, bid/offer spread and commissions that take away from your bottom line. The big advantage to options is you can create strategies not only for direction but for sideways markets that don't offer opportunities in the underlying but you then need a thorough understanding of volatility and how it affects option pricing.

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  #12 (permalink)
Market Wizard
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Yuri57 View Post
Isn't selling options have unlimited downside? Why is it so popular?

Finally can you recommend any really good books on trading options?

Thanks,

Yuri57

Futures also have unlimited downside.

Selling options is popular because you don't have to be correct directionally to make a profit. If you sell puts and futures go up you make a profit. If futures stay flat you make a profit. If futures drop some but not a lot you make a profit. If futures drop a lot, but you don't have to exit, and then futures go up you make a profit.

Carley Garner has several books on commodity options.

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  #13 (permalink)
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ron99 View Post
Futures also have unlimited downside.

Selling options is popular because you don't have to be correct directionally to make a profit. If you sell puts and futures go up you make a profit. If futures stay flat you make a profit. If futures drop some but not a lot you make a profit. If futures drop a lot, but you don't have to exit, and then futures go up you make a profit.

Carley Garner has several books on commodity options.

What if you futures drop a lot and than drop a bit more? How much do you lose?

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  #14 (permalink)
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ron99 View Post
Futures also have unlimited downside.

Selling options is popular because you don't have to be correct directionally to make a profit. If you sell puts and futures go up you make a profit. If futures stay flat you make a profit. If futures drop some but not a lot you make a profit. If futures drop a lot, but you don't have to exit, and then futures go up you make a profit.

Carley Garner has several books on commodity options.

This is probably the most inaccurate statement about Options as far as Risk is concern. Your description sounds like "set it and forget it".
Option selling has its benefits, but sellers are short volatility, and whoever is short volatility finds out that the underlying instrument does not have to move much during certain periods in order for the Options to expand exponentially. Sellers can buy back at a loss not linear to their expectations.
No one can say conclusively that the use of futures is better than options or vice versa.
They both have different risk components that the player accepts and feel comfortable with.

Matt Z
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  #15 (permalink)
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  #16 (permalink)
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mattz View Post
This is probably the most inaccurate statement about Options as far as Risk is concern. Your description sounds like "set it and forget it".
Option selling has its benefits, but sellers are short volatility, and whoever is short volatility finds out that the underlying instrument does not have to move much during certain periods in order for the Options to expand exponentially. Sellers can buy back at a loss not linear to their expectations.
No one can say conclusively that the use of futures is better than options or vice versa.
They both have different risk components that the player accepts and feel comfortable with.

Matt Z
Optimus Futures
There is a risk of loss in futures trading. Past performance is not indicative of future results.

And it is inaccurate of you to assume how close to ITM the position is and how much of account is used to cover margin.

If you are far enough OTM and have enough cash excess then you can set it and forget it in most situations.

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  #17 (permalink)
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Yuri57 View Post
What if you futures drop a lot and than drop a bit more? How much do you lose?

You need to provide a lot more info for someone to answer that question. What commodity? What position? How much did futures move?

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  #18 (permalink)
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ron99 View Post
You need to provide a lot more info for someone to answer that question. What commodity? What position? How much did futures move?

Ron99, whoa. Quite a statement there, and above. Futures have unlimited downside....They also have unlimited upside. But their few limits are set by the exchange, including trading price limits and expiration dates. I dunno' what options entail with this sort of thing, but I think you might be askew here. We do NOT need unlimited up or downside. We need comfort zones, yes??

Options scare the heck out of me. Futures seem much more straight-forward.

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  #19 (permalink)
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mattz View Post
Option selling has its benefits, but sellers are short volatility, and whoever is short volatility finds out that the underlying instrument does not have to move much during certain periods in order for the Options to expand exponentially.

A note for beginners, if it's not already obvious. There is a tribal language used in options that participants can often use in ways that are confusing.

For instance the "short volatility" above is slightly different from the "short Vol" I mention in my post above. mattz is referring to the general strategy of shorting options with elevated or higher implied volatility.

Where I wrote "short Vol" I was referring specifically to the volatility asset class alone, and pretty much VXX alone.
You can employ a short vol strategy with VXX regardless of whether IV is high, because you are hoping to harvest contango in addition to premium. Of course all the better if IV is high. I guess the result of shorting volatility is the same for all classes, but I think it's amplified with options on volatility products in particular.

When people refer to "short volatility" in most cases they are referring to what mattz is discussing, not volatility trading outright.


Last edited by suko; June 26th, 2016 at 09:09 PM.
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  #20 (permalink)
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ron99 View Post
And it is inaccurate of you to assume how close to ITM the position is and how much of account is used to cover margin.

If you are far enough OTM and have enough cash excess then you can set it and forget it in most situations.

I did not assume whether an option is ITM or OTM, neither did I talk about one's equity.
My discussion was a general comment as a response to your comment about Options.
The problem with your approach, in my opinion, exactly as you stated it "most situations"

Options selling is not about most situation, rather those one in a while event that spikes in volatility cause options premiums to explode. This is the debate that I have most option sellers, where their approach to options is that the further away from the money it is, the less risky. This is exactly the opposite, because the premium you collect is so small while the risk you assume is enormous. Look at situations like 2008, or Aug 2015, or look at physical commodities, where small limit move could integrate into the Options a move of 10-15 points. In the early 2000's (cant recall 2003-2004) a limit move of 1.5 points in cattle affected options that were 20 dollars out by X10 premium.

Nassim Taleb the author of Anti Fragile and Black Swan was an option traders. His entire theory about Black Swan events was the one overlooked variable of risk that gets most into trouble, therefore, again your "most situation" is misleading.

Ron, I hope you understand that my disagreement with you is professional and not personal. Many people read these posts who come from many levels. We should not set precedence that any strategy is easy.

Matt Z
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