Options Trading: A Little Knowledge Is A Very Dangerous Thing [View article]
I suspect the author has had a very bad experience with options.
While i can agree that straddles - along with most long premium strategies involving buying either calls or puts - is a profoundly ineffective way to trade options, the negative piece on covered calls and selling naked puts is highly misleading.
It has nothing to do with being "priced attractively and determining intrinsic value". Grinding out profits month after month using options is a simple probability game. Whether you sell a naked put with a 60% or higher probability of becoming Out-of-the-Money, or use iron condors, vertical spreads etc in the same probability range, your win loss ratio will always be higher than 50-50 over time.
Always sell premium (i.e mainly use spreads, and to a less extent, naked short options for a net credit rather than buy single options) in liquid underlyings (1 to 3 cent bid/ask).
It's remarkable how so many people view options trading with fear. Educate yourself, trade small, stay nimble and trade often. Doesn't matter how many books you read or how many thousands of dollars you waste on seminars. Just do it
"Assuming the trade goes my way and the stock hits $605 in July, I make $14,000 on my investment of $600. That is over 2000%. Versus your 206%."
Having looked up your trade strategy, you do realize that given where current implied volatility is, the probability of AAPL getting to $605 by july expiration is 25.35% meaning the probability that you lose money on the trade is 74.65%. Those are odds that I definitely would not want to risk on a 100k portfolio.
"There is the issue of margin, but you can simply buy less calls as in the specific example above or handle margin, in other ways." ..........
Furthermore your margin to hold that position is rediculously expensive (over 114k) meaning in the 25.35% chance AAPL tags $605 and you somehow make 14k, your profit will be 14k/114k or 12.23% return at BEST.
With that approach you will blow up your account in no time.
You are a clown. Get lost and stop misrepresenting performance figures from SteadyOptions' site. Anyone can recognise that directional stock picking is a 50-50 endeavor over the long haul. That some investors are profitable with these odds means that traders with 60% win rate or more perform just as well if not better.
"Any half-way smart investor made much more if they bought aapl at pretty much around any low that they were comfortable with" .... You would have had to buy 38 shares of Apple when it was at $260 on April 19th 2010 (roughly a 10k investment) to make around that $12376 profit, i.e you would have allocated your entire 10k portfolio to one trade, AND wait 2 years and 2 months.
I would rather allocate smaller amounts of capital (in this case $365 to make a max of $135 per contract) and make a 'measley' 22% on an iron condor every MONTH. Annualize that return and throw in the 6/10 win-loss ratio and you'd be way ahead of the curve
Options Trading: A Little Knowledge Is A Very Dangerous Thing [View article]
The main point you are glossing over is that there are traders who employ the very strategies you disparage, and consistently make money.
The overly academic fundamental-based approach you seem to have regarding 'intrinsic value' of options is precisely where many retail investors making a transition to options trading become overburdened. Derivatives trading is a very logical undertaking: You create an assumption on an underlying, use a strategy to support your assumption that skews probabilities in your favor and give your trade enough time for those probabilities to play out.
I agree completely with notion that its not just about strategy, but how you use it.
What separates a good from a bad options trader is the ability to make money (or not lose money) when your initial assumption is wrong. I've seen many newbies after learning about straddles for example, be directionally correct on a stock's movement and yet still lose money. Conversely, I have worked with good traders whose initial assumptions are proven wrong, yet scratch a trade or make a small profit.
Again I repeat:
While you admitted that you've "done very little options trading (for obvious reasons)" and "certainly never used the strategies which [you] discussed in this article", that shouldn't deter you from learning more on options trading first hand. Nor should you scare folks unnecessarily. Paper trade or live trade using 1lots for a while until you get the hang of it.
If you are a long term value investor, well then fine. More power to you. But if your experience in derivatives TRADING is limited, or you've had a rough history attempting to do so, it would be unwise to insinuate that certain options strategies aren't useful.
Options Trading: A Little Knowledge Is A Very Dangerous Thing [View article]
Excellent observation. Many traders ignore or are unaware of the sensitivity of their positions to changes in implied volatility.
When the first question a trader asks is: How much can i make? thats when I shake my head or face palm. Don't get caught up with P/L graphs at expiration.
Options Trading: A Little Knowledge Is A Very Dangerous Thing [View article]
"You can put on trades with a high probability of working, but the magnitude of the downside on the occasional trade that doesn't work can wipe out all your other profits (and much more)."
.....By that logic all hedge funds and prop firms would be out of business Having some losing trades is inevitable. If you find that " the occasional trade that doesn't work can wipe out all your other profits (and much more)", then it suggests that one needs to have a hard look at position sizing.
I used to think your way when I first started trading options ..... until I came to understand the concept of spreads, position sizing and continuous capital allocation across multiple months.
Selling premium and high probability trading is very much akin to running an insurance company. The numbers always add up.
While you admitted that you've "done very little options trading (for obvious reasons)" and "certainly never used the strategies which [you] discussed in this article", that shouldn't deter you from learning more on options trading first hand. Nor should you scare folks unnecessarily. Paper trade or live trade using 1lots for a while until you get the hang of it.
Options Trading: A Little Knowledge Is A Very Dangerous Thing [View article]
While i can agree that straddles - along with most long premium strategies involving buying either calls or puts - is a profoundly ineffective way to trade options, the negative piece on covered calls and selling naked puts is highly misleading.
It has nothing to do with being "priced attractively and determining intrinsic value". Grinding out profits month after month using options is a simple probability game. Whether you sell a naked put with a 60% or higher probability of becoming Out-of-the-Money, or use iron condors, vertical spreads etc in the same probability range, your win loss ratio will always be higher than 50-50 over time.
Always sell premium (i.e mainly use spreads, and to a less extent, naked short options for a net credit rather than buy single options) in liquid underlyings (1 to 3 cent bid/ask).
It's remarkable how so many people view options trading with fear. Educate yourself, trade small, stay nimble and trade often. Doesn't matter how many books you read or how many thousands of dollars you waste on seminars. Just do it
How I Made 22% On Apple In 3 Weeks [View article]
Having looked up your trade strategy, you do realize that given where current implied volatility is, the probability of AAPL getting to $605 by july expiration is 25.35% meaning the probability that you lose money on the trade is 74.65%. Those are odds that I definitely would not want to risk on a 100k portfolio.
"There is the issue of margin, but you can simply buy less calls as in the specific example above or handle margin, in other ways."
..........
Furthermore your margin to hold that position is rediculously expensive (over 114k) meaning in the 25.35% chance AAPL tags $605 and you somehow make 14k, your profit will be 14k/114k or 12.23% return at BEST.
With that approach you will blow up your account in no time.
SMH
How I Made 22% On Apple In 3 Weeks [View article]
"Any half-way smart investor made much more if they bought aapl at pretty much around any low that they were comfortable with"
....
You would have had to buy 38 shares of Apple when it was at $260 on April 19th 2010 (roughly a 10k investment) to make around that $12376 profit, i.e you would have allocated your entire 10k portfolio to one trade, AND wait 2 years and 2 months.
I would rather allocate smaller amounts of capital (in this case $365 to make a max of $135 per contract) and make a 'measley' 22% on an iron condor every MONTH. Annualize that return and throw in the 6/10 win-loss ratio and you'd be way ahead of the curve
Common sense
Options Trading: A Little Knowledge Is A Very Dangerous Thing [View article]
The overly academic fundamental-based approach you seem to have regarding 'intrinsic value' of options is precisely where many retail investors making a transition to options trading become overburdened. Derivatives trading is a very logical undertaking: You create an assumption on an underlying, use a strategy to support your assumption that skews probabilities in your favor and give your trade enough time for those probabilities to play out.
I agree completely with notion that its not just about strategy, but how you use it.
What separates a good from a bad options trader is the ability to make money (or not lose money) when your initial assumption is wrong. I've seen many newbies after learning about straddles for example, be directionally correct on a stock's movement and yet still lose money. Conversely, I have worked with good traders whose initial assumptions are proven wrong, yet scratch a trade or make a small profit.
Again I repeat:
While you admitted that you've "done very little options trading (for obvious reasons)" and "certainly never used the strategies which [you] discussed in this article", that shouldn't deter you from learning more on options trading first hand. Nor should you scare folks unnecessarily. Paper trade or live trade using 1lots for a while until you get the hang of it.
If you are a long term value investor, well then fine. More power to you. But if your experience in derivatives TRADING is limited, or you've had a rough history attempting to do so, it would be unwise to insinuate that certain options strategies aren't useful.
...Just saying
Options Trading: A Little Knowledge Is A Very Dangerous Thing [View article]
When the first question a trader asks is: How much can i make? thats when I shake my head or face palm. Don't get caught up with P/L graphs at expiration.
Options Trading: A Little Knowledge Is A Very Dangerous Thing [View article]
Options Trading: A Little Knowledge Is A Very Dangerous Thing [View article]
.....By that logic all hedge funds and prop firms would be out of business Having some losing trades is inevitable. If you find that " the occasional trade that doesn't work can wipe out all your other profits (and much more)", then it suggests that one needs to have a hard look at position sizing.
I used to think your way when I first started trading options ..... until I came to understand the concept of spreads, position sizing and continuous capital allocation across multiple months.
Selling premium and high probability trading is very much akin to running an insurance company. The numbers always add up.
While you admitted that you've "done very little options trading (for obvious reasons)" and "certainly never used the strategies which [you] discussed in this article", that shouldn't deter you from learning more on options trading first hand. Nor should you scare folks unnecessarily. Paper trade or live trade using 1lots for a while until you get the hang of it.
Cheers