23
Dec
Learn Option Trading

Learn Option Trading

Why would I say such a thing?  Options seem very foreign at first, like a language you are hearing for the first time, but after you learn more about them, they become simple but alive at the same time, which makes them complex.  What I mean by this is options can be very understandable, but since they are driven by people, they take on human behavior, so the option chain is very much alive and is forever moving and changing.  This behavior, however, can be somewhat accurately understood and forecasted, just as we can often times predict how a human would react in a particular situation.  Sometimes computers and technology get in the way though, and then we have an unpredictable behavior and pricing that can arise out of the options chain.

Right now I’m watching Gold Finger, an old Bond movie from the 60’s as I type.  Who says work has to be unpleasant all the time?  Sometimes I write my blog from the beach or way up in the mountains over looking the Bay.  You can also catch me at Panera writing next to a hot cup of herbal tea, doing my best not to spill it on my keyboard.  I haven’t yet, keepin’ the fingers crossed.

A Few Tips to Learn Option Trading Faster

Think of the options chain this way.  The shorter-term months are shorter option chains.  There is not as much time left, so there is less chance the underlying will move a great distance, so chains are shorter.  Then, there is little time premium left, so option prices are less.  Now, since prices are less, each option’s price changes really fast, relatively speaking.  A 1.00 contract can change .50 and that is 50%.  This means closer months are more volatile and unstable.  Since the chains are shorter, any short strikes OTM will be closer to the money, which means there is increased expiration risk.  Theta increases near term, but risk increases more, so there is no advantage to it with the exception of volume, but sometimes that runs out on you too with limited time.

Options farther out in time are more stable.  Prices are greater and IV moves relatively less, in fact up to 4X less farther out in time.  I did studies on this many years ago and created a table for it.  Now, other people are learning about the benefits of long-term contracts.  The more we educate people, the better it will be for everyone.  Fills would be faster and spreads tighter if more people understood options better.  It does look like the SPX open interest is picking up on leaps and options out a few months.

A Tip on Volatility and Theta

Don’t ignore the effects of volatility on your trading profits.  Most traders focus on Theta, but that is a mistake.  Sure, keep Theta in the back of your mind, but the truth is you can make more money from Vega and Delta.  Learn to master these Greeks, and you’ll be a much more profitable trader than the Theta trader.

Learn Option Trading with a Friend

Options trading could be more fun to learn with a friend.  Do you have any buddies that might enjoy options trading?  Understanding the trading concepts could come easier if you study with a friend so you can carry on conversations about option Greeks, trade structures, adjustment ideas, trading systems, money management, brokers, etc.  It’s fun right?

The Rewards

The obvious is once you master options trading, then you can travel around the world and make money from anywhere you are in the world.  You can be in Italy one moment, trading at night, and be in Hawaii the next trading in the early break of dawn.  Options are fun when you do them right.

 

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SJ Options Reviews by Jason

Hi Morris,I’m doing okay with HFM.  With real money, I closed a couple small positions for a total of +$10k.  I have an open position at +$2500.  So you can add me to the list at +$12.5k. Original email:

SJOptions Review by Jim

Hello Morris, I had 4 really small trades on last week.  I made $8,300.  My confidence is growing with these trades and I’m starting to put more capital to work.  I put 2 trades on Friday and will do the same this week on any pullback. I’m up to about 75 hours of backtesting now.  […]

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