Tower1 said that "Options as a Strategic Investment" (Best Book) " and that it made him good money.
my knowledge on the financial markets is a bit limited so if people could post their views and experiences on options, I'd be very grateful.
Ppl say options is speculation, its risky. But then isn't normal equity/debt investment risky, its all about speculation. Although there is a time constraint, less money is at risk in options. Why does everyone say it is risky business???
Tower1 said that "Options as a Strategic Investment" (Best Book) " and that it made him good money.
You probably do not want to exercise options a few months before the expiration. That is giving away money. Also, if you are going to buy a way in the money option, you should buy a future. The leverage makes it a much more attractive speculation.
Options can be a huge loser if you do things like this. Options are just like any investment. If you don't know what you're doing, you can get hurt. If you sell a stock short, you can lose your house too. A simple rule is never invest in anything you do not completely understand.
I will post more when I have more time. I have a couple points about some of the strategies mentioned here.
I understand that you work in the pit trading options or something like that. How true is it that 90% or more of options expire worthless? I have often heard that it is much better to implement sell strategies for options instead of buying, what are your views? Thanks.
What is the difference between options and futures. i've done some reading but it sounds the same. Key differences please...
Big difference betweem futures and options....Futures are contracts to DELIVER or make delivery of the underlying at whatever strike, while options are the RIGHT to buy or sell the underlying at the strike....in other words when u exercise an option you don't actually get whatever stock or future the option is for, you still have to pay for that underlying, while when a future expires you actually get delivery of the underlying. If you are just starting out in options/futures trading, i would say try trading index options by only buying puts or calls, hedge them if you know how to hedge gamma, or just take positions, but i would not recommend selling options for a beginner because there is infinite downside. And I don't know what kind of capital you have, or what kind of trading you want to do in futures, just know that index futures and any kind of futures contract can get away from you very fast so make sure you have an idea of what you are getting into.
I have some other questions for you. What career opportunities are available for someone who is interested in the futures and options markets? How tough is it to get into those fields? Thanks for any help.
East coast Greek & all,
i always thought that with options u can only lose what you put down originally, so i don't understand what u mean by
"but i would not recommend selling options for a beginner because there is infinite downside" ???
Furthermore, is there more risk with futures rather than options in their simpest forms?
In selling options (or writing options), you take the opposite position to somebody buying options (if you're buying it, somebody's selling it, right?)
The premise in selling options is that you make a small amount of money to give somebody the right to buy/sell shares from/to you, at a fixed price.
EG: You sell the option to buy XYZ @ $50. Right now, it's at $45, so there's not a big risk to you. But say it doubles, the fair market value for the shares is $90. You have to sell shares to the person who has the option for $50. This is especially dangerous if you don't actually own shares of XYZ. That's where the term unlimited liability comes from.
As far as the risk question goes, it really comes down to how you play them... Options can be extremely conservative, or extremely risky, in their simplest forms...
As a side note, while in business school I took a course on derivatives, where the whole term was spent showing that just about any transaction can be replicated by derivatives and bonds, and how to use the payoff structure to synthetically replicate any structure, looking for arbitrage. Very interesting course, opened my eyes to derivatives. One of the midterm questions (a freebie) was: Explain how ordering a pizza is a derivatives transaction.
velt1: Where did you go to business school? I'm in the MBA program at Indiana. I'm taking the derivatives course in the spring. I'm actually from the math dept, so I'm extremely tired of the marketing and corporate finance.. ugh. I can't wait..
kbhat: I'm finishing up at the Degroote School of Business at McMaster Univeristy (Ontario, Canada).
Just to be sure there's no confusion in terminology, it's an undergrad, not an MBA. However, the final year MBA's did the same courses, taught by the same professors, using the same texts.... In my trading course, one of the MBA groups copied my groups format for our trading report down to the color scheme... :)
The derivatives course I took was great.... Extremely hard, and it was easy to forget the value of it while bogged down under the work, but now looking back, I can get the "meat" of the course and use it to really understand derivatives and application to trading strategy. That, combined with a course I took that used real time trading simulators, were the two best finance courses I had... Not the dry, boring, very hard to apply corporate finance, but actually something that you can use.
I am surprised at the number of posts here.
I am an options trader at the New York Mercantile Exchange. The end of January is a good time to look for positions. Before the holidays is a slow time. People are closing down their books for the year.
At the NYMEX, most traders start off as clerks. It's a thankless, entry level job with few perks and small salaries. From there, if you show promise, someone will put money behind you and give you a percentage of what you earn. It is a dog eat dog world.
If you have good academic credentials, there are training programs at some of the major investment banks--Goldman, Morgan, CSFB, etc.
I wanted to address some of the things that were stated early in this post.
A future is the OBLIGATION to make or take delivery on a commodity. If you have open interest in a futures contract after first notice (the earliest date futures can be exchanged for physical products), you may have to make delivery arrangement. If you have open interest after termination (the last day a future trades) you MUST make some type of arrangements.
There is no strike price for futures. You have to settle up at the end of each day. You are long a future and it settles down on the day. They take money out of your account on THAT DAY. If you are long and the future settles up that day, you will have extra money in your account on that day. That is the difference between stocks and futures along with the leverage component.
With options you have the choice of whether or not to exercise. When you exercise them, you have a futures position. You do not have to take delivery on physical product. The strike price is the pivot point where your options go from having intrinsic value to no value or vice versa.
Now that the basic difference is out there I want to address these strategies. As a general rule, I have seen dangerous advice on this board many times. Check out anything you read on this board before acting on them. People can make any claims they want with anonymity.
1. Buying deep in the money options is not the best way to play things. Buying futures has better leverage. Just remember to put a stop in so that you can limit your downside risk.
2. Options lose value everyday when there is no movement. The time value of the options "erodes" daily. At the money options have the biggest time value component. You have to do some analysis to determine if it is better. Also if you are wrong your outlay is greater for at the moneys. That is more money gone. I am not trying to say that At the moneys are a bad buys. I am just saying there are no constants in options.
What do you guys think of John C. Hull's derivatives book? I'm thinking of buying it in the next few days.
3. Do not exercise your options early. A little bit of theory to tell you why: For call and put with the same strike price, the following should be true--
Callprice - Putprice = Futuresprice - Strikeprice
What this says is that the time value of a call and a put should be equal. Therefore if you exercise an option I sold you, I am getting that option back without paying the time component. On exercise, you only get the intrinsic value. I will then sell that option for the intrisic value PLUS the time value portion. You should sell it instead of exercising it and you will get more money.
4. "I have often heard that it is much better to implement sell strategies for options instead of buying." Selling options will help you to make money if there is not much movement in the futures market. However, if there is a large move, you can lose an unlimited amount of money. Before you can use selling strategies, whoever clears your trade asks for financial information about you and checks your credit. Be careful selling options in volatile markets. Buying options is not the secret to millions either, but there is finite risk in being long options. Risk management is key whatever you trade.
Butterflies can be a great way to trade, but not foolproof. First of all, you must be cleared by your brokerage to be able to sell options short. Be sure you have a reliable way to price them, or making money on them can be hard.
Hull's book is focused on pricing options. It has little about trading strategies. If you are looking at this academically and mathematically, that is a good book. Executionwise, it is not as good as Natenburg's book.
Thanks so much for the commentary about options, I really appreciate it. Are there any rules concerning when to buy an option verses a futures contract? Is it better to implement an option spread (a bull call or bear put spread) instead of buying a call or put? I have not researched butterflies but I have heard that it is strategy that brokers love their clients to implement due to the huge commisions that are incurred.
Please keep the information coming. It is great that you are willing to share information and you are an options trader of the New York Mercantile Exchange. I feel like I am getting it directly from the source. Thanks again.
tower1, how are you coming along with your bull put spreads? What are your percentage of winners verses losers?