Options Trading
 

puts, calls, whatever

Can anyone explain how to do it and make money?

Read "Live on the Margin" by Patrick Schulte. Long story short he was a commodities trader and left the business to travel the world with his wife Ali. It's a book in layman terms on how it works. His website is Bumfuzzle

Hope that helps.

Sell what you don't own and buy what you don't want!

Try this: buy low and sell high.

rjp

Google "investopedia." Months of great reading.

Ive been mostly trading options the last few years and have done pretty well (actually made money, not lost money). Selling naked puts and covered calls are my prefered MO. I much prefer to sell an option contract than to buy one. I like to sell a Put, for example, on a good stock I wouldnt mind owning anyway. Im selling time, and like the song, its usually on my side. If I end up getting put the stock, I get it at a discount to what I thought was a good deal before the option income. If the stock goes up, what Im usually hoping for, I keep the option premium. Even if I want to buy a stock, Ill almost always buy it through selling a put option.

I get very itchy buying option contracts, so I usually avoid that. Time is constantly deflating the value which you have to make up for in addition to wanting the underlying stock price to move in the desired direction.

I got started with option trades using the Motley Fool Option service. Its a great learning tool and they have some pretty good picks. Tho, I tend to make a lot of trades on my own now.

Hit the nail on the head right there...do this over and over and you'll be a rich man.

Highly speculative trading only for the faint of heart. The best way to make money with options is the way the big boys on Wall Street do it... by controlling demand. For the rest of us it is a risky gamble.

Im not saying the risk isnt there, but there are many many ways to use option trades. They may not all be as crazy dangerous as you think.

The most well known option trade is to just straight out buy an option contract and hope it makes wild money in a short time. But like I said before, I dont do that. There are numerous other strategies that have far less risk.

As with all investing it depends on your goals and risk tolerance. One of my friends played the options game for about 5 years and made a container ship load of money. He was in the right place at the right time with a keen awareness of market movements. Most others didn't fare so well.

I am much more of a long term guy and I hate losing money in the market. After a 5 yr pause, one of my silly index funds manged to appreciate over $100k last year. This with effectively zero long term risk of losses. The only requirement here is patience and the only cost is opportunity. This is not the investment tool for everyone but it works for me.

Different strokes for different folks so choose your investment tools with eyes wide open to both the potential upside and the downside.

I did well in crude oil speculation several years ago but it was pretty obvious what they (speculators, investors) were doing to the market.

You aren't going to get what you need to know here.
Read a hundred books, develop a strategy, try it on a small scale and then start over. Repeat that several times and you might have a chance. By that time the conditions will change and you're strategy will be obsolete.

If it was possible to beat the market with these tools, everyone would do it. If you don't do it for a living, and have the resources of a trading house behind you, don't do it at all. Trying to compete with the guys with supercomputers and all the insider information is like taking your money to Vegas and betting against the house - you are playing their game with their rules. Sure, you could win. The odds are just very much against it.

Several years ago the guy who ran the investment portfolio for Yale retired. He had a brilliant career beating the market and wanted to write a book telling individual investors how to replicate his success. He quickly realized that only someone with the resources available to an institutional investor could do what he did. He ended up writing a book that told individuals that the only way they can make money in the market is to invest in value companies for the long term and benefit from their appreciation over time.

This is good advice. The individual investor, no matter how well educated, motivated and informed, cannot compete with the people who trade with exotic investments professionally. You should not try to. Invest for the long term in companies who have underlying value and you will make boring but good returns. Try anything else and the law of averages will eventually get you.

You can also use options as a hedge, i.e. as "insurance" - dunno if it is worth it for an individual.

Or you can buy some sort of insurance on the underlying option - again, dunno

I have a friend who makes lots of money in options, but while he lacks the resources of an institution, he far exceeds the puny millionaire in his resources.

YMMV, at least for the short run...

One last thing for anyone wanting to trade options- Most online stock brokerages have pretty weak option trading tools. The best Ive seen is Optionsxpress.com. It is made for options trading, is not expensive, and has all the bells and whistles.

Phenomenally risky.

I you have skills better than the next bloke sure, go for it. I've been buying and selling stocks since I was a kid and wouldn't go near it. But I'm no expert on either.

Don't do it. And don't trade warrants either.

I was an institutional derivatives trader for 20 years. Owned seats on 4 exchanges, and pretty much have traded the gambit of options out there.

I would be happy to help you if you have particular questions along the way. I am sure I know just about every strategy you'll come across and all the ones you don't too.

Options are really about math, more specifically about probabilities and statistics. It really doesn't matter what the underlying is when you get into the nuts and bolts of why options are priced the way they are. Most institutions don't trade with a big axe to grind, a lot more often than not their derivatives plays are not directional. The strategy they are employing is usually part of something larger, so looking at what they do is generally not going to help you.

I use the professional version of Think or Swim, its called Think Pipes. TD Ameritrade offers Think or Swim and its really an excellent platform. I would say its easily better than any of the professional platforms from a few years ago.

When I started we pretty much did everything by hand with a calculator and then as the market moved we had to estimate new values. Today few of the traders know any of that and they don't have to because with a few clicks they can identify anything thats not priced to perfection and then find out why.

One of the reasons I left is because the theoretical edge in the market, the part as a market maker you make your living on, got very very thin and I had to trade huge size to earn what I easily did just back in 2002 or 3. Thats great for the retail user and the end institutional user but it stopped being worth my time and effort. I find running a few strategies that I prefer and not having to deal with the constant churn of being a market maker suits my life much better these days.

I still love options and I still trade quite a bit.

trader, what do you think of the book Get Rich With Options: Four Winning Strategies Straight from the Exchange Floor by Lee Lowell?

Here's what you are competing against and what Trader is referring to. My wife comes from a famous family of intellectuals in China. The most distinguished of her father's generation was a physicist who was nationally known in the Bamboo Curtain days. The wall fell in the 1990s and his son, my wife's cousin, was a physics student of some repute in his own right. Right after the Tiananmen Massacre he was desperate to go to college in America, like every other educated Chinese. But he needed a full ride scholarship with a living stipend because he had no money. He asked me for advice on getting into schools in America. I suggested the Big 10 land grants schools, smaller science-oriented colleges, and every angle I could think of to get a Chinese-born student to the US on a full ride scholarship. He kept looking at me blankly like he didn't understand what I was saying, and I assumed he didn't understand my English. He would listen to my suggestions and would always steer the conversation to the Ivy League and Stanford. I told him it was so hard for brilliant American students to get in those schools that he shouldn't try since it was impossible for a foreign born student to not just get admitted but be given a full ride plus living stipend.

He thanked me politely and promptly placed Harvard, Stanford and Colombia into a bidding war for his attendance. He ended up taking Columbia's offer because Harvard's physics lab wasn't up to his standards and he liked the research being done by a professor at Columbia. They paid him to get his Ph.D. in physics, and after a short time as a professor himself, he did what people with the ability to calculate a derivative to the nth degree do in America, he went to work for a major Wall Street trading firm where he, a roomful of others just like him and a batch of supercomputers crack the numbers necessary to work the equations that make his derivatives .01% better than the other firms'.

Common people can use puts and options to mitigate their risk, and as Trader points out, you as a consumer can have a different time horizon and strategy than the boys with supercomputers. So you can get a good return. But you cannot beat the Nobel-caliber brains with supercomputers who work their equations 24 hours a day. If anyone could, Warren Buffett would already be doing it.

Anyway, buy a couple of nice index funds in different sectors with 90% of your funds, invest the dividends and profits, enjoy the compound effect of your reinvested returns, and speculate with a tiny percentage of your portfolio.

Trader220, I always enjoy and appreciate you insight on these type of threads. Same for you MRM (not just financial stuff)...I just condensed it down to the Reader's Digest version for anyone who has to "ASK" the question to begin with :D