Absolute Beginner with a few Questions

[timbosquad]

Hey everyone,

I've been studying options for about 3-5 months now, depending on what counts as studying , and I think I've got a decent sense of what's what. I'm still studying how to do Technical Analysis, and I'll get there relatively soon, I think.

This is not a thread asking about the fundamental rules most traders know (limit losses ALWAYS, do you proper research and due diligence when investigating a stock, etc.), this is more of a thread for specific questions that kept popping up as I was reading.

When I was reading up on the various ins and outs, these questions kept recurring:

-It seemed important to learn and test strategies before putting money on the line, and I imagine this meant paper trading this and that to see what happens. My question is what sort of software (free is better, but it doesn't have to be) do you guys use to do your analysis, and what have you found has the most intuitive interface?
-When creating rules for entering and exiting a trade, and yes I know this has a lot to do with my personal particular requirements and such, what are some typical rules you guys use to determine when to enter and exit a trade. I'm talking specifically about stuff like "Once i have made x% profit on a trade, I get out" or "if an option drops by y%, I get out."
-When you do decide to get out, what are the mechanisms by which you go about doing it? (Y'know, which buttons do you click or commands do you give?)
-How do taxes work with options? Is there a way to structure one's accounts or entities so that it minimizes the resulting tax burden as much as is legally possible?
-What do you consider to be "First Principles" when it comes to trading?

First, I think it's generous for anyone here to offer up any of their thoughts, and I don't expect anyone to answer every single question, and that instead answer as many as you feel you would like to.

Any thoughts?

 

[daveyc]

Hello,
I would just start with opening an account with thinkorswim. Its free to open an account and you can start trading on the paper account for practice. Its as real as it gets.

I wouldn't worry about the tax man, as long as you are making money it doesn't matter. I understand that SPX and RUT and other cash settled options are treated better (look up 1256 contracts and talk to your accountant). Just realize that most traders lose money. Learn to manage risk enough so that you don't end up on the losing side. You will have to decide for yourself your own tolerance on when to close a trade or when to take profits.

One more tidbit of advice, a mentoring program would be worth it at any level.

Good luck,
Dave

 

[market_bull]

Had some of the same questions I'd been wondering. Thanks for the response, Davey.

 

[mikeylai13]

Thinkorswim is a great broker for options and they have a switch there when you can paper trade. And there is a saying if you can't make money in you paper trade account then how can you possibly make money in your real account especially when your emotions play with you more when real money is on the line. So my next step would be after you learn technical analysis, start with trading psychology.

The way you exit is on your risk tolerance. For me this has change over time as I have started trading over the years. What i mean by this is when i first started out with a small account I would attempt to be more greedy and more risky by aiming at 100% ROI or even 60% ROI on spreads. As the account gets bigger, I get 20% now on ROI and I know the bigger accounts now aim for 5% or 10%. I use a lot of technical analysis on my exits also, so if my indicators tell me so then I must get out no matter what I think.

First principles I would say are many. Risk management, money management and then trading psychology. Always think what if I were wrong on my trade and not what lots of beginners do in thinking what if I make X amount of money.

Not sure by your question about what are the mechanisms? If you Buy an option, then the way to close it is to either let it expire worthless (do nothing) or Sell the option you bought (this is diff from selling an option you never had which is a naked put and i would advise against this unless you understood the risks involved).

Hope that helps a bit, feel free to ask more if you like

ML

 

[fullmoon]

I would like to share my experience, as I had as well so many questions starting trading. What I did: learned to read the graphics, opened demo accounts in a few companies, started demo-trading accordingly to my understanding of market situation, permanently educating myself more about trading.
On my opinion, it is very important first to make a demo-trading - it will give a lot of understanding without losing any money. Plenty of brokerage companies are offering FREE demo accounts – you can try different platforms, strategies, instruments and when you’ll feel confident for real trading – then would be a time to think about broker choosing and taxes.
One more advantage of demo accounts –, you have a good opportunity to watch the brokerage company during your trial trading time and to make a right choice. For example, I finished my demo trading with opening a real account by a special bonus program, kinda “from demo to real” and fully satisfied with my choice.

 

[market_bull]

I would like to share my experience, as I had as well so many questions starting trading. What I did: learned to read the graphics, opened demo accounts in a few companies, started demo-trading accordingly to my understanding of market situation, permanently educating myself more about trading.
On my opinion, it is very important first to make a demo-trading - it will give a lot of understanding without losing any money. Plenty of brokerage companies are offering FREE demo accounts – you can try different platforms, strategies, instruments and when you’ll feel confident for real trading – then would be a time to think about broker choosing and taxes.
One more advantage of demo accounts –, you have a good opportunity to watch the brokerage company during your trial trading time and to make a right choice. For example, I finished my demo trading with opening a real account by a special bonus program, kinda “from demo to real” and fully satisfied with my choice.

This. The only way to "practice" is to practice it in action. Reading and studying is good, but not every student can demonstrate what they learn! Thanks for sharing!

 

[JayN]

Hi!
I trade foreign currency only but, to answer the question about paper trading, I opened several demo accounts while learning and to try the strategies. I think it is easier than paper trading. The disadvantages of using a demo account are: they usually let you use it for a month, so you keep looking for other brokers offering demo accounts; you KNOW it is a demo account, not your real money there so your decisions will never be exatly the same as if you were risking your capital. After 3 years of trading with little success, I think now the best it is to open a micro account and risk small money. I am not sure whether this is applicable in the markets you are interested.
Regards!

 

[QuestOptions]

In respect to testing strategies. I think what will work best for you is to identify the nature of your position.
what factors will cause your position to benefit or lose?
For example: a long call option benefits if the underlying rises and implied volatility rises. The position gets hurt through time decay, volatility dropping and the underlying not moving or lower in price.

If you know the nature of your position you know what to look out for and this will prepare you for any adjustments you might have to make.

before you place your trade you should identify your risk parameters. How much are you willing to lose on the trade?

believe it or not the answers to your risk management questions are only going to come from you. some people can accept more risk than others so there is no guide book in respect to that.

Some strategies offer limited risk others offer unlimited risk. Some strategies allow you to play for directional moves others allow you to play for other types of moves.

The best option traders simply construct there option trade to match their market opinion and define their risk. No one knows if prices will rise or fall or whether volatility will increase or decrease. At the end of the day all you want is your strategy to match your opinion and stay within your risk parameters.