Options trading - WARNING !!

options-george

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Recently there have been a couple of threads asking some simple questions in the area of option trading.

To qualify what I am about to say - I have done about 12-18 months of trading US equity options, having done either outright puts or calls, as well as some simple debit and credit spreads. In addition I spent 6 months (11 hours a day) working as an assistant to an options market-market in Euribor futures. I also have a basic grasp of probability distributions and volatility, and generally of how options work.

With that in mind -> I feel obligated to warn new traders about going into the options area. I am sorry if this comes across as direct or too harsh, but I feel that I need to warn traders of trading options before they are ready.

Financial markets in general is quite difficult to do. Yes it's very easy to get started, you open an online account and from day 1 you can buy and sell whatever instrument you like. It gives the impression that there is little education or learning required. And surely if you have done a weekend course or read a couple of trading books, than you are effectively ready to trade with the rest of the market, right? This is not how it works - the issues of technicals, psychology and risk management really take some time to understand. And this is when you are dealing with doing spreadbetting on a currency or a CFD on an index etc. An instrument that simply goes up and down.

With options, it's another entire different kettle of fish. Understanding how options work and how to trade them is significantly more difficult than trading a CFD or a spreadbet. You need to understand the different strategies, you need to understand the implications of Black-Scholes, of what can impact an option price, the practical considerations of an options position.

If you don't have that solid understanding, you will be skinned alive in the options market!

You will NOT learn what you need to understand in the space of a weekend course or reading a couple of option-related books. Training providers in this area are not being open and honest about your preparedness!

PLEASE tread very carefully!!!

:)
 
options aren't so bad

I feel this post exaggerates the danger of options. Of course don't do trades that you don't understand, but options have a unique ability to allow risk and exposure to be managed in quite simple ways. If you are long-only options, your total exposure is the price of the contracts you hold, generally much less than the price of the underlying: reduced exposure for the same investment thesis. You can't do that with spread bet or CFD's which rapidly blow up when they go against you. Writing covered calls (or puts) is another way to manage exposure when wrong, while improving returns when right. Maybe it's imprudent to make such trades without knowing about greeks, how to price options etc., but maybe it isn't if you are very confident that you have a unique insight into a particular company, and want higher returns with managed exposure.
 
Everything in the market, is already basically priced accordingly...to its Risk vs Reward;
So one thing or another is not necessarily better than another to trade :| :eek:

You can make a bundle just trading straight calls and puts options -- but on the flip side of that coin, you can just as easily see it disappear....if you're dumb, or inexperienced, or just plain have bad luck.

American options are better than European-style options.
and closer to expiration, or weeklies, are better for much greater volatility.
 
If you want to trade options succesfully , keep away from the fake option professors and gurus on forums , these trading failures and option failures hang around forums .Don't learn from these failures.

or follow succesful option traders who profit on options ,buy options on high probability entries
 

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