Curious about options

[madcowdisease]

I've been investing for 10 yrs and actively trading for the last 2 or 3. I have always been curious about options and I get the jist of how they work, both trading and exercising them, but I haven't mustered the gonads to actually buy any.

Can any of you that are more experienced than I in this corner of Wall St. offer links or even book titles I might pursue to become more versed in this subject?

Feel free to offer any of your personal opinions or tutorials on this topic as well.

Many thanks.

[Albert0373]

Standard information about Options:
http://www.888options.com/store/uso.pdf

Here is a book on Characteristics and Risks of Standardized Options:
http://www.optionsclearing.com/publications/risks/riskstoc.pdf

Great site: Chicago Board Options Exchange, lots of tutorials on options on there
http://www.cboe.com/

...
This is not a book but it is good info straight from the source.

Options Clearing Corporation has online courses.

http://www.optionsclearing.com/learning_center/opt_ed/get_started.jsp

This is where I learned about options and started to make money by understanding options pricing and strategies.

By the way it's 100% free



Books:

The complete options player - Kenneth Trester

Options/Futures for Dummies & Getting Started in Options are very good.. so are Options Made Easy (for learning basic options strategies and how options work) and The Bible of Options Strategies (to find out about all of the different buying strategies)... check out the tutorial on options express too for some online info.. http://www.optionsxpress.com/educate...aspx?sessionid=

_______________

...

take my advice, i traded an account down 8k on bad options trades. I still do options but i have the t/a knowledge to say yes or no. i like time decay spreads aka the butterfly spreads, and iron condor's.. I will never post any plays i do on options, sorry.

I have been trading options since the 90's and stocks since the 70's and you better know what your doing when you trade options. Some real good advice posted by Jacob. Check out cboe.com lots of info there. I just attented a bettertrades seminar wed. on trading options in indianapolis. For $3000 they will teach you how to trade options if you get a chance go to one of their free seminars or go to their web site some info posted there. The best way to learn is to just do it but do it paper trading and read all you can as most options expire worth alot less then you paid or worthless. You can make a nice little profit selling covered calls on the stock you own. You can make huge profits on stocks that take off or stocks that tank with puts and calls. You can also lose alot with puts and calls so i would advise not playing these with real money till you know what your doing. Options also give you leverage to play the high priced stocks like GOOG. Hope this helps just be careful with options. By the way im holding calls on xing and cvx and would like to see some leaps on xing soon.

I have often thought about a more serious options strategy topic here. The negatives are many as are the positives.
Consider the Cramer demographic, avg age of viewer 28, with a skew towards college students and new investors. On average these are not folks who should be in options generally. If the forum is consistant with these figures the same applies.
When these folks who solicit me to sell far out of the money options (a strategy that can work and make you money until you get killed) finally get down to brass tacks they require a minimum of $100k on deposit or more. Merrill lynch requires me to be an accredited investor to sell any uncovered options positions. (That's the same qualification as hedge fund access or limited partnerships). Most young folks or new investors aren't going to be eligible.
For spreads and straddles and what can be termed intermediate options strategies, I don't see a problem for most investors as long as they have a good understanding of the concepts, the risks, and the range of outcomes.
I routinely take straddle positions going into earnings, and see this as a good hedge position. But I have taken losses when the stock price stays flat. I have also made big wins from the put side on a downside surprise on a stock I was sure would go up (that will teach you to hedge).

Good luck to those who dabble, but go in with your head on straight or don't go in.



There, I'm done thread-digging. :)

Hope that helps.

[madcowdisease]

Very nice. Thank you.

[Niketennis1]

Options are awesome. high risk but can be awarding. Read sane investing in an insane world by jim cramer. The last chapter discusses options.

[Oldedit]

I read my first book on options trading just before the CBOE opened back in the early 1970s because I planned to write columns about the options markets. I never traded options until last year, after attending a $4,000 Optionetics seminar and reading a lot of books.

I started by trading leaps, which allowed me to use leaps to leverage my stock picking. Works pretty well.

As a stock picker, I use a variety of ways to find stocks. Then I check their momentum at investors.com. And I manage my risk by selling if a stock goes down 7% to 8%. In leaps, I've let leaps options drop as much as 30%, or about 12% in the underlying. Last week, I bought a gold stock Jan. 09 call. The underlying confounded chartists and dropped 10%, knocking the leap down 20%, which is where I bailed. So, to me, I lost 10% on the underlying. Stuff happens. Gold stocks rallied today, without me.

A week ago, I subscribed on a trial basis to an advisory service that issues recommended positions weekly. It's gotten me into four covere call buy rights, which I will try to discuss in a new thread.

This is a way of introducing myself to the board.

Here are the books I'm reading, some of which I've had for years and am now re-reading.

Start with The Option Adviser by Bernie Schaeffer. Lots of market insight there, including some I agree with.

Another oldie that I've been re-reading tonight is Getting Started in Options by Michael C. Thomsett. Lots of wisdom coupled with some 1977 ideas.

Profit with Options by Lawrence G. McMillian is a sophisticated book, backed by an advisory service. A very good read, but it doesn't have what I want on covered buy rights at the moment.

The Complete Option Player by Kenneth R. Trester is thick but too shallow for me. Doesn't feel right at the moment, but I plan to give it another try over the next week.

I just shelled out $126 for a new book and DVD, Covered Cals an Leaps, by Joseph Hooper and Aaron Zalewski. They have a sophisticated approach that requires that you subscribe to their traded scanning service, I think. They constantly use a pharase that makes little sense to me, the 75% range. After awhile, you finally figure it out. Their philosophy for picking stocks is the opposite of mine. They want to buy depressed stocks in an uptrend. I want to buy Morningstar 4* and 5* stocks with good earnings records that look good on my charts and generate good yields in covered call buy rights.

I've read parts of the book and need to study it to really understand its approach. Indeed, I'm reading the covered call sections of the other books just to see if they agree with Hooper and Zalewski. I think the latter are more sophisticated, but I don't know whether to try their approach.

[Oldedit]

How did I forget?

You can get the Covered Calls and Leaps book on Amazon for $76, a big discount from the $126 I paid at a local bookstore. I bought them out.

And if you are going to do spreads, you have to have The Bible of Options Strategies by Guy Cohen.

[aiki14]

A week ago, I subscribed on a trial basis to an advisory service that issues recommended positions weekly. It's gotten me into four covere call buy rights, which I will try to discuss in a new thread.



Any chance you're referring to Buy/Writes? That is where you are long the stock and short (write) the calls. This is a way to guarantee the premium on the call but limits your upside to that premium, anything above would be lost upon being exercised.
How far out of the money are you writing the calls at? This is the biggest consideration after choosing the underlying. The further out the lower the price. 2nd is how far out time wise, you get more on long time frames but you tie up the money on the underlyings for a long time for a few percent.
I have to admit this is not a strategy I use since I don't like to hold the stocks long for any extended period of time, and the stocks that make sense for this strategy are not traders. You want a dividend payer with low beta where a 6% gain on the call plus the dividend gets you a 10% return in a reasonable period of time.

[madcowdisease]

Options are awesome. high risk but can be awarding. Read sane investing in an insane world by jim cramer. The last chapter discusses options.

Read it a looooong time ago. Even have a signed copy to boot.

I found this chapter very elementary with respect to options. I'm looking for a more in depth tutorial. I have been trading on paper lately on some calls way out in September and I am up almost 100% -- again, on paper :(.

[madcowdisease]

I am in the process of completing an aplication to trade options. I am required to check one of two boxes on the form requesting levels of approval. One is "covered call writing only" and the second "purchase puts/calls to open and covered call writing".

I am not iterested in issuing my own otions to the public. I am only, at this time, interested in buying and trading options. I assume the second box is the one I want to check, correct?

Lastly, is one permitted by law to trade options in an IRA?

[Albert0373]

Yes, the second box gives your more flexibility in working with options; usually there are up to five levels of approval given to those who want to trade options, based upon experience and required qualifications vary; I believe you will have no problem getting approved for the higher level since you have been trading for quite a while.


Below is how optionsXpress, one of the leading online brokers for options trading, does it:

Level 0
Allows trading of stocks, bonds and mutual funds, meaning long positions (no shorting). Allows no options at all.

Level 1
Allows covered call writing, which means to buy stock and write call options on it.

Allows short sales of stock.

Some firms will allow protective puts at this level, which are puts you buy against a long stock position to protect against a decline in the stock's price. But a speculative purchase of puts would not be allowed.

Level 2
Allows you to buy put and call options that are not protective in nature, but speculative.

Allows covered put writing, which means to short stock and write puts on the stock. These are not separate positions, but a unified trade, because the short put covers the short stock.

And the more advanced ones; usually brokerages won't give you approval for these riskier levels unless you have past experience with options.

Level 3
Allows you to create debit spreads, which involves buying a call (or put) and selling another call (or put) with a different strike price. Because the trade costs you money, it is known as a "debit" spread. The "spread" is the difference between the strike prices of the two options. The most you can lose on a debit spread is the amount of the debit you paid. The debit spreads are the bull call and bear put spreads.

Level 4
Allows you to create credit spreads, which involves buying a call (or put) and selling another call (or put) with a different strike price. Because the trade nets you money and therefore requires no cash investment on your part, it is known as a "credit" spread - the credit is the amount you net. The "spread" is the difference between the strike prices of the two options. This is frequently riskier than a debit spread, because you can lose the full amount of the spread, less the net credit you received. If the spread is $5 and your net credit was $1, you can lose $4 ($5 - $1) on the trade. The credit spreads are the bear call and bull put spreads.

Allow you to sell naked puts, a relatively risky trade, since the stock theoretically could decline to zero, and the stock could be sold ("put") to you at the put strike price.

Level 5
Allows you to sell naked calls, a very risky trade, since the stock's price theoretically could go to, well, infinity. Suppose you wrote the 30 Call when the stock is $28 and the stock zipped up to $100 at the time of option expiration? You certainly would be called out at the $30 strike price but would have to go into the market and buy the stock at $100. If you can't write the check, your brokerage firm would have to cover the trade out of its capital.

Allows the writing of naked index puts and calls.

Allows exotic opton strategies like ratio spreads.


And to answer your 2nd question:

Is it legal to buy and sell options in a Roth IRA? I have asked many brokers and most say that they will only allow the sale of covered calls. I assume that this is because the Roth IRA's purpose is long-term retirement savings. I save the maximum in my 401(k) and would like to be more aggressive in my Roth IRA. If it is legal, do you know of any brokers that allow this practice?


"It is legal to buy and sell options in a Roth IRA, but that does not mean you will be able to easily do it," says Tom Ochsenschlager, a partner at accounting firm Grant Thornton in Washington, D.C.

The IRS places some restrictions on how you can invest IRA savings — outlawing such things as collectibles and life insurance policies. But when it comes to options, the real question is whether you'll be able to find a company willing to handle such trades within your IRA. Roth IRAs and traditional IRAs have to be administered through a qualified custodian — generally a broker, mutual fund company, bank, savings & loan or credit union. It might be tough to find one willing to let you trade something as speculative as options, since custodians tend to fret about the possibility of litigation should an investment go sour.

It might help to explain your situation to your custodian — that you stash the maximum in your 401(k) and can afford to be more aggressive in the Roth. Shop around, advises Martin Nissenbaum, national director of personal income tax planning at Ernst & Young. A full-service brokerage firm might be receptive to the idea, he says. Nissenbaum sympathizes with your desire to be a little more creative in your Roth. "Why not invest in something highly leveraged like options if you think you can do well?"

http://www.smartmoney.com/ask/index.cfm?story=20000307

[madcowdisease]

Thank you sir.

Seems a phone call to my broker is on order.

[madcowdisease]

I went to my local library and gathered everything they had on the shelf regarding options. I came away with the following:

- Futures and Options for Dummies

- Start Trading Options by Kevin M. Kraus.

- The Conservative Investor's Guide to Trading Options by Larry McMillan

- Barrons Business Keys - Keys to Investing in Options and Futures 4th Edition by Nicholas G and Barbara Apostolou CPA, Ph.D., DBA

So far I've combed through the Dummies guide assuming it would be the most basic. It starts out very fundamental, which is what I already know about options, but well see if it gets more interesting as I move along.

Of the above texts have any of you read any of them and is there one that is better than the other? This is just what the local library around the corner had on hand. I can gain access to other texts if you all have any other recommendations.

Thank you in advance.

[madcowdisease]

Anyone follow Lenny's strategy/picks? I have followed him passively since he came on Real Money once a week back in 2005 occasionally reading his columns as well. Obviously, Real Money went caput and with it so did my attention to Dykstra. But, his strategy always seemed appealing and lately I have, in some ways, rediscovered his methodolgy with my copious study of options strategies and techniques.

Does anyone feel this is a viable method of "stock picking" or playing the markets or do you feel most will just get burned? In tracking his picks it seems he has quite a few followers. His deep-in-the-money options have significant volume when his columns are released (in the 1000s) while the surrounding contracts have little or no volume leading me to believe it is a result of his publications.

I'm not necssarily asking if following him is a good idea but do any of you who have or currently play options like/condone the DITM strategy of setting limit buys and subsequent limit sells for ~10-20% premium? Is it reasonable to believe a neophyte, but erudite, ptions player could feasibly succeed at this? The most attractive part, to me, is he seems to have a rough average of only 25 days that he has an open position.

Thanks for any input.

[madcowdisease]

Anyone?

[Keventerprises]

Anyone have experience, feedback or advice about Ken Trester's Fast Options Profits Trading Program/Subscription Service, AKA Fast Options Profits and/or www.optionszone.com (877) 694-5194?? I'm trying to establish if it is another doublingstocks.com self promoter or is legitimate and worthwhile. They claim to boil 400 options candidates per week down to 2-3 and e-mail them every Friday with accompanying options price levels. The free trial I started last week began with CAT until Feb 16, 2008.

BTW microhedge and stockviper not only saved me the $47.00 and alot of hassle for a probable refund claim, they also probably saved me whatever I would have lost on the first few risks on their recommendations. Thank you to them and all who look out for each other here!

-Kevin

[netwrangler]

Found a new area on the Morningstar site devoted to options.
The five articles listed and linked under "Options Insight" in this area are, imo, very well written and present a fresh way of looking at the options as investments.

I thought about linking each "Options Insight" article but figured seeing the whole options page was a better entry.
Note there are some links to other resources on the page...an explanation of the greeks, for example.

Here is the page link. (http://www.morningstar.com/Cover/Options.aspx) This is in a free area of the Morningstar site.

[madcowdisease]

Anyone have experience, feedback or advice about Ken Trester's Fast Options Profits Trading Program/Subscription Service, AKA Fast Options Profits and/or www.optionszone.com (877) 694-5194?? I'm trying to establish if it is another doublingstocks.com self promoter or is legitimate and worthwhile. They claim to boil 400 options candidates per week down to 2-3 and e-mail them every Friday with accompanying options price levels. The free trial I started last week began with CAT until Feb 16, 2008.

BTW microhedge and stockviper not only saved me the $47.00 and alot of hassle for a probable refund claim, they also probably saved me whatever I would have lost on the first few risks on their recommendations. Thank you to them and all who look out for each other here!

-Kevin

Not that I have experienced this first hand but I have relatives and friends that have less than stellar results from newsletters/e-newsletters. Typically anything that is published to the public touting picks, stocks or options, becomes a self-fulfilling prophesy. Almost like the Cramer-effect when a mass of people rush to buy the same thing all at once the laws of supply and demand are fully manifest and we see the newsletter's picks move higher.

I have been experiencing decent results using a stock replacement strategy for deep-in-the-money calls for stocks that are approaching a level most would consider a value investment and I buy the options a minimum of 6 months out with all other habits and practices for regualr stock trading applicable such as averaging down. So far it seems to be working just fine but I haven't been practicing this method for more than three or four months if you exclude paper trading.