Newbie Questions

[redrabbit 10]

Hi. I am very new to options, at least in the sense that I haven't actually traded live with options. I've been hanging around forums but until now I still cannot find a sticky thread where all newbies should read before doing anything. I start this thread to ask some basic questions and would encourage anyone new to ask questions here too. Ok, here's the questions:

 

1) If I sell options, do I get the premium credited to my account instantly? Or does this depend on broker, eg some brokers may use the premium collected to offset the required margin?

 

2) If I sell options, and later on I suspect my trade will go bad, can I buy back at the same strike price to cancel the overall position?

[brownsfan019 17]

Most here trade futures or forex. There isn't much discussion on options. I would try using google to find forums that have an active options area.

[Tams 20]

Hi. I am very new to options, at least in the sense that I haven't actually traded live with options. I've been hanging around forums but until now I still cannot find a sticky thread where all newbies should read before doing anything. I start this thread to ask some basic questions and would encourage anyone new to ask questions here too. Ok, here's the questions:

 

 

you will need to take a course...

most brokerage have online seminar

some are live, where you can ask questions.

 

look up thinkorswim and interactivebrokers

they are the 2 biggies... ie most likely to have lots of newbie resources.

 

 

1) If I sell options, do I get the premium credited to my account instantly? Or does this depend on broker, eg some brokers may use the premium collected to offset the required margin?

 

yes, you do get the money,

and yes, you can't use any of it because it will be use for margin.

 

 

2) If I sell options, and later on I suspect my trade will go bad, can I buy back at the same strike price to cancel the overall position?

 

yes... you can buy back your option at anytime, at whatever the prevailing market price.

 

 

 

p.s. options is a very technical game... there are traps everywhere... things that you have never heard of before can hurt you real bad. (I mean real bad!)

my suggestion is to read a book, and TAKE A COURSE...

Edited November 29, 2009 by Tams

[DugDug 10]

Tams is 100% correct...

Also if you start trading options (and this cannot be repeated enough)

1) make sure you actually understand your REAL exposure if things go bad with options.

Too many new players start selling options without understanding the margining and the fact that you may have to stump up the amount of the underlying.

2) Understand how the margining works - be careful about thinking you can afford more than the account can bear as the margining and leverage can be pretty good.

3) understand that "a put is a call and a call is a put" using the formula Call=Put + Underlying

If you understand this then it means you have a better understanding of how options can work.

4) remember options are quotes by market makers - sometimes they can become very illiquid.

5) when you understand options and get them right - they are very powerful tools.

[robertm 10]

Hi. I am very new to options, at least in the sense that I haven't actually traded live with options. I've been hanging around forums but until now I still cannot find a sticky thread where all newbies should read before doing anything. I start this thread to ask some basic questions and would encourage anyone new to ask questions here too. Ok, here's the questions:

 

1) If I sell options, do I get the premium credited to my account instantly? Or does this depend on broker, eg some brokers may use the premium collected to offset the required margin?

 

2) If I sell options, and later on I suspect my trade will go bad, can I buy back at the same strike price to cancel the overall position?

 

Agreed with what the others said.

 

Check out this link, lots of cheap cool options stuff

Trading and Investment Tools by Peter Hoadley

 

The optionsexpress.com website has a great demo platform, they offer it for the CBOE as well as a free tool. Throw on some options & watch the interaction with price/volatility

 

The best value for money options information I've seen anywhere is a guy called Chris Tate out of Aus, save yourself the expense of an Optionetics or TOS & look into his materials at http://www.tradinggame.com.au. His book is dated but still accurate, the charts are mostly Aus but the theory is sound for options in general anywhere.

 

If you want to see some real "instant" feedback on how options interact with changes in the underlying get a demo account with IG Markets / Index and watch their day expiry options on FX, Dow, DAX etc. It gives you an instant feel for how much joy/pain go with a time expiry instrument rather than waiting 3 months for your Jan options to play out.

 

Best advice I ever had on options:

You can't trade them unless you can make money trading shares (meaning you must understand how/why the underlying price moves)

You can't trade them unless you have time to monitor them actively, although that's pretty easy these days.

[redrabbit 10]

Hi. Thanks everyone for commenting. I have experience in trading forex and so I'm not entirely new in trading, risk management and margin. I just want to inform that I know a lot of the stuff being shared in the posts, so that future posters will have a rough idea of where my level is. I fully understand that option trading is risky, as with forex. Now I only need to figure out the technicalities involved when I'm actually trading live. And the remaining things that I need to get a grip on would be greeks, black-scholes, volatilities and adjustments on corporate actions (I believe a lot of newbies miss that).

 

My current thinking is forex trading is mere speculation. I have some positive results, but definitely not something I consider to be consistent enough that I would entrust it to my future. I haven't entirely given up on forex, but I figure out I would be better off start accumulating assets like stocks. I intend to use options to sell put of the stock that I intend to collect. And possibly selling covered call for income. That's pretty much it. I don't intend to involve in volatility play as I'm still not pro enough, and also it doesn't fit my investment criteria of accumulating asset.

 

I wonder if there is anyone here in a similar situation as me?

[robertm 10]

Look into spreads before you go down the covered call path & compare the payoff diagrams (or the risk more so)

 

Bull Call Spread: An Alternative to the Covered Call | The Options & Futures Guide

[DugDug 10]

lesson one: being short a naked put, and buying the underlying and writing calls (buy write, or covered call) are the same risk.

 

Also yes - the hoadley options site is great.

Dont worry too much about black and Scholes - they were just the first to formulate an option equation - binomial is probably better suited to understand, particularly if you are using equities with corporate actions.

 

If you are just writing puts and calls, you wont need to focus too much on greeks, you should focus on your plan for the trade. (As the most you are going to make when shorting options is on the day you sell them.) I would focus on scenarios of what to do if certain events occur.

Also - cant stress this enough. If you sell and option and its practically worthless, if you can try and buy it back for a cent or two. I have seen numerous occasions where people have got away with it 9 times out of 10, only to have that one time cost them. Until they expire you have risk on the book.

[redrabbit 10]

robertm:

 

Cool. I didn't thought of that.

 

dugdug:

 

I have just begun to look into equivalent positions, I'm grateful that you mentioned it. I could probably save some cost.

 

Anyone using the analysis tab of TOS? Any ideas on how to use the probability analysis to your edge?

[kutukupret 10]

thanks for all the instructions above. I newbie, I still need more study.