8 ms·

“Multi-leg options strategies have been one of the most frequently requested features by options investors on Robinhood. With multi-leg, you can trade Level 3 s

“Multi-leg options strategies have been one of the most frequently requested features by options investors on Robinhood. With multi-leg, you can trade Level 3 strategies such as iron condors, straddles, strangles, call and put debit spreads, and call and put credit spreads more efficiently, invest at a lower risk, and with less capital requirements. ” I’ve never traded options. Have any non-traders here effectively used any of the above mentioned strategies? If so, how do you learn to use these techniques?

durkie 8y ago
you have a few ways: * a paper trading account, where you can experiment with trading strategies without risking real money * reading about the strategies and their payoff scheme, eg: http://www.theoptionsguide.com/long-straddle.aspx http://www.theoptionsguide.com/long-straddle.aspx
- thro1237 8y ago
  Thanks -- Is there some software (mostly free) where I can model these strategies and understand the payoffs, etc?
  - officalrules 8y ago
    My recommendation is to read, read, read and build out the models yourself in the language or application of your choice (Python is pretty easy, Excel is even easier to start with). Start by drawing the simplest payoff diagrams you can, then layer various additional positions to build up strategies until you can recall the payoffs of your combined position with your eyes closed. There are plenty of options models available online in various formats, but by taking the time to build it yourself you will have a much deeper understanding of the structure of the positions and you will be able to extend the model to fit your needs as you move beyond simple strategy payoffs. Source: I was a TA for a graduate finance class for 3 years
  - jonknee 8y ago
    This is a pretty clean list of all the common strategies along with charts showing their P/L: http://www.theoptionsguide.com/option-trading-strategies.aspx http://www.theoptionsguide.com/option-trading-strategies.asp...
  - durkie 8y ago
    http://www.optionsprofitcalculator.com/ http://www.optionsprofitcalculator.com/ seems to be kind of popular, but it's not the most intuitive to use. I think of this as something that many brokerages offer...
paulie_a 8y ago
Learn by doing. what could go wrong?
- deltateam 8y ago
  Its the best way. What happens is that you lose money. This is the best way to enjoy your privilege in society, capital loss deductions aren't bad. Better yet, if you want to REALLY amplify your socioeconomic privilege, you can turn capital losses into Net Operating Losses and deduct the entire thing as an income expense. Do this by forming an LLC and sending a Section 475 election to the IRS before April. This is specific for traders doing short term strategies in the equity and equity options market. You will then lose your money experimenting with options and the government will pay you back, from taxes you sent them in prior years, current and future years.
- nimish 8y ago
  Leverage.
koolba 8y ago
Multi-leg option strategies are designed to constrain the total risk exposure and possible profit of a combination of trades. One of the simplest example is to sell a call at $X and purchase one at $X+N[1]. The purchased call is insurance against being on the hook for an unknown rise in the prices of security (which would then be exercised against your sold call). The "bet" in this case is that the rise in the price of the stock during the period of the spread is not going to rise above $X by more than the price difference of the two options. All the rest of the fancy names are combinations of buying or selling these types of combinations. The names come a combination of the desired result (ex: "strangle") or the shape of the profit graph (ex: "condor"). Do a lot of reading before dipping your toes into options trading. On the one hand it's arguably less risky than regular equities as you "know" what you're risking. On the other hand it's very easy to get wiped out as well. Something as stupid as not closing your our spreads before expiration can destroy your account if they get exercised. [1]: https://en.wikipedia.org/wiki/Bear_spread#Bear_call_spread https://en.wikipedia.org/wiki/Bear_spread#Bear_call_spread
- ryandrake 8y ago
  Honestly these tools remind me of all the “systems” gamblers are constantly coming up with, thinking they can beat the casino in the long term. Complete with the goofy names and cottage industry of books, experts and courses teaching you the system.
  - jonknee 8y ago
    It's just different ways of describing risk/reward. Unlike a casino you can take either side of the contract.
    - ryandrake 8y ago
      It’s more like poker in the casino. There are at least three sides: player A (you), player B (your counterparty), and the casino (Wall St.). It’s zero sum between A and B, but the casino always takes their cut. +EV for the casino means -EV for the players on average
jnwatson 8y ago
Books. This is definitely an area where book study is important. You must learn the “Greeks” as most of the different strategies are tradeoffs among those variables. It isn’t hard if you remember your multivariate calculus. The biggest issue I had back when I played is commission. If this is commission free, that’s a whole new ballgame.
- bertjk 8y ago
  Though if we are talking multi-leg options, bid/ask spreads are likely significant too.
wycy 8y ago
Investopedia has good resources for understanding the various types of options spreads. They have nice cartoon graphs that illustrate what happens in each one. For example, the page on the iron condor[0] or the straddle[1]. [0] https://www.investopedia.com/terms/i/ironcondor.asp https://www.investopedia.com/terms/i/ironcondor.asp [1] https://www.investopedia.com/terms/s/straddle.asp https://www.investopedia.com/terms/s/straddle.asp
anoncoward111 8y ago
Multi leg options sound weird on paper but aren't too hard to understand when explained properly. An option is a bet on the future price of a stock. If you think that Stock XYZ will go from $15 today to $20 next month, you can buy an option that will reflect your prediction. A multi-leg option allows you to bet on the "magnitude" of a stock's price change, rather than the "direction". For example: "Tesla reports earnings next month. They're either gonna be REALLY good, or REALLY bad. So let me buy a multi-leg option that predicts a 10% price jump either up or down". You'll make money whether Tesla goes up 10% or down 10%. You'll lose a ton of money if Tesla remains roughly the same price.
- jonknee 8y ago
  > A multi-leg option allows you to bet on the "magnitude" of a stock's price change, rather than the "direction". Or simply define risk/reward (spreads and the like). That's especially useful if you want to sell premium and not risk getting killed.
- ataturk 8y ago
  The problem is that the earnings report being bad doesn't mean "stock goes down" or that it will fall 10% or anything, really. If your exact scenario doesn't play out, you're losing money on those options. Multi-leg setups aren't going to help you much, either. It's bullshit, don't do this. Stocks are manipulated, okay? It's very subtle, but it's a fleecing ceremony. For example, I once bought calls on DIS because my thesis was that the new Force Awakens film would make them a lot of money (which it did). However, ESPN totally shit the bed and cost DIS dearly and thank brought the stock down. Calls didn't do ITM, fucked that up big time. It's all a big fucking game is all it is and the individual investor is the sheep to be sheared no matter what. It is the law of the universe--you are the sheep getting sheared always and forever. Don't fucking do this stuff. If you're not a securities trader with a real hunting license, don't go near this shit. They will front run on the buy and the sell side, fees and taxes will eat up any profits you make. You are picking up pennies in front of a steamroller.
- wdn 8y ago
  Actually, it doesn't work like that. If a stock is volatile, as TSLA is, the out of money (OTM) options will take that into consideration and the premium for it will be very very high. A OTM straddle options trade probably a very bad choice. Like you said, if TSLA don't make a big move, you will lose. Even if they do make a big move, you will still lose because you are opening a trade on both directions. My personal opinion on options is this: 1. Find stocks that move 2. Buy in the motion options 3. Expiration at least 6 weeks away, prefer to be longer. If price move into your target, great, take profit early.
deltateam 8y ago
I personally liked the Bible of Options Strategies that I read 10 years ago. I loved trading butterflies on Thursday-Friday. Butterflies are a form of debit spread.
cascom 8y ago
Check out the Options Clearing Corporation https://www.theocc.com/education/options/ https://www.theocc.com/education/options/
kuwze 8y ago
TC2000 has a really great visual representation of various option payoffs[0]; remembering their names is next to impossible for me. The only thing it's missing are futures and a good depth of market view like NinjaTrader. [0]: https://www.tc2000.com/CMS_Static/Uploads/526553716D662F/2016-11-17_10-32-52.png https://www.tc2000.com/CMS_Static/Uploads/526553716D662F/201...
throwawayad7d9f 8y ago
Yep! Mainly call/put spreads but also iron condors. The basic idea of options is that you think the price is going to be somewhere within a certain period of time and you place a bet saying so. If you bet right, you make money, if you bet wrong, you lose it. The different strategies give you different ways of targeting prices. For example a call debit spread is essentially "I think the price will be below $X in Y days", an Iron Condor is "I think the price will be between $X and $Y in Z days" and a straddle is "I think the price will move by $X in either direction in Y days". The different strategies also have different profit/loss curves. For example selling a call option has unlimited loss potential (the stock could theoretically soar 1000x before the option expires) while selling a call spread has defined loss potential. The process for me is basically find somewhere where the option is typically priced higher than it's worth and sell spreads. Sometimes this is year round, sometimes around earnings.
- whatok 8y ago
  99% of people who make consistent money trading options have little to no view of the price of the underlying.
  - throwawaymath 8y ago
    It's a serious pet peeve of mine when people use arbitrary statistics instead of just saying "most" or "almost all." What's the point of quantifying something if it's made up? That said...yes, most profitable options trading (especially on intraday time resolutions) is focused on volatility and pricing inefficiency, not forecasting the directional movement of the underlying price.
bunderbunder 8y ago
My layman's take on this: If you really do think you can make money at this, you'd be silly to waste your time mucking about with a retail options platform. Go get a job as a trader instead. You'll have to go through quite a bit of training and apprenticeship and suchlike first. That's a good thing. It will get you access to higher quality information than is available as an outsider (those in the know don't dilute the earning power of their best knowledge by just giving it away). Possibly even better yet, you'll be getting paid to learn it instead of expending your own resources and free time. Once that's done and you're set loose as a full-fledged professional trader, you'll quickly have a pretty enormous amount of capital to work with. You'll only get to take home a small cut of what you're able to earn with that money, but the total size of that cut is still going to dwarf what you can make just playing with your own money.
- rjdagost 8y ago
  That is just not true. One of your primary advantages as a retail trader is that your positions (being much smaller) don't move the market anywhere near as much as if you're a big institutional investor. So you can pursue strategies that are off limits to institutional investors. Options on small cap companies tend to be illiquid and traded in small quantities, so they often won't be touched by big money. This presents an opportunity for retail investors.
  - mrfredward 8y ago
    It's true that being small is an advantage, but there's something else to consider: Long-term investing is a positive sum game--companies grow and return money to investors, so most investors make money over time. Short-term trading is not like this, it's zero sum. Every quick profit comes at someone else's expense. As they say in poker, if you don't know who the fool at the table is... ...it's probably the guy trading on an app he downloaded 5 minutes ago, whose brokerage doesn't even let him use limit orders.
    - bunderbunder 8y ago
      Well, sometimes it's going to be that little guy, but not always. You can also, for example, try to skim off the moves of big institutional players, whose activity frequently moves prices, by trying to get in there and be the one who reaps the benefit of that price shift. The ultimate seller maybe gets a little bit less than they might have, and the ultimate buyer maybe pays a little bit less, and there's maybe a small gap in between those prices that reflects the trader's take. I do agree that there can be nooks and crannies with ample room for small players on the equity options market. I'm just not convinced that someone who thinks they have the skills (and guts) to reap a reliable reward in that space should be going straight to Robinhood without at least submitting an application to Citadel first.
thisisit 8y ago
> I’ve never traded options. Then please stay away from multi leg options stuff because it gets even more complicated.
- bcheung 8y ago
  Agreed. Learn the basics first before doing anything advanced. At a minimum, know what trading "naked" means and don't do it unless you REALLY know what you are doing.
super996 8y ago
Read Option Pricing and Volatility, by Sheldon Natenburg. This is the bible for option trading. As a former member of the now defunct AMEX, every trader from here to Chicago is familiar with this book.
clairity 8y ago
these are for the advanced gamblers on the market, once you get bored of regular equities trading (short and long), and basic put and call options. they’re names for various combinations of the aforementioned basic trades. they don’t actually give you a real advantage, because that only comes from (insider) information. rather, they’re designed to increase your investment/involvement and prolong the gambling time (and enjoyment possibly).
- mikec3010 8y ago
  As I get older, the more I agree with this sentiment. Before the stock market, businesses made money for the owners. Stocks allowed anyone to share ownership of businesses, who thereby benefited from the influx of capital. An investor could put his money away with long term gains if the company made money. And by diversifying he could shield himself from the ones that didn't. What tangible value do options actually bring anyone besides gambling? Oh they allow shareholders to rent out their shares, or allow you to structure sales before/after the fiscal year? Big deal. All it does is create a market for pseudo science middle men/rent seekers who sell "vehicles" that many use to try to get rich quick. All this does is divert funds from markets that are actually tied to something useful like legitimate businesses that sell products or services
  - clairity 8y ago
    agreed, the legitimate uses of these financial tools (as you noted) are dwarfed by the actions of rent seekers. let's support creators (of all stripes) over rent seekers. there's no need to reward a person for simple ownership over some capital or good. rewards should go to those who wield them effectively by making something useful out of it. it's trickier to do than it sounds, but absolutely worth the effort.
    - mikec3010 8y ago
      Also forgot the biggest reason: "they allow you to buy and sell volatility". Ok, but volatility isn't an asset. So this must be the original "synthetic asset", long before all the other exotics came on the scene. On one hand, why should I care what other people do with their money. But what worries me is that with normal markets, assets have intrinsic value: corn, oil, securities. They're all things people want. The market can always assume this is true, but with synthetic "assets" like trading volatility, it's not true and that creates a market built on a false pretense.
bcheung 8y ago
Options greatly expand the universe of possibilities when it comes to investing in markets. You can make money if a stock goes up, if it goes down, and even if it doesn't go anywhere at all. Options can be used to increase leverage and they can also be used to decrease risk. You can use options to change the risk / reward profile in non-linear ways. Meaning you can do things like, I'll sacrifice a little bit of my upside to reduce the risk on the downside (and vice versa). You can also design positions such that if the stock goes up a little bit I make money much easier but if it goes up a lot I don't get as big of a win. One of the best books on the subject I know of is "Option Investing as a Strategic Investment". It is sufficiently technical and yet approachable as well. It goes from introductory basic theory to complex multi-legged strategies. Me personally I don't touch the market at all any more and choose to invest in real estate. I can't speak to the current option trading environment. I used to trade options in the past and didn't see anything significant from it. No catastrophic loses, no big wins. I don't know what the landscape looks like now with more algo type trading.

durkie 8y ago

you have a few ways: * a paper trading account, where you can experiment with trading strategies without risking real money * reading about the strategies and their payoff scheme, eg: http://www.theoptionsguide.com/long-straddle.aspx http://www.theoptionsguide.com/long-straddle.aspx

thro1237 8y ago
Thanks -- Is there some software (mostly free) where I can model these strategies and understand the payoffs, etc?
- officalrules 8y ago
  My recommendation is to read, read, read and build out the models yourself in the language or application of your choice (Python is pretty easy, Excel is even easier to start with). Start by drawing the simplest payoff diagrams you can, then layer various additional positions to build up strategies until you can recall the payoffs of your combined position with your eyes closed. There are plenty of options models available online in various formats, but by taking the time to build it yourself you will have a much deeper understanding of the structure of the positions and you will be able to extend the model to fit your needs as you move beyond simple strategy payoffs. Source: I was a TA for a graduate finance class for 3 years
- jonknee 8y ago
  This is a pretty clean list of all the common strategies along with charts showing their P/L: http://www.theoptionsguide.com/option-trading-strategies.aspx http://www.theoptionsguide.com/option-trading-strategies.asp...
- durkie 8y ago
  http://www.optionsprofitcalculator.com/ http://www.optionsprofitcalculator.com/ seems to be kind of popular, but it's not the most intuitive to use. I think of this as something that many brokerages offer...

paulie_a 8y ago

Learn by doing. what could go wrong?

deltateam 8y ago
Its the best way. What happens is that you lose money. This is the best way to enjoy your privilege in society, capital loss deductions aren't bad. Better yet, if you want to REALLY amplify your socioeconomic privilege, you can turn capital losses into Net Operating Losses and deduct the entire thing as an income expense. Do this by forming an LLC and sending a Section 475 election to the IRS before April. This is specific for traders doing short term strategies in the equity and equity options market. You will then lose your money experimenting with options and the government will pay you back, from taxes you sent them in prior years, current and future years.
nimish 8y ago
Leverage.

koolba 8y ago

Multi-leg option strategies are designed to constrain the total risk exposure and possible profit of a combination of trades. One of the simplest example is to sell a call at $X and purchase one at $X+N[1]. The purchased call is insurance against being on the hook for an unknown rise in the prices of security (which would then be exercised against your sold call). The "bet" in this case is that the rise in the price of the stock during the period of the spread is not going to rise above $X by more than the price difference of the two options. All the rest of the fancy names are combinations of buying or selling these types of combinations. The names come a combination of the desired result (ex: "strangle") or the shape of the profit graph (ex: "condor"). Do a lot of reading before dipping your toes into options trading. On the one hand it's arguably less risky than regular equities as you "know" what you're risking. On the other hand it's very easy to get wiped out as well. Something as stupid as not closing your our spreads before expiration can destroy your account if they get exercised. [1]: https://en.wikipedia.org/wiki/Bear_spread#Bear_call_spread https://en.wikipedia.org/wiki/Bear_spread#Bear_call_spread

ryandrake 8y ago
Honestly these tools remind me of all the “systems” gamblers are constantly coming up with, thinking they can beat the casino in the long term. Complete with the goofy names and cottage industry of books, experts and courses teaching you the system.
- jonknee 8y ago
  It's just different ways of describing risk/reward. Unlike a casino you can take either side of the contract.
  - ryandrake 8y ago
    It’s more like poker in the casino. There are at least three sides: player A (you), player B (your counterparty), and the casino (Wall St.). It’s zero sum between A and B, but the casino always takes their cut. +EV for the casino means -EV for the players on average

jnwatson 8y ago

Books. This is definitely an area where book study is important. You must learn the “Greeks” as most of the different strategies are tradeoffs among those variables. It isn’t hard if you remember your multivariate calculus. The biggest issue I had back when I played is commission. If this is commission free, that’s a whole new ballgame.

bertjk 8y ago
Though if we are talking multi-leg options, bid/ask spreads are likely significant too.

wycy 8y ago

Investopedia has good resources for understanding the various types of options spreads. They have nice cartoon graphs that illustrate what happens in each one. For example, the page on the iron condor[0] or the straddle[1]. [0] https://www.investopedia.com/terms/i/ironcondor.asp https://www.investopedia.com/terms/i/ironcondor.asp [1] https://www.investopedia.com/terms/s/straddle.asp https://www.investopedia.com/terms/s/straddle.asp

anoncoward111 8y ago

Multi leg options sound weird on paper but aren't too hard to understand when explained properly. An option is a bet on the future price of a stock. If you think that Stock XYZ will go from $15 today to $20 next month, you can buy an option that will reflect your prediction. A multi-leg option allows you to bet on the "magnitude" of a stock's price change, rather than the "direction". For example: "Tesla reports earnings next month. They're either gonna be REALLY good, or REALLY bad. So let me buy a multi-leg option that predicts a 10% price jump either up or down". You'll make money whether Tesla goes up 10% or down 10%. You'll lose a ton of money if Tesla remains roughly the same price.

jonknee 8y ago
> A multi-leg option allows you to bet on the "magnitude" of a stock's price change, rather than the "direction". Or simply define risk/reward (spreads and the like). That's especially useful if you want to sell premium and not risk getting killed.
ataturk 8y ago
The problem is that the earnings report being bad doesn't mean "stock goes down" or that it will fall 10% or anything, really. If your exact scenario doesn't play out, you're losing money on those options. Multi-leg setups aren't going to help you much, either. It's bullshit, don't do this. Stocks are manipulated, okay? It's very subtle, but it's a fleecing ceremony. For example, I once bought calls on DIS because my thesis was that the new Force Awakens film would make them a lot of money (which it did). However, ESPN totally shit the bed and cost DIS dearly and thank brought the stock down. Calls didn't do ITM, fucked that up big time. It's all a big fucking game is all it is and the individual investor is the sheep to be sheared no matter what. It is the law of the universe--you are the sheep getting sheared always and forever. Don't fucking do this stuff. If you're not a securities trader with a real hunting license, don't go near this shit. They will front run on the buy and the sell side, fees and taxes will eat up any profits you make. You are picking up pennies in front of a steamroller.
wdn 8y ago
Actually, it doesn't work like that. If a stock is volatile, as TSLA is, the out of money (OTM) options will take that into consideration and the premium for it will be very very high. A OTM straddle options trade probably a very bad choice. Like you said, if TSLA don't make a big move, you will lose. Even if they do make a big move, you will still lose because you are opening a trade on both directions. My personal opinion on options is this: 1. Find stocks that move 2. Buy in the motion options 3. Expiration at least 6 weeks away, prefer to be longer. If price move into your target, great, take profit early.

deltateam 8y ago

I personally liked the Bible of Options Strategies that I read 10 years ago. I loved trading butterflies on Thursday-Friday. Butterflies are a form of debit spread.

cascom 8y ago

Check out the Options Clearing Corporation https://www.theocc.com/education/options/ https://www.theocc.com/education/options/

kuwze 8y ago

TC2000 has a really great visual representation of various option payoffs[0]; remembering their names is next to impossible for me. The only thing it's missing are futures and a good depth of market view like NinjaTrader. [0]: https://www.tc2000.com/CMS_Static/Uploads/526553716D662F/2016-11-17_10-32-52.png https://www.tc2000.com/CMS_Static/Uploads/526553716D662F/201...

throwawayad7d9f 8y ago

Yep! Mainly call/put spreads but also iron condors. The basic idea of options is that you think the price is going to be somewhere within a certain period of time and you place a bet saying so. If you bet right, you make money, if you bet wrong, you lose it. The different strategies give you different ways of targeting prices. For example a call debit spread is essentially "I think the price will be below $X in Y days", an Iron Condor is "I think the price will be between $X and $Y in Z days" and a straddle is "I think the price will move by $X in either direction in Y days". The different strategies also have different profit/loss curves. For example selling a call option has unlimited loss potential (the stock could theoretically soar 1000x before the option expires) while selling a call spread has defined loss potential. The process for me is basically find somewhere where the option is typically priced higher than it's worth and sell spreads. Sometimes this is year round, sometimes around earnings.

whatok 8y ago
99% of people who make consistent money trading options have little to no view of the price of the underlying.
- throwawaymath 8y ago
  It's a serious pet peeve of mine when people use arbitrary statistics instead of just saying "most" or "almost all." What's the point of quantifying something if it's made up? That said...yes, most profitable options trading (especially on intraday time resolutions) is focused on volatility and pricing inefficiency, not forecasting the directional movement of the underlying price.

bunderbunder 8y ago

My layman's take on this: If you really do think you can make money at this, you'd be silly to waste your time mucking about with a retail options platform. Go get a job as a trader instead. You'll have to go through quite a bit of training and apprenticeship and suchlike first. That's a good thing. It will get you access to higher quality information than is available as an outsider (those in the know don't dilute the earning power of their best knowledge by just giving it away). Possibly even better yet, you'll be getting paid to learn it instead of expending your own resources and free time. Once that's done and you're set loose as a full-fledged professional trader, you'll quickly have a pretty enormous amount of capital to work with. You'll only get to take home a small cut of what you're able to earn with that money, but the total size of that cut is still going to dwarf what you can make just playing with your own money.

rjdagost 8y ago
That is just not true. One of your primary advantages as a retail trader is that your positions (being much smaller) don't move the market anywhere near as much as if you're a big institutional investor. So you can pursue strategies that are off limits to institutional investors. Options on small cap companies tend to be illiquid and traded in small quantities, so they often won't be touched by big money. This presents an opportunity for retail investors.
- mrfredward 8y ago
  It's true that being small is an advantage, but there's something else to consider: Long-term investing is a positive sum game--companies grow and return money to investors, so most investors make money over time. Short-term trading is not like this, it's zero sum. Every quick profit comes at someone else's expense. As they say in poker, if you don't know who the fool at the table is... ...it's probably the guy trading on an app he downloaded 5 minutes ago, whose brokerage doesn't even let him use limit orders.
  - bunderbunder 8y ago
    Well, sometimes it's going to be that little guy, but not always. You can also, for example, try to skim off the moves of big institutional players, whose activity frequently moves prices, by trying to get in there and be the one who reaps the benefit of that price shift. The ultimate seller maybe gets a little bit less than they might have, and the ultimate buyer maybe pays a little bit less, and there's maybe a small gap in between those prices that reflects the trader's take. I do agree that there can be nooks and crannies with ample room for small players on the equity options market. I'm just not convinced that someone who thinks they have the skills (and guts) to reap a reliable reward in that space should be going straight to Robinhood without at least submitting an application to Citadel first.

thisisit 8y ago

> I’ve never traded options. Then please stay away from multi leg options stuff because it gets even more complicated.

bcheung 8y ago
Agreed. Learn the basics first before doing anything advanced. At a minimum, know what trading "naked" means and don't do it unless you REALLY know what you are doing.

super996 8y ago

Read Option Pricing and Volatility, by Sheldon Natenburg. This is the bible for option trading. As a former member of the now defunct AMEX, every trader from here to Chicago is familiar with this book.

clairity 8y ago

these are for the advanced gamblers on the market, once you get bored of regular equities trading (short and long), and basic put and call options. they’re names for various combinations of the aforementioned basic trades. they don’t actually give you a real advantage, because that only comes from (insider) information. rather, they’re designed to increase your investment/involvement and prolong the gambling time (and enjoyment possibly).

mikec3010 8y ago
As I get older, the more I agree with this sentiment. Before the stock market, businesses made money for the owners. Stocks allowed anyone to share ownership of businesses, who thereby benefited from the influx of capital. An investor could put his money away with long term gains if the company made money. And by diversifying he could shield himself from the ones that didn't. What tangible value do options actually bring anyone besides gambling? Oh they allow shareholders to rent out their shares, or allow you to structure sales before/after the fiscal year? Big deal. All it does is create a market for pseudo science middle men/rent seekers who sell "vehicles" that many use to try to get rich quick. All this does is divert funds from markets that are actually tied to something useful like legitimate businesses that sell products or services
- clairity 8y ago
  agreed, the legitimate uses of these financial tools (as you noted) are dwarfed by the actions of rent seekers. let's support creators (of all stripes) over rent seekers. there's no need to reward a person for simple ownership over some capital or good. rewards should go to those who wield them effectively by making something useful out of it. it's trickier to do than it sounds, but absolutely worth the effort.
  - mikec3010 8y ago
    Also forgot the biggest reason: "they allow you to buy and sell volatility". Ok, but volatility isn't an asset. So this must be the original "synthetic asset", long before all the other exotics came on the scene. On one hand, why should I care what other people do with their money. But what worries me is that with normal markets, assets have intrinsic value: corn, oil, securities. They're all things people want. The market can always assume this is true, but with synthetic "assets" like trading volatility, it's not true and that creates a market built on a false pretense.

bcheung 8y ago

Options greatly expand the universe of possibilities when it comes to investing in markets. You can make money if a stock goes up, if it goes down, and even if it doesn't go anywhere at all. Options can be used to increase leverage and they can also be used to decrease risk. You can use options to change the risk / reward profile in non-linear ways. Meaning you can do things like, I'll sacrifice a little bit of my upside to reduce the risk on the downside (and vice versa). You can also design positions such that if the stock goes up a little bit I make money much easier but if it goes up a lot I don't get as big of a win. One of the best books on the subject I know of is "Option Investing as a Strategic Investment". It is sufficiently technical and yet approachable as well. It goes from introductory basic theory to complex multi-legged strategies. Me personally I don't touch the market at all any more and choose to invest in real estate. I can't speak to the current option trading environment. I used to trade options in the past and didn't see anything significant from it. No catastrophic loses, no big wins. I don't know what the landscape looks like now with more algo type trading.