Options Trading Tutorial

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Question by RoastGoose: Options Trading Algorithm……?
how would i best go about developing an options trading algorithm?

Barry – i’m not sure what you meant by overriding strategy. Make as much money is the shortest time possible? :\

Would this be the general outline for starting from scratch?

1. Analyze the underlying –> Backtest correlations between the underlying and TA, FA and sentiment factors

2. Use results from 1 to predict the implied volatility and trend (?) of the underlying

3. Based on predictions, use the option strategy that’s most likely to generate the best profits

Thanks for your feedback

Best answer:

Answer by Barry789
There are different uses of options, not all of which are concerned with making the most money from the option trade.

You can use them to speculate (outright naked buy and naked sell of puts and calls), increase income (covered call writing), protect positions (buying puts on a long position that has profit), etc. There are a lot of options and stock, long and short, that you can use to replicate any outcome you want, assuming your assumptions on market and stock movement and volatility are correct.

Once you decide what you are trying to do, then you should back test the price movements to see if there are any tactics that work better than others *in the market conditions you are predicting*.

The second step in back testing is to extend the range of favorable and adverse price movements to see when the tactic would have turned against you. The troubles that LTCM had were a result of not testing their strategy into what amounts to 5 and 10 standard deviation events.

I wouldn’t worry too much about implied volatility. In the short term it doesn’t change much. You should know what it is today and what it has been in the past, but the volatility won’t be as big a factor as the movement of the underlying and its market.

You should understand that the distribution of price changes is not normally distributed, which is the assumption of most of the models people use. Mandelbrot’s work has demonstrated that these things are best understood using the stable distribution. One interesting factoid is that in the stable (also called the Pareto distribution), the standard deviation is undefined.

The assumption of normality or log-normality implies that all events occur within +/- 3 standard deviations from the norm and that events like the ones that buried LTCM and the events of 10/19/87 were once in a 3,000 years events. If you look carefully at price changes, you will see that there are a lot of outliers, price changes that don’t fit within the models, but which contain information.

Know better? Leave your own answer in the comments!

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by SS&SS

Delta is the amount by which the price of an option moves for every dollar move in the underlying security. For example, an at-the-money call option which has a delta of 0.50, the option price will increase by .50 for every move in the underlying security. If you were to purchase 2 at-the-money call options, your delta would be 1, and your position would move inline with the underlying. Deep in-the-money calls will have a delta close to 1, and deep out-of-the-money the option, calls will have a delta close to 0.

My Favorite Delta Neutral Strategy

Basically this strategy means selling multiple out-of-the-money puts (positive delta) and selling the underlying stock (negative delta) in order to obtain a delta neutral position. This trade can be risky, so you need to ensure you comprehend the trade before attempting it. These are some of the factors I look for when determining whether to use this trading strategy:

* Generally I pick a stock I’m slightly bullish on. The reason being that as underlying stock increases in price, my delta will increase. This is due to the delta on the short stock position remaining at -1 while the delta on my puts will increase. So the best scenario for me is that the stock rises slightly.

* This is also a trade that will benefit from decreasing volatility, so I pick a stock that has high volatility that I think will decrease in volatility over the course of the trade. The other benefit of high volatility stocks is that you receive more income for your out-of-the-money puts. Although, as with everything be aware that the greater the reward, the higher the risk!

* I pick a stock that I know a lot about. Picking a stock that you know little about just because it fits with your option strategy is a recipe for disaster.

* I plan in advance how I will manage the trade and whether I will dynamically hedge the delta. As the underlying security moves, so will my delta so that I am no longer in a delta neutral position. Before I make the beginning trade I will know what I plan to do in this scenario. If I am bullish on the underlying and my delta becomes positive (i.e. I now have a long exposure), I may leave the trade as is because I am happy with a slightly long bias. Otherwise I might short more stock to get my delta back to zero. I would also plan how often I was willing to do this, as commissions will start to add up and eat into my profits.

* This is a fairly risky strategy, so I generally do not use too much of my capital.

For more details on this and other options trading strategies, please visit Options Trading IQ.

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www.TradeTheMarkets.com co-founder John F. Carter discusses “Day Trading Options” Options Trading Strategies with Amazon (AMZN). Learn how to day trade options with options expert, John Carter, at www.TradeTheMarkets.com. When it comes to “Day Trading Options” you need to move fast because the electronic trading and options market makers move very quickly with price action. John Carter Day Trader: Futures, Stock, Options and Currency Trading John F. Carter: Trader behind www.TradeTheMarkets.com Started day trading options in high school, John came home from the mall where he was working at a store making cookies. He had saved up 00 over the course of a few months, and his dad told him that he and some of his friends were going to buy “some call options on Intel” the next day. Although he had no idea what they were talking about, it sounded good. He bought 10 call options at 75 cents, and sold them a few days later for .50, doubling his money. He was hooked and has been trading ever since–going on 20 years now. After high school, John Carter studied at the University of Cambridge, England, then graduated from the University of Texas in Austin with degrees in History and Economics. John Carter was never that intrigued by the brokerage side of the trading world. Instead, he liked to try and test various day trading options strategies through college and well into his corporate jobs. He became quite adept at making money day trading options, though there were times when …
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by OptionsHouse

Options Trading Strategies – The Bull Call Spread Method

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Options Trading Strategies – The Bull Call Spread Method

By: Closson, M
Posted: Nov 14, 2010

Too many traders stay away from options trading strategies because they just don’t understand them . If you would like to become a better trader and make the most out of you investment dollar by limiting you risk, learning some of the options trading strategies can help you do just that. In this article we will take a look at the “bull call spread method” of trading options.

An option is nothing more than a contract between a broker and a trader, giving the trader the right or option to buy or sell equities at an agreed upon price and a specified length of time for a fee , anywhere from 21 days to over a year. For instance: You may pay a 0 premium for the call option on GE at 35 ½ for 6 months and 10 days. (This is the most popular length of time because any profits made from that length are considered long-term capital gains and taxed at 25%) Let’s say GE’s stock goes up and starts trading at 45 ½ before your option expires. You then exercise your option and realize a gain of 0. A gain of a share, 100 shares =00-0 premium = 0 net gain.

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The bull call spread method favors a bull market, or an upward trend. This method will require you to buy a lower strike (price) call and writing a higher strike call at the same time. The lower strike call has a better chance of being worth more because of the bullish trend in the market. You will write a higher short call to protect yourself from unfavorable swings in the market.

Example:

Long 1 September corn 350 call for 152

Short 1 September corn 400 call for 56

Days till expiration 33

Net premium 152-56=96 cents (9.5cents)

10(1 cent) in corn =

Net premium in $ value is 9.5 cents */tick=5

This method can be highly effective in maximizing profits and limiting risk . Hopefully you can realize the power of this sort of strategy and the unlimited potential of options trading.

Although trading options is a powerful tool to have on your side, please take the time to fully understand any new trading strategy before using your hard earned money in the real market. Ask a trusted advisor if you have any question and be sure you know both the potential and the risks involved with any investment or trading strategy.

Visit Mr. Closson’s website to learn more about options trading strategies and while you are there, sign up for his news letter where you’ll get the latest in Forex trading system reviews as well as helpful strategies designed to help you get the most out of every trade. http://www.reviewforextradingsystems.com

Closson, M – About the Author:

Mr. Closson is the owner of ReviewForexTradingSystems.com. He spends countless hours searching for and reviewing forex trading sytems and trading bots that provide you with the edge to succeed in all your forex trading ventures.

ReviewForexTradingsystems.com also has an exstensive library of trading articles and strategies that you can take advantage of for free.

Source: http://www.articlesbase.com/currency-trading-articles/options-trading-strategies-the-bull-call-spread-method-3665718.html

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Article Tags:
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Question by Maria L: Has anyone bought the ibankinsider options trading ebook?
I want to know if the ebook actually tells you any insider secrets in options trading. As I am a newbie to options trading this ebook looks impressive but i don’t know how good it is. Are the strategies recommended too complicated for a new investor?

Best answer:

Answer by Ted
It’s not complicated. There are many books out there that try to make it sound complicated so that they can sell you “the Secret”. There is no secret. It takes commitment to doing your homework. There are a lot of good books in book stores and at the library.

Look at how people who are actually successful make money:

http://www.amazon.com/How-Trade-Options-Wiley-Trading/dp/0471312789/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1213721428&sr=1-1

http://www.amazon.com/Looking-Years-Trading-Success-Boils/dp/B00005RFA4/ref=pd_bbs_sr_2?ie=UTF8&s=books&qid=1213721428&sr=1-2

Add your own answer in the comments!

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