Options

[nzambition]

Who here trades options?

What on? and Who with?

I'm thinking about opening an account with optionsXpress, I have done some currency options with Tricom, but I'm looking to cut my teeth in equity options...

Any advice? good websites?

[nzambition]

ok did some research and found:

optionsXpress
www.optionsxpress.com
OIC options industry council
www.optionseducation.org
options insider
www.theoptionsinsider.com

.........

is there any bench mark for optionsXpress??

[Technical.Trader]

I have been advising on ASX Equities and ETOs for the last 3 years so I can help or point you in the right direction. I am not current;y working for any firm so can give you an unbiased opinion.

TT...

[nzambition]

who do you use to trade?

what are the commissions like? is it easy to get cash in/out of the account?

what strategies do you use?
I've had a look over some of the strategies like bear/bull spreads, straddles, covered call writing, long puts/calls... They're easy enough to understand and figure how to use (in hindsight) - but would be cool to hear what sort of strategy you take with options trading... or your thoughts on what a seasoned share investor, but options beginner, should try...

many thanks!

[Technical.Trader]

Hi NZAmbition

As mentioned I m setting up a stockbroking business and expect to be up and running later this month or early August. Please PM me for details.

In relation to your other questions the answers very much depend upon your investment strategy, because for every advantage an option strategy has, there is a trade off.

Some rules of thumb I like to use when advising my clients and things I have learnt from my many mistakes:

When Buying Options stick to Long Dated (Expiry at least 9 months away) Out of the Money Options (20-30% away).

The reason for this is that the premiums are low(ish) and therefore the most you can lose is also quite low on a per option basis. It also offers you the opportunity to obtain more leverage without a large increase in risk. The added time value and low premium from buying out of the money options means the option holds its value and time decay does not have to much of an effect (compared with buying short dated). The premium you may in total should not be more than 10% of your options account and even less on a larger account size. Your options account should never be more than say 25% of your overall investment portfolio (and 25% is aggressive).

After a decent move in your favour you have the opportunity to sell your option, or you could Sell a short dated option (with 1-2 months to expiry) against your position. Often you might be able to sell a short dated option for a higher premium than what you paid for your long dated option. If this option expires worthless you will have a nice premium you can use to offset the original cost of your long dated call/put.

This brings me onto my next point:

When selling options sell Short Dated options with 1-2 months to expiry.

The reason for this is that time decay is higher for short dated options. Get this working in your favour.

ALWAYS RUN LIMITED RISK POSITIONS!!!!!!

Covered Calls are a high risk position. They pay-off is exactly the same as a Naked Put Option (they are synthetic equivalents). Not only that but they limit your profit potential while only offering a small amount of downside risk (the stock price when your entered the position less the premium you receive). It is also an expensive position because you need to own the stock....at 1000 shares per option (ouch) and you pay interst if you leverage this position.

An income producing strategy

This strategy idea is as good as any:

Depending on your view Buy out of the money call options or out of the money put options or both. Make sure they are 20-30% out of the money with at least 9 months to expiry. These options act as your protection or a back-stop as our strategy revolves around selling options. You can work out your cost per month by dividing the premium paid by the months to expiry. It might result in a cost of say 15 cents per month.

Each month Sell a Call or a Put option or both with 1-2 months to expiry. Do not exceed the number of contracts your bought because this significantly increases your risk. If you option goes in the money hold it through to expiry and buy it back for intrinsic value as close to expiry as possible. Getting exercsied is only bad if your broker stitches you up on stock brokerage..(unfortunately most brokers do this) so for in the money options you may be forced to buy back earlier than expiry or around dividend time. If you do buy back, simply sell an out of the money option expiring the following month and take the loss on the sell side. Occassionally you will get a decent loss, but this should be (partially) offset by a gain on your long dated bought call/put. Sell another out of the money option the next month.. Consistency at doing this across a portfolio of stocks will eventually average out to a profit over time on the sold option side, but you cannot expect to win each and every month.

The above strategy work well, it is limited risk and gets the fundamentals of options working for you (i.e. time decay). It is still risky and should only ever make up a small portion of your overall investment portfolio.

Other uses for your portfolio and stratgies I like:

Hedging with put options... its expensive but sometimes pays off.
Calendar spreads: the strategy above is a variation on the calendar spread
Buying Long dated out of the money options

TT