Where to Start in Options Trading
This post is not related to SPREADs but it is my thoughts about learning that one needs to start properly in OPTIONS TRADING. It was in reply to following question --
I want to learn options trading. Do we have to be well versed with the equity trading. To be frank I have a year and half exp in swing trading that too not a active participant.
AW10,Lazytrader, Kindly inform me the ways to learn options from beginning that too very basics. Have gone through the websites provided earlier and was able to grasp some of the stuffs. However, will appreciate if explained in detail step to step to gain the knowledge of options trading.
tvrssvk , I will attempt to give u very practical answer to start in options trading.
1) To make money in any trading (be it a house, stock, goods, options or anything), very first thing to know is the direction of the market. Can u make money by buying something, when market is falling. So very first thing you need to learn is to identify the current trend of the market (up, down or sideway). Better u are in this, solid is your foundation. E.g. – If you are in Nagpur and want to go to Delhi, then first thing u have to do is to be on platform where Northbound trains are arriving, and then u need to board the right train for your destination. No great deal but just common sense.. But u will surprised to see how often it is not followed in market where people buy, when market is going south.
2) Once u know the direction of market or stock that u want to trade, then choose appropriate option strategy for this.
3) There 6 basic risk graphs in core option and stock strategy. All other strategy is just combination of these 6 basics. They are – Buy Stock, Sell stock, Buy Call, Sell Call, Buy Put, Sell Put. Spend as much time as required to understand them on parameters I am going to mention in next point.
4) For any strategy (including the 6 basic one), know how they are constructed, what is max risk, what is max reward, where is BREAK-EVEN point, How the risk graph looks like at expiry, suitable market condition favourable for these strategies. Once, you should be able to draw risk graph without any option analysis tool, then u pass out from this stage.
5) Understand the concept of option pricing, intrinsic value and time value, the factors that affect option premium. Focus on not the theory, but how change in those factors will affect the premium. Watch them in real life, experiment with them using option calculator.
6) At advance stage, u can look at transition of risk graph from now to final stage at expiry, various option Greeks etc., various strategies that are combination of 6 core strategies. This is the stage, I will advise one to start using a tool. IMO, A professional’s doesn’t become handicap without a tool. He/she know how to work without tools.. And if they are given the tools, then their performance and efficiency zooms. They know what they are doing, or what they want to do because they have solid foundation. IMO, a great tool in the hand of a monkey is no different from a banana or a stone in its hand. Cause monkey doesn’t know how to get best from it. But give a great tool a professional, and see the difference.
There are different approach to get above (read books, take mentorship, play in market and learn the hard way, go-to school/collage etc). The decision is yours. But be careful about selecting the place or option that u are going for. If u read wrong book, go to wrong person for training, do wrong course, etc, you will be just wasting your resources (time, money, energy etc.).
This is just to give base in option trading, so that u can plan an option trader properly. Remember, that doesn’t make you a trader still. Trading involves Money mgmt, psychology, risk mgmt, system testing etc which is beyond the scope of this post.
Last but not the least, there is not defined path that u need to follow to get started in options trading like first stocks, then futures, then options. If it is done appropriately, then you can start directly in options, without getting into stocks etc. If you know stock trading (better have good track record in stock trading), then few initial steps are not required.
But that is not limitation, even if you have never traded stocks. As long as you learn to read market trend, you can start with options trading.
LEARNING MATERIAL
There are many good resources available on internet to learn about Options. Some of them are:-
1) CBOE dot COM site // Learning Center section
2) 888Options dot COM site
3) NSE site // "Home > NCFM > NCFM Modules" section and check out the study material on following modules
- Equity Derivatives: A Beginner's Module
- Derivatives Market (Dealers) Module
- Options Trading Strategies Module
4) INVESTOPEDIA dot COM
Happy Trading