Greetings from a fellow Chicagoan and former bivio
columnist! And greetings to you Candis.
I am just starting out studying options. I have recently
attended classes put on by the Options Industry Council
about options and I have a few (a lot of!) questions.
Good to know you picked a decent spot to begin.
One of the suggestions made by the Options Industry Council
classes was to specialize in 4-5 stocks and learn the heck
out of them. Fine and dandy, but how do I go about choosing
the 4-5 stocks and what do I look at? They are assuming you
are an experienced stock trader and thus, have a method for
choosing stock to own or sell short. They also assume
you have a method of timing buys and sells.
I cannot answer this question. In theory you watch the price and
then try to predict future price. Nonsense to me, but some people
appear to be able to do that. I am not one of them.
Those are big assumptions.
If your plan is to buy options in the hope if using
leverage to achieve good profits, I wish you well.
In my opinion, that's an extremely difficult task. You must
get the direction of any move correct - OK, at least that's the same
as when trading stocks. But you must get the timing right because
options have an expiration date. And because you are paying a
premium to own the option, you must also have the move be large enough
to overcome the cost of the options. Not impossible. Just difficult.
Is it the fundamentals of a stock I look at? It is the
technical analysis of the stock? Is it the earnings
announcements? conference calls? Mostly yes. If your plan is to be
a short-term trader, then technical analysis is probably the way to go. But
I never use it. I don't believe in it. However, some people do VERY with
TA. But in my opinion it takes a lot of study to try to get it right. And
most who try fail - or so I have heard.
Fundamental analysis? The professionals who manage mutual funds, pension plans etc
cannot beat the market averages on a consistent basis. One TV jerk tells listeners to spend one hour per week with
with stock in the portfolio. That's a lot of research. But you not only have to read all you can, but understand it as well.
My thought is that if the professional money managers cannot do that well, why would I attempt it?
Why the OIC would pat their
seminar attendees on the say, and tell them to go off and pick a few stocks to
trade is beyond me. I'm not knocking them. Plenty of others take the same approach.
And it's great. If you have the patience to 'learn' how your stocks trade and get a good feel for
rallies and declines. to me, it's an impossible take for the vast majority, and easy for a selected few.
Should one have a 'stable' of companies one likes to buy
puts on and others to sell calls? What? I must say NO to this because both of those plays are bearish and no
matter how you feel about the market, you don't want to be a bear 100% of the time.
I would really appreciate any guidance you can provide to
shed light on my confusion and lead me into the land of
option profits. :) Obviously, there are no promises. Not everyone can be a good trader or successful
investor. But to me, the first step is to understand how options work. Here is a link to a page at my website on
the basic concepts of options: http://www.mdwoptions.com/BasicConcepts.html
If you have little or no experience with stock trading (and even if you do), stock picking is a difficult task.
This is not for you (yet), but I trade index options so that I don't have to try to predict which stocks are heading higher and which lower. I try to remain neutral and not care in which direction the market moves.
My philosophy, and the one I teach and suggest is a good way to begin (I am not so arrogant as to assume this is the best approach for
everyone, but it makes good sense to me and my readers agree). I recommend writing covered calls. Not because it's the best strategy. It's not. It's a strategy with more risk than I like to see option traders take. But if you already buy stocks for investment, then this reduces the risk of owning stocks. Once the trader gains experience and confidence, I suggest moving on to more conservative strategies. You an play these VERY conservatively or very aggressively, or anywhere in between.
There are free courses at OIC and CBOE. I don't know how good they are. But, please avoid spending thousands of dollars for weekend seminars. If you are someone who likes to learn by reading (others prefer live talks or video), find a good beginner's book and go with that. I believe The Rookie's Guide to Options (if you choose to buy this book, please use this link and I'll get a small commission from amazon)is by far the best for beginners, and so do my readers. I explain options and how to sue them in details. Lots of detail.
I encourage you to go to my blog: http://blog.mdwoptions.com
It's called Options for Rookies. It's disorganized in that it's not written as a book. But if you go to the first few entries you can see some ideas for beginning.
One thing I strongly recommend is to open a brokerage account (deep discounter please). If you need a recommendation, let me know. Then use a practice (paper-trading) account. Have patience and don't use real money until ready.
I am NOT trying to discourage you. If your plan is to buy options, tread carefully. If you like the idea of selling options, as I do - many will warn you that it's too risky. Some strategies are risky, others are fairly safe. Less risk and reduced rewards go together, but there is no need to be greedy. At least not when beginning.
I hope I have shed some light on this issue for you. I believe with all my heart that my advice is sound, intelligent, and a winning approach to using options. But there are those who prefer to buy options. You have to do what is comfortable for you
Thanks and try to stay warm in this dank and chill October
weather! And is was so beautiful not too long ago. Thanks.
Mark D. Wolfinger
The Rookie's Guide to Options:The Beginner's Handbook of Trading Equity Options