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Dear @tderrick, as you're not (already) an option expert, my very humble advice will be: don't trade stock options with stocks quoting more than $50.
An option is the right 100 shares, so the option price is directly related to the share value. So choosing AAPL or GOOG as an underlying is not a good choice if you want, to try options without risking too much.
Correct, you need to know "where" and "when", or "where not" and "when".
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That's remind me a real story, with one of my trading mates, who was only trading futures, but just had an option course, and absolutly wants to trade options "now !!!". That was a friday, 30 minutes before the US RTH close, the following monday was the Apple results announcement (or very important news another, I forgot). The guy was very febrile, really wants to short the volatity, and it was supposed to be a low risk trade, two legs, small potential loss, small potential gain.
Few minutes before the close, he calls me to check the trade he has done.
Instead of being delta-neutral, his position was like being naked short for 10 AAPL options, the day before a very big news... He makes some money on this trade, but that was pure gambling, and a very very bad R/R ratio.
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(1) Avoid any complex trade, such as strangle, straddles, butterflies, vertical spreads, calendar spreads
(2) Avoid selling an option, as this is a high risk trade. Selling call options involves unlimited risk.
So you will want to buy an option. If you are buying an option you will suffer from a reduction in time value, so you do not want to keep it for too long. You need a directional move pretty soon, the option basically adds leverage to the directional move and you have a limited downside, which is the option premium.
Otherwise I really recommend to get some knowledge on how to trade options before starting anything. The best book would be the "options bible":
Lawrence G. McMillan : Options as a Strategic Investment
You only need to read until page 962 for your first options trade. The book costs you less than what you will lose from options trading if you do not prepare yourself.
If you're able to watch your position, and cut your loss if needed and not late, a covered Call (if bullish on the stock) or a covered Put (if bearish).
You can take a look at this webpage, where most common options strategies and their associated risk graph is described.
you must be kidding. A covered put - selling a put and shorting the underlying - is the equivalent of selling a naked call, but more difficult to implement, because you have to borrow the stock and therefore generating higher commissions for the broker and fee income for the party who is lending the stock.
This is the option trade with the highest possible risk - actually unlimited risk - as an answer to the question, which is a conservative trade to start with.
Congratulations!
I hope you don't mind my mockery. Je n'ai pu resister à retourner ta balle....
Our friend wants to learn options, let's start by what must be avoided first .
The unlimited potential risk of this strategy is only theorical, and as always when shorting options, Theta is working for us.
In options trading, imvho, you can't use only the safest strategies. Well, it's possible, but it's harder to make money with only these.
But for sure, the conservative/safe trade is a long call, no doubts.
The potential loss is limited, and you are cool enough to look at the time value of your option decreasing a bit more every day.
I have read many articles on options trading. Most of them explain, how different types of positions work, how you should manage them and what are the risks associated.
Understanding how the option mechanism works does not give you an edge. If futures trading is one-dimensional, as it is all about price, options trading is three-dimensional, as it depends on
Standard options models - for example Black-Scholes - only can be used for approximate options evaulation. As far as I know, they cannot explain the volatility smile. So I am incapable of following any systematic approach in options trading.
So the nly way to trade them is to apply some technical rules. Buy options if they are cheap, i.e. that implied volatility is low, sell them if they are expensive and you have reason to believe that implied volatility will drop back to normal levels. But this is not trading, it is like walking in a foggy forest during night. Won't touch that stuff until I understand what I am doing.