US Stocks - Option Trading

Unlimitedinvesting

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Creating this thread to build a community of options trader in the US stock market. (Not binary option)
Any tips or even newbie interested to learn, this thread is for you!
 

Shiny Things

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I'm not hugely active (FX and rate options are more my space), but since I punt the odd stock option in my fun-money account I'll chime in here.
 

SpeedingBullet

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Trade monthly options here on stocks that i’d like to own. I usually sell puts and buy the occasional VIX call.
 

BBCWatcher

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I did it once out of curiousity, a modest strangle on a major U.S. listed stock, to play the classic corporate quarterly earnings announcement game. With straddles and strangles (and a trading platform that doesn’t allow one side to be executed without the other), losses are mathematically capped, and that’s nice. Strangles cost less than straddles, but that means the stock price has to move more aggressively up or down in order to make the same amount of money on the bet. As it happens, the earnings announcement resulted in strong enough stock price movement (up or down, I can’t remember, didn’t care — and I can’t even remember if I let the strangle die naturally or if I closed it out before the casino closed the table). I won the bet with a respectable payout, an expensive dinner with some nice drinks....

....and I’ll never do it again. There are shades of gray between investing and gambling, but that’s gambling. It was educational, that was the point, and that’s enough. It was not a brilliant bet. It was just a pure, dumb guess, that a specific quarterly earnings report would be surprise the market enough. Yippee, it worked, and...I’m done.
 
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BBCWatcher

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So, what did I learn?

1. Even in the mighty U.S., only a small subset of listed stocks has enough option interest and associated market maker support to function well enough. Apple, sure. But you don’t have to look far down the S&P 500 list to get into very thin option markets. Stick to the big ones.

2. Relatedly, you need to be very careful to avoid being the big fish in a small pond. Keep the size of your bets down to a tiny fraction of option interest.

3. If you’re starting out, I would do what I did: a strangle (or straddle). And make sure the trading platform executes only the whole strangle (or straddle), or none of it. One put, one call, precisely matched — and only that, or none of that. That’ll cap your potential losses. If you eventually feel comfortable accepting some risk of a mathematically unlimited loss, you’re braver than I am.

4. CNBC has an options-focused program — can’t remember the name of it, but they have one — where a bunch of alleged options traders talk about what they think. Ignore their advice about specific trades, but in terms of learning how the markets function and the lingo, it might help. Reading a good book (or online equivalent), and using simulated platforms before executing any real trades, is a darn good idea. This is complicated stuff if you’ve never dealt with it before, and there is a learning curve. I think OptionsXpress used to have free classes in Singapore, and if Schwab is still doing that you could try one. Interactive Brokers has free webcasts, and you might find that helpful.

5. Costs are relatively high to play this game. This isn’t Vanguard-like stuff.

6. Triple check trade orders. It’s extremely easy to make a mistake. As just one simple example, options vary in the unit quantities on the exchanges. As I recall, sometimes you’re dealing in 100s (so quantity 5 = 500 puts, calls, or whatever), sometimes not (“micro” units). A good trading platform will help you avoid the dumbest mistakes, but don’t count on it.
 

Shiny Things

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I also want some fun money. �� How are you trading with stock option tho!

My stock option trades are usually either event-driven, or I want to put on a short position in something without leaving my losses uncapped (and, incidentally, locking in the borrow so I can't be squeezed out).

To your other question: Interactive Brokers, 70 cents per contract if you use their smart-router, $1 per contract if you decide to direct-route to a specific exchange; and if you do over 10k contracts a month the price drops even further. Can't beat it.
 
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