Do you trade options?

[ScarElbow]

Any options trader in the house? I just took an interest in this world of puts, calls, and spreads.  It seems so exotic with potential with side incomes.

[Financial.Velociraptor]

I trade options with a significant portion of my portfolio and blog about same.  I recommend selling options rather than buying them. 

Options are the secret sauce that let me retire early long before having 25x expenses saved.

[CCCA]

I trade options with a significant portion of my portfolio and blog about same.  I recommend selling options rather than buying them. 

Options are the secret sauce that let me retire early long before having 25x expenses saved.

How would you go about learning how to trade options?  any good online tutorials or books?

[ScarElbow]

FV...for spreads is there a formula that you use to have the trade probability going your way (prob otm%, delta, etc)? For selling puts are there main indicators to determine when to sell?

[Financial.Velociraptor]

I trade options with a significant portion of my portfolio and blog about same.  I recommend selling options rather than buying them. 

Options are the secret sauce that let me retire early long before having 25x expenses saved.

How would you go about learning how to trade options?  any good online tutorials or books?

I'm not aware of any good ones that aren't ridonkulously technical and math intensive.  I'm writing one to sell on Amazon for 99 cents but it isn't finished yet...because I'm kind of lazy.

[Financial.Velociraptor]

FV...for spreads is there a formula that you use to have the trade probability going your way (prob otm%, delta, etc)? For selling puts are there main indicators to determine when to sell?

Scar,

I haven't traded spreads in a couple years and don't plan to again.  Wasn't worth the extra trouble.  I find keeping things simple with just writing cash secured puts (else covered calls) allows annualized returns consistently above 12%.  The trick is picking boring and slow moving companies you would be happy to own if the trade goes against you to mitigate risk.

Some people want more than 12% return from their options and portfolio -- their FIRE experience will be short lived in my estimation...

[ScarElbow]

Well the  way I look at it (correct me if I'm wrong here), is that selling puts can be an investment in the underlying security whereas spreads are more speculative and has more risk if you have a trading system in place.

[Interest Compound]

I spent years of my life with 100% options. My plan was similar to Financial.Velociraptor's, and everything went well for me. Very well. Then the volatility showed up. And OH DID IT SHOW UP.

This is a favorite site of mine for learning about options, and referencing the charts for various trades:

http://www.theoptionsguide.com/

Here's the strategy Financial.Velociraptor is referring to:

http://www.theoptionsguide.com/uncovered-put-writing.aspx

[ScarElbow]

IC....did you have an exit strategy when there were wild price swings like that as it got closer to expiration date ?

[Interest Compound]

IC....did you have an exit strategy when there were wild price swings like that as it got closer to expiration date ?

Yes, and the exit strategy worked perfectly. I got out at a breakeven. Breakeven from my balance when I first started trading options. And not before watching my net-worth plummet by the second. It's one thing to read the phrase "zero-sum game", it's quite another to spend years of your life experiencing it.

It's because of my years trading options that I know I can handle the volatility of 100% stocks, so it wasn't all bad :)

[Financial.Velociraptor]

Well the  way I look at it (correct me if I'm wrong here), is that selling puts can be an investment in the underlying security whereas spreads are more speculative and has more risk if you have a trading system in place.

opinions vary but I think that is the right way to look at it.  You sell an obligation to buy the underlying security at a predetermined price.  If you are comfortable owning the underlying at that price, you can't lose.  If you aren't, why in the hell did you sell the contract?  You wanted to gamble?!?  Selling options actually reduces risk because your downside is reduced by the options premium.  That isn't an invitation to go ass-wild though. 

[Financial.Velociraptor]

Here's the strategy Financial.Velociraptor is referring to:

http://www.theoptionsguide.com/uncovered-put-writing.aspx

Correct.  I'd like to add though that it is critical to my strategy that the put but secured by CASH.  Some people write puts on margin and that is just asking for trouble.  I can make upwards of 12% annualized on big slow moving blue chips.  Companies I'd be glad to own if I turn out to be "wrong".  You can make 50%+ annualized returns by chasing high fliers but the risk isn't worth it.  My old MBA Finance professor used to say "Daddy always said, bulls and bears both make money; but hogs get slaughtered" ('Daddy' was also a PhD professor of finance from West Texas...)

I'm delighted (smiling so wide you can't tell which end is up) to beat the long term market averages but just a tiny bit with lower risk.  No need to swing for the fence.  Stick to bunting!

[ScarElbow]

And that is precisely my problem. I have predisposition to go ass-wild. Discipline is key here I suppose. But I think it will come with experience

[Financial.Velociraptor]

And that is precisely my problem. I have predisposition to go ass-wild. Discipline is key here I suppose. But I think it will come with experience

I have a friend who likes to shoot dice.  I'm actively trying to steer him away from trading options...wrong temperament...

[Interest Compound]

Selling options actually reduces risk because your downside is reduced by the options premium.

That all depends on how you define risk of course :)

Not saying that you're wrong here, I'm sure you've thought about this already. The analysis in this post showing the safest inflation-adjusted rolling 10 year returns were from an 80/20 portfolio, along with my own post advocating 100% stocks, really has me looking at risk differently. For example, if reducing your downside risk also reduces your upside gain, to the point where inflation is a bigger long-term enemy than nominal price drops, you might be in trouble.

Something to watch out for.

[brooklynmoney]

I buy options to cover downside risk when I buy stupid tech stocks on the IPO and don't sell after the first day pop.

[Financial.Velociraptor]

Well put Interest Compound.

I think I'm well positioned to give up "upside" if I can meet my 12% annualized minimum as I'll beat the long term averages, even after a 25% tax hit in my taxable.  Completely moot in a hyperinflationary environment.  I'm banking on hyperinflation meaning super fat put premiums though as one component of the Black-Scholes pricing model is prevailing interest rate.  But, we could all be fux0z0r3d in a HI environment though.  It's never hit the US before so it could be a zombie apocalypse scenario?!?

[ScarElbow]

I have a different take on risk. If I find that a security is on sale by ways of an event (ie oil spill, Fukushima, political turmoil, etc) AND that causes the price to come down AND that I've done my due diligence of fundamental analysis on the said company AND I find that it has cash flow positive. Then the risk is automically reduced by owning said stock. You can further reduce your risk even more by selling puts on that stock and collect the premiums and reduce your basis even more. Hmmm I'm licking my lips just thinking it.

[PaulMaxime]

I have been very successful trading options as a complement to my stock investing. I generally write puts for income and use diagonal calls on big slow moving stocks.

I got my education by signing up for Motley Fool Options service. It's worth the money for the education alone. The difference between them and what I see on CNBC is that they are focused as long term investors that use options as a complement and based on business fundamentals instead of trying to play earnings or make a quick buck.

They have a great track record with over 90% of completed trades having a positive return.

You need to be careful.

Options are a leveraged instrument. You need to be careful not to overextend yourself. Don't write puts on a stock that you wouldn't be willing and able to buy at your strike price. Prefer written options over bought options - that way time value is on your side. It's an asset that is always decaying, so better to sell it than to buy it.

If you do buy calls, buy them deep in the money to pay as little time value as possible, and choose the longest strike price available.

[Interest Compound]

They have a great track record with over 90% of completed trades having a positive return.

This isn't hard. Seriously. Anyone can do it. My broker even shows you the success rate of a trade before submitting it. And yes, it was accurate, there's no secret sauce, it's simple math. If you wanted every one of your trades to have a 90% success rate, you could do it. In fact, that's pretty much what Financial.Velociraptor is doing. Don't get too excited though, there is no free lunch. The options with a 90% success rate have a 9/1 risk/reward ratio. There's a 90% chance of gaining $1, and a 10% chance of losing $9. So you'll need to put $900 on the line, to gain $100.

[mrpercentage]

Well put Interest Compound.

I think I'm well positioned to give up "upside" if I can meet my 12% annualized minimum as I'll beat the long term averages, even after a 25% tax hit in my taxable.  Completely moot in a hyperinflationary environment.  I'm banking on hyperinflation meaning super fat put premiums though as one component of the Black-Scholes pricing model is prevailing interest rate.  But, we could all be fux0z0r3d in a HI environment though.  It's never hit the US before so it could be a zombie apocalypse scenario?!?

What broker do you use Raptor? You seem to be doing what Im interested in. Im still in accumulation though. Will be for a while due to obligations (mouths to feed and general rat race entertainment). Right now Im focused mainly in direct stock purchasing. Im pretty sure Im ditching Scottrade, Closing Betterment, and will stop using Robinhood usless they go to computer platform.
Never thought about selling options until I read some of your posts.

[ScarElbow]

Personally I use thinkorswim. There are other good cheap ones such as interactive brokers and tradeking. Look into each of them. They're quite good

[GoldenStache]

I buy way out of the money (usually over a year out) calls/puts and sell them when they are close / in the money.  Small fun money but it is hit or miss.  I have not ever executed on them, usually don't have that amount of funds in that account, but I would think about it if I got a great deal on a long term stock.

I had fun with Radio Shack before I got stuck with the hot potato.
Returns of 300%,  250%,  -100% in about a 3 months time period.  I do not reinvest the full amount (do not let it ride) after each transaction so I ended up positive.  Realized that I got greedy thinking I could get one more deal before they declared bankruptcy, lesson learned, maybe.   

[Financial.Velociraptor]

What broker do you use Raptor?

I use Interactive Brokers.  Typical commission on an option trade is 75 cents a contract.  Can't beat them.

[PaulMaxime]

They have a great track record with over 90% of completed trades having a positive return.

This isn't hard. Seriously. Anyone can do it. My broker even shows you the success rate of a trade before submitting it. And yes, it was accurate, there's no secret sauce, it's simple math. If you wanted every one of your trades to have a 90% success rate, you could do it. In fact, that's pretty much what Financial.Velociraptor is doing. Don't get too excited though, there is no free lunch. The options with a 90% success rate have a 9/1 risk/reward ratio. There's a 90% chance of gaining $1, and a 10% chance of losing $9. So you'll need to put $900 on the line, to gain $100.

It's exactly this type of  "roll the dice" gambling behavior that gets people in trouble with their options investing. There's so much more to it than just looking at some backwards-looking technical analysis screen that gives a bogus "percentage of success" chance. If you want to actually make money at this long term you need to understand the businesses you are investing in.

[Interest Compound]

They have a great track record with over 90% of completed trades having a positive return.

This isn't hard. Seriously. Anyone can do it. My broker even shows you the success rate of a trade before submitting it. And yes, it was accurate, there's no secret sauce, it's simple math. If you wanted every one of your trades to have a 90% success rate, you could do it. In fact, that's pretty much what Financial.Velociraptor is doing. Don't get too excited though, there is no free lunch. The options with a 90% success rate have a 9/1 risk/reward ratio. There's a 90% chance of gaining $1, and a 10% chance of losing $9. So you'll need to put $900 on the line, to gain $100.

It's exactly this type of  "roll the dice" gambling behavior that gets people in trouble with their options investing. There's so much more to it than just looking at some backwards-looking technical analysis screen that gives a bogus "percentage of success" chance. If you want to actually make money at this long term you need to understand the businesses you are investing in.

It's important to keep things in perspective for the newbies in the forum who don't know anything about options. Having 90% of completed trades with a positive return is not an accomplishment, but reading things like that can get people very interested (see mrpercentage's post) if they don't understand the mechanisms behind it.

[Vertical Mode]

Posting because I'm also interested in learning about options. Not sure if I will employ them, because I don't feel like I know enough about how they work yet. Working on that.

I believe longtime forum contributor Nords does some option trading from time to time, and he recommends Lawrence McMillan's "Options as a Strategic Investment". To paraphrase his thoughts on the matter, "if the math and mechanics of trading options don't fascinate you to your core, you probably shouldn't be trading options".

[ScarElbow]

If I were you, to get a feel of it  I'd use paper money to trade with no risk of losing your capital. Thankorswim dies offer a 60 day trial for you to paper trade. Practice before going out on stage for real.

[Interest Compound]

If I were you, to get a feel of it  I'd use paper money to trade with no risk of losing your capital. Thankorswim dies offer a 60 day trial for you to paper trade. Practice before going out on stage for real.

Paper trading screwed me when I was new, as it gave a false impression of how the market works. Never assume you can just get into, or out of, a trade at a specific price.

[PaulMaxime]

If I were you, to get a feel of it  I'd use paper money to trade with no risk of losing your capital. Thankorswim dies offer a 60 day trial for you to paper trade. Practice before going out on stage for real.

Paper trading screwed me when I was new, as it gave a false impression of how the market works. Never assume you can just get into, or out of, a trade at a specific price.

The other problem with paper trading is that you don't get the same emotional connection as you would with a real trade. It can be useful, but there's nothing like the feeling of losing real money to get your attention, and I bet you are much more likely to allocate trades reasonably if your real dollars are at stake.

[ScarElbow]

So its not the method we're arguing over. It is clearly the people employing the method that need to get their emotion in check. Not saying I'm calm as the lake water, but its called practice for a reason. Refine it with guess what....more practice.

[ArtX]

I use options to determine where the shares price would go, if you look at options data you can get plenty of hints. Volume, prices, at times it does help predict trends on the market. Don't trade options myself, but I did some commodity futures trading before they crushed, which is very interesting too.

[mrpercentage]

They have a great track record with over 90% of completed trades having a positive return.

This isn't hard. Seriously. Anyone can do it. My broker even shows you the success rate of a trade before submitting it. And yes, it was accurate, there's no secret sauce, it's simple math. If you wanted every one of your trades to have a 90% success rate, you could do it. In fact, that's pretty much what Financial.Velociraptor is doing. Don't get too excited though, there is no free lunch. The options with a 90% success rate have a 9/1 risk/reward ratio. There's a 90% chance of gaining $1, and a 10% chance of losing $9. So you'll need to put $900 on the line, to gain $100.

It's exactly this type of  "roll the dice" gambling behavior that gets people in trouble with their options investing. There's so much more to it than just looking at some backwards-looking technical analysis screen that gives a bogus "percentage of success" chance. If you want to actually make money at this long term you need to understand the businesses you are investing in.

It's important to keep things in perspective for the newbies in the forum who don't know anything about options. Having 90% of completed trades with a positive return is not an accomplishment, but reading things like that can get people very interested (see mrpercentage's post) if they don't understand the mechanisms behind it.

Yeah, definitely not jumping in without a lot of research. Just so you know, I never go to casinos or gamble for that matter. Im resistant to making things complicated. A sledge hammer rarely breaks but electronics fall prey to many things. I like dividends and direct stock purchasing because they are easy. Dividend check shows up in mail and its bigger than last time. That makes me happy. No calculating withdrawal rates or sweating down markets. I welcome purchasing higher yield. Real simple. So simple most don't have the patience for it.

[mrpercentage]

See this is one of the reasons I like keeping it simple. This article. Shorting isn't exactly options but there are unknown risks with making things complicated.

http://www.joshuakennon.com/how-joe-campbell-found-himself-106445-56-in-debt-to-his-broker-in-a-matter-of-minutes-because-he-didnt-understand-the-risks-of-shorting-stock/

[markbike528CBX]

If you haven't read http://www.theocc.com/about/publications/character-risks.jsp   ,
I mean really read it,  don't start. 
It's the minimum requirement.

"Prior to buying or selling an option, investors must read a copy of the Characteristics & Risks of Standardized Options, also known as the options disclosure document (ODD)."

I've sold covered calls, cash covered puts.

I don't like covered calls, as I really want to hold stuff forever.
Maybe after I want to draw down the stache in the distribution phase, I'll use them more.

I sell cash covered puts as a way to minimize my costs to buy stocks that I want to buy.   
(Did I say that I wanted to buy and hold the stocks I'm selling options on?)

For me a selling a cash covered put is just a limit order I get paid to make. 
No margin use, ever.
 

[Nords]

I believe longtime forum contributor Nords does some option trading from time to time, and he recommends Lawrence McMillan's "Options as a Strategic Investment". To paraphrase his thoughts on the matter, "if the math and mechanics of trading options don't fascinate you to your core, you probably shouldn't be trading options".

Yep.  I sold some naked puts back in August.  Here's the post:
http://forum.mrmoneymustache.com/investor-alley/selling-put-call-options-as-a-rebalancing-technique/msg782748/?topicseen#msg782748
One expires next month and the second expires in February.  They're both out of the money and have stayed that way.

These opportunities only come along every year or two, and they're frequently disguised as "end of the world" volatility or bull markets. 

Again I'll point out that even if you've read the books and think you know what you're doing, you're still taking unquantifiable risks.  Most of the traders are using options to protect profits, but they're all a lot more experienced (and perhaps smarter) than the average retail investors.  However there's a behavioral finance benefit:  my spouse and I are attracted to an occasional options trade because it helps us rebalance with less emotion, and it satisfies our need to feel like we're "doing something". 

[rayt168]

I trade options with a significant portion of my portfolio and blog about same.  I recommend selling options rather than buying them. 

Options are the secret sauce that let me retire early long before having 25x expenses saved.

Hi, FV.

As far as reporting the options on your tax return, how difficult is it?  Or do you trade the options in a tax sheltered account?  Thank you.

[Financial.Velociraptor]

I trade options with a significant portion of my portfolio and blog about same.  I recommend selling options rather than buying them. 

Options are the secret sauce that let me retire early long before having 25x expenses saved.

Hi, FV.

As far as reporting the options on your tax return, how difficult is it?  Or do you trade the options in a tax sheltered account?  Thank you.

I almost always have transactions that the broker (Interactive Brokers) does not record on 1099 and end up with an 8949 from the broker instead.  I file 8949 in a summary format, entering a grand total of six lines (long term/short term) for each of three categories (pulled directly off the summary lines on said 8949).  I then attach a copy of 8949 detail to return.  Has never been challenged.  Easy-peasy.  You still file 1099 for interest on your bonds, checking account, etc; but investment gains/losses all go on 8949....

I had HR Block do it one year and they entered it in summary format as well.  Uncle Sugar apparently isn't picky if he can trace your detail back to the total.

A funny point, short options are always short term gain/loss, even if held for over a year.  Long options are long term if held for a period greater than a year.  If long options are left to exercise instead of being sold, your proceeds are zero and your basis ends up in the underlying instead...almost always better to sell the long term 'long' option and then buy the underlying direct.