OPTIONS Market
Definition of the OPTIONS Market
Derivative market. Can be traded on many different underlying asset classes – most common is equities; some Futures and index options as well.
Traded in contracts (typically 100 shares per contract).
Traded on an exchange and regulated similarly to other exchange-traded markets.
Provide a multi-dimensional approach to the market – direction, time, and volatility.
Primarily a swing and position traders’ market for income and wealth trading opportunities.
How are Options Traded?
Contracts (typically 100 shares per contract).
All Options strategies are made up of a combination of buying and/or selling calls and/or puts.
Call – the option to purchase something at a fixed/set price on or before a specific date.
Put – the option to sell something at a fixed/set price on or before a specific date.
Strike – the price at which the underlying security of an option can be bought or sold, regardless of the actual market price.
Expiration – the date that determines the life of the contract.
Benefits of Options Trading
Because options are multi-dimensional, a trader can take advantage of moves in the underlying asset, time decay, and changes in volatility. This allows traders to make money regardless of market direction (or lack thereof, i.e. ranging markets).
A multitude of strategies allow traders to hedge risk and control specific risk such as gaps in the market, fundamental risk, etc.
Can be used in combination with the underlying asset to protect positions and enhance returns.
Gives you the opportunity to get paid to buy Stocks.
It provides great purchasing power compared to the expense of trading equities.
Gives you the ability to capitalize on bearish moves with an IRA account.
Certain strategies allow traders to be bullish and bearish simultaneously.
Provides low-leverage that creates a safe learning environment. This allows you to utilize small position sizing to minimize risk as a novice.
Understanding the equities market is a critical step to becoming a successful Options trader.
Essentially traded during the regular session for the underlying asset (Equities 9:30am EST – 4:00pm EST).
Best times to trade and periods of highest liquidity and volume will coincide with the underlying asset’s regular session.
Swing traders can evaluate the market after hours and set up trades to execute during the normal session.
Ideal Account Size for Options
Minimum account size is $5,000 at most brokerage houses. It is important to note that the “pattern day trader” rules apply to the Options market in a margin account.
An educated trader/investor should be aware of appropriate account size, position sizing, and risk management when trading or investing in any market.
This is also great for traders who have large wealth account(s) because of liquidity.
Types of Accounts for Options
Cash
IRA
Various Entity Structures
(LLC, Corp, LP, etc.)
Ideal Options Trader
Someone that works full time and can’t be in front of the computer in the morning for day trading
Someone who has less than $10K to fund a trading account for income
Someone who has seven-figure accounts to hedge fixed income currency risk
Someone who is looking for a simple swing trading market
Novice Mistakes
Misconception that trading Options means buying calls when bullish and buying puts when bearish.
Not understanding the impact of the Greeks.
Not understanding the proper time horizon (i.e. day trading Options).
Not understanding the way Options are priced and implied volatility’s affect on premiums.
Not knowing when to implement the correct strategy based on given conditions.
Consistently being on the wrong side of time decay and not understanding how time decay affects different premiums.
Unaware of Vega and the detrimental effects it can have on the premium even if the trader is correct on the direction of the underlying instrument.
Inability to read and understand an Options risk graph and therefore understand the evolution of an options position.