beginning trader ?

alen

New Member
#1
Hello! i am a beginning trader in options. how much money should i expect to make weekly with daytrading/swing trading? ps: im starting out with only $1000.
 
#2
Alen,

Great enthusiasm, but please be mindful of a few things first.

Options:
1. Options are perishable equities and ultimately become worthless.
2. Options have Intrinsic value (what they MUST be worth based on the equity they track) and Extrinsic value (time remaining until they expire).
As an option get closer to expiration, the more theta (extrinsic value) they lose. Theta does not affect intrinsic value. Delta affects an options intrinsic value because delta measures the performance of the equity the option tracks.

Example. If XYZ is $50 per share and you purchase a 6 month X$40 Call option, the intrinsic value MUST be $10 minimum in order to prevent/avoid arbitrage. Now, because the option is 6 months out, you are necessarily purchasing time value which could be another $3+/-. So, the option would cost you $13 per share.

Now fast forward 6 months...the option is set to expire TODAY and the price per share on XYZ is still $50 (it hasn't moved at all). The 6 month X$40 Call option will no longer be worth $13 per share. It has lost all of its theta, but because it is still $10 ahead of $40, the option MUST be worth $10.

In this case, even though the security XYZ did not lose value per share, your option still did because of time decay.

3. Options are affected by volatility. As volatility increases, the option's value also increases - and vice versa. Mind you, volatility is constantly changing - fluid.
The problem with volatility is that if you purchase an option with a high IV (implied volatility) and then the IV falls, your option will lose value. You have to understand a fundamental principle of mean reversion. Mean reversion dictates that on average, the average wins. In other words, over time, all things revert to the average...they go from extreme highs and extreme lows back to the average, somewhere in the middle.

Therefore, if historic volatility is 40 and the option you're about to purchase is 100, then there is a high proabability that your option will revert to the mean - your option will lose value.

So far, for the options trader/investor, you must be correct about time, direction, and volatility. That's a lot to juggle, especially if you're new to the game - but not impossible.

In my own experience, I have been correct about directionand time, but because I neglected to review IV, the option did not appreciate as much as I thought it would. I still made money, just not as much.

For this reason and other reasons, many traders will enter into volatility spreads where they sell option with extremely high IV relative to historic IV with zero regard of direction because even if the stock it tracks appreciates in value, the volatility reversion will negate any possible gains. Of course traders will also employ these spreads when there is 30 days or less remaining in an option since the last 30 days, theta depreciates exponentially.

Mean reversion:
As mentioned above, over time, series data reverts to the mean. Take 1 exam and earn 100% - great. But take a different exam everyday for the next 210 days of the year. the average for the exam should revert to 50%, or close to.

As such, I would stear clear of day trading. Stick with macro price trends and study money management and risk management. a number of great articles inthis forum are dedicated to those topics and are excellent!

Options naturally are tools of leverage, but they come with a cost...delta, vega, theta, gamma..and little old rho who rarely is ever mentioned. get a handle on the top 3 and you're on your way.
 

alen

New Member
#3
Two things: 1. I dont plan on keeping any options for more than 5 days, and 2. I am not gonna exercise my options; im just gonna close my position by selling them.
 
#5
Alen,

Now I am concerned. No offense, but the fact that you don't intend to "hold" an option for more than 5 days isn't the issue - and quite frankly is irrelevant.

If you purchase a Call or a Put with high IV and then 5 days later the IV reverts closer to the mean, your option - even if it is only 5 days old, will LOSE VALUE.

I have never exercised an option also, but that doesn't mean that every position was profitable. You cannot anticipate nor avoid a GAP. What happens when you have Puts and 5 days later the stock Gaps up $10? I once had a credit spread where I sold Puts and literally in after-hours trading, the stock spiked $20. The next day, it opend with a Gap up and the Puts I sold were worth $.05.

Someone out there in the world purchased those Puts from me...it could have been you. And I can tell you, the premium wasn't less than $2 per share. On 10 contracts, that's $2,000 it would have cost you...and the next day only be worth $50.

I strongly urge you to slow down, get educated, and even paper-trade for a while and see how options respond to the market...get a feel for it and create a plan for trading.

Good Luck!
 

alen

New Member
#6
again, 2 things: 1. i understand that i will have the occasional losses here and there, but when i first start, i plan on risking a little of my money in the safer stock options, so that my investment capital will go up; then i will do more risky things, such as straddles and spreads. and 2. i have been paper trading options for over a month, with acceptable results.
 
#7
Alen,

I'm really not trying to be prickly here, but I must protest your sense of urgency in participating.

One month is not a sufficient amount of time to learn all the nuances of options trading.

We use general terms like "options", but what specific option do plan on trading? ATM, ITM, or OTM? WHat expiration month will you concentrate on - and why? You MUST have a reason for why you chooce one option over another. The reason itself is no guarantee that you'll be profitable, but having a reason will surely lead you to study and formulate strict models from which you'll trade. It is this strict adherence to the plan/model that will translate into annual returns - not scant daily swings.

trading is no different than health and fitness.
Everyone wants to look like a model - but few are willing to put in the hard work of going to the gym and punishing their muscles. Few are willing to adhere to a strict diet that carefully balances carbohydrates, protein, calories, fat, iron, calcium, and assorted vitamins. Few are willing to be patient for results - results that usually do not begin to appear until 6 - or more weeks from starting. Few are willing to persevere through the negativity and discouragement associated with a lack of visible results.

However -to those who are patient and persevere - they truly reap the rewards of being healthy and looking fantastic!

All the other people either don't care - or they care but want it NOW and without effort - at no cost whatsoever.

Now, i say again...if you are willing to work, willing to be patient and persevere through the difficult times, then you're ready to begin training. Otherwise, don't waste your money.

there is no such thing as easy money.
MasterChief
 

alen

New Member
#8
I agree with you that making money isnt gonna be easy; but i do have a thought out plan for the different stages; for example, for the first few months, im gonna invest about 20% of my money is a relatively safe investment, such as an oil company or the likes; once i get sufficient $, i will conduct more speculatory business.
 
#9
Alen,

I wish you all the best then. Were you thinking of trading stock options or futures options?

incidentally, are you trading based on TA or FA or a combination? Don't forget, in this case, your Calls may depreciate even if OIL continues to advance. Why? Lots of reasons...maybe you purchased too early an expiration...maybe IV is high relative to histprical...who knows.

Remember, unless you're hedging, it's all speculation...anytime you purchase risk. Hedgers sell risk to speculators.

MasterChief
 

vince

Active Member
#10
Alen,
All I would like to say is have a plan and trade it with confidence and a stop loss (at least mental) in place. Go for it.
Trade well.
 

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