Intro to options

[Nysoz]

Thanks for the advice and insight. I believe I will continue to explore a little more but it seems like something I may be inclined to do. It would be a deviation from my boglehead roots but I intend on looking into options more as an intellectual exercise than as a thrill-ride

Buying options is more of a thrill ride.

Selling options is less exciting but a lot more thinking/planning involved. Can still make decent money doing so and it’s more steady. But if done wrong can still lose a lot of money too.

Always recommend plenty of reading/learning first. Lots of informative YouTube videos out there too. Then either do paper trading or start small to see if you like it or not before getting really into it.

[DocFi]

Buying options is more of a thrill ride.

Selling options is less exciting but a lot more thinking/planning involved. Can still make decent money doing so and it’s more steady. But if done wrong can still lose a lot of money too.

Always recommend plenty of reading/learning first. Lots of informative YouTube videos out there too. Then either do paper trading or start small to see if you like it or not before getting really into it.

Exactly my thoughts! I was looking into being more on the side of selling options too if and when I ever get there. My investment policy statement states that I need to wait 6 months before I exercise a new investment strategy so I am giving myself that much time to educate myself and try out simple strategies with paper trading before seeing if I can do the real thing!

[CordMcNally]

I have been an buy-and-hold index investor all along and have not even bothered having a play-money account. I can't put my finger on it but for some reason, options trading seems interesting to me. I am not a risk-taker by nature and am not drawn to it because of the lottery like benefits.

I'll put my finger on it, figuratively speaking. It's FOMO. You're seeing all these people post about doing this stuff and making money. Your grocery bagger is probably giving you stock tips. You're probably hearing about it in the doc lounge from those who probably can't even balance their own checkbook and are still working well into their 60s because they have to. It's easier to make money when the entire market has nearly doubled in the last year. It won't always be like this or maybe for very long so tread carefully.

[fatlittlepig]

My recent experience: play account has more than tripled and is approaching 400% in a fairly short time period. Several problems with options in my opinion, it really is in a way just gambling because when you buy a stock you have the luxury of holding and over time it will usually go up. With options it’s much more of a crap shoot since in the short term you don’t know whether it’s time for it to go up or down. Second of all options are very seductive because of the huge gains, it is extremely tempting over leverage and buy more and more contracts. After buying calls, buying stock seems so boring and the gains so small. Selling options I’m sure can be lucrative but I think it can be problematic from a risk standpoint. Finally you really have to have a detached mindset from money and losses. The poster who stated he made more money with options than his salary, I think that is pretty amazing because you would really have to be unemotional dealing with that size options portfolio with the volatility and the amounts on the line.

[xraygoggles]

It's easier to make money when the entire market has nearly doubled in the last year. It won't always be like this or maybe for very long so tread carefully.

Yes, this is the right take. But, the conclusion I would come to is that now is precisely the best time to go gangbusters on options, because it's a bull market.

Leverage is your friend, until it isn't. Right now, it certainly is.

[CordMcNally]

Yes, this is the right take. But, the conclusion I would come to is that now is precisely the best time to go gangbusters on options, because it's a bull market.

Leverage is your friend, until it isn't. Right now, it certainly is.

It's a bull market, until it isn't.

[Panscan]

if you believe the market goes up with time, isn't leverage going to be your friend in the long run? I mean I guess if you get over-leveraged you can get cleaned out, but a modest amount coupled with the circuit breakers make this pretty difficult

[DocFi]

I'll put my finger on it, figuratively speaking. It's FOMO. You're seeing all these people post about doing this stuff and making money. Your grocery bagger is probably giving you stock tips. You're probably hearing about it in the doc lounge from those who probably can't even balance their own checkbook and are still working well into their 60s because they have to. It's easier to make money when the entire market has nearly doubled in the last year. It won't always be like this or maybe for very long so tread carefully.

Thank you for the cautionary words. I have been a buy and hold investor for over a decade. Despite multiple stock tips over the years, I have been able to tune out the noise and have never purchased anything but passive index funds or ETFs thus far. I generally am not prone to FOMO (still live in our starter home, drive a 10 year old Toyota with nearly 200,000 miles that I am not ashamed to park next to the Teslas). I know I don’t need to get outsized returns either as I already have a net worth that is 30x my annual expenses.

Rather than FOMO, I wonder if it’s boredom that is driving me to distraction!

I do feel though that the options marketplace, albeit decidedly risky is also prone to inefficiencies and behavioral issues may be at play. At this point, I simply want to learn more about this and it is quite possible that I may never put any money in.

[CordMcNally]

Thank you for the cautionary words. I have been a buy and hold investor for over a decade. Despite multiple stock tips over the years, I have been able to tune out the noise and have never purchased anything but passive index funds or ETFs thus far. I generally am not prone to FOMO (still live in our starter home, drive a 10 year old Toyota with nearly 200,000 miles that I am not ashamed to park next to the Teslas). I know I don’t need to get outsized returns either as I already have a net worth that is 30x my annual expenses.

Rather than FOMO, I wonder if it’s boredom that is driving me to distraction!

I do feel though that the options marketplace, albeit decidedly risky is also prone to inefficiencies and behavioral issues may be at play. At this point, I simply want to learn more about this and it is quite possible that I may never put any money in.

Good investing is boring. There's no way to get around it. 98% of people who are raking in the bucks now will lose that money (and likely more) when things take a turn for the worse. People who aren't good with money typically don't keep it very long. Right now, a lot of people who aren't good with money are making a lot of money.

[DocFi]

Good investing is boring. There's no way to get around it. 98% of people who are raking in the bucks now will lose that money (and likely more) when things take a turn for the worse. People who aren't good with money typically don't keep it very long. Right now, a lot of people who aren't good with money are making a lot of money.

That is exactly what I wonder! Is there a cross-section of investors who can be boring like me and still invest in options and can generate income through singles as opposed to home runs. I certainly don’t see myself buying out the money call options and hoping for the best!!

[Brains428]

A lot of options strategies are boring because you cap your upside to lower the overall risk, as well as to have a smaller cash outlay. There are options to the upside, downside and if the underlying stays flat. Also, let's say you're bearish for the next 6 months- you could sit in cash and sell cash covered puts. You can also protect downside risk without cashing out by simply buying 5% or whatever puts on whatever you hold (it'll cost money, but less than losing 10, 15, 20% at a time).

Also, pretty much anyone who teaches buys options in 3 or 6 month intervals (at least on the long side). Short puts and calls are typically in the 30-45 day range. Weeklys and shorter are essentially coinflips. So, I think when you think about it from an outside perspective, then you think of options as things for day traders, who essentially never win in the long run. But if you want to make money in the long run, then it's finding where the asymmetry is.

A good place to start: https://www.optionseducation.org/

My desire to learn the stuff is because I have the time to and trying to understand some of the stuff the macro and finance people I follow talk about.

[Tim]

“But if you want to make money in the long run, then it's finding where the asymmetry is.”

And this basically assumes that one can consistently find where the market has incorrectly valued options. Good luck with that in the long term. Similar debate on stock picking.

Simple puts and calls built around current or planned holdings can increase returns. That is not the options trading being discussed as a source of income.

[Brains428]

Agreed, Tim. The market makers are much smarter than we are at markets, much like we are smarter than them at medicine. There is a ton of free learning available, but I'm sure they look at us like we look at intelligent and articulate people who bring a google page or webmd page to a clinic visit.

The experts I've read and listened to can go into a lot of depth that we we can't, simply because we (as in the retail crowd) don't know enough to even ask the right in depth questions.

Obviously, there are people here who might have a deeper level of understanding. But there is likely an overestimation of ability given the "stonks go up" mantra that exists. There is a reason why books like "random walk down wallstreet" and "fooled by randomness" exist and can provide examples over different trading periods of people getting wiped out, or exposed as frauds after.

[Nysoz]

I do use a fairly significant amount of buying power to get the returns that I get. I also use TSLA which most people aren’t happy owning for the long term which makes my returns higher than other tickers or the indexes.

I’ll run the numbers later but I briefly looked at Apple and Amazon and the returns on capital invested with them were decent as well but not as good as Tesla.

Also it’s true that I’ve become detached from the gains and losses. I try and base my trades around support and resistance levels with any potential catalysts around the company. After letting emotions get the better of me a few times leading to poor decisions managing trades going the wrong way, I’ve learned to leave emotion at the door for the most part.

MM will always win in the long run I agree 100%. The reason why I like selling options is because it’s almost like being on their side. I’ll never be as efficient as them but I’m also able to pick and choose where I enter my positions as they make sense to me.

But for the time being, there’s money to be made. Strike while the iron is hot, make hay while the sun is shining, etc.

[CordMcNally]

But for the time being, there’s money to be made. Strike while the iron is hot, make hay while the sun is shining, etc.

At what point do you determine there’s no longer money to be made? That seems to be the most important piece of information to have.