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Help me learn about options trading

GenlyAiGenlyAi Registered User regular
edited July 2010 in Help / Advice Forum
Thanks in advance for your help.

I want to learn to trade stock options -- or rather, I want to learn whether to trade options. I don't want to jump in with both feet right now, but I want to start leveraging my nerdiness to assess whether I have any chance of success.

So here's what I need to know, if anyone has any experience with this: First, I want to be able to test ideas out against historical options prices. But where can I download the necessary data without paying $4,800 per year (for fuck's sake). Second, I want to start a "fantasy" portfolio. Does anyone have any recs on the best site for this? It would have to allow options trading using real market data.

Finally, feel free to tell me if you think anything other than value investing is retarded on account of 50 supercomputers in a Newark warehouse programmed to kick my ass. My motivating idea is just that I'm holding some stocks that I don't want to get rid of yet for tax reasons, and I want to know why I can't just start writing calls against them. ... And also are there other strategies I should be looking at while I'm at it?

Thanks, HA.

TL/DR: Where can I download historical options data? What's the best site for a fantasy options portfolio?

GenlyAi on

Posts

  • Acebgd12Acebgd12 Registered User
    edited July 2010
    Investopedia is likely your best bet on the fantasy trading front. It allows options trading, at least when I used it a few years ago.

    The historical options data will be difficult to get for free, and essentially impossible to find in a usable and accurate form. Back testing equity options remains a pursuit for the big boys. You'll have to work from old articles and books that include anecdotal accounts and limited data. Sites like SeekingAlpha and the like will be your best bet, most likely. You'll have to learn a good deal about financial markets and work from your understanding of them, and of course, from your gut.

  • GenlyAiGenlyAi Registered User regular
    edited July 2010
    Thanks, I'm checking out Investopedia, and it looks like what I need.

    In terms of historical option data, now I found this site called ... historicaloptiondata. You can get a year worth of something for ~$200. Any idea whether it's legit?

    Like you said, articles, anecdotes, established strategies, etc are the most readily available resources. But man I'd love to have a big old database to try out my nerd powers on. I guess if I can't find anything decent, I can start downloading daily option prices for a few stocks.

  • GenlyAiGenlyAi Registered User regular
    edited July 2010
    Ok, one gripe with Investopedia is that it seems to only allow you to buy options, but not to write them. This, of course, removes a lot of the strategies one would want to play with.

    I found that optionsxpress.com seems to also allow you to do virtual option trading, but I can't tell whether they allow a full spectrum of strategies. Signing up means opening a brokerage account with them, so I'm a bit hesitant. Does anyone have any experience with that site?

  • DeebaserDeebaser Alpha Teemo Registered User regular
    edited July 2010
    Please Please Please realize that your nerd powers, no matter how l33t, are no better than straight up gambling.

  • KathrisKathris __BANNED USERS
    edited July 2010
    Yep, remember that all derivative trading is really just gambling under another name. And you will be gambling against computer programs that are made to screw over people like you.

    http://en.wikipedia.org/wiki/Derivative_(finance)

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  • GenlyAiGenlyAi Registered User regular
    edited July 2010
    Yeah, I do realize that that's the prevailing view. And maybe it's right. But again, all I want to do is back test strategies, and then try to implement some in a toy system with no money at risk. The first provides (slightly questionable) statistical breadth; the second provides (approximate) experience.

    I'm just trying to be scientific and this is no more than an experiment in a model system. I'm quite prepared to accept a negative result, but I want to get the result myself.

    ... All that said, options can be used to mitigate risk you're already exposed to for one reason or another. So unless you call buying health insurance "straight up gambling", I think that's an overreach when applied to every options strategy.

  • PheezerPheezer Registered User, ClubPA
    edited July 2010
    Sure. Maybe you're smarter than absolutely everyone else who's ever looked at the problem.

    There are people who have computers and money at their disposal that allow them to trade hundreds of thousands of times faster than you can. As soon as any trend becomes apparent, they'll have already taken the profits. You'll never identify a strategy and make money on it in the options market that way.

    IT'S GOT ME REACHING IN MY POCKET IT'S GOT ME FORKING OVER CASH
    CUZ THERE'S SOMETHING IN THE MIDDLE AND IT'S GIVING ME A RASH
  • Battle JesusBattle Jesus Registered User regular
    edited July 2010
    So, I did some looking around for you - Thinkorswim looks like it has the best, most complete, most functional and intuitive interface (for me, at least) out of all the trading platforms - it also includes all the charting stuff that you'll need. Also - the charts will have all the relevant historical options price data - not necessarily news events that may have caused the prices to increase or decrease. This is all you'd get from that historical option data site. Except this information will be presented in a pretty chart, which is significantly more useful.

    You will also want a book on technical analysis. No, wait. You will NEED a book on technical analysis. John J. Murphy's "Techincal Analysis of the Financial Markets" book is the one you want - it is basically the technical analysis bible. It costs about $150-200 bucks, and is around 600 pages. Get it off of Amazon. Don't bother trying to trade options without knowing all the information in the book from cover to cover, because you will lose all your money quickly. It is completely possible to find all the information in that book online, but it is usually poorly presented, and you'll have to weed through idiots trying to sell you their trading systems that are "guaranteed to double your account in 2 weeks" or whatever.

    Remember that options trading is a very, very risky venture - the leveraging that is possible (400:1 in some places) means that you could easily blow out an account in minutes.

    Personally, I'd recommend sticking with trading stocks for now until you've mastered technical analysis and have a solid win rate on your trades (probably 80% or higher if you want to trade options), as well as a solid money management system, and an ability to keep a cool head when you lose money (because you WILL lose money). Once you have that down, it'd be safer to move into options.

    Also - if you're just doing it to hedge your positions, then you don't really need to do much analysis - put options are all you'll need.

    Basically, I just want to make sure you know that trading of any sort (that isn't of the "buy and hold" variety) requires a whole lot of studying and work, and is not terribly likely to end up profitable for you in the short run - it could even result in you losing a LOT of money - but if you're willing to put in the chart and reading time, you can be rewarded handsomely.

    Please note - I trade FOREX. This advice is all based on my experience with that market (a simple leveraged "buy/sell" market - they're all really the same from a technical analysis perspective) and might not entirely pertain to options trading.

    If you do decide to start trading (not necessarily options - again, I don't really know much about the options market specifically - mostly regarding order entry and such) feel free to fire me off a PM or two with any questions you may have. I'll do my best to help. Also, if you start trading, make sure you get that book. Seriously. It's incredible.

    Also - yes, it is gambling in a sense, as you don't have much control over the environment you're investing in (unless you have many millions of dollars at your disposal), but you do have complete control over where you cut your losses, and take your profits, which helps to mitigate that somewhat. Either way, there is a serious element of risk involved.

    [SIGPIC][/SIGPIC]
  • KakodaimonosKakodaimonos Registered User regular
    edited July 2010
    Well, as someone who works on option trading systems for a living, I'd say you should definitely dive right in. The more customer orders out there that we can pick off, the better.

    You can probably do some basic back testing with the end of day closing data. Especially if you're going to be doing a mid-term strategy that's going to have you with an open position for a while. If you really want to go cheap, you can just do a quick scraping program to snarf the end of day closes from Yahoo. You also want the underlying prices, since that is an input into the Black-Scholes model.

    And you do understand the Black-Scholes pricing model? It's the most basic of all the option pricing models out there, but it's where you want to start to understand how the option TV is dependent on the volatility and spot. If you're going to be trading and holding a position, know what the greeks are and how to hedge your risk with them. Understand what it means when you're short delta and long vega in your position and how market moves will affect your position PnL. You need to get a good feel for delta, gamma, vega and theta. No one worries about rho much.

    Figure out what your transaction costs are. They are not cheap for options. If you're looking to seriously trade options, find a broker that has good costs because those usually eat away most of the profits from people who are just poking around at the trading.

    And you want this book: Natenberg: Option Volatility-Pricing-Strategies-Techniques. That's the best book to learn how to trade options. Hull is occasionally recommended, but it tells you fuck all about how to actually trade that stuff. Natenberg goes over how to set up strangles, straddles, butterflies, etc.

    Finally, DO NOT WRITE NAKED OPTIONS UNLESS YOU REALLY KNOW WHAT THE HELL YOU ARE DOING. The risk profile on options when you sell them completely changes from what it is when you're just buying them. Make sure you know what the hell you're doing if you do get into writing options.

    Good luck and feel free to ask any other questions you may have.

  • ApogeeApogee Lancks In Every Game Ever TorontoRegistered User regular
    edited July 2010
    As another guy in the financial industry, I'm in complete agreement with the others here - don't do it with real money. I don't know where you are physically, so I can't reccomend anyone who has practice accounts. Feel free to play with those, but for the love of god, keep your own money away from this.

    Really, it's like any competitive game - even if you're way above the average skill level, there are people who do this for a living. Would you bet money on beating a professional Korean gamer at Starcraft? Your odds at beating the market (full of professional investors) are about as good.

    8R7BtLw.png
  • NathuramNathuram Registered User
    edited July 2010
    At least at the Casino you get free drinks in exchange for pissing away your money,

  • GenlyAiGenlyAi Registered User regular
    edited July 2010
    I just want to thank those who've weighed in, especially those with direct experience doing stuff like this.

    I'll definitely pick up the two books recommended. I think I get Black-Scholes ... at least on an intuitive level, but perhaps not well enough, and it clearly has limitations. If I'm right, it models European-style options, and I'm in the US. This seems like it would have a huge effect on pricing when an option is out of the money. Anyway, technical books are good.
    So, I did some looking around for you - Thinkorswim looks like it has the best, most complete, most functional and intuitive interface (for me, at least) out of all the trading platforms - it also includes all the charting stuff that you'll need. Also - the charts will have all the relevant historical options price data - not necessarily news events that may have caused the prices to increase or decrease. This is all you'd get from that historical option data site. Except this information will be presented in a pretty chart, which is significantly more useful.

    Yeah, I'd like to be able to access the data in bulk, though. Otherwise thinkorswim does look pretty good; fees especially are lower than others I've come accross.
    Also - if you're just doing it to hedge your positions, then you don't really need to do much analysis - put options are all you'll need.

    Totally true. The rest just seems like something potentially amenable to the data mining and stats I use in my real job. I want to see how well those computers in Newark are keeping guys like me locked out.
    You can probably do some basic back testing with the end of day closing data. Especially if you're going to be doing a mid-term strategy that's going to have you with an open position for a while. If you really want to go cheap, you can just do a quick scraping program to snarf the end of day closes from Yahoo. You also want the underlying prices, since that is an input into the Black-Scholes model.

    I think end of day data is fine for my purposes -- I'm thinking of holding positions for days to weeks, not hours. But am I right that there's no free source for this data on a historical basis? I'd have to buy it or collect it going forward from Yahoo or whatever?
    Finally, DO NOT WRITE NAKED OPTIONS UNLESS YOU REALLY KNOW WHAT THE HELL YOU ARE DOING. The risk profile on options when you sell them completely changes from what it is when you're just buying them.
    I'm with you. That is the one thing I've figured out on my own!
    Good luck and feel free to ask any other questions you may have.
    If you do decide to start trading (not necessarily options - again, I don't really know much about the options market specifically - mostly regarding order entry and such) feel free to fire me off a PM or two with any questions you may have. I'll do my best to help. Also, if you start trading, make sure you get that book. Seriously. It's incredible.

    Thanks guys. It'll probably be a while before I have any practical questions, but I'll keep this thread open in case anyone else wants to weigh in on historical data sources or good sites for fantasy trading. I opened an account at wallstreetsurvivor.com. It's pretty cheesy, but at least it lets you buy, write, and open spreads.

  • ClipseClipse Registered User regular
    edited July 2010
    GenlyAi wrote: »
    I'll definitely pick up the two books recommended. I think I get Black-Scholes ... at least on an intuitive level, but perhaps not well enough, and it clearly has limitations. If I'm right, it models European-style options, and I'm in the US. This seems like it would have a huge effect on pricing when an option is out of the money. Anyway, technical books are good.

    I'm pretty sure American and European options are named as such because of their origins, not because of modern usage.

  • EriosErios Registered User regular
    edited July 2010
    I do equities, and I was always no good with options but I wanted to echo the things other people were saying. It's not just ability, but capital, time and risk. Having teams of experts working and researching 12 hours/day (fundamental) or great financial engineers programming computers (technical) provides massive advantages and having the capital to make bad trades and stay in the game is important. Right now, I'm looking at a 2 foot stack of research booklets about only one sector. That's a ton of information to process.

    Honestly, trading in derivatives sucks because you have to know derivatives and underlyings rather than just the underlying security. If you must trade options, do me the greatest favor and utilize the best-named strategy ever: The Reverse Iron Condor.

    In the end, you have to ask yourself what you want to achieve. If you want great returns, I would have recommended some S&P500 on Tuesday (and I did to a few friends) because of the recent volatility and likely uptrend blah blah and then cashing out today given the tons of money you would have made. As a small-time investor, I would recommend against heavy active trading. If you want low risk, there are other moves as well, but you may not always beat the market. So I feel like people saying "you won't beat the market" are being a bit unfair (see: volatility of S&P), but have a point that needs to be considered nonetheless. I'd recommend picking a few industries you're interested in and doing a hell of a lot of homework.

    Steam: erios23, Live: Coconut Flavor, Origin: erios2386.
  • CycloneRangerCycloneRanger Registered User regular
    edited July 2010
    You should also know that there is a large subset of investors who consider technical analysis to be about as valid as Miss Cleo's predictions. There is considerable evidence to suggest that it is no better than random guessing.

    The best way for the average investor to make a profit is through careful asset allocation (in the investment jargon sense of the phrase), not technical analysis or value investing. Being successful at value investing requires vastly (vastly!) more understanding and time commitment, and being successful at technical analysis... well, it's better just to forget about that one.

    MWO User Name: Gorn Arming
    StarCraft II User Name: DeadMenRise
  • KakodaimonosKakodaimonos Registered User regular
    edited July 2010
    Clipse wrote: »
    GenlyAi wrote: »
    I'll definitely pick up the two books recommended. I think I get Black-Scholes ... at least on an intuitive level, but perhaps not well enough, and it clearly has limitations. If I'm right, it models European-style options, and I'm in the US. This seems like it would have a huge effect on pricing when an option is out of the money. Anyway, technical books are good.

    I'm pretty sure American and European options are named as such because of their origins, not because of modern usage.

    No.

    American options allow early exercise, meaning you can execute the option at any time up to the expiration date. European options can only be exercised at expiration. Now, if it's an American call option without any dividends before expiration, you can just use a European pricing model, since there's no advantage to exercising the option early. American puts always need to be priced using a model that takes into account early exercise.

    European options simply refer to a type of option. Some products in the US options markets are European options. Notably, SPX and other index product options. All equity options are American and ETF options are American.

  • ClipseClipse Registered User regular
    edited July 2010
    Clipse wrote: »
    GenlyAi wrote: »
    I'll definitely pick up the two books recommended. I think I get Black-Scholes ... at least on an intuitive level, but perhaps not well enough, and it clearly has limitations. If I'm right, it models European-style options, and I'm in the US. This seems like it would have a huge effect on pricing when an option is out of the money. Anyway, technical books are good.

    I'm pretty sure American and European options are named as such because of their origins, not because of modern usage.

    No.

    American options allow early exercise, meaning you can execute the option at any time up to the expiration date. European options can only be exercised at expiration. Now, if it's an American call option without any dividends before expiration, you can just use a European pricing model, since there's no advantage to exercising the option early. American puts always need to be priced using a model that takes into account early exercise.

    European options simply refer to a type of option. Some products in the US options markets are European options. Notably, SPX and other index product options. All equity options are American and ETF options are American.

    Sorry if I was unclear, I didn't mean to imply American and European options are the same. I meant that American options are called American because the exercise style originated in America, and likewise with European options. (Or at least that is the explanation I've always heard for the naming convention.) But both styles are traded in both regions (as you said, index options are commonly European options even on American exchanges), and thus the Black Scholes formula is not completely useless to someone trading options in America.

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