Welcome back to the musings from the desk of an options trader. I wanted to discuss some important facts readers should keep in mind when considering an options trade.
There are lots of ways to make errors in my world, and I think I have made most of them. I suggest you at least consider the points I will discuss- each has cost me a lot to learn and I would like to save you the expense and frustration. After all, errors are inevitable, so at least make ones I have not warned you about. Be forewarned that there is a voluminous set of specific data that derives from the various pricing parameters of options.
The several data points for stock trading only require inputs of price and volume. Option datasets as a necessity include parameters of volume, implied volatility, and time to expiration.
Each of these datasets exists for the various strike prices in each and every of the various expiration months available for trading. The data compilations are huge. The magnitude of the data available is overwhelming in its entirety. It is for this reason that the options trader must approach each trade with a specific price, time, and implied volatility hypothesis.
One of the most important considerations with options is that of liquidity. Option volumes can vary dramatically between the various underlyings available. Consider the case of AAPL options which have trading volumes in excess of several millions of dollars each and every day; this is to be contrasted to the numerous underlying stocks having thinly traded options that trade only occasionally and by appointment only.
I believe that it is important to restrict your focus to stocks having options that reliably trade consistently and in significant volume. It may be possible to negotiate a reasonable price to enter a position, but if you need to exit, you can expect to leave a pound or more of flesh on the table.
Only bad things typically happen when trading these Kate Moss thin series; I strongly suggest that you avoid them like the plague. Another benefit to using liquid series for trading is the fact that these issues generally have minimal slippage.
This is where you want to live and work. These missives are directed at those traders beginning to visit my world of options. As new visitors, I would like to see you test the waters gently in order to determine if you would like to become our new neighbors.
While a host of proprietary sites exist and provide invaluable data to the experienced trader, there is less discussion of the free sites for those of you taking our introductory tour. An excellent place to start in order to find the most liquid options is the list of options available for trading the weekly option series.
This diverse group represents a small portion of the entire options universe, but has been selected to include only the most actively traded series. I will get to specific discussions of the peculiarities of weekly options in future postings. For now suffice it to say that the series included in the weeklies are the most liquid and the place to which the aspiring option trader should direct his attention. This material should not be considered investment advice.
Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.
The tour of my world will continue next week, until then trade safely! Options Trading Newsletter Tagged With: How to trade eft options , How to Trade Options , How to trade stock options. Audio interview with J. Probability Based Option Trading.More...