Trading Options is not for your average risk taker. Although there are ways to limit your risk to manageable levels, for those with a significant knowledge base and high risk tolerance there is definitely money to be made. Typically prayer is left to those playing some type of lottery where the likelihood of winning is so stacked against you that it’s a fool’s game. Options Trading, on the other hand, involves a significant amount of skill and for those who are good at it, prayer is not necessary. Those Traders consistently make money (in the course of a year) Trading Options.
The consistent Options Traders who make money are usually professionals who have been trained to understand all of the following factors:
1) The Greeks
2) Implied and Historical Volatility
4) Synthetic Positions
6) Options Trading Strategies
7) Quick execution
8) Changes in the Implied Volatility Skew
9) Supply and Demand Factors
A full understanding of these factors, in addition to a significant amount of seed capital provides an opportunity to make a tremendous return on one’s investment. In the old days of Pit Trading, individuals would easily make returns in excess of 100% per year on their investment. Now, with everything computerized and algorithms involved in the action, making money is much more difficult. The average investor must be acutely aware of Liquidity. While the market maker is happy to trade with wide Bid/Ask Spreads, the customers must insist on reasonable value to trade. They can’t settle just because they think they want to trade a particular vehicle. There a numerous products out there. Make sure the market is suitable for you.
Master the list before you commit hard earned capital to the Options Markets. Understand each of the Greeks. Understanding how Delta affects the price of the Option you are Trading and comparing it to the Bid/Ask Spread may discourage you from Trading a particular Option. Our Options Guide discusses many of the important Trading Issues listed above. The one member of the Greeks you can find truly unreliable is Theta. While it is the theoretical value of time decay, any change in Implied Volatility can make you wonder what happened to Theta?
While you may not ever hedge your Options Positions, professionals do. The reason they do is to offset the risk of the Trade they just made. If a market-maker Sells 1000 Puts, they will typically Sell the Stock, ETFs or Futures contract necessary to offset their Delta position. While they are temporarily Short Vega they will likely attempt to Purchase comparatively cheaper Options in order to level out their Short Volatility and Gamma Risk. Small Traders often initiate Short Vega Positions without fully understanding the risk that they are taking. If you’re Trading Options and this all makes sense to you then you are probably appropriately assessing the risk you are taking. If not, an Options Training Webinar could get you started on understanding the issues that successful Options Traders evaluate.
Each and every aspect on the list above is second nature to a Professional Options Trader. If you’re serious about Trading Options then make sure you are comfortable with the list. While there are an innumerable number of aspects to Options Trading, a full understanding of these issues goes a long way to helping meet your goal as a profitable Options Trader. Paper trading is one thing, finding the appropriate Options Trading Strategy to meet your risk/reward requirements is another.
Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results.