Extraordinary Options Trading Techniques

Options Trading Topic: Extraordinary Techniques for the Ordinary Investor

Dear Options Trading FAQ:

An options trading friend forwarded me your discussion on option volatility. As someone who has played options on a part-time basis (no way to grow old gracefully), I can appreciate the difficulty of playing the game properly. Can you please tell me how the ordinary investor would have access to the transaction information required to know if option contract purchases were naked or part of a spread? Or, more importantly, are you really saying that one shouldn't play options (at least short-term) without the battery of information you imply is required? My gut (and also my wallet) tell me that this is probably the case.

Concerned Option Trader

Dear Concerned (about your wallet, or your gut?):

There are basically two types of options traders: gunslingers and researchers. The fast and loose style of the former is loud, boisterous and a lot of fun. Does it make the option gunslinger rich? Occasionally, but these traders are usually in it for the heady action. Gut reactions and hunches rule. Other than a source of market information, not much is needed in terms of research materials. An informal sense of trend formation allows the shooter to spot and ride a developing situation. For a small entry fee, one can be part of the fireworks of an incredible move (Who owned Internet Index calls this week?). With a group of other similarly minded traders gathered around a real time quote feed, it’s a blast. Just don’t lose your cool - if you treat the option game as a casino, act accordingly.

The researcher type of options trader, in contrast, may prefer to work alone so that he can concentrate on picking the right entry and exit spots. Of course plenty of research allows him to become intimately familiar with the options he deals with. This type of trader patiently waits for those times when something falls out of line. Because of his dutiful study, these situations are readily apparent and he feels comfortable with taking action at that time to capitalize on it.

Does it cost and arm and a leg to set yourself up for proper options research? Do you need to spend thousands on some sort of rocket science package? Even if money was no object, where does the little guy get access to the secrets of the street?

You would be amazed at some of the option trading folks I have met over the years. With very little in the way of "street connections" and money to spend, some traders have put together amazing systems and databases.

I think the secret is to start with a very small area of study. Choose a few stocks or even just one and watch its options closely. Get a feel for the trading style of the contracts. Pick up the Investors Business Daily during the week and Barron’s on Saturday. Learn how to read the listings properly. Start logs of the open interest statistics you’ll see there. Use your stock broker or quote machine correctly. If you see the option volume jump drastically, find out if it was in a few huge chunks or by a steady pick. The Time and Sales screen of the quote machine will list whether the trades were done as part of a spread or a stand alone purchase. The next day, check the open interest to see if the transactions were closing or opening. Write all this down and track it through a few expiration cycles. You’ll get a sense of things unmatched by all except the specialist.

There are plenty of little things such as these one can do for zero or very little cost that will add up to an expert understanding of the option situation. I suppose that the trick is to learn about these procedures in the first place. Many of them I have never seen discussed in books or how-to manuals. They can be learned by word of mouth and in forums such as this one. Information is king so stay tuned. I aim to dispense as much "secret" information in this e-mail list as possible. The problem is that I keep taking certain things done on Wall Street as routine. It doesn’t occur to me that others wouldn’t intuitively know to look at something in the way I, or my colleagues do. That’s why your questions are so important - keep them coming!!

Good luck and trade well! Remember, an educated options trader is the best options trader. Browse these books books on trading options.

Tags: Options Trading, Options Strategy

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