WS,
McMillan's book is a must read before you begin to play with serious money (whatever that means to you) with options. Of course it a huge book and you will have trouble reading it over the weekend. :). A few things people need to understand before proceeding.
1) synthetics/arbitrage. In other words, what can be substituted for what. I read things here on SI that befudle me all the time. Some people will suggest elaborate option strategies which all really add up to owning a put, or shorting the stock, etc. In this thread someone posted that puts are now more expensive than calls, or some such thing. nonsense. conversion and reversal arbitrage ensure that puts and calls on the same underlying at the same strike price always the same time premium (before interest rates are factored in). you must understand the relationship between all the possible arbitrages.
2)implied volatility. this is also crucial. this is what really tells you whether an option is expensive or not. Never buy out of the money option unless you are of the opinion that IV is too low (and vice versa)
3) price patterns, at expiration, of all the basic spreads: bull spread (put and call) bear spreads (put and call) straddles and strangles. Learn to be able to draw a quick, back of the napkin, graph at expiration of any combination.
4) price patterns, BEFORE EXPIRATION, of the basic spreads. this is the holy grail of understanding options. It is unrealistic to think on can learn this without significant experience, but forewarned is foretold. This stuff is complicated, it requires understanding the greeks: delta, gamma, omega, and vega. Many people have no idea how there option portfolio will react to a certain move in the underlying if it occurs before expiration. this is very important. ESPECIALLY WHEN GOING NAKED SHORT! suppose you think AOL will never hit 140, so ill sell some april calls at 140. tomorrow AOL goes to 130, you think , "no problem, my calls are still out of the money" wrong. your calls may have skyrocketed, and worse, they are growing at a faster and faster rate, wrt the stock.
Good luck to you, options are the most interesting creatures on wall street. I like them because they have very objective qualities (given an underlying price) and can be understood rationally with mathematics and probability.
some day this f-ing piece of s-t stock will trade for under $5 and those of us who are patient (I havent been patient enough) and persistent (im hoping to hang onto my balls long enough) and who hedge ourselves right with options, should be able to squeeze some sizable profit out of this salamander eventually. the key will be to be able to stay in the game for a long time, not to erode too much capital, but be there with a substantial bear position when the s-t finally hits the fan.
duke |
