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If you must look at Options

Learning options

Part 2 of 2, White Top View series, The option of options

If you must look at options, begin by reading, Options for Dummies by George A. Fontanills. This low cost and readily available introductory book gives good basic coverage of the options spectrum. It serves as a good reference to keep on hand.

Last discussion I made it clear that option trades have no place in a beginner’s portfolio. It is good to be aware of them and to learn about them.

Link to Part 1, White Top View series, The option of options

Part 1 Are options an option?

Only consider using options after you become a knowledgeable and experienced investor. Be in no hurry to get there.

Options for Dummies may not be the complete how to guide but does a very good job of the basics. I urge you to start your research there to make sure you have the basics well in hand.

Options can turn nasty in a hurry!

You certainly need to pay attention and truly understand what they are and are not. Many small investors quickly have their pockets picked in the options market. Do your homework before going there.

Paper trading – practice or kidding yourself?

We love to win, we love to feel smart and making money is great! On paper it is all so easy! You can start by wasting some paper and pretending that you are trading.

If you do, at a minimum be honest with yourself. No ‘do overs’ or ‘only ifs’ allowed. Actually track your imaginary transactions.

When you paper trade options you can become a billionaire in short order! But it is not real. You are playing without true time or market pressure and using only your imagination in a static unresponsive market.

Of course it goes your way!

It’s only pretending! Yes, do paper trade to run through the process. It can teach you the mechanics of the basic action but can not give you actual trade experience.

To more closely resemble the real world, make certain you paper trade in real time, using real price quotes and real order depth.

Any time delay in your pretending gives you an artificial and unrealistic experience. Many books and “consultants” can seem very far away from reality to an experienced player’s eye.

When you actually do go live things are suddenly different. That’s when the real learning starts. It can involve both paying and pain.

Thin markets are financial quicksand – risky!

Know that at times specific option markets are notoriously thin. Newcomers can be surprised and may not realise how risky a thin market can be. Make a wrong move and you may soon feel like you dropped through thin ice into financial quicksand!

Thin markets mean that there are few others ready to buy or sell. You need trade action, trade volume and multiple buyers and sellers to have any reasonable hope of making a profitable trade.

Thin markets means buying or selling at a favorable price can be difficult. Spreads can be huge. Or seemingly reasonable spreads can quickly become profit swallowing chasms.

That means even if you got in when you wanted, at a price you find acceptable, getting out at a profit could be a challenge.

Sophisticated market risk

Be able to recognize and fully understand the price, volume and time risks before trading options. Blindingly fast price swings do happen.

Connected electronically or not, distance does make a significant difference. The pros are at the front of the line and well ahead of you. The implications must be well understood.

Your will never be first

You are going up against very knowledgeable and experienced players who are very willing to pick your pocket. They are armed with superior technology and positioned in front of you. Your dealer or their associate can be the other side of a trade while “serving” you.

Be aware of who gets paid and who gets to look over your shoulder. They do need to play both sides to make a market. They are doing this to make money, not to benefit you.

Pay especially close attention to lot size on each side as well as order number and depth on both sides. You do not want to be drawn into a losing trade by chasing a position that you can not possibly leave at a profit.

Numerous pro services are available online. For a price they are willing to help you. They will give you a very different story then what I say. They make their money by getting you to trade.

They are ready to collect your money for the assistance. It will be exciting but few newbies find it profitable for any length of time. No person I know stays with any but a very basic option program AND consistently makes money for any length of time.

Options do work

For hedging or insurance, yes to options. To chase any but minor covered call profits, no, as far as I am concerned. Using covered calls works but you have to be aware of all the implications and costs to net out ahead.

Experienced and knowledgeable players can profitably use far more sophisticated strategies. Doing so is years beyond any beginner.

Are you considering using options? Let’s talk about it.

Your comments and questions are welcome here. Pay it forward, please share this blog. The bite sized White Top Investor lessons are intended to demystify investing. You can become a knowledgeable confident investor, one small step at a time. Please ask questions, I can help you better understand markets and investing. The White Top Views email list will not be shared or sold.

Have a prosperous day!
White Top Investor
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