Hi everyone, first post. I've never traded before, but have a strategy that I am confident in and would like to get started.

Long out of the money SPY puts
(expecting SPY to reach 80 by 2nd half 2012)

A couple days ago I was looking at SPY 117 OCT puts and SPY 102 OCT puts.
Expected ROI = 1,600%

Prices might have changed in the last couple of days, but gives you an idea what I have my eye on.

That said, I've never traded before and would like to know everything I need to know for getting started.

What is the minimum requirement for opening an online trading account?
Will they let you trade options right away?

What online brokerage to use?

Etc.

I don't have a lot to invest and tie up for several months, and it's also my first trade so I don't want to invest too much money, but I'd like to take a punt with a few hundred dollars expecting that if the trade works it will yield something like $4,000.
Peanuts for some of you I'm sure. :)

Thanks for the help!

your expected return on equity is unreal learn the greeks before you play, try options university they have free education. and by the way there is nearly no premuium in what you looking at all you are doing is paying for time. that far out ya need to go 2-3 strikes in the money .

by the way where did you get this from?

Expected ROI = 1,600%

Hi British, thanks for the reply,

I saw $102 SPY OCT 12 Puts the other day for $1.35

You buy in 100 share blocks so
$1.35 x 100 = $135 ... 200 shares = $270 + commission

If SPY hits $80
$102 - $80 = $22 and $22 x 200 = $4,400

So $4,100+ profit on less than $300 investment

Those calculations are correct or incorrect?

I realize $102 - $1.35 = $100.65 is breakeven and under is profit,
but my price target is $80 so that's where I got it from.

Think or swim lets you set up an account with play money that you can practice trading with.

I would FIRMLY recommend paper trading options before you do for real.

There's a lot to them that most beginners aren't aware of.

Just an example: Do you know what the greeks are?

http://www.investopedia.com/articles/opt....

http://www.investopedia.com/articles/opt....

if you are buying 1 contract its 135.00 if, you buying 10 its 1,350 each contract = 10 shares so 10 contracts = 1,000 shares that far out your delta better be 60 or better and it has to move steadily down with no real up moves . otherwise you get IV collapse if you get a huge rally. I would not buy those puts . But thats just me ,in fact I may even sell em to ya.

Capitalist bastard!

There is huge money to be made in options but you need to understand you have to be right on 3 things at the same time:

1) Direction
2) Magnitude
3) Timing

The spy is 128 so a 102 October put means the market has to pull back 260 S&P points between now and October for you to break even. So you betting a 20% decline will happen before October. A 20% decline is called a crash and they don’t happen often so most likely you will be wrong. If it goes up you lose. If it goes down 10% you lose. If it crashes in November you lose.

If you’re right...you can make the money you're talking about and if you're wrong, you'll flush your options premium and start over. This is a classic bar bell option strategy and I would advise you read a couple of Taleb books to understand how this can make you very rich but also how to limit your exposure.

When this works, as it did for many of us old TF’s during the last crash it’s pure magic….but the rest of the time you just bleed option premiums. As a newb, I would have no issue with you buying put options but just start small. Spend less than 1000 bucks and see how it works so you don’t get burned. You’ll probably lose the entire 1000 but you will learn a bunch about time decay on options, the VIX, etc.

Just remember, when fear is high (as it is now) option prices are high and your returns lower. This is what the VIX is supposed to track. You’re better off buying options when people see no risk. And the other one I live by…”the market can remain irrational longer than you can remain solvent”…translation…you can be right and still go broke if you miss the timing.


KD has a good post somewhere on risk management. I think it's pinned. Find it and read it before you play with serious money. For me 1000 is something I can***** away and not lose sleep over. For Swing, that number might be 25,000...for you it might be 300 bucks....just think about that before you trade.

you need to anticipate the inflection points of the curve - zig when everyone zags.

The CBOE has a free options training CD you can order online.

ivolatility.com has an utterly excellent free options price calculator which is far more comprehensive than the various free ones available. It is sort of snarkly to learn to use but I would encourage you to beat on it until you can use it.

Options are so enticing, mathematically, strategically, profit-potential-wise, and so on, not to mention all the various combination strategies over and above straight long calls or puts.

There are enough lessons in options to be learned to destroy your account at least four times over. That means that there is quite the excellent chance that this will indeed be your outcome. If you want to throw out a figure such as "only 10% of traders make money in stocks" I would venture to say that less than half that number make money in options. By making money, I mean (and I know this sounds really dumb) having a bigger number at the bottom of your screen at the end of a year. This is a thing that excess trading of options will in all probability make impossible. There are many, many pitfalls in options, but probably the most prevalent is the one that makes you think you are seeing something for nothing, or for less than it's worth. We who trade stocks, when we see a stock and price, very, very seldomly think "wow, that's a deal, I'll load up because I know the Street isn't seeing something that I see". It DOES happen. It happens massively less in options. With stocks, you can overpay *a little* and have events, or, just the passage of time cure your goof. With options, such a goof is almost always fatal. (to profitability)

This is not to say you can't make money in options. You can, and lots of it. But to do so, generally you have to risk a fair amount of capital. "Only $135" you say. Well, what the old saying "you only have limited risk" in options fails to address is that you might buy $2500 worth of stock and suffer a $135 risk before deciding maybe the bet wasn't as good as you thought when you bought. In options, the $135 is likely to be really, really gone, or, turned into $17 after commishes. Making your ROI -85% or so. To overcome that type of ROI on any kind of bet of size, you have to have some outrageous homeruns. And you can, anything is possible. But what options are about is odds. Odds, odds, odds.
What often happens is that beginnning options traders "fall in love" with a particular strategy; say, covered calls. Or puts. Or calls. Or spreads. After they have done their new play 50 times, they acquire a different opinion.

Options are more often than not about achieving massively impressive ROIs on tiny amounts of money, like a 400% ROI on $65. calls. That's great. Now, balance that against 85% losses on $550 puts. Heh.

They are wonderful, marvelous, endlessly enticing things. Most, the overwhelming majority, do not get out alive. Them's the facts.

Thanks for all of your advice everyone. I will certainly have to read more into the Greeks and everything.

This might be all over the place, but here it goes ...

I expect this to be my ONLY options trade this year. How does that affect your thinking? I realize betting on more than one and two sigma moves over and over again is a losing strategy. That said, this is a one time bet for me that I feel very confident in. If I lose the entire premium, I'm willing to risk that. And I understand that if my timing is wrong, I can still lose too. What I'd like to make sure is that I can't be right and still lose. What I mean is, if the SPY declines to 80 before my option expires, I'd expect to make the money I outlined above, and I want to make sure that nothing esoteric negates that.

So when you talk about time decay, theta burn and everything, I'd really like to know that my SPY 102 put is still earning me $22 profit (minus cost) when SPY hits 80 ... that nothing esoteric will wipe out that profit.

Does that make sense?

I realize that most people will not agree with this trade, but I've backtested the t/a and fundamentally the writing is on the wall ... the Europeans are broadcasting that Greece WILL leave the Euro this year ... they are now referring to Greece as "a special case" over and over again in the European media, whereas Spain and Italy and the others are still being treated as though they will remain in Europe.

So anyways, my strategy is not to trade options over and over again. I just want to make 1 single bet this year on SPY breaking down to 80, and if right, I will probably reinvest the money on 1 single trade next year, long SPY calls for 2013.

Given that, do you think the trade I suggested is the best way to profit on those expectations?
(crash this year like 2008, and another rally next year, like 2009)

Thanks again for the help!

Go learn to use the free calculator at ivolatility. There. you can enter any number of "what if" scenarios. Warning: It is somewhat tedious. But excellent. You might say "what if SPY is at 97 and I have 45 days left to expiry?" "What if SPY is at 86 with 14 days left?

Whatever you learn by doing such an exercise will be of value. But the one thing you cannot judge in advance (without at least something like the above exercise) is the answer to the question "when and under what conditions will I know I am wrong, dead stinking wrong, and it's time to bail and salvage what few pennies I can?". Because you can be right on direction and wrong on timing. You can overestimate how far the move might extend. (personally, I think you are doing that, but let's leave my market opinion out of it) You can be faked out multiple times. SPY options are not cheap, and, they are bound to be especially not cheap with the volatility we've had of late. But if you buy them dear, they can get incredibly cheap very shortly after you own them, if you stumble. There are lots and lots of ways to go wrong with options, but the question you ask, which is essentially "if I make the correct call and the option flowers within the time I have allotted even if maybe the market doesn't get all the way to my target, will there be someone there to pay off my bet?" The answer is yes. Whether you will be judicious enough, or scared enough, or wise enough, or intelligent enough, or savvy enough, or watching enough to take the money when the gettin's good, is absolutely unpredictable. It is very, very common for longer term options to get close to your target (on a big market dump) and then, while you are not especially watching, decline badly in value if the market makes a "V" shaped move off a panic bottom. This will really wound your options, and in my experience, they will not recover. In other words, your "doomsday" options will flower to the max on a massive intraday plunge, and if you don't take them off then, you'll never see that high of a price for them again. This forces you to watch more than you might want to.

Thanks for that Gamma, I will check out all the tools you and others have mentioned. And I completely agree with a lot of your points, especially on the V thing. I know most people will laugh at the suggestion, but actually I expect SPY to trade below 80 this year, albeit the volatility will be incredible and the trade could reverse very quickly below those levels. So the first chance near 80 I would get out.

What I really appreciate is that even if someone doesn't agree with my outlook, that you guys are still willing to help. Thank you for that.

So can I ask a couple more questions?

What is the minimum to open an online account? And the minimum to trade options?
Is it even possible to trade for just a few hundred, or do you need $1k or $2k or?

try optionsxpress and optionshouse.com I use both good executions optionshouse better fees. 10K would be my opening balance.

PS. options are the DEVIL!

I have traded spy optione for several years. Most brokerages will require a few thousand.

The cost of options trading varies greatly. Merrill and Fidelity are very expensive. I used TD Ameritrade for some time (there iPhone app is by far the best, and I still keep funds in my brokerage there so I can use the app.

Most of my options trading is now through OptionsHouse. Their fees are ridiculously cheap, Partclaly if you are trading 100s or 1000s of options at a time. Their web platform is also slick, in my opinion.

Agree with other posters regarding losing your ass in options. It is critical you get out of bad trades quickly when trading options.

Honestly I don't have 10k to stash away in an account right now nor could afford to lose that much.
Is it possible to start anywhere online with 1k or less?

And do they force you to do a minimum number of trades?

Ideally I would like to do only this one single trade at a time.

I think you can open a TDA (TOS) account for $3500. That doesn't mean you need to MAINTAIN that money in the account. You can always pull some of it back out later.

If you have only $1000 to lose that last thing you should be trading is options...

+1,000 Pat

OptionsHouse has a slick smartphone based practice account. Gives you like $5000 to practice with.

Things I have found helpful:
(1) trade something with lots of open option interest like spy, q's or apple
(2) have a plan. Daytime scalper? Swing trader?
(3) if a trade doesn't go your way pretty quick, odds are you made a bad trade, and get out. This is 10x true for options
(4) don't force trades. Wait for the ball to come to you.

Stop thinking about options as a proxy for price. That is how you want to employ them- and it will cost you. Historically, you have a about a 1 in 4.5 chance of exiting profitably being long premium on (any) single equity or index.

I saw an online ad from Scottrade offering commission free trading (including options) for the next 70 days for new accounts. I'm not sure what the minimum amount is to open a new account, but you don't have to use the entire amount to place trades.

Scott sucks ass. Free is not cheap enough for me.

Scottrade is by far the worst broker on the entire planet.