Developing Option Skills
Options are an especially technical area of trading. The better you understand them, the more strategies you will have at your disposal and the better you will be able to execute those strategies.
Good options traders know their strategies inside and out, understand what makes them work, and know how and when to implement them. Although not everyone is willing to put in the time to learn the fine points about options, this is an area where knowledge definitely pays large dividends.
These commentaries offer a kind of tutorial on options, given in bite-sized chunks so that you are not overwhelmed with technical information and can absorb the ideas gradually. Sooner or later, here, or in the articles I post in the Advanced Traders Strategies section, we will touch on every aspect of options trading, and I will along the way give you some ideas that you cannot find in other places. But I want to mention another resource that you might find useful, either for its educational or for its informational content.
The Chicago Board Options Exchange (CBOE) Web site (www.cboe.com) displays the latest prices on all its options (with a 15-minute delay). If you have zeroed in on an option or a spread that interests you using the information on this site, you can see recent prices of the options involved on the CBOE site. In addition, the CBOE site contains an education section that discusses basic option concepts and offers the CBOE’s Options Toolbox software as a free download, which you can use to explore some of the strategies I mention here.
The Options Toolbox allows you to analyze complex spread positions containing up to four options and the underlying stock. Using it, you can easily vary parameters such as the volatility and time to expiration and see graphically how your position is affected, which is not only of great educational value but also of great use when entering, adjusting, or liquidating a position.
To become very successful trading options, you need to have a software package that performs numerous sophisticated analyses, some of which I have mentioned in these commentaries and some of which I will cover in future commentaries. These topics include analysis of the implied volatility as it varies across time, analysis of actual volatility as it varies across time, sensitivity of complex positions to changes in the actual volatility of the underlying, liquidity concerns in adjusting positions, and so on.
These analyses are not performed by The Options Toolbox, but it does a lot. And if you are serious about options and don’t already have a higher end program such as Osrt3, I strongly suggest you download The Options Toolbox and learn to use it.