Options Trading Blog

We were witnesses of an extraordinary option phenomenon back in 2010. A negative news report came out against Goldman Sachs (GS) according to which they committed fraud during the subprime mortgage crisis. I am going to show you this phenomenon just to illustrate what leverage means when you trade options and you are right both on the direction and timing as well. Please note that this example is a little extreme, this doesn't happen every day unfortunately:).

Anyone who is a little bit familiar with options trading is familiar with Vertical Spread strategy. This type of strategy involves buying an option and simultaneously writing another one. It can be a Call or Put but never both at the same time. This is an example of a Bull Call Vertical Spread: Long 65 Call + Short 70 Call. This is a bullish debit spread which reaches its maximum profit at the level of 70 or above, near the expiration. Let’s see what we should do at expiration. If the price is above 70, then both legs are ITM; namely our broker will automatically exercise that option if we have not done anything until 4:00 p.m. (EST) on the third Friday of the month (or the weeklies).

I still remember the phenomenon of the Flash Crash and how it helped me that I didn't trade stock and didn't use stop orders. I was only trading with options and that is the reason I was not annihilated in that violent market crash. So I've decided to replay the Flash Crash of May 6^th from multiple perspectives. One of the unique features of the TOS platform, was a great help to me, is called ThinkOnDemand. This function makes it able to replay the market movements from a particular time period on. What is this all about?

Liquidity as a concept is a much more critical factor at the options market than it is at the stock market. One reason is that options have a far less a daily volume than the underlying products. At the moment in the US market there are 3,755 stocks which can be traded with options. The use of the free finviz screener is the easiest way to find out. Just go to the following link: http://finviz.com/screener.ashx?v=111&f=sh_opt_option

Unfortunately this doesn’t mean that 3,755 stocks can truly be traded with options. The fact that something has a quoted option does not mean that it has liquidity at the same time.

Many people know this cliché. In this article I will discuss the two aspects of this fact: the first aspect is, of course, the option market, the other one is the effectiveness of learning.

Let’s see what this means in the case of options market:

In my previous articles I have already explained the two main components of the option price: intrinsic value and time value. If someone has already spent some years in the option market, he instinctively feels that option trading is about trading time and probability and much less about following the directional movement of the underlying product.

Let's talk about the available profit in the option market. Since the existence of the optionsrules.com I have received a lot of emails and I have met many people either in person, at the training courses, or through individual consultations. I would like to dispel some misconceptions and incorrect approaches, which often occur in the minds of the first-time option traders due to their lack of experience. I would like to list some interfering factors in the way of thinking about the option markets, which are the general attitudes among the beginners: