I Set Aside $1000 to Learn Options Trading
Part 1: Either to $0 or to $2000: The Start of a Beginner Trader’s Journey
View all the other parts of the series (so far) here.
Disclaimer: Directly from the subtitle it is already clear that I am a BEGINNER and in no way a financial advisor (or advisor of any sort for that matter). Options themselves are leveraged and marginalized assets and as such can generate large losses!
Second Disclaimer: I recommend a few sites and trading platforms in this post; I AM NOT sponsored or affiliated with any of them! This is truly just me being crazy with a personal experiment and I’m just sharing my process in hopes to help anyone get up to speed in the trading world of 2018.
***UPDATE February 26th, 2021: I’m back in the game! So to speak. I’ve recently been using “the wheel” trading strategy, where you continually write options (starting with a put, typically) to earn premiums on companies you perhaps would like to own stock in anyway, even if the trade goes against you. I built a market-wide options screener, The Wheel Screener, which can be accessed here:
Full disclosure: It’s been 100% built by me, and to unlock the full options dataset you’ll need to subscribe to a premium plan for $10 / month.
***EVEN NEWER UPDATE October 19th, 2023: A long time coming, I’ve found that intraday trading is what fits my personality best, and I (currently) trade Nasdaq futures (NQ / MNQ) exclusively now. My latest fintech project / product is AMT JOY, a session-by-session tool to help new futures traders learn intraday patterns and auction market theory (AMT). I hope you check it out, its completely free for now!
Background
So, I finally got options unlocked on my Robinhood account — Robinhood is a commission-free brokerage that started as a phone-only app and has only recently expanded to include a Web app (Sorry — it’s currently only available in the United States.). I expect in the coming months many more people will also have options unlocked, and then, even more when options are rolled out for Robinhood Web (Robinhood says this is coming in Q1 2018 — technically that’ll be over just a few days; Q2 starts April 1st, we’ll see what happens). My theory is that options trading will become somewhat of a micro-trend over the coming months thanks to Robinhood, and there will be a flood of options tradings questions floating around the internet.
If you are one of those people and wound up here from similar sources, that’s great! You are exactly who this post is intended for. Hopefully we can learn from mistakes (trust me when I say there will be many), enjoy successes (I hope at least a few!) and find a bunch of neat tools and strategies along the way.
Teaser of What You Can Expect
I was talking to my buddy Mike about options trading, (and it was a bit of bragging, to be sure) so I showed him a part of a video from Option Alpha (more on what Option Alpha actually is will be discussed further down in this post) where Kirk du Plesis, the founder of Option Alpha, is closing out an Iron Butterfly options strategy:
“…With these iron butterfly trades, what you’re basically looking for is you’re basically looking for the stock to close at the peak of the butterfly. And in this case, this is what happened here with this iron butterfly… is that we sold options at the 100 strike, so we sold the 100 strike calls and the 100 strike puts, and then we bought options far out for protection and to reduce margin, so we bought the 110 calls which are all the way out here, and we bought the 90 puts which are all the way down here. And again, that adds a layer of protection for our trade, in that if the market makes a really big move we are protected to our downside…”
As I was thinking when I first saw this video, Mike responded in the text: “No idea what this guy is talking about lol”
But then I told him: “They lame thing is after watching a few videos you understand all of the lingo; people bragging about this type of stuff is what generates content on reddit.com/r/iamverysmart!”
So, long story short, if that paragraph up there was total jargon for you, if you have any interest in options trading and follow through these posts, you’ll be understanding the lingo in no time!
Amount And Goals
I went with $1000 because I wanted to be able to trade in very high volume/volatile options which are the most expensive kind of options (read: meme stocks, for example, MU and FB). Still, a single leg or set shouldn’t cost more than the 400–500 dollar range.
If you were sharp and noticed the subtitle, my hope is to eventually earn $1000 from options trading. It’s either that or lose everything to $0. I’m almost certain I won’t get to either amount within a few posts I’ve planned for this project, but you can follow along on Twitter @BadMNQTrader or here on Medium and find out!
I realize $1000 is not in the cards for some people. That’s okay. You can get started with $500 or just $100 — there are some options options (heh) possible for you.
Getting Started
Obviously, Robinhood got me started down this rabbit hole, and that’s indeed where I made my first two options trades. But once I started learning more about options trading and strategies, I learned about multileg options strategies. I decided it was best to get an account with a brokerage with a more built out trading UI (sorry Robinhood).
As of this post, I’m still only Tier 2 (of 3) in Robinhood and as such cannot conduct complex options strategies. Tier 2 are only able to buy or sell standard calls and puts. Complex options strategies could be possible, but you would have to do those manually (buying each leg separate, not simultaneously) and I didn’t want to involve that kind of money on the Robinhood app, because of the collateral rules Robinhood has set up.
Here’s a table of what type of options are possible and the collateral requirements for Tier 2 users in Robinhood:
For any novice traders, it’s immediately clear that you won’t be able to set up advanced multileg options with just Tier 2 settings — even manually, if you were to purchase each call or put separately one by one — without a huge amount of collateral. With the accounts I’m about to discuss, you can purchase multileg options in one go, and thus the collateral calculation is different. With defined risk strategies, it is of course nowhere near as high with Robinhood.
Additional Accounts
I opened both a Tastyworks and TD Ameritrade thinkorswim account. Why two accounts you ask? Well, after a lot of hunting around, I realized most options traders use this setup namely because of charting issues in Tastyworks.
Tastyworks has no implied volatility (IV) charting — which is an important metric for selling options at a premium (if you don’t understand that sentance at all, no worries, we’ll talk about that later). However, on the other hand for laying options strategies, Tastyworks is by far the more intuitive service, thinkorswim much more technical and with a higher learning curve.
The commission fee with tastyworks is also a nice $1, TD Ameritrade’s is $6.75 base + $0.75 per contract (so + $3 for those 4 leg strategies).
***Update 2023 — Things have changed quite a bit in the now-competive broker space 😉. TD Ameritrade options are now only $0.65 per contract, and free to close if the option is worth $0.05 or less. It remains to be seen if their merger with Schwab will change the pricing scheme yet again.
Learning & Training
For getting started, I found Option Alpha to be unbelievably valuable. What Kirk Du Plesis, the founder of Option Alpha, is doing there is simply amazing. I would say nearly 80% of the material on the site is free — and that’s saying a lot; there is A LOT of material. I would start by completing the “Beginner Track” there. Kirk starts with the very very basics: from what an options contract actually is, to some simpler strategies for trading by the end of the track:
Through the +2 hours of video in this track, I can distill the basic concepts down to the following simple bullet points:
- trade small positions (never get greedy)
- trade often (law of big numbers)
- only make +70% probability of profit trades (common sense / no YOLOing sorry, WSBers)
This seems to make total sense right? I think the reason trading is written off as ‘gambling’ is indeed, because trading obviously involves money, and you can win or lose it. It has a lot to do with emotion as well — I think if people lose a few of their very first trades (as I have, very stupidly, from my very first trade ever with $FB in the next post in this series), they become discouraged and think that trading is not for them.
I am attempting to forgo these emotional issues by this very project — making posts about each trade I make is so I have a public forum to backtest my reasoning and second guess myself.
Veteran traders are welcome to berate me, critique me, and call me an idiot with my options choices and strategies— it’s all a learning process for me!
Getting Started With thinkorswim
There’s two things I did to beef up my workflow in thinkorswim that corresponds with the implied volatility driven research process as used in Option Alpha:
- Added a screener to help find securities where the implied volatility (IV) is in it’s highest percentile for it’s respective
- Added an IV value and rank chart to the chart section.
(I’m not going to get into the details of why we want to search for high IV stocks — but it has to do with selling options at a premium and how the implied volatility is often an overcalculation of the actual volatility that will occur — a full video discussing this statistical ‘edge’ can be found here: https://optionalpha.com/members/tracks/beginner-course/whats-our-edge-trading-options
Implied Volatility Screener
To find securities which will be selling options at a premium due to high IV, I use the following filters for our scanner in thinkorswim:
There are only 3 filters you’ve got to create:
- Stock Filter, Last (price) $10–$7400 (removes more volatile penny stocks)
- Stock Filter, Volume 2 million+
- Study Filter, IV_Percentile, 60+
A video on how to build this filter from TickerTank is here: https://www.youtube.com/watch?v=lTCkhfC5hpE
Implied Volatility Charts — Rank and Percentile
For an IV rank and IV chart, you can put in a custom thinkscript, which can be found here:
http://iv-rank.blogspot.co.at/
The video (and the code) on how to do this from TechnoloTRADE is here:
https://www.youtube.com/watch?v=lkxVvyBMGkE
This IV scanner and IV chart will be important in how I determine making future trades.
To Sum It All Up
So, to get started with options trading:
- Please, AT LEAST go through the beginner track at Option Alpha or a similar course (tastytrade has one as well), I’ve done a lot more additional research by myself. The details of options trading are complicated and you need to understand what you are doing before throwing money down.
- Some money to set aside to open an account (how much is up to you)
- Opening a brokerage with options trading (Often recommended -not just from me- is the Tastyworks + thinkorswim combo)
- You’re ready to start losing money! (Just kidding, we’re gonna start slow.)
Stay Tuned
Stay tuned for following posts in this series. I will post each trade opening, closing, and net results on Twitter, @BadMNQTrader, and then a much more involved post-trade review here on Medium.
My next post will be very soon, about my experimental first-ever option: a bullish $FB call. (tl;dr; RIP me).
***UPDATE February 26th, 2021: I’m back in the game! So to speak. I’ve recently been using “the wheel” trading strategy, where you continually write options (starting with a put, typically) to earn premiums on companies you perhaps would like to own stock in anyway, even if the trade goes against you. I built a market-wide options screener, The Wheel Screener, which can be accessed here:
Full disclosure: It’s been 100% built by me, and to unlock the full options dataset you’ll need to subscribe to a premium plan for $5 / month.
***EVEN NEWER UPDATE October 19th, 2023: A long time coming, I’ve found that intraday trading is what fits my personality best, and I (currently) trade Nasdaq futures (NQ / MNQ) exclusively now. My latest fintech project / product is AMT JOY, a session-by-session tool to help new futures traders learn intraday patterns and auction market theory (AMT). I hope you check it out, its completely free for now!
-Chris
If you enjoyed this post, give it a like and a comment — this took up the better part of my Sunday to draft :)
