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I have never taken the time to learn about or trade options, and I'd like to give it a shot.

IMO, I am a reasonably sophisticated investor; I've been investing in one form or another since I was 11, mostly stocks and funds but I have also bought and sold bonds on a few occasions. I understand at a high level what options are, but am not familiar with all of the lingo or strategies. I would only commit an amount of money to this venture that I am prepared to lose.

So few things that I would like to know:

  • What is a good resource to learn about options trading strategies?
  • What is the minimum amount of money to have in play to be successful?
  • How can I use options to establish some cash flow from long standing investments while minimizing capital gains expenses?
  • Is there ever an instance where options investing is not speculative?
  • Might search on Google too for options trading pdf I just grabbed this guide that enumerates a lot in a short space, which is near the top of the returned search. euronext.com/fic/000/010/729/107297.pdf BTW, when I print out PDFs, there is a useful option, Page Scaling: Fit to Printable Area. – Ray K Sep 16 '11 at 14:48
  • That PDF is pretty interesting. I'd hesitate to call it a beginner item, though. There's of bit of simple learning to get to the level to understand this. The guys/gals on CNBC's Options Action put up a chart showing pricing today and profit/loss based on future price moves. Once that makes sense, this doc is great. For what it's worth, I've traded options for 30 years, and can not tell you off the top of my head what delta, gamma, theta, and vega are. I knew 31 years ago. – JoeTaxpayer Sep 16 '11 at 16:55
  • @duffbeer703 check my answer here for a simple example. – Johnny Oct 5 '17 at 12:15
  • Many options trading firms require new analysts read Sheldon Natenburg's Option Pricing and Volatility – ford prefect May 23 '18 at 16:16
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What is a good resource to learn about options trading strategies?

Options are a quite advanced investment form, and you'd do well to learn a lot about them before attempting to dive into this fairly illiquid market. Yale's online course in financial markets covers the Options Market and is a good starting point to make sure you've got all the basics. You may be familiar with most of it, but it's a decent refresher on lingo and Black-Scholes.

How can I use options to establish some cash flow from long standing investments while minimizing capital gains expenses?

This question seems designed to get people to talk about covered calls. Essentially, you sell call contracts: you let people buy things you already have at a price in the future, at their whim. They pay you for this option, though usually not much if the options aren't in the money. You can think of this as trading any return above the call option for a bit of extra cash.

I don't invest with taxable accounts, but there are significant tax consequences for options. Because they expire, there will be turnover in your portfolio, and up front income when you take the sell side. So if you trade in options with close expiration dates, you'll probably end up with a lot of short-term capital gains, which are treated as normal income. One strategy is to trade in broad-based stock index options, which have favorable tax treatments. Some people have abused this though to disguise normal income as capital gains, so it could go away.

Obviously the easy approach is to just use a tax advantaged account for options trading. An ETF might also be able to handle the turnover on your behalf, for example VIX is a series of options on S&P500 options.

A second strategy I've heard of is buying calls and puts at a given strike price. For example, if you bought Dec '13 calls and puts on SPX @ 115 today, it would cost you about $35 dollars. If the price moves more than 35 dollars away from 115 by DEC '13 (in either direction), you've made a profit. If you reflect on that for a bit, you'll see why VIX is considered a volatility index.

I guess I should mention that shorting a stock and buying a put option at the market price are very similar, with the exception that your loss is limited to the price of the option.

Is there ever an instance where options investing is not speculative?

The term 'speculative' is not well defined. For many people, the answer is no. It's very easy to just buy put options and wait for prices to fall, or call options and wait for prices to rise. Moreover, the second strategy above essentially gives you similar performance to a stock without paying full price. These all fall under the headline of increasing a risk portfolio rather than decreasing it, which I figure is a decent definition of speculation.

On the other hand, there are ways to use options minimize risk rather than increase it. You can buy underwater options as portfolio insurance, if your portfolio drops below a certain amount, you still have the right to sell it at a higher one. And the Case-Schiller index is run in part, on the hopes that one day there might be a thriving market for real estate options (or futures). When you buy a home or lend money to someone to buy one, you could buy regional Case-Schiller options to protect you if the regional market tanks. But in all of these cases, it's required for someone else to take the opposite trade. Risk isn't reduced, it's traded around. So technically, there is a speculative element to these as well.

I think the proper question here is whether speculation is present, but whether speculation can be put to good ends. Without speculators, the already very thin market for options would shrivel faster.

  • In my answer I offer a real example of a trade in which the option trade reduced risk on the downside and improved my return on the stock rising. – JoeTaxpayer May 28 '14 at 9:55
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One answer in four days tells you this is a niche, else there should be many replies by now.

The bible is McMillan on Options Note - I link to the 1996 edition which starts at 39 cents, the latest revision will set you back $30 used. The word bible says it all, it offers a great course in options, everything you need to know.

You don't get a special account for option trading. You just apply to your regular broker, so depending what you wish to do, the amount starts at

You sell calls against stock you own in your IRA. You see, selling covered calls always runs the risk of having your stock called away, and you'd have a gain, I'd hope. By doing this within the IRA, you avoid that.

Options can be, but are not always, speculative. Covered calls just change the shape of your return curve. i.e. you lower your cost by the option premium, but create a fixed maximum gain. I've created covered calls on the purchase of a stock or after holding a while depending on the stock. Here's the one I have now:

MU 1000 shares bought at $8700, sold the $7.50 call (jan12) for $3000.

Now, this means my cost is $5700, but I have to let it go for $7500, a 32% return if called. (This was bought in mid 2010, BTW.) On the flip side, a drop of up to 35% over the time will still keep me at break even. The call seemed overpriced when I sold it. Stock is still at $7.20, so I'm close to maximum gain. This whole deal was less risky than just owning one risky stock. I just wrote a post on this trade Micron Covered Call, using today's numbers for those actually looking to understand this as new position. (The article was updated after the expiration. The trade resulted in a 42% profit after 491 days of holding the position, with the stock called away.)

On the other hand, buying calls, lots of them, during the tech bubble was the best and worst thing I did. One set of trades' value increased by a factor of 50, and in a few weeks blew up on me, ended at 'only' triple. I left the bubble much better off than I went in, but the peak was beautiful, I'd give my little toe to have stayed right there. From 99Q2 to 00Q2, net worth was up by 3X our gross salary. Half of that (i.e. 1.5X) was gone after the crash. For many, they left the bubble far far worse than before it started. I purposely set things up so no more than a certain amount was at risk at any given time, knowing a burst would come, just not when. If nothing else, it was a learning experience.

  • Most options trading firms also include Natenburg's Option Pricing and Volatility – ford prefect May 23 '18 at 16:15

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