When I learned how to options trade markets were quite a bit slower and competition was significantly less (for lack of a better word) automated. Today’s market requires quite a different strategy than those of days past. Today’s trader has to be less exposed in terms of duration with shorter term position and higher investment turnover. The good news is that today’s less expensive trading platforms allow for high volumes of trading without getting eaten alive by transaction costs.
How to Options Trade in 2011 As we stated in the open, the market has changed dramatically in the last decade plus. Many firms use computer programs to flood the market with orders in order to manipulate prices. It is very easy to get caught up in all the hoopla surrounding HFT (high frequency trading), algorithms, and other market distractions. I stay focused by trading option contracts only on companies I know and understand very well and are priced attractively. It’s a little tricky to know when a contract is priced attractively but there are some tools to help you get by today that weren’t available years ago.
Advantages to Options Trading in 2011: Better Information Faster and Lower Costs Information availability is the single greatest resource available to traders today. Once you know the basics of how to options trade it becomes a daily grind of identifying opportunities and executing trades. Amongst the greatest tools I use to identify which strategy to employ on a daily basis is my knowledge of trading the vix. Using the VIX indicator as a guide of market direction and contract volatility premium helps determine whether today is a buyer’s or seller’s market. This indicator is fundamental to know when and how to options trade in current market conditions, and it simply wasn’t available at such speed a decade ago to individuals the way it is today. Investors now know that trading the VIX adds valuable information on contract pricing and market direction, both key to making winning trades.
The Advantage of Lower Trading Costs The other great difference in trading today versus a decade ago is the reduced capital needed to open and maintain a margin account. A margin account is required (as it has always been) to access the options markets. The nice thing today is that a discount option broker requires very little capital to start and doesn’t eat up your limited capital with commissions. Commissions today on options contracts run between $4 and $20 depending on your broker, whereas a decade ago you could expect to pay on the order of $30. Needless to say it is much easier to trade profitably with lower capital exposure with today’s lower commissions than it was in the past. You really had to know how to options trade much better when commissions ran at 3% (on a $1000 investment) than you do today (with commissions at about 0.4% on the same $1000 trade).