Options Pros Talk Put-Call Parity and More This rebroadcast of OICs webinar panel on Put-Call Parity...
Options Trading—Designed for the Analytical Mind
08/31/2015 8:00 am EST
Options instructor Russ Allen, of Online Trading Academy, outlines the key differences between analysis and intuition and illustrates why—if you tend toward the analytical, like an engineer does—then you may well find options to be the most satisfying trading vehicle.
In any area of life, there are multiple approaches to solving problems. Every approach involves some mixture of intuition on the one hand and analysis on the other.
Intuitive approaches lend themselves to certain kinds of problems (What does my spouse mean by that?). Analysis is more successful with other types of problems (Why won’t my car start?).
Everyone has some degree of talent for both analysis and intuition but each person’s mind inclines in a different degree toward one side or the other. If you are primarily an intuitive type, you just instinctively grasped what I meant by that. If you are more analytical, you thought about it and decided whether you agree. See what I mean?
People who are more intuitive by nature gravitate toward occupations where their particular talents serve them well. The best artists, actors, salespeople, and teachers have strongly developed intuitive sides.
Those who lean more toward the analytical are drawn to careers where their strong suit pays off. These include programming, finance, systems analysis, and engineering.
Some rare people are gifted in both realms and can pretty much do anything.
If you tend toward the analytical, like an engineer does, then you may well find options to be the most satisfying trading vehicle.
Of the many things that an engineer is routinely concerned with, some of the most important are the sources and applications of energy and materials and structures. These elements are directly represented in put and call trading. The sources of energy for an option are stock price movement and volatility. An option’s structure is clearly defined by the terms of the option contract and that structure governs how it responds to these energy inputs.
The tools that an option trader uses are also familiar and comfortable to an analyst/engineer type. Probability calculators and P/L graphs are an every day occurrence.
A typical trading opportunity might go like this:
- A stock’s price action indicates that it is likely to _____ in price from the current level, (drop or rise). This bit of analysis is done using the Online Trading Academy Core Strategy, with specific criteria applied.
- The stock’s recent volatility indicates the selection of a particular option strategy (some strategies work best when volatility is high, others when it is low).
- Best and worst-case outcomes are computed and reward:risk calculated and assessed.
- A plan is made to manage the trade.
- The trade is initiated.
- The trade is concluded based on the plan.
This sequence is not very much different from that for any kind of trade, but there are extra layers involving volatility assessment and strategy selection. This requires multi-dimensional thinking and application of mathematically-based tools in a structured way. All of these are skills that an engineer or programmer uses every day.
If you have the kind of mind that relishes this kind of activity, you should seriously consider options trading. At Online Trading Academy, we teach a unique systematic approach to finding, evaluating, and managing option trades that will dramatically shorten your learning curve.
By Russ Allen, Instructor, Online Trading Academy
Related Articles on OPTIONS
OIC instructor Bill Ryan joins host Joe Burgoyne in a discussion about protection strategies. Then, ...
This rebroadcast of OIC's webinar panel discussion covers why implied volatility levels drive option...
I always find it fascinating to see what kind of big trades are being made in the options markets. S...