“Realities” for New Options Traders

11/08/2011 2:00 pm EST

Focus: OPTIONS

Kerry Given, PhD

Founder and Managing Director, Parkwood Capital LLC

With a lot of misinformation out there about options trading, Kerry Given wrote a book to define the "realities" and what it really takes to make money in the business.

Dr. Kerry Given is in the studio. Kerry, it is nice to see you. I know you’ve just written a new book, No-Hype Options Trading. Why did you write it?

Two principal reasons: One is I’ve been exposed to an awful lot of misinformation in this business and in options trading; both things that scare people as well as things that simply aren’t true and set their expectations too high. So first of all, let’s try to dispel some of those myths. Secondly, I was trying to give traders like myself—retail traders—a realistic expectation of what they can achieve.

Is this suitable for beginners?

Yes indeed. I start out with a chapter that really just starts at the very basics about options trading and what they are and so forth. All the terms and the special language that is involved, and then I build slowly into more advanced strategies.

Some of the basic strategies; can you give me an idea?

Well anything from just selling calls or puts or buying long calls or puts, or selling calls against your stock portfolio, or buying puts to protect your stock. Those would all be fairly simple strategies.

What are some of the reasons that people want to trade options?

Well number one, if you have a stock portfolio, they are very useful for protecting your stock positions. When you are a little concerned about where the market is going—like right now—you might be buying puts to protect those positions.

In other cases, if your stock that you believe in longer term has started to trade sideways on you, you can sell calls against that stock and bring in some income while you are waiting for the eventual bullish trend to resume.

See related: How to Sell Options for Income

There has been an explosion in options activity. Is it because more retail investors and retail traders are coming into it?

I think that is a lot of it, but the bulk of the trading is still institutional. It is the large funds that are really buying the bulk of the options, and they are protecting their portfolios.

So watching the action in options is giving you an idea of what the “smart money” is doing?

It can, absolutely, but it can also be deceiving because sometimes the smart money is moving to one side of the boat and that doesn’t turn out to be where you ought to be.

How will we know that?

You don’t really. I mean, certainly it is true that if you watch acquisitions, sometimes you will see a lot of call volume in that stock ahead of time, but lots of times you see that and nothing happens. So it’s like with rumors in the market; sometimes they are true and sometimes they aren’t.

And so we are trying to get rid of the hype and just get down to the basics?

That’s right. It’s very important to have realistic expectations. A lot of people that I talk to who are interested in learning about options trading will oftentimes have expectations that they are going to turn their $2000 into $1 million in the next few months, and that just simply isn’t going to happen.

Everybody has to manage expectations.

Right.

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