Some Sharing on usage of options

Attended tiger's event yesterday and had some discussion with some of the attendees of the event. 

Decided to do some sharing on what I understand so far about options. It isn't much, but hope that it helps.

1. Do understand that options is a derivative. 

As above, options is a derivative product. Understanding the base matters. 

If it's a stock, take note of how the stock behaves, the earnings period, dividend period, impact to company etc. 

if it's a etf, what forms the etf, how the etf moves, any dividends. 

The pros and cons of options is that wins and losses are magnified. If the base assumption is wrong, options will backfire spectacularly, regardless of buy or sell options. 

2. Do understand how options works.

Options is not a get rich quick scheme. It's a get poor quick scheme when used wrongly. 

options is a contract to buy or sell the underlaying at indiciated timing at mentioned strike price. 

a) Do understand the obligation of option seller, (ie. assignment/what happens during assignment) vs the rights of option buyer.

b) understand the impact of time on options

Do research and find out on time decay. 

Options is a contract with time period involved, the passing of time will cause the value to fall. Time decay is best friend of option seller and the greatest enemy of option buyer. 

Do find out on theta, and what it means. How will time decay help or affect ur position 

c) Do understand the main components of options contract 

Options contract comprises of i) stock direction/pricing ii) time premium iii) volatility premiums, there are still other components, but the impact isn't as major as these 3. 

d) volatility 

There will be cases whereby stock price is in the same direction as our option contracts, but our options contract is losing money. The impact isn't caused by liquidity issues. It's cos of increased volatility. 

Volatility increases during high risk events like earnings or when time duration is short. 

Contracts with longer time frame tends to have lower volatility than contracts with shorter volatility.

Volatility levels can be seen from IV % vs historical volatility (HV).

e) Usage of delta 

Delta is a good Greek to use, as it is an easy gauge of the option risk levels. delta value can be very versatile when we understand how to use it. But used in simplistic way is to take the value as risk that option strike price will be touched. Hence 0.15 delta means 15% chance. 0.5 delta means 50% chance. 

f) No free lunch 

Options contract premiums capture volatility, time and price values.

The higher the risk, the higher the premiums. If premiums is high, expect higher risk of assignment. If risks are lower, premiums will by extension be lower. Decide the risk levels before entry. 

I will conclude with rule no.1 for options selling. 

DO NOT SELL PUTS ON ANYTHING THAT U DUN WANT TO OWN.

Greed chasing after premiums from high iv options is one of the most common pitfalls of beginner option sellers. 

Well, this article isn't supported by Tiger, so dont want to spend too much time on it.