Pete najarian how we trade options
I think a person would need to know just some of the risk and reward of those other trades. And by being proactive, you are being able to put into a position to put these positions on. For instance, I rarely would put on positions where I have unrealized amounts of exposure. I always want to know exactly what my exposure is. I try to limit my exposure and limit my risk so that every single night, regardless of what were to happen, I know that I can sleep.
And for me, that gives me the ability to go home at night and be able to sleep. Do you think that if people need to trade stocks before they trade options? Or do you think that people can go straight into options? People really have to understand all the metrics that go into what prices an option. In other words, you buy a stock; you basically know where the stock is and it includes the dividends and so forth.
It really is the major difference between the options and the stock. But by paying that premium, that is allowing you to do trades with leverage. I say that because when you use the expression leverage, then people often times go: Can you think of another thing or two that are also the kinds of key things that options traders really need to get their hands around? Well, you know, understanding the volatility of the options is probably as critical as anything.
Under normal circumstances, an option has a price based upon past history. What traders need to understand is how much volatility is attached to the option relative to the normal volatility. Ahead of all of this craziness that happened, there were the institutional buyers and some speculative buyers but very large paper was trading in there that I would have deemed institutional size. So traders just have to understand what the levels of volatility are because that really will tell you how much more risk you really are putting on a trade when you decide to go into the options.
And the smoke for us often times is in the options where it can be very difficult. There are plenty of examples in the last couple of years, whether they be take-overs or upgrades. You name the catalyst or in the case of some of these negatives lately in the marketplace, the smoke has been there and the smoke has been in there with the options.
The leverage of options allows people to put on just an incredible amount of exposure working towards that ultimate of what they think the catalyst is going to be.
Do you have an opinion of some of the popular metrics that people use to allow options to lead them? Things like the put-call ratio? You know, everybody loves to talk about the put-call ratio. I think that it gives you some insight. People tend to treat it as a binary, on-off sort of thing giving specific signals… Laughter Peter Najarian: Along that line of perhaps myths about options trading, if you were going to give a table-pounding rant about one topic in options trading that drives you crazy, what might that rant be about do you think?
I often times hear people pounding about the table, the rants on volumes that end up being fairly meaningless.
I mean, often times, I hear people talking about well, there was just this amazing amount of volume in the options of a particular stock. That really is the whole trade. You see it around stocks. You talked about some of the strategies that you use and how some of them are things that certainly a beginner or maybe an advanced beginner options trader would be able to use.
Are there other strategies out there that you think that a new options trader should be aware? I know straddles are some that some people recommend for new options traders. My biggest issue is this; when it comes to some of the more complex strategies, when you start getting past some of the very, very simplistic trades that are out there, the more complex the trade becomes with options, the more expensive it becomes and the more you really have to be right to make any money on the trade.
There are just too many pieces of the puzzle that between the commissions and the overall cost, they just become almost impossible to make money unless you just were right beyond all words. When you leave the trading floor and you see — I mean, now the trading markets in general have tightened up, I think, over years because of the competition.
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