Your Questions About Paper Trading Options

Richard asks…

Feasible? (Options Trading)?


I started learning to trade options a few months ago.
Due to an overwhelming schedule, I’m still on my first few paper trades.

I know the basics about how things work,
I use basic methods of trend analysis (Elliot wave, moving averages) and I know in theory how to implement most strategies.

What kind of returns can most people expect their first year of trading?

And what place do some of the more advanced strategies (Iron butterflies, etc) have? I was told that most of the time the simple spreads and basic calls / puts bring in the most.

John answers:

Option trading do not expect to make big profits often. It is riskier than stocks and once in a while you might make a good return that is all. It was initiated as hedge instruments and later on shrewd investors figured out strategies to avoid loss. Professional traders do make decent profits but that is after long periods of time. My advice is you learn the dynamics of the option market thoroughly, the Options greeks, like delta, lambda, theta, vega and rho is a good starting point. Then you learn their charecteristics or graphs simly. Try to figure out the state of the market using this and predict where the market is going. Then do a sensitivity analysis of your possible trade on the spread sheat, find out the different gains and losses at different price levels and then find out the down side risk, upside potential, and maximum loss scenarios. Some strategies are self financing meaning you need to invest only little or nothing for a whole lot of trades when the market is in certain state. Study this and you will be able to trade better in options. Sometimes simple strategies will pay off. For example when the market is predicted to move up a call buy and a put sell will pay off. This is self financing for the same strike if you sell enough puts. But you should be sure. And sureity arises from your knowledge of Option greeks and knowledge about volatility like Implied and statistical volatility.

Lisa asks…

Can you help me with stock options?

Ok, so as I am learning more and more about options I realize they are very confusing, but can be much more rewarding than stocks. I’m trading options with paper money to learn the ropes but need some help.

If I call AAPL (Apple Inc.) at a strike price of $90.00, and the option costs $2.34 and expires in Febuary 2009, and say before it expires AAPL goes to $100, how much profit will I have made?
I would be buying 1 option, which would cost me $232.
not $232, $234! sorry.

John answers:

If AAPL is at $100 at expiration your profit will be

($100-$90) – $2.34, or $7.66 per share or

$7.66 x 100 = $766.00 per contract.

If AAPL is at $100 prior to expiration your profit will be at least $7.66 per share ($766.00 per contract) but the exact profit cannot be determined without knowing the implied volatility and the number of days until expiration at the time.

(I excluded commissions, fees and bid-ask price slippage from my calculations, so your exact profit would probably be a little lower. I also ignored the comment that “I would be buying 1 option, which would cost me $232.” since if the option costs $2.34 you would pay at least $234.00 for one contract.)

Linda asks…

Which online trading firm has the lowest brokerage rates for cash (delivery) & intraday ?

I need details of online trading option (paper less), should have ability to transfer money instantly for increasing limits.
you may give reviews of the ones you are using.
for the range :
Rs. 10 to 25 lakh turnover per quater

John answers:

India infoline

George asks…

Is CBOE still offering Weeklys/where do you find? (short term options).?

I have been paper trading for a several months now and have found that I really like to trade options. In the past I have used the investools program (powered by think or swim), but now think that I would like to try make (and hopefully not lose) some real money.

I recently signed up for an account with Scottrade and it says something about ‘weeklys’ for option trading. However, I have never seen anything listed about where to find them. I know that it was a trial run back in 2005, but have not seen anything where it was cancelled. I am assuming that it has been, but I was curious if anyone knew anything about it or has tried using this method (whether or not it was cancelled). The idea of it is very intriguing for many reasons to me.

Thanks for any help/information! Have a nice week.

John answers:

Weekly options have traded on the CBOE on the SPX (S&P 500) and OEX (S&P 100) indexes since October 2005. Codes for these options are given in the attached link. You may need to have your broker tell you how to access these options through their trading system.

Sandra asks…

Options: How liquid is the options market for closing or trading out of positions?

Just wondering how easy it is to get out of positions before the expiration date, and if you can still get the expected price for it, (even if has already amounted a large paper gain or loss). Thanks!

John answers:

If you are talking about currency or futures options, I am not sure.

If you are talking about stocks or stock indexes, they are all liquid but some are more liquid than others. Every option market maker for a stock has to give a bid quote and an ask quote for every option on that stock, and they have to honor an order up to a specific number of contracts at those quotes. The exact number of contracts depends on the underlying, but it is always at least 20 contracts.

So, there will always be bid and ask quotes, although if the option is far enough out of the money the bid quote may be zero. That is not the issue. The issue is the size of the spread between the bid and the ask quotes. Every exchange has rules about how large that spread can be but every exchange makes it possible to stretch that limit at times.

Options on popular stock, such as INTC, tend to have small bid-ask spreads. Options that are listed on multiple exchanges tend to have smaller bid-ask spreads than those that are not.

If you want an example of some relatively illiquid options look at the options on PNSN. The bid-ask spreads on that stock’s options tend to be quite large. If you want to trade options on that stock you almost always want to use limits orders between the bid and the ask quotes.

Also, deep in the money and far out of the money options tend to have larger big-ask spreads than near the money options. Longer term options tend to have larger spreads than nearer term options. Options with more volume will almost always have lower bid-ask spreads. (Warning: Do not trust the volume figures from Yahoo option quotes. If you want a free delayed quote alternative source I suggest you use


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2 Responses to Your Questions About Paper Trading Options

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  2. It took me time to read all the tips, but I clearly loved the post. It proved to be very helpful to me and I’m certain to all of the commenters here!

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