Thursday, March 26, 2009

Learning About Options (1)

I have recently received several requests from readers who are interested in learning about options from scratch and are looking for suggestions on how to proceed.

First, I should preface my answer by saying that even if you never intend to trade options, it will probably be worth your while to take some time to understand how they work. At the very least, it is helpful to appreciate what is in the black box that generates various options indicators, such as the VIX and the put to call ratios.

Second, I intend on making this the first installment in a series of posts that cover the subject of learning about options. Today I will talk about two excellent general resources on the web; in later posts I will examine educational resources offered by the exchanges and several options brokers, recommend some books, discuss additional web sites and conclude with an overview of some of my favorite options blogs.

The subject of options is broad and deep. Fortunately, there are some excellent free resources on the web that allow someone who is interested in options to learn at their own pace and in small chunks of ideas and information.

Two excellent all-purpose resources for options beginners are The Options Guide and The Options Industry Council (OIC). I mention these two sites first, because their sole intent is to inform and educate, unlike some commercial sites that provide some free information and then try to sell you something with a subtle or sometimes not-too-subtle approach.

The Options Guide has a variety of short articles in their Options Basics section, as well as a handy Options Strategies reference, where you can search for specific types of options strategies that meet your needs, or click on an excellent visual menu of profit and loss graphs to get detailed information about a wide variety of strategies. There are even separate sections for index options and VIX options.

The Options Industry Council takes a comprehensive approach to education. While The Options Guide is a great starter kit and reference tool, I consider the OIC’s web site to be the gold standard. It is a great place to browse and get lost. If you want articles, DVDs, books, brochures, etc. on just about any options topic you are interested in, there is a good chance you will find it in the OIC’s online vault. The OIC has embraced a multimedia approach and as a result, offers online classes, as well as seminars and webcasts. You can see what material is available as a video webcast and also download a wide variety of podcasts.

The OIC also has a broad range of tools that includes a several options calculators, an options strategy screener and a position simulator. If that is not enough, you can even do some virtual trading through the OIC.

Considering that everything offered by The Options Guide and just about everything (books are an exception) offered by the Options Industry Council is free, investors who are interested in learning about options should put these two web sites at the top of their list when embarking on a self-study approach to learning about options.

6 comments:

semuren said...

Greetings Bill:

Thank you very much for your great blog. Since you are posting about learning options basics I though I might recommend another great resource for people just learning options strategies. The Options for Rookies blog (http://blog.mdwoptions.com/options_for_rookies/) has a lot of information about learning options basics and trading mostly market neutral income strategies. The site's creator also has a book by the same name. I have read quite a few options books and I was really impressed with Options for Rookies in that it take someone who just knows a bit about stocks to a point where they are ready to paper trade a variety of options strategies. It is THE book I recommend to my friends who ask me to explain options trading to them. It is written in accessible language but does not shy away from topics like the Greeks. The OIC and CBOE resources are great but the nature of web based informations can make things confusing or disjointed for those who lack a basic framework. I think the rookies book makes gives beginners this framework.

John said...

I have also read Options for Rookies and frequent his blog. He has a twitter account http://twitter.com/MarkWolfinger where you can follow his trades in realtime. Can't recommend him enough.

Manish Chauhan said...

For people who wasnt to know very basic stuff , they can read my : http://www.jagoinvestor.com/2008/06/what-is-option-option-is-contract-which.html

Manish
http://www.jagoinvestor.com

Jack Finn said...

Thanks Bill! I didn't think my options education would start so soon. :)

Karl K said...

Bill, I would just add that learning about options -- REALLY learning -- is a substantial intellectual undertaking. Before anyone trades with real money, they should be able to answer without hesitation questions like "What is implied volatility?" "Why does volatility tend to increase as earnings approach?" "Why does gamma increase as expiration approaches?" "Why is a calendar position a postive vega trade?"

To know the answers to these questions requires STUDY. Reading books. Hours of paper trading practice. Going in half-A$$ed will get your aforementioned A$$ handed to you.

Bill Luby said...

Well said, Karl...and I think you have several important questions ready for an options final exam.

As you imply, ultimately the study of options is largely the study of volatility and time.

Cheers,

-Bill

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