Options for the intelligent but inexperienced
"Some thoughts on your questions in order, Duration: You might want to look at the longest-dated option (often a ""LEAP""), for a couple reasons. One is that transaction costs (spread plus commission, especially spread) are killer on options, so a longer option means fewer transactions, since you don't have to keep rolling the option. Two is that any fundamentals-based views on stocks might tend to require 3-5 years to (relatively) reliably work out, so if you're a fundamental investor, a 3-6 month option isn't great. Over 3-6 months, momentum, short-term news, short squeezes, etc. can often dominate fundamentals in determining the price. One exception is if you just want to hedge a short-term event, such as a pending announcement on drug approval or something, and then you would buy the shortest option that still expires after the event; but options are usually super-expensive when they span an event like this. Strike: Strike price on a long option can be thought of as a tradeoff between the max loss and minimizing ""insurance costs."" That is, if you buy a deeply in-the-money put or call, the time value will be minimal and thus you aren't paying so much for ""insurance,"" but you may have 1/3 or 1/2 of the value of the underlying tied up in the option and subject to loss. If you buy a put or call ""at the money,"" then you might have only say 10% of the value of the underlying tied up in the option and subject to loss, but almost the whole 10% may be time value (insurance cost), so you are losing 10% if the underlying stock price stays flat. I think of the deep in-the-money options as similar to buying stocks on margin (but the ""implied"" interest costs may be less than consumer margin borrowing rates, and for long options you can't get a margin call). The at-the-money options are more like buying insurance, and it's expensive. The commissions and spreads add significant cost, on top of the natural time value cost of the option. The annual costs would generally exceed the long-run average return on a diversified stock fund, which is daunting. Undervalued/overvalued options, pt. 1: First thing is to be sure the options prices on a given underlying make sense at all; there are things that ""should"" hold, for example a synthetic long or short should match up to an actual long or short. These kinds of rules can break, for example on LinkedIn (LNKD) after its IPO, when shorting was not permitted, the synthetic long was quite a bit cheaper than a real long. Usually though this happens because the arbitrage is not practical. For example on LNKD, the shares to short weren't really available, so people doing synthetic shorts with options were driving up the price of the synthetic short and down the price of the synthetic long. If you did actually want to be long the stock, then the synthetic long was a great deal. However, a riskless arbitrage (buy synthetic long, short the stock) was not possible, and that's why the prices were messed up. Another basic relationship that should hold is put-call parity: http://en.wikipedia.org/wiki/Put%E2%80%93call_parity Undervalued/overvalued options, pt. 2: Assuming the relationship to the underlying is sane (synthetic positions equivalent to actual positions) then the valuation of the option could focus on volatility. That is, the time value of the option implies the stock will move a certain amount. If the time value is high and you think the stock won't move much, you might short the option, while if the time value is low and you think the stock will move a lot, you might buy the option. You can get implied volatility from your broker perhaps, or Morningstar.com for example has a bunch of data on option prices and the implied components of the price model. I don't know how useful this really is though. The spreads on options are so wide that making money on predicting volatility better than the market is pretty darn hard. That is, the spread probably exceeds the amount of the mispricing. The price of the underlying is more important to the value of an option than the assumed volatility. How many contracts: Each contract is 100 shares, so you just match that up. If you want to hedge 100 shares, buy one contract. To get the notional value of the underlying multiply by 100. So say you buy a call for $30, and the stock is trading at $100, then you have a call on 100 shares which are currently priced at $10,000 and the option will cost $30*100=3,000. You are leveraged about 3 to 1. (This points to an issue with options for individual investors, which is that one contract is a pretty large notional value relative to most portfolios.)" "I strongly suggest you read up the Option Greeks. You can be right about a stocks price movement and still not make money b/c other factors come into play from time or volatility. For a ""free"" option hedge you can look at collars. Buying puts and selling calls to offset the debit you pay for the transaction. Ex: AAPL is 115, You buy the 110 puts and sell the 120 calls. This gives you a collar around he current price. Your hedged below 110 and can still participate in upside move to 120. Also look into time value. Time decays exponentially in the last 30 days. If you are long this hurts you, if you are short(selling) this is good. Be sure to take this into account. Delta: relation of the option to the underlying stock move on a .01-1 scale, .50 is ""normal."" Deep in the money options have higher deltas. It is possible other factors can offset this delta move. This is why people will lose money on earnings plays even though they are right.  EX: Say you buy an AAPL call at 120, earnings comes out and the stock goes to 121. Even though you are ""in the money"" your contract may still have less value than what you paid because of VOLATILITY collapse. The market place knows earnings move a stock and that is factored into the price of the options expected volatility. As mentioned watch out for dividend dates. Always be aware of dividend dates and earnings dates and if your contract is going to cover one of these events. Interest rates have an effect as well but since the Fed has near 0 rates there is little impact at the present. Though this could certainly change if the fed starts raising rates. Research the Black Scholes Pricing model. Whenever you trade always think about what the other guys is thinking. Sometimes we forget their is someone else on the other side of my trade that thinks essentially the exact opposite of me. Its a zero sum game. As far as choosing strikes you can look at calculating the At THe money straddle to see if the options are ""cheap"" [stock Price * Implied Volatility (for 30, 60, 90 days Depending on your holding period)* Sq root of days to expiration] / 19 (which is sq root of days/yr) Add and subtract this number to the current stock price to give you an approximate 1 standard deviation of expected price movement. Keeping with our example. AAPL at 115, lets say your formula spits out a 6; therefore price range is expected to be 109 to 121 for the time period. Helpful for selling options, I would sell the 122  call or the 108 puts. Hope this helps. Start small and get a feel for things." "Realize this is almost a year old, but I just wanted to comment on something in Dynas' answer above...  ""Whenever you trade always think about what the other guys is thinking. Sometimes we forget their is someone else on the other side of my trade that thinks essentially the exact opposite of me. Its a zero sum game."" From a market maker's perspective, their primary goal is not necessarily to make money by you being wrong, it is to make money on the bid-offer spread and hedging their book (and potentially interalize). That being said, the market maker would likely be quoting one side of the market away from top of the book if they don't want to take exposure in that direction (i.e. their bid will be lower than the highest bid available or their offer higher than the lowest offer available). This isn't really going to change anything if you're trading on an exchange, but important to consider if you can only see the prices your broker/dealer provides to you and they are your counterparty in the trade."
"If you are interested in a career in algorithmic trading, I strongly encourage you to formally study math and computer science.  Algorithmic trading firms have no need for employees with financial knowledge; if they did, they'd just be called ""trading"" firms.  Rather, they need experts in machine learning, statistical modeling, and computer science in general. Of course there are other avenues of employment at an algorithmic trading firm, such as accounting, clearing, exchange relations, etc.  If that's the sort of thing you're interested in, again you'll probably want a formal education in those areas as opposed to just reading about finance in the news. If you edit your question or add a comment below with information about your particular background, I could perhaps advise you in a bit more detail. ::edit:: Given your comment, I would say you have a fine academic background for the industry.  When hiring mathematicians, firms care most about the ease with which you can explore and extract features from massive datasets (especially time series) regardless of what the dataset might represent.  An intelligent firm will not care whether you arrive at their doorstep with zero finance knowledge; they will want to teach you everything from scratch anyway. Nonetheless, some domain knowledge could be helpful, but you're not going to get ""more"" of it from reading any mass market news source, whether you have to pay for it or not.  That's because  Some non-mass-market news sources in the industry are  These are subscription-only and actually discuss real information that real professional investors care about.  They are loaded with industry jargon, they're extremely opinionated, and (in my opinion) they're useless.  I can't imagine trying to learn about the industry from them, but if you want to spend money for news in order to be exposed to the innards of the industry, then either of these is far better than the Financial Times.  Despite requiring a subscription, the Financial Times still does not cover the technical details of professional trading. Instead of trying to learn from news, then, I would suggest some old favorites: and, above all else, Read everything in the navigation box on the right side under Financial Markets and Financial Instruments." There are some useful comments about the tradeoffs of the decisions in front of you.  Intertwined with the financial choices, hopefully you can see a map opening up.   Make a little chart if it helps.  Benefit and Cost.  If you're looking for financial options, you will have to also add more columns to that chart:  Option and Cost. An example is the comment on making connections with rich kids.  Trust fund babies are everywhere in this country.  Did you know any rich kids while growing up?  How were those rich kids you knew of back then... in your school... in your town?  How did they treat you?  Were you ever invited to their parties or gatherings?  Now there's an opportunity for the privilege to pay a lot of money to sit in a classroom next to them?  Even in the early days of American history with merit based millionaires... tycoons who made it rich by the seat of their pants.  At fancy dinner parties and soirees, a new term emerged to put each other again out of reach: old money (the deserving) and new money (uncultured climbers).   That's my bias.  You'll have some of your own.  What is important to YOU has to come through because these days, the price tag of any higher education implies a considerable piece of your life's timeline will be committed to... something.  Make sure you get what you feel is worth that commitment. Take stock of what has been said here by the others, but put a value on those choices and seriously consider what you're willing to pay for... and what you're not.  There is no formula for your success as there's been thousands of exceptions... ESID (Every Situation is Different). "Consultant, I commend you for thinking about your financial future at such an early age. Warren Buffet, arguably the most successful investor ever lived, and the best known student of Ben Graham has a very simple advice for non-professional investors:  ""Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)"" This quote is from his 2013 letter to shareholders. Source: http://www.berkshirehathaway.com/letters/2013ltr.pdf Buffet's annual letters to shareholders are the wealth of useful and practical wisdom for building one's financial future. The logic behind his advice is that most investors cannot consistently pick stock ""winners"", additionally, they are not able to predict timing of the market; hence, one has to simply stay in the market, and win over in the long run." I would suggest equity research, or as mentioned, consulting. You could go into IB. Your main hindrance is your age, how long has it been since you finished your PhD?  Equity Research: you will analyze companies, on an individual and micro basis, and provide macro point of views on the industry etc.   Sales/Trading: you will not get a job in trading, sales...maybe, if you get a bank large enough that has a healthcare/industrial chemicals sales positions, but this is a job that requires you to be able to sell your bank's point of view to large, very sophisticated clients, and provide them with better ideas than other sales guys, so that they will trade with your bank...can you learn finance and the industry fast enough? You would be better off working in a buy side shop (there are tons in boston)  IB: never met anyone that likes ib. depends on the bank but even mid market small banks it is 80hr weeks on avg. bulge bracket its 100. but you would likely start as an associate, (if at all) so that would go down really fast, (3-5 yrs to vp)  If you went to a top tier school, find alum from your school that work at banks and talk to them first, a 30 min conversation with anyone is incredibly useful. Just ask them how to get in. Also make sure you know all the capital markets firms in your area, know what all the fields are from a basic level (read the shit on wallstreetoasis etc) so that you dont waste time when talking to people.   You will likely need a CFA level 1 to get any traction, unless you can find some people that are willing to pull for you, which you will find is actually more simple than it seems - people love helping their alma matter, and every firm is always looking for smart people. anyways, sign up for the december 2012 cfa exam, and download/buy the schweser notes (don't read the actual books) this will be a great refresher about finance and economics even if you don't end up switching careers.  actual answers to your questions 1) yes 2) start as an associate in ib, spend 3 years doing bs, and workin average 90hrs a week, either quit of become vp and start selling work vs doing it 3) ib: immediate sales/trading: immediate, buy side: varies on the firm, size, performance, could be immediate, could be the year after, or you could get fired after 3 months because your phd isnt as useful as they thought it was. 4) mentioned above...a few years, its managable, suck it up 5) no sorry   goodluck Sir, although I am quiet inexperienced speaking in this subject but being an undergraduate in financial engineering, I feel the title is suited very well since providing unbiased financial advice is the last and greatest thing that any financial adviser would ever do.... "Good ones, no there are not.  Go to a bookstore and pick up a copy of ""The Intelligent Investor.""  It was last published in 1972 and is still in print and will teach you everything you need to know.  If you have accounting skills, pick up a copy of ""Security Analysis"" by Benjamin Graham.  The 1943 version was just released again with a 2008 copyright and there is a 1987 version primarily edited by Cottle (I think).  The 1943 book is better if you are comfortable with accounting and the 1987 version is better if you are not comfortable and feel you need more direction. I know recent would seem better, but the fact that there was a heavy demand in 2008 to reprint a 1943 book tells you how good it is.  I think it is in its 13th printing since 2008.  The same is true for the 72 and 87 book.  Please don't use internet tutorials.  If you do want to use Internet tutorials, then please just write me a check now for all your money.  It will save me effort from having to take it from you penny by penny because you followed bad advice and lost money.  Someone has to capture other people's mistakes.  Please go out and make money instead.   Prudence is the mother of all virtues." Out of curiosity, where do you get your news? Had I been asked to explain the two crises, I have no doubt that I would fail horrifically. You seem to explain everything quite concisely. I assume part of it is innate intelligence, but it can't hurt to have a good news source either. "Most articles on investing recommend that investors that are just starting out to invest in index stock or bonds funds.  This is the easiest way to get rolling and limit risk by investing in bonds and stocks, and not either one of the asset classes alone.   When you start to look deeper into investing there are so many options: Small Cap, Large Cap, technical analysis, fundamental analysis, option strategies, and on and on.  This can end up being a full time job or chewing into a lot of personal time.  It is a great challenge to learn various investment strategies frankly for the average person that works full time it is a huge effort.  I would recommend also reading ""The Intelligent Asset Allocator"" to get a wider perspective on how asset allocation can help grow a portfolio and reduce risk.  This book covers a simple process." Be cognizant of your own limitations when approaching this material.  I've dealt with lawyers, doctors, engineers and other highly intelligent people from other disciplines, who then try to learn about companies and the stock market.  Their own arrogance and assumption that they can just learn anything *quickly* ends up hurting them.  It can take years and real classical training of finance to understand this material with any depth.  Someone is wrong (a fool) in every trade.  There is someone who is going to make money and lose money.  Odds are the fool is you. "As foundational material, read ""The Intelligent Investor"" by Benjamin Graham.  It will help prepare you to digest and critically evaluate other investing advice as you form your strategy." My plan is that one day I can become free of the modern day monetary burdens that most adults carry with them and I can enjoy a short life without these troubles on my mind. If your objective is to achieve financial independence, and to be able to retire early from the workforce, that's a path that has been explored before. So there's plenty of sources that you might want to check.  The good news is that you don't need to be an expert on security analysis or go through dozens of text books to invest wisely and enjoy the market returns. This is the Bogleheads philosophy. It's widely accepted by people in academia, and thoroughly tested. Look into it further if you want to see the rationale behind, but, to sum it up: It doesn't matter how expert you are. The idea of beating the market, that an index fund tracks, is about 'outsmarting' the rest of investors. That would be difficult, even if it was a matter of skill, but when it comes to predicting random events we're all equally clueless.  *Total Expense Ratio: It gives an idea of how expensive is a given fund in terms of fees. Actively managed funds have higher TER than indexed ones. This doesn't mean there aren't index funds with, unexplainable, high TER out there. Listen, I planted a seed in your head that will grow into intelligent thinking. You can do it.   As an alternative to believing me (since I'm so ignorant) just read a LOT more. But don't just read CNN. https://www.google.ca/amp/s/amp.businessinsider.com/most-important-finance-books-2017-1  Bloomberg, finacial times, chat with traders, calculated risk, reuters, wsj, cnbc(sucks), bnn (if canadian)  Audio books on youtube helped me read a lot of finance books in a short amount of time, listen while working out.  One thing that helped me stand out at my student terms (4th year here) was learning outside of the classroom and joining an investment club. Learning programming can help if thats a strength, but its really not needed and  it can waste time if yoi wont reach a point to build tools.  Other than that at 18 you have more direction than i did, good luck! Start at Investopedia. Get basic clarification on all financial terms and in some cases in detail. But get a book. One recommendation would be Hull. It is a basic book, but quite informative. Likewise you can get loads of material targeted at programmers. Wilmott's Forum is a fine place to find coders as well as finance guys. A couple of good books I enjoyed and found very understandable (regarding the stock market): As for investment information you can get lost for days in Investopedia.  Start in the stock section and click around. The tutorials here (free) give a good introduction to different financial topics. Regarding theoretical knowledge: start with what you know well, like your career or your other interests.  You'll get a running start that way. Beyond that, it depends on what area of finance you want to start with.  If it's your personal finances, I and a lot of other bloggers write about it all the time.  Any of the bloggers on my blogroll (see my profile for the link) will give you a good perspective.  If you want to go head first into planning your financial life, take a look at Brett Wilder's The Quiet Millionaire.  It's very involved and thorough. And, of course, ask questions here.