Options Trading Tutorial

How do I get started trading equity options and futures?

I have a quant background in hedging, so I'm not asking for guidance on how to learn modeling or developing strategies for trading options. I have work experience doing option valuation and developing dynamic replication strategies, but I have never done the trading. I want to start relatively small - I'm comfortable putting about $20K at risk. I would be looking to hedge options against options while trying to limit the amount of dynamic hedging. I expect that I'll need set up some margin in addition to any net option premium. Is $20K reasonable? Are there brokers specializing in options? Does anyone recommend CME, CBOE or other tools? (I know that some exchanges offer tools for subscription.) Thanks!

Public Comments

1. OptionsXpress specializes in options, I don't know about futures. Interactive Brokers doesn't specialize in options, but they do futures so I presume stock futures are available. IB handles stocks and bonds also, so I suppose you could use them for margin if you have them. Account size all depends on position size and potential risk. Hedged trade implies to me that every trade has a max dollar loss, which helps planning quite a bit. Rule of thumb is you need to be able to withstand 20 losses before wiping out your account or its getting so small that you can't trade. 20 losses in a row is unlikely, but 5 in a row is very common. If you can only stand 10 losses and you get 5 in a row, you're under huge psychological pressure with half your stake or more gone. So if each trade has a maximum possible loss of $1,000, $20k should be fine, assuming you meet margin requirements.
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