Jon najarian how we trade options
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Najarian found he was indeed suited to the floor. After serving his apprenticeship, he bought a limited exchange seat on the CBOE which allowed him to trade options on 16 stocks and starting trading. It was a bit slow at first, but things picked up when he moved up to a full seat after a few months.
Because he started just as listed options markets were in their infancy, we first asked him about his early experiences and how he—and the markets—have evolved. When you started out, what kinds of strategies did you trade?
Mainly time spreads and volatility, where I was buying volatility when it was cheap and selling it when it was expensive. I will sell it sometimes, but I prefer to buy it because you get to trade the market instead of the market trading you.
Long backspreads work when the market moves, which has certainly been the case this year. How did you determine what qualified as high or low volatility? The first thing to understand is that volatility can be a blessing or a curse. The professional firms used computers to do their analysis, of course. But not everyone had one. Back then, they had no idea—only the real pros knew. How has your trading changed over the years? Are you doing anything differently now? Most successful retail traders know how to use simple strategies like 1: The people who made a lot of money on the AOLs, Yahoos, Intels, and Ciscos and all the other stocks that have moved around a lot, have either been flat volatility and just traded, like all the new day traders, or people who understand that you give up something when you buy options, because they decay, but you get a lot in return because you can sell more as the market is rising and sell more as the market is falling—which is the most sane way to trade, really.
And whenever the customer tries to compete against the market maker, they lose. Now our edge is that we can buy them in a fraction of a second and then get hedged. Our competition is the rest of the exchange membership on the floor. What kind of strategies are best for off-floor traders to use in the options market?
What should they understand? Volatility is often very high right before earnings because no one is really sure what the earnings are going to be. As soon as earnings are announced, that volatility drops like a rock.
Think about what happened in AOL recently. Its volatility dropped from to A lot of professional option traders like to sell premium before earnings. As soon as option traders understand how volatility works, they want to know how to lessen the potential negative impact: