Anatomy of a fun 2-day trade (AMC +$60k)

[Dustin]

Excellent. I'm quite rusty on options stuff since I'm heavily into trading ES/NQ, so bear with me please.

So 16 cents is very cheap for an option. I guess this was the market pricing in the low probability of a move down to $48 for this last day before expiry, correct?

How often do these low priced options present themselves? I keep reading about how options are sometimes very expensive for both calls and puts because nobody has a clue where its going so people want to be paid for a risk.

Also, when you say leverage, you simply mean the ability for the option to go up 5 or 10x in price, correct? A 16 cent option has to move to 80 cents to be a 5x trade. But if you bought the $49p for example, this might have been $1 (just pulling a number out of a hat), so a 5x trade would have to have this climb to $5 which is highly improbable, correct? So a 5x trade on the $49 is probably not possible. Do I have this right?

There are always cheap options toward the end of the week which is why Friday is statistically twice as profitable as any other day for me. Finding the mover on Friday pays big.

Yes by leverage I mean 5-10x+. Correct that the 49p wouldn't have worked as well, they were probably about 50c which means they would have paid 2-3x and I couldn't have bought as many with the same $ at risk.

 

[NoahA]

I'm very appreciative of your replies Dustin. Your willingness to fully disclose your thought process and the entire anatomy of the trade should leave no doubt for the skeptics that profitable traders do exist.

 

[Arnie]

There are always cheap options toward the end of the week which is why Friday is statistically twice as profitable as any other day for me. Finding the mover on Friday pays big.

Yes by leverage I mean 5-10x+. Correct that the 49p wouldn't have worked as well, they were probably about 50c which means they would have paid 2-3x and I couldn't have bought as many with the same $ at risk.

Are these options expiring on the Friday you trade them?

 

[Dustin]

Are these options expiring on the Friday you trade them?

Yeah.

 

[qlai]

Definitely a chart trader. I have 40+ charts at my desk to watch all the setups. Price action + basic TA are everything.

Are you watching Level2 to time entries/exits?
Why are you trading options instead of stock, sounds like you should have enough buying power.

 

[Dustin]

Are you watching Level2 to time entries/exits?
Why are you trading options instead of stock, sounds like you should have enough buying power.

I use L2 but it's all about the charts. I like the leverage the options provide. I risked only $5k (not enough in hindsight, but I also had the $50p from previous day) on the $48p and made $26k on a $2 move. With stock I would have needed 13k shares, or a $650k position.

 

[NoahA]

I use L2 but it's all about the charts. I like the leverage the options provide. I risked only $5k (not enough in hindsight, but I also had the $50p from previous day) on the $48p and made $26k on a $2 move. With stock I would have needed 13k shares, or a $650k position.

Is the 5k risk simply that the option just expires worthless? If you're buying options for 16 cents or there abouts, I can see how not being worried about what happens to them is a huge weight lifted off the decision making process.

Is letting options expire worthless a good risk mitigating strategy in general or would you always try and at least get something for it? By holding the stock, or the short which is even worse since you're paying a fee, you always have to think of an exit, but with this type of options strategy, I can see how beneficial it is to have one less thing to worry about if your exit plan is just to forget about it.

 

[Dustin]

Is the 5k risk simply that the option just expires worthless? If you're buying options for 16 cents or there abouts, I can see how not being worried about what happens to them is a huge weight lifted off the decision making process.

Is letting options expire worthless a good risk mitigating strategy in general or would you always try and at least get something for it? By holding the stock, or the short which is even worse since you're paying a fee, you always have to think of an exit, but with this type of options strategy, I can see how beneficial it is to have one less thing to worry about if your exit plan is just to forget about it.

Yes, I like 100% defined risk, so that was $5k max loss. If the trade looked like it was going to fail then I would have tried to sell for 50% loss or whatever was left on it. The trades I get stuck with that go to zero are usually the nickle increments because even if there's just a penny bid I'll take it.

 

[traider]

Yes, I like 100% defined risk, so that was $5k max loss. If the trade looked like it was going to fail then I would have tried to sell for 50% loss or whatever was left on it. The trades I get stuck with that go to zero are usually the nickle increments because even if there's just a penny bid I'll take it.

Do you get rebates for options only for limit orders? I find it hard when getting out at a loss and options are trading really low with the comms really adding up. Taker orders only make it worse and you usually don't have the luxury to exit slowly.

 

[NoahA]

Yes, I like 100% defined risk, so that was $5k max loss. If the trade looked like it was going to fail then I would have tried to sell for 50% loss or whatever was left on it. The trades I get stuck with that go to zero are usually the nickle increments because even if there's just a penny bid I'll take it.

Is it not possible that with a few hours to go, that penny bid could climb higher? I would think that over dozens of trades, for each trade that you exit for that penny profit so you don't take the full loss on the option, there are some that will make it back to 10 or 20 cents.

I do lot of stats on my trades and it's amazing how many turn around and go right back to entry if either i just give it more time or at least one scale-in lower down. It comes from the idea that I'm never that good about knowing which direction its going on a minute by minute basis. If I exit because I think I'm wrong then it means that it should conceivably go in the other direction, but this is easily false half the time. So this means that either being more patient or averaging in at a better price turns out to be better over a series of trades rather than just taking the exit.

So I guess that what I'm saying is that if there is a floor to how much I can lose and it's already at that level or 1 cent from it then it doesn't make much sense to take the exit if there is still hours to go for the trade to turn around.

But of course I would love your take on this.