Any advice for my poorly designed options trading strategy

C

CommercEngineer

I think I have good fundamental ideas, but I'm not making a killing.

I went long 80 jan 08 AAPL calls 5 points ago at 12.90

at the same time, I went short 85 jan 08 AAPL calls at 10.90

Currently the 80s are marked at 14.75
and the 85s are marked at 12.60

so i'm up 7.5% in two weeks, but I want more.

Had I just went long 80 calls, I would have been up 14% which is a much better return.

I figured the spread was the more aggressive way to go, but it doesn't look like it played out that way.

Am I missing something? Can anyone think of any trades that would have performed better in this situation?
 
Just some thoughts. Take 'em or leave 'em.

1) Why the heck are you trading '08 options? The spreads alone will kill you on highly illiquid LEAPS, and the deltas are practically non-existent. If you had traded Octs or Novs ('06), you would have done very well.

2) A vertical is not "more aggressive", it's less. Me personally, I use verticals to:
a) Reduce the impact of theta. For you, with '08 options, theta is negligable.
b) Reduce the impact of high IV due to earnings or other expected events. For you, with '08 options, you won't be overpaying for IV due to short term events.
c) Adjust my market outlook. If I believe something is going to trade sideways or slowly upwards, an ITM vertical works well.

So, the questions for you are:
1) What time frame did you believe AAPL would trade upwards? If you had a play over a few weeks, you'd be much better served with anything with Dec or prior in expirations. If you had a play over several years, then LEAPS may make sense.

2) How agressively did you believe AAPL would move upwards? If it was VERY, then just buy calls. If it was moderately, then think about a calendar or a vertical.

3) Are you only playing the stock directionally, or are you playing for time? For example, you could get short theta and earn money through a calendar or a butterfly if there was a good chance of the stock moving sideways.

4) Can you get access to an option calculator--one that allows you to put in legs and have it show you a p&l chart at expiration and at various points in time? This would have showed you exactly how much you can expect to make over 2 weeks given the option choices you made.

Just as a comparison, take a look at these two images. First is the vertical for Oct expiration. The second is the vertical for Apr '07 expiration.

octvert.png

aprvert.png


Let's say AAPL rallies to 85 in the next two weeks. If you bought the Oct vertical, you would be up roughly $170. If you bought the Apr '07 vertical, you would be up $50. Big difference!

I hope that helps.
 
Your position actually shows a deep misunderstanding of the fundamentals of options.

1. If you understand DELTA and time value premium then you know that a spread with more than a year and a half to expiration will hardly budge if the stock moves. It is not a good idea to go that far out unless you are willing to IGNORE the position for some time and let it do what it is supposed to.

2. 7.5% return is on your option position really is not a lot when you consider wide spreads on LEAPs and commissions. The max profit on your position is over 100% so even 14% return is not the goal. It goes back to #1 where the delta of the spread is small such that the position will move very little unless the stock really makes a large move.

3. A spread is not an aggressive play. The spread reduces your net cost and thus your risk and negates much of your exposure to volatility. A spread is a smart play to limit risk but using LEAPS might not be the best choice here since you seem to expect results now.

4. I suggest you look at delta and comapre long calls in OCT and in JAN08 to see how they move and their cost and then compare spreads in the same two expiration periods. Also study what time decay and time premium means and why a spread way out in the future will hardly budge when the stock moves.

Start here and you are on your way....


Quote from CommercEngineer:

I think I have good fundamental ideas, but I'm not making a killing.

I went long 80 jan 08 AAPL calls 5 points ago at 12.90

at the same time, I went short 85 jan 08 AAPL calls at 10.90

Currently the 80s are marked at 14.75
and the 85s are marked at 12.60

so i'm up 7.5% in two weeks, but I want more.

Had I just went long 80 calls, I would have been up 14% which is a much better return.

I figured the spread was the more aggressive way to go, but it doesn't look like it played out that way.

Am I missing something? Can anyone think of any trades that would have performed better in this situation?
More...
 
Next time...If you have any money left when your done with this spread...
Stick to a spread that is less that 30 to 40 days out till expiration.
The reason for trading spreads is to capitalize on the time decay of the option. Plus it will limit your upside, but it give you downside protection also. The only thing I would ever use an 08 option would to do a covered call, (Calendar spread) and use the LEAP as a surrogate for the underlying stock.
 
LEAPS atm deltas aren't somehow discounted by time... an atm delta is roughly static across expirations [50] when adjusted for carry. The forward price on AAPL implies a much higher "atm" delta for LEAPS.

There is very little convexity of delta[gamma] in a LEAPS, so perhaps that's what everyone is referring to in their analysis.
 
long calls on OTM LEAPS caries a danger of cash buy-out ( well , probably not in case of AAPL). How much your calls would be at 84 ( nice 20 % premium) ? Four bucks . A loss of 7$ on best possible news !
:)
 
I appreciate everyone's well thought out advice for me.

Just so you know I am not completely full of shit and I actually did put this trade on.

thinkorswim1.png


I should probably sit in the corner of the room with a dunce cap for using 09 calls on INTC.
 
#1, I looked at the difference in cost to enter the spreads at the same levels, but different expirations and didn't see that much of a difference in cost. I figured it was like getting free time. Obviously, it's severly handicapped my ability to make money in the short-term.

I tend to be ahead of the market and wanted to make sure I had time.

#2, I see the stock moving up from here until earnings are announced and then a high potential for a sell off. I then see him appreciating until early January where I expect another sell off. If he moved enough in my direction, I was going to take some off of the table going into where I anticipated the sell off to capitalize on short term fluctuations.

#3, I think the stock over time is going to move in my direction. Because the last support level was $50, I did not want to do shorter term put spreads because 50 is too far out of the money to make real profit.

#4, I have access to TOS. After this last trade, I now better understand how to use the analyze tab.


Here's a question, if I want the ability to take advantage of short term price spikes, but believe in the business behind a stock having good fundamentals to drive a higher stock price over time, what is the best way for me to do that?

Should I just put on separate trades or is there a combo that would work for me?

Quote from FullyArticulate:

Just some thoughts. Take 'em or leave 'em.

1) Why the heck are you trading '08 options? The spreads alone will kill you on highly illiquid LEAPS, and the deltas are practically non-existent. If you had traded Octs or Novs ('06), you would have done very well.

2) A vertical is not "more aggressive", it's less. Me personally, I use verticals to:
a) Reduce the impact of theta. For you, with '08 options, theta is negligable.
b) Reduce the impact of high IV due to earnings or other expected events. For you, with '08 options, you won't be overpaying for IV due to short term events.
c) Adjust my market outlook. If I believe something is going to trade sideways or slowly upwards, an ITM vertical works well.

So, the questions for you are:
1) What time frame did you believe AAPL would trade upwards? If you had a play over a few weeks, you'd be much better served with anything with Dec or prior in expirations. If you had a play over several years, then LEAPS may make sense.

2) How agressively did you believe AAPL would move upwards? If it was VERY, then just buy calls. If it was moderately, then think about a calendar or a vertical.

3) Are you only playing the stock directionally, or are you playing for time? For example, you could get short theta and earn money through a calendar or a butterfly if there was a good chance of the stock moving sideways.

4) Can you get access to an option calculator--one that allows you to put in legs and have it show you a p&l chart at expiration and at various points in time? This would have showed you exactly how much you can expect to make over 2 weeks given the option choices you made.
...

Let's say AAPL rallies to 85 in the next two weeks. If you bought the Oct vertical, you would be up roughly $170. If you bought the Apr '07 vertical, you would be up $50. Big difference!

I hope that helps.
More...
 
Quote from CommercEngineer:

I appreciate everyone's well thought out advice for me.

Just so you know I am not completely full of shit and I actually did put this trade on.

thinkorswim1.png


I should probably sit in the corner of the room with a dunce cap for using 09 calls on INTC.
More...

one thing you did really right was show us your screen...how did you do that and block out net liquidating value? I'd love to show stuff but haven't a clue how to actually do it. I use TOS as well.:)
 
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