I understand, thanks. I will take a look at those books.
Box Spread Arbitrage
- Thread starter chicagodon
- Start date
I understand, thanks. I will take a look at those books.
Indulge me for a second if you will. If I have to be directional, and I'm a good momentum swing trader, meaning I buy breakouts, then what are the benefits of using options vs just buying the stock? Wouldn't IV be increasing as its breaking out thus I might already be giving up some juice or buying on high volatility?
I guess partly you made my point, if someone is a good trader, as it appears you are, then why are you playing primarily options? I get the leverage standpoint but that can't be all?
Also I wish there were still boarders or B&N around so I could check out the book before I bought it lol
In that example the advantage of buying options vs the common is leverage. You can use a small amount of money to buy lots of deltas. The reality is that option buying in general, overtime, tends to give up edge, so you need to be right quickly, because of time decay. Also, option buyers tend to get sloppy. They say things like I can only lose $0.50. But then they lose $0.50. When they are right, they get out for small gains. When they are wrong, they don't take quick loses.
1245
The advantage is stops. When I buy an option vs stock, I'm paying for the right to defer my stop. We all value things differently. For me, the value of a stop is priceless. What I mean by that is, the right not to NOT get stopped out of a trade.
Example: XYZ is trading at $100. Let's say the stock is breaking out. The whole world see this of course but it's still a good trade. Say I buy 100 shares at $100 and put my stop order at 96.00. Now I'm not looking to flip this for 5 pts, I want to make 15 or 20 pts or more. But this is one volatile stock. So now I'm long at 100, it goes to 103 and a few days later some analysts mumbles something about valuation and downgrades the stock. I could give two shits what some guy at "our research is worthless, inc" thinks about valuation but it does pull the stock back to 95.00 over the next few days. I get stopped out at a 4 pt loss. Sure enough, that was the swing low and it rallies back up, takes out 103 and sure enough, goes to 120....130....140....150..etc.
The other scenario is, I buy the DITM call, say the 6 month 90 strike call for 11.00. There is no decay on this option. I'm basically long stock. My risk is 11.00 if the stock were to collapse, but I would probably get out at 5 or 6 pt loss. So now the stock pulls back to 95.00. I keep my call as it's still trading at 8.00. Stock then rallies to 110...120...130...140..etc. I get out at 120 lets say and sell my call for 30 pts that I paid 11 for.
So in this example, I purchased the right to not get stopped out of my trade. Technically that right cost me 1.00 over 6 months. Or about two cents a day. Sure, one could say I bought the call for the leverage, but that is not how I price this opportunity. I price the value of the stop. You have to understand no matter what you are trading, the market is very messy these days. Even the BEST trades are going to shake you out. Look what TSLA did before it shot to 155. That was cruel. But that is what the market does today.
Now before you say, well if I get stopped out I'll just get back in. Well, how many times are you going to do that? Twice, three times, 5 times? Trust me, the market will take you out 5 times and then double. It's called murphy's law. You'll lose 5 times what your original stop was and still won't catch the move.
It's all about choice and what you value. I value not getting stopped out. My calls tend to be good. I do obscene amounts of spreadsheet work to get into the right trades and I trust my decisions. What I don't trust is the noise to follow. I can't control the rumors, the upgrades, downgrades, the chatter on CNBC, the rumors that some hedge fund is putting out there. However I also don't want to say "f*ck it" and not use a stop. That's how guys go from trading into selling used cars.
At the end of the day you have to make a choice. Nothing is free. You have to decide what you want and what you are willing to give up to get that. It's no different then any other decision you make in life.
Try the "look inside" feature on Amazon. It's like going to B&N without leaving your couch!
Here's a trip down memory lane. I thought you might like reading this from the old days:
http://money.cnn.com/magazines/moneymag/moneymag_archive/1998/04/01/240376/
Always such good contribution.......I remember the first time i started learning about options... at that point i became literally fascinated with them. I think if nothing else it gave me a better dimension on life to be honest.. One thing i can say is you can express your self in only two ways when trading the underlying.. long or short.. nothing in between... Options are instruments in which you can derive your profit from a few other factors on top of direction. I can make so many different expressions with options that i just can't make with underlying...
You can't pre event trade with the underlying.. IE.... take a position on the anticipation of the event without actually trading the event
get unlimited reward without static stops like Mav talks about
make money when nothing happens
take a long or short delta position in a fly, and kinda be right about direction and still make money
you can trade the SPY stay super super small, trade against either a discretionary market view, or a backtested, optimized, walk forwardeded model... and use debit spreads, outright premium purchases and/or butterflys to express delta views.. i've tried every complex strategy just for the sake of it i think... but when it comes down to it.. i only sell premium in two respects.. long calenders, long butterflys... limit risk in a absolute way when selling premium.. I think my biggest lesson is trading less has a huge advantage to it..
Agree with all Mav had to say and what you have expanded upon.
Are you not a fan of verticals? I have done well on them generally, though timing was out once and that was a bit frustrating.
I opened a put vertical in TLT with the near expiration like 8 days away so I opted for the next one. Three point strike spread, by the first expiration it had reached the lower strike and then traded through another 5 points. So the sold leg 5 points ITM and the spread theoretically worth 3.00 but trading at 1.90 - 2.00 thereabouts, inching up to 3.00 in expiration week. Most frustrating trade I ever put on.
I didn't think I should start a new thread for these 2 questions so sorry they dont have anything to do with a box spread...
Basically I'm still fairly new to trading options, I wanted to get everyone's opinion on my 2 trades and know if there was a better way to actually do them.
1st Trade
GMCR Call Spread Oct 80/90 - I put this on 8/20 for a debit amount of $4.55c
The long call cost me $7.70
The Short call gave me $3.15
As of the close today, this spread is about $5.99
I also bought a Oct 82.50 Call at $6.30 the same day today it closed at $9.95, not part of the above strategy, but more of a way to learn which strategy might work out better.
2nd trade
WYNN Oct Call Spread 140/150 debit $3.40 today closing at $4.15 entered 8/19
I'm obviously bullish when I entered the trades, and did Oct to give me a little bit of time for the trade to work.
However I'm also finding I prefer to be a momentum breakout trader, so maybe I shouldn't be going so far out (less then 5 weeks)?
Or should I just buy back my short call and stay long the other calls and just trail it up? The naked call I have was more of an experiment.
I guess part of my questions about trading options is if I'm playing a momentum type stock with a breakout level and if I had been long the stock knowing I would have sold my stock at a loss of say $76 (GMCR) would it just make more sense for me to buy naked calls with a delta of .70+ instead of using a call spread and just sell it if it violated that $76?
Meaning if I am long 1 call with a delta close to 1 and my stop for the stock would be $5, could I expect to lose roughly $500 on the call as I would being long 100shs of the stock?
My brother in law is the one that gave me these trade setups, he is a professional equity trader. I am working fulltime so can't really monitor the market tick for tick, so I know for example he's sold some of both (he doesn't trade options), so maybe I should just be looking to play the naked calls or maybe I should just buy back my short when the position of the long call gets close to ITM like GMCR?
Sorry for such newb questions just looking for a little friendly advice and knowledge.
Basically I'm still fairly new to trading options, I wanted to get everyone's opinion on my 2 trades and know if there was a better way to actually do them.
1st Trade
GMCR Call Spread Oct 80/90 - I put this on 8/20 for a debit amount of $4.55c
The long call cost me $7.70
The Short call gave me $3.15
As of the close today, this spread is about $5.99
I also bought a Oct 82.50 Call at $6.30 the same day today it closed at $9.95, not part of the above strategy, but more of a way to learn which strategy might work out better.
2nd trade
WYNN Oct Call Spread 140/150 debit $3.40 today closing at $4.15 entered 8/19
I'm obviously bullish when I entered the trades, and did Oct to give me a little bit of time for the trade to work.
However I'm also finding I prefer to be a momentum breakout trader, so maybe I shouldn't be going so far out (less then 5 weeks)?
Or should I just buy back my short call and stay long the other calls and just trail it up? The naked call I have was more of an experiment.
I guess part of my questions about trading options is if I'm playing a momentum type stock with a breakout level and if I had been long the stock knowing I would have sold my stock at a loss of say $76 (GMCR) would it just make more sense for me to buy naked calls with a delta of .70+ instead of using a call spread and just sell it if it violated that $76?
Meaning if I am long 1 call with a delta close to 1 and my stop for the stock would be $5, could I expect to lose roughly $500 on the call as I would being long 100shs of the stock?
My brother in law is the one that gave me these trade setups, he is a professional equity trader. I am working fulltime so can't really monitor the market tick for tick, so I know for example he's sold some of both (he doesn't trade options), so maybe I should just be looking to play the naked calls or maybe I should just buy back my short when the position of the long call gets close to ITM like GMCR?
Sorry for such newb questions just looking for a little friendly advice and knowledge.
The day it occurred to me that a long call was essentially long stock with an "invisible" stop was a day my trading got a lot better. Indulge me, though -- do you try to account for sub-unity delta as well as slippage when comparing a long DITM call to long the underlying? It seems that in the example you gave you paid $11.00 ($1 extrinsic) but you didn't get 100 deltas, either.