Buying calls and puts

D

danjuma

Hello all. For those that successfully trade options by buying calls (when bullish outlook) or puts (when bearish outlook), which is the most effective of these - buying ITM, deep ITM, ATM, OTM or deep OTM?

I am not after the arguments against buying calls/puts. I know the general perception is that selling options is better than buying, but then why do we still have buyers (i.e. who the sellers selling to!), obviously there must be people that buy options profitably over the long-term. Thanks
 
It's just not that simple. You have to take into account your expectations. Each situation will be different. EG Stock replacement-buy ITM options so you are stopped out but the same volume to replicate the stock position. Event, high expectation of a quick move, buy extra just OTM options. The scenarios are endless and there is no "right" position without know what you expect and current option pricing and liquidity.
 
Hello 1245, thanks for your reply. My expectation can be summarised as follows. Example I am bullish XYZ stock and expect it to move up in price in the near term (obviously by exactly how much or how soon is unkown). So I decide to buy say a 3-month call with the expectation of a 5 - 10% move in price, taking the cost of premium into consideration, and of course the fact price might not move at all or even drop, and probability of price moving in the anticipated direction etc, which has been found (from people that buy naked calls/puts as their strategy) to be the most profitable/effective long-term - ITM, ATM or OTM? Thanks
 
danjuma said:
Hello 1245, thanks for your reply. My expectation can be summarised as follows. Example I am bullish XYZ stock and expect it to move up in price in the near term (obviously by exactly how much or how soon is unkown). So I decide to buy say a 3-month call with the expectation of a 5 - 10% move in price, taking the cost of premium into consideration, and of course the fact price might not move at all or even drop, and probability of price moving in the anticipated direction etc, which has been found (from people that buy naked calls/puts as their strategy) to be the most profitable/effective long-term - ITM, ATM or OTM? Thanks
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I know IB has a tool that allows you to see expected Returns (Perf) given a date & a %move. You could experiment with it. If you know your greeks it can help to answer your question. You're talking about time and monyness. You want to MAX(Delta / Gamma) & MIN(Theta). What kind of option best suits these constraints ? Donno ... Btw ATM & OTM I'd say. But I am biased since I never play ITM options. Here is a book for you :


And don't forget to experiment.
Buy ITM / ATM / OTM in Demo & see how they perform.
Learn the theory, deduce, run simulations & experiment.

He told you it's complex.
Options are non linear & multidimensional.
It's not a joke. He didn't tell that for having fun with you.
 
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Hello K-Pia, thanks for your response. By the way, where is the book (or link to the book), nothing shows in you post?
 
danjuma said:
I am not after the arguments against buying calls/puts. I know the general perception is that selling options is better than buying, but then why do we still have buyers (i.e. who the sellers selling to!), obviously there must be people that buy options profitably over the long-term. Thanks
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RE: "I know the general perception is that selling options is better than buying"


There is no advantage of selling options over buying options. Below is a post I made in another thread comparing selling the ATM straddle and buying the ATM straddle. Options are priced very efficiently, both the long and short ATM straddles will most likely expire at break-even.

In the case below the long ATM straddle was profitable while the short ATM straddle lost money.


OptionGuru said:
Forget OI and focus on the premium for the ATM straddle. The market doesn't reward dumb money and will make sellers and buyers earn their money.


Example:
  • SPY at 209.99.
  • SPY July 08, 2016 210.00 Call (bid $0.71 ask $0.76).
  • SPY July 08, 2016 210.00 Put (bid $0.90 ask $0.91).

  • A strangle buyer will pay $1.67 and needs the SPY to finish above $211.67 or below $208.33 to make a profit.
  • A strangle seller will collect $1.61 and needs the SPY to finish in between $211.61 and $208.39 to make a profit.
The above quotes show that the SPY will trade in a price range of about $211.61 to $208.39 until expiration, and on expiration finish at about $211.61 OR $208.39. Both traders will break even unless the market moves beyond what the option premiums indicate - in that case one of the traders will profit.


Long story short - This Friday the SPY will close at $211.61 OR $208.39, give or take a dime.
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:)
 
OptionGuru said:
RE: "I know the general perception is that selling options is better than buying"


There is no advantage of selling options over buying options. Below is a post I made in another thread comparing selling the ATM straddle and buying the ATM straddle. Options are priced very efficiently, both the long and short ATM straddles will most likely expire at break-even.

In the case below the long ATM straddle was profitable while the short ATM straddle lost money.



Thank you OptionGuru for the tip.


:)
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Really study Options before you get into it. No need to buy books or spend $$ on courses. This isn't the 90s. All material is available online for free.
When you start, only risk a small amount to see how PnL works. Oh and don't get cocky. Leverage goes both ways.
 
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