Buying deep OTM call options on value stocks

[El OchoCinco]

ATM options are really expensive, so you never make 20x with ATM options.

This quote kind of shows your incorrect thinking and maybe why you are having trouble making money with options. No such thing as "really expensive" when all you are doing is comparing premiums. Newbie attitude that you would rather pay $0.50 for an option than $5.00 even though you are most likely going to lose your money. It is a newbie approach to finance and I always thought anyone trading should first learn about fixed income products to truly understand risk and how risk is priced before looking at equities. That is where people learn that a $101 par priced high rated AAA bond is not more expensive than a $20 par priced D rated bond.

Unless you see how wrong your above statement is, then you will have trouble making money or understanding how to make more informed trading decisions.

 

[ScroogeMcDuck]

That was just shorthand for saying you can't buy as many of them, so your max gain is lower when you buy ATM options. If you just think the underlying will just beat the market a little bit, then it's better to buy the ATM or ITM call. If you have a strong view that the underlying is going to go up by 33%+ in a year, then you should buy the OTM call. If you have a strong view that XYZ is not going to default, then you should buy their $20 priced D rated bond. If you are a pussy, then you should buy JNJ AAA rated bonds with 0% YTM.

 

[El OchoCinco]

You just backed into bullshit thinking but go ahead and still think you can succeed playing in the OTM kiddie pool. I bet your are a genius that always picks those stocks that jump 33% while scanning porn from your yacht in the Bahamas.

To say your max gain is lower when you buy ATM options is just a childish way of saying "I don't understand finance".

message received!

 

[Sig]

That was just shorthand for saying you can't buy as many of them, so your max gain is lower when you buy ATM options. If you just think the underlying will just beat the market a little bit, then it's better to buy the ATM or ITM call. If you have a strong view that the underlying is going to go up by 33%+ in a year, then you should buy the OTM call. If you have a strong view that XYZ is not going to default, then you should buy their $20 priced D rated bond. If you are a pussy, then you should buy JNJ AAA rated bonds with 0% YTM.

Again you're missing optioncoach's point entirely. A AAA rated bond that yields 2% may have a far higher risk adjusted return than a junk bond that yields 80%, and the opposite may also be true. The return or potential return give you no information on the value of the investment (or if you're a pussy or not, for that matter). If you don't understand the concept of risk adjusted return you're simply randomly throwing money at the market and fooling yourself into thinking you're making rational choices, no matter if you're buying options or bonds.
I'd highly recommend you take a basic finance course, there are a number of free MOOCs taught by top notch professors. You'll enrich your life and have a bunch of ah-ha moments, one of which for me happened when I fully grasped the risk adjusted return concept and everything that went along with it in modern portfolio management. Well worth the investment of your time for you personally, and it will be great to have you contributing when you understand the underlying ideas behind what you're discussing.

 

[ScroogeMcDuck]

Modern portfolio management and the whole idea of being able to quantify risk-adjusted returns is bullshit. Volatility is not risk. Volatility is opportunity to buy things for less than they're worth.

 

[ScroogeMcDuck]

As warren buffett said, "I prefer a lumpy 15% to a smooth 12%". Sharpe ratio is meaningless unless you have a short term need to liquidate.

 

[newwurldmn]

As warren buffett said, "I prefer a lumpy 15% to a smooth 12%". Sharpe ratio is meaningless unless you have a short term need to liquidate.

Very few traders can afford to not worry about volatility. If you can do it, there are lots of opportunities in the market.

 

[El OchoCinco]

Modern portfolio management and the whole idea of being able to quantify risk-adjusted returns is bullshit. Volatility is not risk. Volatility is opportunity to buy things for less than they're worth.

WTF is talking about modern portfolio management..we are talking about your ass backwards viewpoint on how a far OTM option is better to sell because you can do more of them than ATM options. There may be reasons you prefer to do OTM options for your own trading but the reasons you cite are just below high school level finance. And your last sentence is too stupid for me to try and dumb myself down to answer

 

[Sig]

Modern portfolio management and the whole idea of being able to quantify risk-adjusted returns is bullshit. Volatility is not risk. Volatility is opportunity to buy things for less than they're worth.

There are many legitimate shortcomings of modern portfolio theory, but since it does not claim that volatility is risk it doesn't make much sense to criticize that. I happen to believe that the whole idea that you can perfectly hedge delta is bullshit, but since that has nothing to do with modern portfolio theory it's pretty irrelevant in a discussion of same.
You're so very very close with the understanding that things do have a "worth" and at times may be priced above or below that worth. You just need the finance, and possibly the statistics, background to close the loop and fully understand it. Really, take a couple courses, you'll be glad you did. Don't worry, they won't brain-wash you and in fact we all welcome criticism of theories, it's a fundamental part of the scientific method and is what allows us to make the theories better. However you have to both know and understand what the theory says to be able to critique it, in this case you clearly don't.

 

[ironchef]

ATM options are really expensive, so you never make 20x with ATM options.

I just told you the result of buying 1 yr ATM LEAPS call for WFC on the same date you bought your OTM. At expiry, the ATM investment would have gone up 20X, i.e. 2000% profit, instead of the 3X you quoted for your DOTM.