Buying Naked Calls

[destriero]

In this context it's the edge loss from trading the deep ITM in lieu of the OTM (equivalent). You're looking at a bear call diagonal at a 14.5 debit (20-wide) but it's deep ITM so you trade the put diagonal (OTM) at a 6 credit.

The NBBO mid may reflect a 0.50 edge loss on the call due to being ITM as flow is always OTM.

They should fill equal, but always trade the OTM position when possible.

 

[Cabin111]

Didn't read the whole thread. But clearly you should NOT be trading options. You asked for a book. Here's one...New York Times best seller for a loooong time. Start with this before you seek options.

The book is old, but the concepts still apply...

 

[ironchef]

Didn't read the whole thread. But clearly you should NOT be trading options. You asked for a book. Here's one...New York Times best seller for a loooong time. Start with this before you seek options.

The book is old, but the concepts still apply...

Actually we like to be those that start with a B, not a M. i.e., guys like Soros, Paulson, Simons, @destriero .....

The book is old, but the concepts still apply...

 

[Pkay]

I am curious how far ITM y'all would go? If you have a stock with a solid upward trend and news is all positive so there a solid chance it will still Gain another 5-10% for example in the next couple months.

Do you go more off entry Price and what % that possible loss is to your overall account?

Do you have certain stocks you always follow for this type of option?

Do you base it more on RSI below 30 on a 90,120,180 day RSI trend?

Sorry for the basic stuff... Just starting to play with some strategies here on my paper money account to see if I can come up with my own tweaked strategy

Good questions, I've been wondering the same myself. This is going to be my personal strategy:

1. Look for stocks in a strong up trend.

2. Wait until they pull back and RSI is oversold.

3. Buy an OTM option with at least 60 days to expiry.

NB: this is just my personal opinion, I'm a newbie so most likely don't know what I'm doing. Just thought I'd share the bare bones of my "strategy".

 

[Pkay]

Personally, I go for the strikes with the highest ratio of intrinsic value to time value for my trade duration without going silly, so usually within a few daily ATR.

I read somewhere that intrinsic value should be no more than 1% of the underlying (as a rule off thumb).

 

[Pkay]

I'd agree with much of the above by nooby

It's very, very rare I'll buy a single option; unless it's part of some larger Option Strategy (A Jade Lizard, IC's, Spreads, etc). Though I would buy them as part of BUYING a cheap IV credit spread if IV is really depressed. But generally, if it's not one of those situations? The math says I shouldn't be buying them.

But if I were to buy one directionally (I think the last time was at some point in 2018)? I buy as Deep ITM as it makes sense from a Capital Allocation standpoint, and a little bit out in time.

My reasoning is this ...

The higher your Δ (Deep in the money calls and puts)? By definition, that means that when the stock moves, your option also moves in a similar value for $'s. The lower your Δ (Out of the money options)... the stock can move in your preferred direction? But you will not be making the same $ value, unless you time it PERFECTLY so as to get a simultaneous γ explosion.

So if the stock is at $10.00

And there are $20 calls, but the Δ is only 0.10? Your option will only gain $0.10 for every $1.00 in stock movement (not accounting for γ movements). This is why people cry "The Option market is fixed? I bought a $20.00 call, and it went in my direction, but I didn't make any money!! It's a scam!"

No, they bought a sucker bet, and didn't get a gamma explosion at the same time, and they didn't understand the math of what they were doing.

Basically, people are lured into buying what they think are "cheap" options, because they are only 0.05, but they don't really know what they are doing.

Conversely ... if the stock is at $10.00?

And there are $5 Calls, and the Δ is 0.90? Then the option will gain $0.90 for every $1.00 of stock movement (not accounting for γ movements)

This is why it makes more sense, mathematically ... to buy more expensive options, because in the long run ... they're more math advantageous to what you are trying to do.

That's Delta ( Δ ) in a nutshell, and why if you are going directionally? And buying? You want those Δ numbers as high as possible.

Wow, great post. I now finally understand how to assess delta and why it's important.

I was thinking of starting out buying slightly OTM options but now see that I'm better off getting an ITM option. What is the minimum delta you'd recommend if one is looking at buying options with at least 60 DTE?

 

[Pkay]

There's a 5th basic contributor profile: Mean people, aka assholes.

 

[Pkay]

There's a 5th basic contributor profile: Mean people, aka assholes.

 

[Pkay]

@Bushwacked9
Finally, a sensible comment. For the benefit of us newbies could you please expand on how this would work? Thanks.

have you considered ATM-OTM verticals? If you have a very clear profit target and you don't expect massive rallies then this could be a safer play.. you cap your upside but you further reduce the downside.

 

[nooby_mcnoob]

I read somewhere that intrinsic value should be no more than 1% of the underlying (as a rule off thumb).

That actually works out really well now that I think about it!