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Buying options...
- Thread starter mizhael
- Start date
Quote from mizhael:
Hi all,
Let's say one wants to buy some puts, out of the whole option chain, he decides to buy March 20, and then there are strikes to decide. How should he choose which one to buy? What type of analysis can help select the best put to buy?
Thanks!
huh? didn't you decide to buy the March 20 puts? It depends on what you're buying them for. A speculative move that the underlying will fall hard? Hedging a newly put on stock position? attempting to protect a profit? Spreading off risk on an existing short put?
Quote from mizhael:
Hi all,
Let's say one wants to buy some puts, out of the whole option chain, he decides to buy March 20, and then there are strikes to decide. How should he choose which one to buy? What type of analysis can help select the best put to buy?
Thanks!
The reason the person who replied was confused is because you described the options as "March 20"
Very few people think you are referring to 3/20/2009. The phrase you chose means (to most) an option with a Mar expiration and a strike price of 20.
Mark
I think I understand your question. I do not normally buy puts or calls outright. My best advice is to buy ATM or slightly ITM puts or calls and buy them three months out. Suppose XYZ is trading at 30, and you expect this stock to take a dive. I would buy June 30 put. You have to set yourself a target price in which you will exit. Suppose you pay 10 for one contract--$1,000.00. Now suppose within the next month, XYZ goes down to 25. Your put will be worth 15 plus any time premium. At this point, you are up 5 points or so. You have made 50% within one month. Personally, I would exit and pat myself on the back. You also need to consider a downside target as well. I wouldn't hold this thing to expiration hoping for a comeback if XYZ takes off.
Quote from mizhael:
Hi all,
Let's say one wants to buy some puts, out of the whole option chain, he decides to buy March 20, and then there are strikes to decide. How should he choose which one to buy? What type of analysis can help select the best put to buy?
Thanks!
Maximum 1 strike OTM.
Quote from dagnyt:
The reason the person who replied was confused is because you described the options as "March 20"
Very few people think you are referring to 3/20/2009. The phrase you chose means (to most) an option with a Mar expiration and a strike price of 20.
Mark
Thanks for pointing that out. I am really a newbie... as you can see from every aspect. It's so nice of you guys on this board giving me invaluable advice...
Quote from mizhael:
There must be a mathematical optimum as for which option to choose to purchase, once an objective function is defined. How shall I formulate this objective function to evaluate the performance of option?
Perhaps in theory.
But you want to buy an option? Why? Based on what?
You think the stock is moving lower? How much lower? When will the move occur?
If you have an opinion you want to bet on, then you can choose an option based on your prediction. If you believe a stock is moving down to 35, do NOT buy the 35 puts. Buy something that will have value, such as the 40s.
Buying options is a loser's game, IMHO. You must predict too many thinks accurately to win.
Mark
Quote from mizhael:
Hi all,
Let's say one wants to buy some puts, out of the whole option chain, he decides to buy March 20, and then there are strikes to decide. How should he choose which one to buy? What type of analysis can help select the best put to buy?
Thanks!
Ok, I see what you meant now. It still really depends on your outlook for the underlying stock. I'm not really big on just buying a long put either but if thats what you want to do then you need to decide on your outlook for the stock. Do you think it will fall hard? If so then you probably want to look at some of the out of the money puts. Are you unsure of how much you think the stock will fall? Then you may want to buy an at the money put. I'd say study the greeks and determine how big of a position you want. Also should compare the implied vol vs historical vol on a site like ivolatility for one. If the IV is high in relation to historical vol then most likely you're going to pay extra for that put. Also have to determine how soon you are expecting the underlying to drop. Each day your long put will probably lose a little value (unless it's deep in the money or so far out of the money that it's practically worthless). These are a all some of the reasons many people are opposed to just straight up buying puts or calls. But if your analysis is correct and you do end up picking the right strike price then it can really pay off, it's just that you've got quite a few stars that have to line up correctly.
Quote from mizhael:
There must be a mathematical optimum as for which option to choose to purchase, once an objective function is defined. How shall I formulate this objective function to evaluate the performance of option?
Is your background in Operations Research, Mathematical Finance?