Confused about Option value.

Quote from themadride:


Unless I misunderstood you, it seemed like you were saying that making the same trade with the assets will be more profitable than with options.
Please expand a little on this if you can. Thanks very much.
Scott
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Trading just the stock may not be more profitable on a ROI basis, it's just the little bit more hassle trading the ops, and fighting a b/a spread that may take 10-20-30% of your gain. Short term stock and futures trading don't have quite the "friction losses", as op trading.

No risk without reward of course - those gains (congrats) can start out with or change to even larger percentage losses...in a HURRY! I've made more, in a shorter time, in options than any other things I've traded. But, sadly, I've also suffered some breathtaking losses, when trade after trade went bad (the smoke clears and you sit there stunned at how fast it happened).

The thing about trading long options now, is that you are paying for some horrendous volatility, that sometime will come crashing down. Those OTM calls may actually lose money, even as the underlying stock moves up. Now that's depressing! You may want to look at some spreads that match your expected targets for the stock moves. There are lots of things you can do with them and "trade around" the positions to try and capture a few gains. I bet Spin has a few good ideas!
 
Thanks for the thoughts, concerns, and encouragement.

I made nice gains on Thursday and Friday with trades that I felt confident about....but as of right now I dont know where to position myself for Monday.

I'm trying to be somewhat conservative. I set aside a specific portion of my portfolio for "day trading" and then I'm only risking small portions of it at a time, so that I scale into the options just like I would scale into a stock. I don't know if this is a good plan or not. So far so good. 2 days. hahah. I guess time will tell.
 
Scott,

No need to apologize for asking questions.

You're absolutely right that on a same dollar investment, the return from the calls is higher. And if your capital is very limited then options may be the only path for you. If not, the underlying will provide a better profit (not ROI).

As a Pattern Day Trader (PDT), you get 4:1 margin intraday (thought technically, I think it just went to 10:3 since some, if not all tradeables got bumped upto 30% from 25%. On 25%, buying 400 shares involves $2,385 for margin. If the stock went to $25.50, that's a gain of $660 (4 x 1.65).

The delta of the Nov 25 call was about .50 when you bot it. The stock moved up $1.65 and after the effect of delta and wide B/A slippage, you netted 55 cts per 100 shares for a $1.65 stock move.

And if you add time (decay) and IV change this can end up being even worse.

Without a doubt, the ROI on the call purchase is much higher. But I'll gladly take the lower ROI and the extra $440.
 
Be careful. As an option writer (stopped short selling all the low hanging fruit gone, IV too good to pass up) I have seen contracts I wrote lose 32% of its value in 1 day. It is a sellers market in my opinion right now.

Less liquidity, greater spreads and right now with this high IV you are paying a big premium for these options.

Lots of low hanging fruit right now for the writers (eventually this will end though)

That 880 bet could easily become 0 dollars, poof! 100% loss.

or 440 dollars poof! 50% gone in 3 days!

My opinion the probability is not in your favor unless you really have a strong grasp of options and the underlying equities in question that the options are derived from.

Good luck, I am gonna milk this options cow for now while the getting is good.
 
Well,

I try to have a pretty good understanding of the stocks themselves, but I know market volitility and technicals effect the options an a lot. That is why I've allocated only a small part of my portfolio to this "experiment".

At any rate, the last few posts are so far above my head that I reread them each a few times. I think I'll go to sleep and then reread them a bunch more tomorrow. haha.

KINGOFSHORTS:
Your post is obviously quite bearish. Do you think the market has hit a bottom? If so, then why not ride the intraday (or a few days if neccessary) ride on stocks that I believe are strong?
If not, then why? And what would you do if you were committed to only buying puts and calls (for now...at my current knowledge level)?


EVERYONE:
Thanks for clarifying on the profit (or gains) issue. If I understand you guys now....you were comparing the gains from a contract of 100 shares with actually owning 100 shares...NOT from an equal dollor amount investment either the contracts or stocks.

Great educations so far.
Thanks.
 
What would you do if you were committed to only buying puts and calls (for now...at my current knowledge level)?
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If you can turn a profit while only buying puts and calls then continue doing so. Never execute a strategy that someone else claims is better or is having success with unless you fully understand it and feel comfortable with it.

EVERYONE:
Thanks for clarifying on the profit (or gains) issue. If I understand you guys now....you were comparing the gains from a contract of 100 shares with actually owning 100 shares...NOT from an equal dollor amount investment either the contracts or stocks.
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Yep.
 
As long as you are fully aware that it is at risk money and you have the potential to lose 100% of your investment, I say go for it. You seem to be using a small amount of capital. Good that you have the take the money and run attitude. Too many people lose money on options bypassing the chances to make a decent return while they waited for the big run only to see the value of their contracts disappear quickly before their eyes.

I highly recommend you buy this book called

"Understanding Options" By Michael Sincere.
 
I spend a good portion of my day today researching "vertical spreads" to try to offset some of this priced in volatility. At any rate....I think I understand them almost completely..EXCEPT one huge question:

How do I take my gains from a good vertical spread play? Do I sell the whole spread again just like an option?

Thanks.

And...just fyi...I understand the 100% risk. Everyday so far I have been nervous and stressed feeling like any second I will loose everything I have wagered. That is probably part of the reason I've been pretty good at taking my gains at modest levels. Yes risky, yes stressful, ......yes a blast!
 
Quote from themadride:



How do I take my gains from a good vertical spread play? Do I sell the whole spread again just like an option?
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This is a very basic item.

If you don't know how to exit a trade, how can you open the trade in the first place?

The answer is 'yes' - you enter an order to sell the spread. But DO NOT trade each option separately. Be certain you enter an order to sell the spread (or COMBO) with a LIMIT order.

If you speak to your broker (as opposed to online" tell him: "I want sell to close, the following position, as a spread order. I want to collected $x per spread, or better."

Then tell him the position and make sure that he get's it: That he sells your long options and buys your short options in a SINGLE spread transaction.

Mark
 
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