First DITM Stock Replacement Buy

L

louisjxn

I am looking into buying my first DITM option as a stock replacement strategy. In order to not make any major mistakes doing this the first time, I was hoping to get some feedback/critiques on my first strategy.get

I want to get DITM calls on SBUX in order to profit from any rise in the stock over the next two months. *My* novice strategy right now is to buy the April16 calls with a $55 strike for around $12.80 each. The open interest is currently $558 with a bid of $12.60 and an ask of $12.85. Delta is currently 0.8629.

This would be the most amount of money I have spent on one single position, so I wanted to see if some of you with more experience could tell me if I am overlooking something, making a mistake, etc. I have made a few mistakes so far in my very short time trading options, but fortunately it has been with very small amounts of money on single contracts.

Thanks for any feedback on this.
 
Looks like your looking at the stable part of the vol surface for that period. Near month vols has come down to what has been the norm. The curve will be following with a lag.

The strike is liquid to buy close to theo. At the end of the day, your trading on direction. Giddyup.
 
louisjxn said:
I am looking into buying my first DITM option as a stock replacement strategy. In order to not make any major mistakes doing this the first time, I was hoping to get some feedback/critiques on my first strategy.get

I want to get DITM calls on SBUX in order to profit from any rise in the stock over the next two months. *My* novice strategy right now is to buy the April16 calls with a $55 strike for around $12.80 each. The open interest is currently $558 with a bid of $12.60 and an ask of $12.85. Delta is currently 0.8629.

This would be the most amount of money I have spent on one single position, so I wanted to see if some of you with more experience could tell me if I am overlooking something, making a mistake, etc. I have made a few mistakes so far in my very short time trading options, but fortunately it has been with very small amounts of money on single contracts.

Thanks for any feedback on this.
More...

Without seeing the menu, the delta appears to be too high, let the gamma earn its keep. If you're certain on the direction, consider putting on a cheap strap straddle (5 to 1 or >). A little cheap insurance never hurt. Trust me, I know from experience.
Cheers.
 
Thanks for the feedback. Since one of my first (albeit relatively small amount) mistakes was buying illiquid options, I want to make sure that I buy calls that I can close out quickly. The extra premium is worth it to me in order to avoid a major loss.
 
louisjxn said:
Thanks for the feedback. Since one of my first (albeit relatively small amount) mistakes was buying illiquid options, I want to make sure that I buy calls that I can close out quickly. The extra premium is worth it to me in order to avoid a major loss.
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Well, that's the rub. It becomes more illiquid as you make more money (deeper ITM).

It is never good to exit under duress. You should consider having bigger cash reserves to hedge your deltas/lock in profits for when things go south.
 
louisjxn said:
Thanks for any feedback on this.
More...
I assume that you mean the 50 strike. What's your purpose for using calls?

@62 compare the stock+ APR 50P to the APR 50C. Don't forget the div.

Compare the cost of holding the call to holding the stock with a hard stop anywhere in the 50s or high 40s.

The call contract has its benefits and costs.
 
louisjxn:
The following is intended to be helpful and not critical:
Do you have a specific plan?
How much are you willing to risk. What will be your trade exit, should you realize your trade will fail.
What is your target exit, or if no exit, then what is your plan if SBUX moves as you "hope"? Will you roll your position up to maintain constant risk, or exit entirely at some point?
Knowing these may help to decide the entry strike and size.

Since you are trying to figure this stuff out, it is wise to keep your position size small! -- May also be wise to keep positions small after you "figure it out" also! For a stock replacement, I typically purchase 70Delta Calls, 45-120 days till expiration, but I only do this on Indexes, since the IV presents less of a headwind, and has less surprises. I look for boring trades, so you may have no interest in this.

Happy learning!
 
See attached -entry is easy, exit is 90% of trading
 

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