For Directional traders

Quote from Rob on Business:

Nicely explained, Cache Landing, and thanks for your personal reply! It sounds like you are available to be a good coach. Too bad it comes just at the time I can't trade! As you explained, your last workings with straddles/strangles wasn't working - what is the name of the strategy you use now? And, I noted you made good money on ER's. Is it not still a good strategy for you? How does that work? Do you buy a level call and put on the same stock and one increases more than the other diminishes after the gap up/down? I've asked on this site a number of times how to read and access IV on options but, no replies.
You say one needs only $500 to trade your style, but doesn't that style require you to have an acc't size that is big enough to handle exercises of the options you write/sell to open?
I may not be able to reply to anything you send up soon, I'm away on a trip for a week starting tomorrow. Chao.

Happy Trades to you...
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Since I have a few minutes I will reply and you can get to it whenever you want. This might be a bit long.

It sounds like you might have misunderstood me slightly. I said that I started with $500 originally, but that is not what I would recommend to anyone. Good advice for spread trading would be starting with $5,000 (or at least $3,500). When I started with $500 I was younger and an adrenalin junky. I loved the thrill of the game. Huge gains/losses. (e.g. one time I went from $6,000 to $18,000 in 30 minutes)

During that time I loved to find companies that were going to release earning, and I would play straddles/strangles on them. I would only play those that had a history of big moves after ER. Problem is that you are fighting IV constantly. There is no way of guessing how far the IV will drop after earnings. Sometimes I would see the underlying drop 20% and I still wouldn't make enough on either leg of the straddle to beat the IV drop.

Anyway, I wouldn't recommend straddles/strangles to any beginner. They will have you jerking your hair out. I mostly play verticals now. I have a specific strategy but it would take too long to describe it here. The point is. Limited gains are great if used correctly. Limited gains are probable gains. PROBABILITY IS KEY! When I was new to the game I wanted 300% on every play. Now I'm ok with 10-20%/month on my total account value. Trust me. You don't need the 200% gainers. The probability of the 75% gainers more than makes up for the fact that the gain is limited. 15% each month = 535% each year. If you start out at $3500, that's only $15,225 gain your first year. But you'll hit $100,000 within 2.5 years at which time you'll be a lot less concerned about hitting homeruns every trade.
 
Quote from Cache Landing:

I should clarify my positions a bit.

DJX- I am on a bear call spread.

COF- I am in a bear call spread on that one too
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I've got a couple nail-biters on my hands. I'm currently almost dead even on both of them. I'm not down so I have no reason to get out of them, but I'm not up so I can't take profits. One week left to expiration.

CPI data comes out next Wednesday which will be huge for both COF and DJX. Also COF realeases earnings on Thurs. I hope I'm not still in at that time.

Got in on a Feb bull put spread on RIMM finally. I was a little less sure on this one because it had to get down to support before I got filled, so I reduce my posistion to half of normal.
 
Didn't get your answer in time so I put a GTC market sell trailstop of 10 cents.

Just got home from work, only to find that the stock's dropped 0.42, but I was stopped out with yesterday's profits and a $5 bonus.

Looks like I got lucky.

But I've learnt my lesson.

Thanks again for the advice.
 
Good trade! Just remember to keep it coming in steady. Every time I overextend for that extra little bit, I get burned. Never chase pennies. Have a great weekend everyone, and a happy Martin Luther King JR day!!!
 
What term do you usually select and do you go ITM, ATM, or OTM? I'd like to go 2 or 3 months out, so the story can play out, and so theta doesn't bleed me. And a notch or two OTM.

How many directional trades do you make a year? Even with all the leverage it seems that eating the spread on short term plays will really add up over the course of a year. But for those cheaper options, why doesn't everyone use BOX price improvement? A couple pennies go a long way as you get down to the really cheap options. But do you actually use these?

For example, let's say I'm bullish on AMD for the next 6 months. What exact calls would you buy?

Or would you be even more bullish and create a synthetic stock?
 
Quote from luh3417:

What term do you usually select and do you go ITM, ATM, or OTM? I'd like to go 2 or 3 months out, so the story can play out, and so theta doesn't bleed me. And a notch or two OTM.

How many directional trades do you make a year? Even with all the leverage it seems that eating the spread on short term plays will really add up over the course of a year. But for those cheaper options, why doesn't everyone use BOX price improvement? A couple pennies go a long way as you get down to the really cheap options. But do you actually use these?

For example, let's say I'm bullish on AMD for the next 6 months. What exact calls would you buy?

Or would you be even more bullish and create a synthetic stock?
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Who is this question for?
 
Quote from Cache Landing:

Who is this question for?
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You, or anyone on elite trader with insight into directional trading.

I ask about typical term because, while I know we're readier than a dog with two dicks to get into our directional trade, we really ought to look at the long run. While I'd feel like a big swinging dick to buy 200 short-term contracts and control 20,000 shares, if these are nickel contracts, 75 cents commission in and out is 30%, the bid ask is going to take a 50% bite (depending on how you calculate it), and the theta is going to bleed us (though yes there is no free lunch and that is why they are so cheap.) And of course if you're playing this game, you're throwing away another 20 or 40% if you ignore the chance for price improvement from the BOX exchange.

Its tempting to get that extra Friday if you buy an options with 4 days left on it, but then you might end up in this guy's famous situation http://www.elitetrader.com/vb/showthread.php?s=&threadid=51251&perpage=6&pagenumber=1
 
I'm new to all this, but for what it's worth, I started with front-month OTM/ATM options, and lost money on every trade, even when the underlying moved in my direction.

I made the transition to 80 delta ITM calls, with at least 2-3 months till expiry (based on my estimation of how much time the stock would need to make it's move) and I've since found my contract appreciation/depreciation more accurately following the movements of the stock.

True, the b/a spread is quite hefty, but in my limited experience, it's been more consistent and profitable so far.

I'm limiting downside risk by buying close to support and setting fairly tight stops.

Hope that is useful, albeit basic.
 
Quote from luh3417:

What term do you usually select and do you go ITM, ATM, or OTM? I'd like to go 2 or 3 months out, so the story can play out, and so theta doesn't bleed me. And a notch or two OTM.

How many directional trades do you make a year? Even with all the leverage it seems that eating the spread on short term plays will really add up over the course of a year. But for those cheaper options, why doesn't everyone use BOX price improvement? A couple pennies go a long way as you get down to the really cheap options. But do you actually use these?

For example, let's say I'm bullish on AMD for the next 6 months. What exact calls would you buy?

Or would you be even more bullish and create a synthetic stock?
More...

I don't really trade the really cheap options. Don't get me wrong, there was a time when I did, but that was back in my wilder days. When utilizing those options a person has to switch into slot machine mentality. There is a chance to make a huge score, but most likely in the long run you'll lose. The big moves that would create those home run situations are only predictable when they are event related. In this case the IV will collapse and even if the underlying runs in the right direction you'll make no money. Then when you factor in that you can't just get in and out of the trade for free. All factors are against you.

In regards to the b/a spread... It is a good idea to utilize limit orders to narrow the spread. If you trade options on high volume stocks, that spread is usually smaller to begin with. If you were to trade options on SPX the b/a spread is quite large. If that makes you uncomfortable, consider options on SPY as an alternative.

As for me, I usually play credit spreads because I can engineer the trade to work in my favor most of the time. Occassionally I still go long either calls or puts, but that is only if I have a well defined support or resistance and the IV is low. Is these cases I usually don't let them get closer than 3 weeks to expiration before closing the position. I usually start a couple months away. A delta around 70 usually works out ok if IV is low.

I make about 2-3 directional trades a week. I only like to have about 10-12 positions at a time. This allows me to be very picky about what I get into. So figure that out and I make between 100-150 directional trades/ year. Yes I do pay a lot in commissions compared to say a stock trader, but it's worth it.

I'm not bullish on AMD in the short term. I think the $35 level is going to prove to have big resistance. But if you're bullish on them, the APR 27.5 or APR 30 don't look too bad. IV is a bit high, but normal for them.
 
Appreciate the helpful replies. I am using limit orders (and even BOX price improvement orders) in IB's Simulated Trading paper account. Not sure how they simulate all this, but in any event it seems like it takes a while to get filled if at all.

I can only add 2 thoughts. First, we need to think of the costs in terms of percentages of our total portfolio value. Second, any combination or more involved option position will of course, 2x 3x or 4x your commission + spread cost.

Let me put it this way: for illustration purposes, what if you did your (e.g. 120) options trades a year, and then hypothetically sold them 1 second after they filled. How much have you spent to play the game: what percent of your portfolio value are you signing up for as an uphill battle?

And then if you are simply buying calls/puts, what % of the time do you need to be right (directionally) to get back to break even.

One more question, I may need to ask this somewhere else but, the Option Analytics model values coming out of IB's TWS seem super low, anyone dealt with this?
 
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