If I thought the S&P was going to 1125 by end of year, what call option to buy?

option911 · Oct 10, 2009

I dont understand why he has to make it so difficult on himself. For someone that is new to the business and doesnt understand options very well, I would say:

1. Dont trader them until you really learn how they work

2. The simpliest and easiest strategy would be a synthetic covered write. I might buy Mar or Apr 100 calls, and sell the Nov 112 calls. After Nov exp I might sell the Dec 112, and then Finally the Jan 112s. This is obviously over simplified, but I always thing the best place to start with options is from an area that produces premium.

3. As I learned I might try some sort of condor possibly.

But seriously, read and learn.

Mark

http://www.option911.com

christianhgross · Oct 10, 2009

Quote from option911:

I dont understand why he has to make it so difficult on himself. For someone that is new to the business and doesnt understand options very well, I would say:

1. Dont trader them until you really learn how they work

2. The simpliest and easiest strategy would be a synthetic covered write. I might buy Mar or Apr 100 calls, and sell the Nov 112 calls. After Nov exp I might sell the Dec 112, and then Finally the Jan 112s. This is obviously over simplified, but I always thing the best place to start with options is from an area that produces premium.

3. As I learned I might try some sort of condor possibly.

But seriously, read and learn.

Mark

http://www.option911.com

I completely agree on point 1.

But on point 2 what would bother me is that I am assuming that there will be a pulback before Nov.

The strategy could blow up in your face if the pullback were to happen around Jan or Feb.

I also would not be selling 112. This month I played naked the ES 1180's and would not be playing any closer. Next month I will probably be playing something a bit higher.

ang_99 · Oct 10, 2009

A lot of good info to digest guys, thx.

With options, I feel like there are to many smart guys in the room which is why i stay away.

christianhgross · Oct 10, 2009

Quote from ang_99:

A lot of good info to digest guys, thx.

With options, I feel like there are to many smart guys in the room which is why i stay away.

The problem with options is that they are bets, and it is a zero sum game. That means you have winners and you have loosers. Because it is a bet what you have are gamblers, and when you have gamblers you have "magic ways".

I am not saying that on this thread there were snake oil salesmen. What I am saying is that options without understanding them are prone to have snakeoil salesmen. This can be very very confusing for a beginner.

What I would do is papertrade options. Get yourself a broker where you can do this and play for about a year. And more importantly keep a diary of what you did. That way when you analyze what worked and did not work you can accurately follow your logic. Most people in the market loose money because they delude themselves. Don't delude yourself, accept that you lost money and move on.

ramaTrade · Oct 10, 2009

If you are 100% sure about the SPY prediction and you can stick to your original plan, then you have nothing to worry about.

Expertise on options won't always translate into gain.

Don't be imitidated by so called smart people.

Hester · Oct 10, 2009

Quote from option911:

2. The simpliest and easiest strategy would be a synthetic covered write. I might buy Mar or Apr 100 calls, and sell the Nov 112 calls. After Nov exp I might sell the Dec 112, and then Finally the Jan 112s. This is obviously over simplified, but I always thing the best place to start with options is from an area that produces premium.
http://www.option911.com

That is exactly what I was going to post. I would just add that if you are unsure when it will go to 1125, you might instead want to do a vertical. Buy a mar call and fund it with another mar call instead of nov. Because if spy goes to 1125 quickly, and goes past the front month call that you sold, you will realize less of a profit or maybe even a loss if your mar or apr call gets called away. But if you think it will be a slow grind up, then I would do what option911 suggested.

ramaTrade · Oct 10, 2009

Quote from Hester:

That is exactly what I was going to post. I would just add that if you are unsure when it will go to 1125, you might instead want to do a vertical. Buy a mar call and fund it with another mar call instead of nov. Because if spy goes to 1125 quickly, and goes past the front month call that you sold, you will realize less of a profit or maybe even a loss if your mar or apr call gets called away. But if you think it will be a slow grind up, then I would do what option911 suggested.

The original question is very straightforward , which options strategy is most profitable at end of year if SPY reaches 112.5 at that time, then nothing can beat long calls.

asiaprop · Oct 10, 2009

fully agree. The question was simple enough. No need for any verticals, covered calls...a simple upside call does the trick. I dont agree with the OP's view of the market but that is not the point under discussion. Simple call or 5-10% upside call with initial delta hedge .

Quote from ramaTrade:

The original question is very straightforward , which options strategy is most profitable at end of year if SPY reaches 112.5 at that time, then nothing can beat long calls.

slapshot · Oct 11, 2009

Quote from ramaTrade:

The original question is very straightforward , which options strategy is most profitable at end of year if SPY reaches 112.5 at that time, then nothing can beat long calls.

I am submitting this fully expecting to be humbled by correction from those who know much more.

As my options-rookie brain understands it, if OP buys calls, then he is really buying two things that vary depending on the contract:

1) time

2) relationship to the underlying

So it would seem to me that he needs to pick a call that is the best value in relation to his bet of what the underlying will do. The best price vs. most potential gain within his proscribed time period.

If I was him, with his stated goals, I would buy calls that have a strike that is currently just a little OTM, so they are cheaper, and hope that they go deep ITM during the projected time period for the move, which is a relatively small time period for an option, right?

I would also not buy them too far out because I don't want to pay for a bunch of extra time. So I don't think June 2010 calls are correct as someone mentione prior.

Nor too short of time because the more rapid decay of short time to expiration makes it tougher to time the move and makes it necessary to get to intrinsic value via ATM or ITM for the contract to maintain much value. So I don't think December 2009 calls are a good plan either, even though they would be cheapest.

Perhaps Feb 2010 calls (or whatever is closest) that are just a little bit OTM currently would give him the best bang for the buck on that bet? And lose him the smallest amount of money if he is wrong since they are cheaper than currently ATM or ITM contracts?

I have noticed the exponential growth of gains that happen to an OTM option that goes past ATM to deep ITM, especially if there are a couple of months to expiration remaining.

(Sorry, I don't have a working knowledge of the Greeks)

Now, would someone who actually has a clue please critique and correct as needed what I just wrote?

galvinlee888 · Oct 11, 2009

Quote from ramaTrade:

Expertise on options won't always translate into gain.

Don't be imitidated by so called smart people.

Completely agreed !!

Most of the "options expert" only make gain in selling their seminar, web sites or books..