Is buying naked calls a stupid way of being long?

[jr07]

Hi,

I thought buying calls of stocks I am bullish on was a good way of leveraging a long only strategy

However, I have noted that

1. the spreads on the calls are so large that as soon as you have entered you are already losing money and

2. the calls loose value extremely fast, specially in weeks like the past two.

Is buying calls instead of the stocks themselves a stupid way of being long? I was under the impression there would be some benefit in being able to put fewer money to work for more quantity of stock, kind of like having greater margin....


J

 

[nazzdack]

Quote from jr07:
----the spreads....are so large.....
----the calls loose value extremely fast, especially in weeks like the past two.
----I was under the impression......

1) Any type of speculative-oriented strategy has benefits and drawbacks. You seem to be experiencing the drawbacks right now.
2) When volatilty spikes up, bid-ask spreads can widen out. Option premiums can decline drastically when volatility declines.
3) Instead of outright purchases; consider spread combinations, covered-writes, put options and pay closer attention to the trend of the implied volatility.

 

[LeeD]

There is a recent thread on these forums which discusses this exact issue in great detail. In brief:

1. You need a substantial price move in your favour before you start making any money by executing an option.
2. Option price is primarily determined by volatility. So, you buy options in expectation of volatility increase. Volatility fell in the last 2 weeks. Hence options fell in value.

Options also loose value as they approach expiration.

Conclusion: If you want to express view on a stock price and not volatility, it's better to go long or short actual shares, not options

 

[stoic]

Buying calls is not a stupid way of being long. However, being long calls ATM or OTM would be more speculative then ITM or Deep ITM. The deep ITM call will have very little Time Value thus little time value decay. For me If I bullish on a stock and feel the long call is justified I put on a bull debit spread with the long side ITM. Most of the time the short side subsidizes the time premium in full and then some. I give up the unlimited up-side but increase the odds I'll turn a profit.

 

[stoic]

Quote from LeeD:

2. Option price is primarily determined by volatility. So, you buy options in expectation of volatility increase. Volatility fell in the last 2 weeks. Hence options fell in value. [/B]

Wrong!!!

Option price is primarily determined buy the price of the underlying. Volatility if one uses the VIX is about the same as it was 2 week ago with a spike up in the middle. The VIX is up over the last 30 days.

 

[LeeD]

Quote from stoic:

Option price is primarily determined buy the price of the underlying.

I respectfully disagree here. Around at-the-money point, where the most liquidity is, the option premium is determined primarily by the volatility and time to expiration. It's only when the price of the underlying experiences a substantial move, the contribution of the difference between the strike and the current price of the underlying becomes substantial.

 

[livevol_ophir]

Yes. Options are vol first, delta second. Also, don't pay NBBO, put a limit for something at least a little better. And please don't <i>ever</i> use a market order.

When a market order comes into the floor through a broker, we literally laugh about it. Even the announcing broker gets embarrassed.

When you trade an option you are trading vol, whether you know it or not, that's your position.

 

[charts]

Quote from jr07:

Hi,

I thought buying calls of stocks I am bullish on was a good way of leveraging a long only strategy ...

1. Don't trade options before learning well their fundamentals!
2. When implied volatility is high selling premium is favored; when it is low buying premium is favored
3. When buying premium longer term expiration is favored; when selling, short term expiration is favored
4. Low open interest, low volume options have higher spreads; always options' relative spreads are higher than underlying's spread.
5. Never over leverage yourself: be risk averse!
6. Never trade options when you don't have an educated opinion about the underlying's and market's direction, and without knowing the calendar of main events!
7... etc. ...

 

[rosy2]

let me make it simple ....
sell upside calls
buy downside puts

 

[livevol_ophir]

Quote from rosy2:

let me make it simple ....
sell upside calls
buy downside puts

That's guaranteeing de-scalping yourself in vol. Not a good idea. All of us on the floor make a living b/c people do that. We'll buy some call from you (cheap vol), sell you some puts (high vol), hedge and walk away with a vega scalp.