Is buying naked calls a stupid way of being long?

[lindq]

Quote from 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.

J

You are correct on both points. And if one doesn't completely understand the impact of volatility on options pricing, then one shouldn't be in that market.

I suggest as a starting point pick a few stocks and monitor the calls. Watch the value of the calls in relation to the underlying, volatility and time.

What you may experience is the frustration of watching the underlying gain in value while the option price decays or is impacted negatively by volatility.

 

[Random.Capital]

Quote from jr07:

...kind of like having greater margin....

Having more margin also means losing more money faster when you're wrong, as you appear to have been if you're long calls during a month when the markets are down ~10%.

 

[asiaprop]

respectfully, you may want to mention the turnover/attrition rate among floor traders (if there still are any left ;-) A lot of the guys do NOT make a living anymore and a handful gets carried out each time vol had its day. I think you look at that business through a little too rosy glasses. Its often a lot of other guys who have the final laugh.

Also, there are times when it makes absolute sense to lift the offer or hit the bid, otherwise vol is simply running away from you. Good example, market open right after earnings (at least there are cases when the spread is tight due to sufficient liquidity but implieds are moving). So I do not agree with your blanket statements.

Quote from livevol_ophir:

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.

 

[asiaprop]

also I believe you are picking some specific scenarios to support your argument. "Generally" moves in the underlying have by far the largest impact on options premiums. You are maybe entirely focused on stocks that experienced a spike or huge sell off in vol (whether vol or moves in the underlying contributes more solely depends on the greeks of the instrument under discussion and not what you think the right textbook answer is). For a lot of other option instruments vol actually almost always contributes less than moves in the underlying. Keyword: Fx options.

Quote from 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.

 

[nazzdack]

Quote from asiaprop:
----specific scenarios to support your argument.
----entirely focused on stocks.....
----Keyword: Fx options.

?.....Confirmation of the obvious, equity instruments are more volatile than debt (interest rate sensitive) instruments.

 

[asiaprop]

generally in pure percentage terms but in rates world people rather look at bp vol (related to distributions). It still does not matter whether we are in equities or fi instrument world.

For the purpose of discussion, a stock's moves can impact the option premium more than changes in implied volatility. Claiming that the vol contribution is always of higher order is simply not true.

Quote from nazzdack:

?.....Confirmation of the obvious, equity instruments are more volatile than debt (interest rate sensitive) instruments.

 

[macrotrader]

The price of an option is calculated in terms of its implied volatility (IV).

Yes, you can use a call for a leverage long position iff

a) you want to trade the underlying longer term (say 1 week minimum)

b) you know whether it is not to pricey in terms of IV


In fact if you have a distinct view on a stock over a few years options can in some cases be far superior to a leverage stock position.

 

[failed_trad3r]

I definately lost some money buying calls in this VIX +30 market even though I guess right.. should have sold a put spread like some ET'rs said

 

[taowave]

You can be rest assured that anytime Vix rises above 30 and you buy calls,you will lose money even if the stock rallies initially..

What one should do is look at the historical level of implied volatility and assume vol will move to that level(or less).At that point it is simply a tradeoff of your delta having to overcome the vega contraction..

Quote from failed_trad3r:

I definately lost some money buying calls in this VIX +30 market even though I guess right.. should have sold a put spread like some ET'rs said

 

[asiaprop]

...if there wasn't gamma and theta....;-)

Quote from taowave:

You can be rest assured that anytime Vix rises above 30 and you buy calls,you will lose money even if the stock rallies initially..

What one should do is look at the historical level of implied volatility and assume vol will move to that level(or less).At that point it is simply a tradeoff of your delta having to overcome the vega contraction..