Is this a red flag or white?

[7out]

I have 2+ decades worth of futures and stock trading experience both professionally and personally. However never dabbled much in options because I was mostly a short term/day trader.

Since then, I took a full time job (government job with zero stress with great benefits and plenty of time off). I still trade future indexes when I see my patterns and do pretty well most months, handily exceeding my salary.

I now want to transition a bit of money into option as I see opportunities I think I can't resist. If an at the money call option for ABC is 33%, that is stock is at $9 and call option is at $3 for a net return of 50% in 1-2 months - How likely is that a sign that stock is ready to shoot up, plummet downwards or stay sideways in next month or so?

In other words, is it a neutral risk with such high premium, higher risk or ??

 

[BlueWaterSailor]

If an at the money call option for ABC is 33%, that is stock is at $9 and call option is at $3 for a net return of 50% in 1-2 months - How likely is that a sign that stock is ready to shoot up, plummet downwards or stay sideways in next month or so?

ATM options for a $9 stock that's a month out will typically pay around 0.50 at an IV of ~50 and ~$1 at an IV of 100. A $3 call on one of these would be the biggest "guaranteed to crash in the next 30 seconds" flag I could think of...

 

[7out]

ATM options for a $9 stock that's a month out will typically pay around 0.50 at an IV of ~50 and ~$1 at an IV of 100. A $3 call on one of these would be the biggest "guaranteed to crash in the next 30 seconds" flag I could think of...

I admit this is strange, but:
This has been going on for 2 plus months (that I can back track)?
In mid June the stock was at just $7.75 with a $4 call option (same strike/expiry date).
The IV past 2 month has also bounced between 250-400%
The stock has been gyrating between $6 and $9 for past few months and just recently cracked a new 52 week high and goes up every week.

 

[BlueWaterSailor]

I admit this is strange, but:
This has been going on for 2 plus months (that I can back track)?
In mid June the stock was at just $7.75 with a $4 call option (same strike/expiry date).
The IV past 2 month has also bounced between 250-400%
The stock has been gyrating between $6 and $9 for past few months and just recently cracked a new 52 week high and goes up every week.

You're basically playing the penny stock game. Extreme volatility, low liquidity, huge bid/ask spreads (meaning you're going to get a haircut on both ends of the round trip), and high chance of total or nearly total loss.

A quick scan turns up about a dozen stocks in that range that have options - mostly pharmas - and a couple of them have IVs and premium in that range. It's worth looking at the charts for the rest, because that tells you about what's most likely to happen to these, too.

TLDR: you'd be gambling against some of the smartest handicappers in the world, paying a huge ticket going in, and holding for a month while the market does what it's going to do. If you're going to gamble at those odds, Vegas is much more fun.

 

[murray t turtle]

I have 2+ decades worth of futures and stock trading experience both professionally and personally.

I now want to transition a bit of money into option as I see opportunities I think I can't resist.
%%
Its more likely you make money with cash stocks + other derivatives.
50% in1/2 months is also much more likely in stocks/other derivatives; especially if I want to do something for 10 years + I do.Since you cant resist/bad start.
Stocks/etfs tend to lose money in SEPT/spy/qqq -1%.[4th quarter tends to be superstrong/so 25% a month could happen...……………………………………………………………………………………….]Good thing about options losses can be limited exactly for buyers

In other words, is it a neutral risk with such high premium, higher risk or ??

 

[7out]

I guess this will be a lesson for the future.
Since I have already purchased the shares in all the accounts (mine, son's and girlfriend's) I have no issues of releasing the stock ticker so we can all follow together and revisit this page in 3 weeks when some options start expiring.

I purchased CRBP (Pharmaceutical company) in different price points:
(some at $7.90 and selling Sept $9 calls for $2.65, some at $8.55 and sold Oct $10 calls at $3.30 and past friday purchased the last chunk at $8.65 - but have yet to offset with options.)

Chartwise, imo it looks very bullish. Just hit a fresh 52 week new high. Of all the charts in that group only 1 had disastrous results and that was UBX which plummeted when their test trials failed poorly - however, it seems CRBP is much farther ahead in its Phases and test trial results. They are also are sitting on lots of cash for now and have several studies on the go for the next few years.

 

[thecoder]

@7out, did you really mean: the stock is bullish and you sold its call options?

 

[BlueWaterSailor]

@7out, did you really mean: the stock is bullish and you sold its call options?

He bought the stock and then sold the calls on it. A covered call.

 

[7out]

@7out, did you really mean: the stock is bullish and you sold its call options?

I am bullish and I did sell call options, but you seem to misread the part where I bought the shares outright prior.

It seemed like a great idea because (for instance in first trade), we paid $7.90 per share and immediately received $2.65 per the sale of the $9 call option. That reduces the purchase price to $5.25. If the dock maintains $9 by Sept 18th, then it’ll be a 71% ROI in just 4 weeks on that trade.

In the 2nd instance, we paid $8.55 per share and got back $3.30 for the Oct 16 $10 call which reduced the cost price to $5.25. If by Oct 16th the stock remains at $8.55 it would be a 60% Roi in 7 weeks and 90% if it reaches $10 by Oct 16th.

In the 3rd instance we purchased the shares at $8.65 this past Friday, however I couldn’t sell calls on it yet, because my son has not set up his account to trade options yet. That takes 5 days to get approval - seems by then he’ll make a sizeable profit and get even more for the calls than if he sold right when he purchased stock.

As I said, I am no professional when it comes to trading options, but these returns sure seem amazing and just wanted a 2nd opinion (and that maybe I’m missing something).

 

[xandman]

Ofc, high premium is high risk. At least they tell you upfront, eh?

You are looking at biotechs. They are built mostly on promises of getting approved on a new drug or a buy out from big pharma. They typically have crazy high IV, thus premiums are very big.

Understand that buying stock and selling a call, you essentially have a short synthetic put. Thus, you are capping the potential upside and exposing yourself only to the potential downside for the sake of collecting that fat premium.

So, a strategy might be to continue fading those upsides with a covered call while there isn't any official news and collect premiums. However, you might loose taste for these trades after a few negative surprises since you are essentially short a put.