Long calls and stop losses

T

trendisyourfriend

Hi guys, I'm new to options trading and I'm interested in buying long calls for canslim growth stocks.

Do you recommend that I use a stop loss when buying calls? Gavin McMaster from Investor's Business Daily's Options Corner has recommended using a 50% stop loss with options but he trades bull call spreads, not long calls.

For anyone who is interested, here's a bull call spread that he bought for AAPL back in March.

AAPL Stock Bull Call Spread | Investor's Business Daily (investors.com)

He says "In terms of trade management, if the spread dropped from $2.00 to $1.00, I would consider closing early for a loss, otherwise I would hold to expiry."

Should I use a 50% stop loss or should I just hold the option until expiry?

Thanks
 
OptionsOptionsOptions said:
Your "stop loss" should be the total debit paid.
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I agree with your post, but don’t you think the duration matters? If you bought 60DTE option and in 15 days your view had changed for some reason or stock moved too far, maybe it’s better to take a loss or roll?
 
I wish you the best of luck, this may be the exact strategy for you...but...

I tried exactly what you are attempting...CANSLIM but with long options...And it didn't work out so well.

Look at someone like Mark Minervini who uses a modified CANSLIM method very effectively trading equities. I have read his books, i have watched his webinars...the guy stated that his average SL is about 6%. This is simply not possible with options, you would get stopped out of nearly every trade.

long options really need to see rapid price movement to pay. Using CANSLIM to identify a solid company and uptrend makes perfect sense in theory...however I found myself losing most due to what essentially boiled down to Winners not being large enough to offset the losers. Like OOO said above, with long options the trade is all or nothing much of the time. The price swings are so violent due to leverage (lambda) that you often find yourself so far down on a position so rapidly that it isnt even worth closing.

I was decent at picking direction, but even still, the slow grind upwards by the underlying was offset by time decay of the contracts...holding while trending (unless you get a nice gap) would produce only mediocre winners...while the losers were often -100%.

and pyramiding into the position was another thing that just did not work out well for me at all...like, at all. Adding to winners was one of my most catastrophic failures as an options trader.
 
zghorner said:
I was decent at picking direction, but even still, the slow grind upwards by the underlying was offset by time decay of the contracts...holding while trending (unless you get a nice gap) would produce only mediocre winners...while the losers were often -100%.
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That statement is pivotal in the evolution of an options trader, if someone pays attention and learns :)
Hint: then maybe you should find a way to sell first instead of buying?
 
zghorner said:
I wish you the best of luck, this may be the exact strategy for you...but...

I tried exactly what you are attempting...CANSLIM but with long options...And it didn't work out so well.
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Very well said zghorner. Even with a decent system, adding option trading on top will add its own complexity. what you really need to do if you are quantitatively bent, is not just look for entry and exit signals of a system - but pair them with the particular option trading system = and backtest it as a whole.

Doing that you will find exactly what zghorner posted above. Its a big bad can of worms.. but an exercise worthy pursuing. If nothing, you will find a ton about how options work..

@trendisyourfriend: As per your question - should you hold till expiry or exit at 50% stop loss. Best way is to do the same.. get some signals in the past - perhaps from Canslim or whatever other fundamental system you want to use - put some parameters around a couple of option strategies (long calls vs verticals - exit at 50% loss vs at expiry) - there are now 4 different systems which will all behave differently. After testing you might not like any 4 of them.. but will have new insights into what you might want to do instead.

HTH!
-gariki
 
emulimu said:
That statement is pivotal in the evolution of an options trader, if someone pays attention and learns :)
Hint: then maybe you should find a way to sell first instead of buying?
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What would you consider as a safe place to start? I have read books and watched videos etc...But I admit that I am intimidated by multi leg strategies as I have burned myself selling premium in the past. It has also became more than clear to me that long options resemble gambling more than trading so i know that i must evolve or perish.

my favorite explanation of gambling vs trading: Gambling is when the odds are in the house's favor, trading is when the odds are in favor of the individual.
 
If you are going to replace stock with options you need to do a bit of work..For starters,you should run a backtest on a portfolio of stocks given your parameters.You then should look at the distribution of returns,in particular MAE and drawdowns. Why?? Because you need to understand the return distribution of the stocks backtested to see if it makes sense to chose a portfolio of options as opposed to the underlying...

Anything else is pissing in the dark,which most people seem to opt for
 
taowave said:
I am a broken record,but if you are serious about trading,run some simulations/ backtestss on a program like Orats..
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Is there any software that can run back tests on options trading?

I use NinjaTrader for backtesting stocks.
 
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