mange profitable directional options

riskarb · Aug 20, 2006

I like to sell frontspreads into a large gain in a simple long call or put buy. Often you'll see a rise in vol in that strip as well. You can afford to go as far otm as it allows you to cover the current mark on the profitable option.

You've locked the premium on the call or put buy with the frontspread, and possible convergence gains to the sold-strike.

I have purchased deep itm up and out reverse calls in exotic markets to leverage the gains for a small sum.

RichardRimes · Aug 20, 2006

Quote from zxcv1fu:

after the option doubled.

We can use Oct 30 calls as a case study to keep it simple. I bought them on 7/20 @ 0.55 when YHOO was @ 25.2. Now the option is @ 1.30 bid.

I am not interested to leg into calendar spread since it is a directional trade for me.

Thanks for any good idea!

when you bought the calls you made a directional bet which has panned out well. You must have had a Fair Value in mind as to what YHOO was worth? Perhaps Yahoo is now AT that fair value. One way to lock in some gains would be to sell the Oct 32.5 calls. (I think that was what riskarb said

) You immediately realize a full return on your initial money outlay leaving room for more gain. You can also cash in the 30's then buy a farther OTM call. You can convert to a B-fly by selling the 32.5 twice and buying the 35 call also pocketing more money. Nice problem to have.

The calendar is actually not so much directional...works best if the stock doesn't go very far very fast so your right if you are bullish not to do the calendar.

As pointed out coach's book does have many good suggestions.

OddTrader · Aug 20, 2006

Do you think your option strategies and their considerations of playing directional on whether the underlying's price , option's price, and/ or IV would require different adjustments?

Quote from zxcv1fu:

thanks!

I only have 1 of his books, it does not have that chapter.

Here is the book which has another chapter for managing unprofitable position:

Trading Index Options by James B. Bittman (Hardcover - May 31, 1998)

Quote from Tums:

try the coach's book

http://www.elitetrader.com/bo/index.cfm?action=view&B_ID=102&CatID=4

From Amazon.com's review of the book about free trades:

Q

The second issue concerns the use of the terms free trade or risk free trade. The reality is the trade was not free and there is a price. The price may have been actual money, foregone opportunities, or increased risk. Sometimes the authors mention the cost, other times they do not.

An example of a not so free "free trade" would be to buy a call have the stock rise, sell a higher priced call for what you paid for the original. You now have a bull spread. This is free in the sense you now have a spread position at no cost. However it could end up costing you if the stock drops because the spread could become worthless and you could have sold your long call outright. The concept is good but I find the wording to be troublesome.

UQ

zxcv1fu · Aug 20, 2006

Quote from RichardRimes:

when you bought the calls you made a directional bet which has panned out well. You must have had a Fair Value in mind as to what YHOO was worth? Perhaps Yahoo is now AT that fair value. One way to lock in some gains would be to sell the Oct 32.5 calls. (I think that was what riskarb said) You immediately realize a full return on your initial money outlay leaving room for more gain. You can also cash in the 30's then buy a farther OTM call. You can convert to a B-fly by selling the 32.5 twice and buying the 35 call also pocketing more money. Nice problem to have.

The calendar is actually not so much directional...works best if the stock doesn't go very far very fast so your right if you are bullish not to do the calendar.

As pointed out coach's book does have many good suggestions.

You & riskarb seems know about how to adjust the position. Thanks for your posts!

Right now I have 3 different calls for YHOO:
sep 30
oct 30
oct 32.5

They all either doubled or tripled. I have no idea what is the fair value of the stock, just want to swing trade with options. For butterfly I have to estimate the center correctly. I do not see YHOO stay flat so it is not a good calendar candidate. May be my other stock calss are better for that. Right now I am doing all kind of institutional style option trading with TOS & like to keep my directional trading separate. Maybe I should sell the sep 30 calls first when pullback until I learn better.

OddTrader · Aug 21, 2006

Quote from zxcv1fu:

They all either doubled or tripled. ...Maybe I should sell the sep 30 calls first when pullback until I learn better.

It seems one of the free trades approaches is to sell calls 50% on rally, afterwards adding/ scaling in next round on (if any) pullback.

RichardRimes · Aug 21, 2006

Quote from zxcv1fu:

You & riskarb seems know about how to adjust the position. Thanks for your posts!

Right now I have 3 different calls for YHOO:
sep 30
oct 30
oct 32.5

They all either doubled or tripled. I have no idea what is the fair value of the stock, just want to swing trade with options. For butterfly I have to estimate the center correctly. I do not see YHOO stay flat so it is not a good calendar candidate. May be my other stock calss are better for that. Right now I am doing all kind of institutional style option trading with TOS & like to keep my directional trading separate. Maybe I should sell the sep 30 calls first when pullback until I learn better.

If you don't have an idea of the fair value of the stock and you are trading just the call...perhaps put a stop loss on the call based on the stock price...ie if price of stock goes to X then sell call. You would have to calculate what the Greeks would be doing to the option but on the tos analyse page you can do that. That way you will preserve your profit yet have room to the upside.

zxcv1fu · Aug 21, 2006

I do not care for the fair value, just look at chart.

I did buy DELL 22.5 calls @ 0.3 on Friday & sold for 0.8 the same day for money management. (Bought sep 25 calls @ 0.3 before earning, in red now)

This morning I add more sep 25 calls since it looks very bullish to me. The outstanding DELL options do not cost me anything now because of the previous DELL profit.

I have AET 40 calls after I took profit from my 35 calls. It is in profit. Again they cost nothing too (from the previous AET profit).

RichardRimes · Aug 21, 2006

Quote from zxcv1fu:

I do not care for the fair value, just look at chart.
fit).

ok so where does the chart tell you the option should go to? again just set the stop loss and let it ride....

IV_Trader · Aug 21, 2006

use "odds and prob" calculator when you enter position. This way you can make better decision later (now , in your case) of what to do if trade goes your way.

yip1997 · Aug 21, 2006

Quote from IV_Trader:

use "odds and prob" calculator when you enter position. This way you can make better decision later (now , in your case) of what to do if trade goes your way.

Can you explain with an example how you make adjustment if you knew the prob when you opened the position?