Need help finding a way to trade with a 1/100 (risk/reward)

ironchef said:
Hunt for Black Swan events. If you owned DXCM options yesterday, you could be looking at a huge gain today. If you have a method, the odds are much better than playing roulette. :D
More...

In a black swan event (or not even a full blown black swan, but significant enough) what would be wiser? And what would be more lucrative? Based on these parameters and scenario:

Let's say Facebook is trading at a share price of $200, RVOL is 2x+, big negative catalyst and price starts moving down from $200 fast. Let's say Facebook on that day (On a Friday) makes a 15 point drop (about 8% drop) from $200 to $185 per share. The down move was relatively sudden and straight down.

I have $2,000 to trade with and these are my two choices:
1) Trade the stock itself, so I could short only 10 shares. This one is easy to calculate: If I had shorted the 10 shares with $2000 my profit at the end of the day would be $160 ($2000 x 8%).

2) Buy same-day expiration 5 point OTM options. I buy 40 FB $195 puts at a price of 0.50 cents each, when FB is trading at $200. Now, this calculation is what I need some educated (guesswork?) help with. If FB moves from $200 to a low-of-day of $185, I bought those $195 puts. If I hold those puts all the way down and exit the trade once FB reaches $185, would I at least (theoretically) have $10 of intrinsic value? Meaning my puts would now at least be worth $10 each. So I should have made at least $40,000? ($10 per put X 40 puts X 100), so a 2000% gain.

Based on that, the option trade wins hands down, doesn't it? I'd rather lose $2000 to make potentially $40,000. Instead of let's say having a $160 hard stop-loss trading FB for potentially a 1:1 R/R gain of $160.

Please let me know if that scenario is viable and if my math is right. Thank you!
 
Last edited:
anycolour said:
... Let's say Facebook on that day (On a Friday) makes a 15 point drop (about 8% drop) from $200 to $185 per share. The down move was relatively sudden and straight down.

I have $2,000 to trade with and these are my two choices:
1) Trade the stock itself, so I could short only 10 shares. This one is easy to calculate: If I had shorted the 10 shares with $2000 my profit at the end of the day would be $160 ($2000 x 8%)...
More...

That seems fuzzy math. If the stock drops 15 points, your profit at the end of the day on 10 shares would be $150. 10 shares x $15 = $150.
 
$200 to $185 is a 7.5% drop in price so 7.5% x $2000 traded short (w/ the 10 stocks) is $150.

I just rounded the 7.5% to 8% to make it easier. Sorry for the confusion.

*But it's not the stock scenario that interests me (that is chump money).
What I'm interested to know is if that option scenario is viable.

Thanks!
 
anycolour said:
In a black swan event (or not even a full blown black swan, but significant enough) what would be wiser? And what would be more lucrative? Based on these parameters and scenario:

Let's say Facebook is trading at a share price of $200, RVOL is 2x+, big negative catalyst and price starts moving down from $200 fast. Let's say Facebook on that day (On a Friday) makes a 15 point drop (about 8% drop) from $200 to $185 per share. The down move was relatively sudden and straight down.

I have $2,000 to trade with and these are my two choices:
1) Trade the stock itself, so I could short only 10 shares. This one is easy to calculate: If I had shorted the 10 shares with $2000 my profit at the end of the day would be $160 ($2000 x 8%).

2) Buy same-day expiration 5 point OTM options. I buy 40 FB $195 puts at a price of 0.50 cents each, when FB is trading at $200. Now, this calculation is what I need some educated (guesswork?) help with. If FB moves from $200 to a low-of-day of $185, I bought those $195 puts. If I hold those puts all the way down and exit the trade once FB reaches $185, would I at least (theoretically) have $10 of intrinsic value? Meaning my puts would now at least be worth $10 each. So I should have made at least $40,000? ($10 per put X 40 puts X 100), so a 2000% gain.

Based on that, the option trade wins hands down, doesn't it? I'd rather lose $2000 to make potentially $40,000. Instead of let's say having a $160 hard stop-loss trading FB for potentially a 1:1 R/R gain of $160.

Please let me know if that scenario is viable and if my math is right. Thank you!
More...

Math wise you have the right idea, at least for options. But nailing these type of trades requires practice and a lot of patience. You would absolutely want to scale out, rather than trying to predict the bottom.
 
this isn't for day trading
scale out and take early profits to afford a let it run strategy for monthly options
like walking a tight rope managing the trade
 
I'm coming to this one late. For those kinds of returns you're looking at far out of the money butterflies a few weeks (maybe months?) out. Remember if its 1/100 risk to reward, the probability of earning that reward should theoretically be 1%
 
anycolour said:
In a black swan event (or not even a full blown black swan, but significant enough) what would be wiser? And what would be more lucrative? Based on these parameters and scenario:

Let's say Facebook is trading at a share price of $200, RVOL is 2x+, big negative catalyst and price starts moving down from $200 fast. Let's say Facebook on that day (On a Friday) makes a 15 point drop (about 8% drop) from $200 to $185 per share. The down move was relatively sudden and straight down.

I have $2,000 to trade with and these are my two choices:
1) Trade the stock itself, so I could short only 10 shares. This one is easy to calculate: If I had shorted the 10 shares with $2000 my profit at the end of the day would be $160 ($2000 x 8%).

2) Buy same-day expiration 5 point OTM options. I buy 40 FB $195 puts at a price of 0.50 cents each, when FB is trading at $200. Now, this calculation is what I need some educated (guesswork?) help with. If FB moves from $200 to a low-of-day of $185, I bought those $195 puts. If I hold those puts all the way down and exit the trade once FB reaches $185, would I at least (theoretically) have $10 of intrinsic value? Meaning my puts would now at least be worth $10 each. So I should have made at least $40,000? ($10 per put X 40 puts X 100), so a 2000% gain.

Based on that, the option trade wins hands down, doesn't it? I'd rather lose $2000 to make potentially $40,000. Instead of let's say having a $160 hard stop-loss trading FB for potentially a 1:1 R/R gain of $160.

Please let me know if that scenario is viable and if my math is right. Thank you!
More...
If you randomly or blindly buy DOTM options your chance of a 1/100 payoff without a 1/100 win/loss is just like playing roulette. You need to develop a black swans (or gray swans) hunting strategy. Read Taleb if you are interested. :finger:
 
anycolour said:
Could someone please point me to a relatively safe trade with a 1/100 Risk Reward.
For example, I'm willing to risk all of $10k (and lose it all) in order to potentially make 100 times of it which is $1 million.

I'm not looking for a trade, but a way to best make the trade. That is, using which instrument: options, futures, stocks, pairs, forex, options on futures, etc.

I'm guessing options would be the way to do this, but which option strategy is most likely to potentially provide what I'm looking for? E.g., spreads, iron condors, butterflys, etc. I really don't know much about options, except straight calls and puts.

Some parameters on the trade I want to make, which might help you in answering my question:
I plan to make a short trade, in a fast downward movement environment with increasing volatility.
I will be looking to stay in the trade for about 250 days (I will exit the trade after ~250 days).

Well, actually, while you're at it, if you could tell me what exactly would potentially have the best chance to provide a 1/100 risk/reward in the scenario outlined above: /ES, TVIX, /GC, etc.

Thank you!
More...
Boys and girls, this is what can potentially happen to you as well if you hang around this place for too long. With that said, let the three-ring circus begin. LOL
 
You must log in or register to reply here.
Back
Top