Options as long term investments for leverage usage

C

coolweb

I will buy out of the money for long term investments.

My friend buys only in the money for long term investments.


Deep in the money 's only cost would be the spread.

Who's retarded, me or my friend?



What does everybody think.
 
Buying OTM has low probability of winning. However, your friend is right about buying ITM options, as time value of ITMs is lower.
 
ChrisM,
Great answer man,

Ok heres the thing

I know theres a few things such as

1) time of value (Decay)
2) volatility
3) underlying stock


So lets say

Can I go ahead and buy 50 calls of a particular stock
even though the option is thinly traded?

I assume options are "opened" they are not sold or bought

Some would be exchanged, but the ones not exchanged would be "opened" for me.


Even if they were "opened" for me, since nobody is selling it

For me to be buying 50 calls, that would not jack up the price of the options , correct?

Because sometimes I see people buying 900 calls and price of the option is not increased, I'm sure nobodys selling those 900 calls.. they were opened?
 
Quote from coolweb:

ChrisM,
Great answer man,

Ok heres the thing

I know theres a few things such as

1) time of value (Decay)
2) volatility
3) underlying stock


So lets say

Can I go ahead and buy 50 calls of a particular stock
even though the option is thinly traded?

I assume options are "opened" they are not sold or bought

Some would be exchanged, but the ones not exchanged would be "opened" for me.


Even if they were "opened" for me, since nobody is selling it

For me to be buying 50 calls, that would not jack up the price of the options , correct?

Because sometimes I see people buying 900 calls and price of the option is not increased, I'm sure nobodys selling those 900 calls.. they were opened?
More...

Son, that's the job of the market maker. Now go buy yourself a book you illiterate little twerp.
 
Quote from jackbyrd:

Son, that's the job of the market maker. Now go buy yourself a book you illiterate little twerp.
More...

Lets not speak if you have nothing informative to say ok?
 
Quote from coolweb:

Lets not speak if you have nothing informative to say ok?
More...

Did I not just answer your elementary question? The market maker is on the other side of your trade. He/she provides the market for those illiquid options that you are looking to trade.
 
I already know that, it is opened by the market maker.


I was asking if the price will be increased since I am the only buyer ...

so If I buy 5 contracts or 1000 contracts and the price of the ASK of the contract will still be the same regardless of how many contracts?
 
To compare these two strategies draw the P/L graph of the difference between them: i.e. subtract your friend's itm position from your otm position. Where this graph is positive your strategy is superior, in rest his is. You can do it under the following assumptions:
  1. Same number of contracts: it is a bear vertical spread. You lose less if the price goes down, he'll make more if the price goes up. Before expiration, an IV drop will accentuate, but not much, the differences between your strategies.
  2. Same amount invested: it is a backspread. You'll make more money if the price goes up a lot (in my QQQQ example: above $48 at expiration). If the price goes down a lot you'll both lose your full investment. In rest his strategy will perform better. Before expiration, an IV raise will help your strategy more because you're long more contracts. An IV drop will hurt you more.
Buying otm is indicated when you're very bullish. If you're just bullish buying itm is better.

See attached.


  • Quote from coolweb:
    I will buy out of the money for long term investments.
    My friend buys only in the money for long term investments.
    Deep in the money 's only cost would be the spread.
    Who's retarded, me or my friend?
    What does everybody think.
 

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