Options question....

J

jsv416

I trade options, but pretty much only long calls or long puts. I used to do debit spreads but found that I limited my upside most of the time. When I had a good call I was always wishing I had done just the straight long call instead of the debit spread and limiting my upside. I dont claim to be an expert in options, but I just dont get what the real advantage to doing debit spreads is over doing just straight long calls or long puts. One of the main rules of trading is to let your profits run. How can you do that with spreads??

Please someone with more options experience shed some light on me..


Thanks
 
So you are saying that IV inflation or deflation has more to do with making a profit in spreads as opposed to the successful prediction of price movement?

Thank you for your response. Please extrapolate further when you have time.
 
Quote from jsv416:

So you are saying that IV inflation or deflation has more to do with making a profit in spreads as opposed to the successful prediction of price movement?

Thank you for your response. Please extrapolate further when you have time.
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If you have a simple call or put spread, your exposure to IV (vega) is actually less than being naked long or short - simply because with a spread you are long vegas in one leg, and short in another leg. So they neutralize each other to some extent.

However, you still have exposure to IV change. If the underlying is closer to the strike of your long option leg, you are long vegas and want IV to go up. If the underlying is closer to the strike of your short option leg, you are short vegas and want IV to go down.

This effect is not so pronounced when there is a lot of time remaining until expiration, but becomes more and more pronounced as you approach expiration. Vega decreases overall as you approach expiration, but the difference in vega between different strikes increases.
 
Quote from jsv416:

I trade options, but pretty much only long calls or long puts.


Thanks
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1) As MTE mentioned, when you buy options, if the implied volatility drops, you are going to lose, unless the underlying asset makes a large move in your favor.

2) Picking direction is very difficult. Very few can do it. When buying options, it's even more difficult because you MUST have the correct timing. Not only that, if you buy out of the money options, you need a bigger move in the right direction.

3) You need to develop a good attitude towards trading. Wishing you had done something different when the market moves your way - means that you are trading with your emotions. You have no future if you continue to let emotions get in the way.

4) Make the best decision you can at the time a decision is necessary, and live with the results.

5) By buying a spread, you reduce your exposure to the effects of volatility.

6) When you buy a spread, your risk/reward ratio is good and your losses are limited.

7)Sure, profits are limited also. But, your first goal in investing is NOT to make money. Goal #1 is to not go broke. Goal #2 is to make money. Keep priorities straight.

Mark
http://blog.mdwoptions.com/options_for_rookies/
 
I disagree with most of your comments: Here is why

1) I think you should be more precise in your answer. Depending on the trading style delta effects can vastly dominate vega effects. If you are specializing in trading volatility then you should be delta hedged anyway and you focus on trading the asset "volatility" and not the asset "underlying". If instead you run options as a leveraged version of cash trades then the delta effect most of the time dominates the vega effect in regards to contribution to valuation. Unless the underlying completely dies and stops moving, most of the time your focus should be on the movement of the underlier. Of course you want to pick the right strategy at the right time. Buying calls when the stock went through a huge sell off, and vol is sky high, might not be the right thing, instead you may consider a call spread or selling some out of the money puts.

2) Picking direction is the easiest thing in the world , whether you are right or not is the thing. Plus trading direction through options is from my experience way better than putting on a pure cash position because paying premium up front on long options takes a lot of pressure away when things may go against the position in the first few days but then work out exacty the way you have placed the bet.

3) THis does not mean at all that someone is trading with emotions in place. It merely means that one should always look to optimize and improve things. If another strategy works better than others then I think its absolutely fair to search for improvement. I dont think the OP intended to say that something went against him and so he wished he put on a different position.

4) hmm, not sure this comment adds any value whatsoever but sounds good

5) true and you reduce your profit potential by a lot PLUS you better watch out your short position when things go through the strikes. I totally agree with the OP that when using options as a leveraged version of momentum trades , spreads are COMPLETE nonesense. If one cant take the heat then why trading on leverage in the first place?

6) I am not sure what you mean with risk-reward ratio is good??? Risk is limited , so is your profit potential and spreads have their own risk parameters such as any other strategy as well. So, what point do you try to make? A good ratio is (and I had it couple times in my overall options book) is when you are long gamma and earn time value at the same time (note, this is not on the same position ovbiously but the net book risk). Thats what is commonly referred to as good ratios among option traders.

7) Lol, I totally disagree. if your first priority is not to lose money then you should be in the funeral business and nowhere else because one thing that is for sure is that people die. Nothing else goes without risk. So dont touch stocks and especially options if you cant risk or lose anything. Point is, risk and reward goes hand in hand, you cant separate it. You define your profit target and as a result know the risk you gotta take and the other way around too. I trade to make money and this means I need to take risk, and I try to manage my risk well not to go broke. But also here, no secrets, nothing new.

My own comments about spreads are that they have their place and if it fits with your strategy then go for it. But you sounded like someone who likes to trade momentum in the underlying and utilizes options to gain leverage. Whether this works TOTALLY depends on your stock picking skills. Some big movers can make up for all the time value you pay and the wrong picks from time to time plus some more. So, it all comes down to your style. Picking stocks is for some, not others. But so is trading vol. Some can do it others dont. So, know what you do best and find the right instruments to trade and strategies to play. Thats the name of the game. I am not a friend of making everything sound difficult and complicated. Its really not.

Quote from dagnyt:

1) As MTE mentioned, when you buy options, if the implied volatility drops, you are going to lose, unless the underlying asset makes a large move in your favor.

2) Picking direction is very difficult. Very few can do it. When buying options, it's even more difficult because you MUST have the correct timing. Not only that, if you buy out of the money options, you need a bigger move in the right direction.

3) You need to develop a good attitude towards trading. Wishing you had done something different when the market moves your way - means that you are trading with your emotions. You have no future if you continue to let emotions get in the way.

4) Make the best decision you can at the time a decision is necessary, and live with the results.

5) By buying a spread, you reduce your exposure to the effects of volatility.

6) When you buy a spread, your risk/reward ratio is good and your losses are limited.

7)Sure, profits are limited also. But, your first goal in investing is NOT to make money. Goal #1 is to not go broke. Goal #2 is to make money. Keep priorities straight.

Mark
http://blog.mdwoptions.com/options_for_rookies/
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Iluvvol. Thanks for the thoughtful response. It took me a while to read your reply and fully digest it.

More about my trading. I trade S/R levels of stocks and etfs. Sometimes I use options to do this when the price of the underlying is expensive. When I did spreads I usually ended up kicking myself because I nailed a big winner but had limited my upside because of the spread. Yes the risk is limited in the spread but i can also limit my risk through position sizing. So I swore off spreads, but I keep hearing about traders applying spreads to this or that and wonder why the hell they would do that. Obviously, their trading style is different than mine and I should just stay away from what i dont understand.
 
Quote from IluvVol:

I disagree with most of your comments: Here is why

1) I think you should be more precise in your answer...

This is Elite Trader. The poster is a rookie. The information I provided is helpful to him.

This is not a classroom and no one is on the PhD path here.


2) Picking direction is the easiest thing in the world , whether you are right or not is the thing. Plus trading direction through options is from my experience way better than putting on a pure cash position because paying premium up front on long options takes a lot of pressure away when things may go against the position in the first few days but then work out exacty the way you have placed the bet.

OK. That's your experience. i work with rookies and I can guarantee that they do a lousy job of predicting market direction CORRECTLY.

I also do believe that very few can consistently predict market direction CORRECTLY.

Say what you want, but teaching option novices that buying options is an intelligent path is very wrong - at least in my experience (>32 years). I prefer to teach the advantages of limited risk premium selling.


3) ... I dont think the OP intended to say that something went against him and so he wished he put on a different position.

Actually he said a position went his way he wished he did not have a spread.



5) true and you reduce your profit potential by a lot PLUS you better watch out your short position when things go through the strikes. I totally agree with the OP that when using options as a leveraged version of momentum trades , spreads are COMPLETE nonesense. If one cant take the heat then why trading on leverage in the first place?

Geez you are arrogant. He is NOT trading on leverage. He is a beginner who is gambling by buying options. i'm sure the concept of leverage never entered his mind.

My reply was posted to the rookie who sought help. you are not giving him any help.


Why would you care if it goes through both strikes. that provides max profit. remember he is a spread BUYER, not seller (and I know about equivalent positions, but the poster probably does not)


7) Lol, I totally disagree. if your first priority is not to lose money then you should be in the funeral business and nowhere else because one thing that is for sure is that people die.

Nothing else goes without risk. So dont touch stocks and especially options if you cant risk or lose anything. Point is, risk and reward goes hand in hand, you cant separate it.

Of course they go together. But can you not grasp the fact that too many rookies go broke simply because they have no clue about risk. And if you seriously don't believe that the major priority in trading is to make sure you are alive to play again tomorrow then you surely are not as advanced a trader as your attitude says you are.

I teach rookies. I speak at their level. I write so beginners can comprehend. If you find my remarks too low-level for you, you have an ignore button to click. I help them learn. I help them make money. That's the bottom line.


My own comments about spreads are that they have their place and if it fits with your strategy then go for it. But you sounded like someone who likes to trade momentum in the underlying and utilizes options to gain leverage.


I trade neutral. I sell premium. I protect my ass at all times. I make good money. I do n ot predict markets. I never never trade momentum. In fact, I'm more likely to fade it.


Whether this works TOTALLY depends on your stock picking skills.

Not me. I never pick stocks. Don't care if they rise or fall. I still make good money.

But most try to pick stocks and I agree that for them, it' important in determining success. I prefer not to be bothered with picking stocks. That's my comfort one. Other people choose their own.

Some big movers can make up for all the time value you pay and the wrong picks from time to time plus some more. So, it all comes down to your style. Picking stocks is for some, not others. But so is trading vol. Some can do it others dont. So, know what you do best and find the right instruments to trade and strategies to play. Thats the name of the game. I am not a friend of making everything sound difficult and complicated. Its really not.

I know it's not. The strategies are easy to comprehend. but if the investor is a good manager of risk and applies the 'never go broke' rule, the probability is HIGH that success follows.
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Lol, can you possibly stop with advertising your courses or whatever else you have to sell. By the way, if you had such a successful career (was it >32 years?) why do you need to teach option theory to beginners instead of dining at a remote island? Working as institutional trader I take it with a huge grain of salt when someone wants to convey his/her successful track record and then sells some product that everyone can pick up for free on the internet or a $5 book.

By the way, has it ocurred to you that I was addressing the OP when I talked about his momentum style of trading and NOT you? Also, where does the OP mention that he is a beginner in trading and has no ability in picking stocks? I would suggest you listening more carefully before assuming everything is about you, then you, and then again you.

Also, why do you say "My reply was posted to the rookie who sought help. you are not giving him any help."? What makes you assume that my reply did not help him but yours did unless you are one and the same guy and you wanted to get a conversation started to better advertise your questionable services?

As a final word, I warn every beginner of options trading: If someone approaches you to teach you basics of trading and tells you to start out writing premium then you should probably be pretty careful. No successful guys ever learn to trade by primarily earning premium. As a matter of fact, I dont know of any of my long-standing buddies at other options flow desks who has survived by maintaining an option writing strategy. This will be a sure way to the poor house, sooner or later.

I may come across of being overly critical of your remarks but I think for good reason. You sound extremely self-serving, and I think we all have heard now enough about your "rookie teaching services" that actually NOBODY REQUESTED.

Quote from dagnyt:

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