I know what a call,put,straddle,strangle, bull call spread, bear put spread, condors, and almost every definition and theory or concept out there on options. What I do not know is the application of those strategies. Is there a formula out there or an approximation of when a straddle is considered too much. How about screeners to find underpriced options? What is considered fair value for an option spread. I am looking for a book that gives specific instruction and application of those strategies (not theory). Are there any books out there like that? Or are they alll just a bunch of ......
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Options strategies & application
- Thread starter tradingcards
- Start date
tradingcards,
I'm not sure of any book that could tell you exactly what strategy to put on at any moment or what. I guess trying to buy straddles or something like that purely based on data entered into a machine would be kind of like buying a stock just on fundamental analysis or something.
Some tips off the top of my head:
1. I will often check a stock over the last 3 months or 6 months and if it moved say 10 points from high to low, then you go look at what a 6 month straddle will cost - if it is $1500, that's probably too much, if it's $500, you could research it more. I check Larry McMillian's site to see what % of IV Pricing the option is in (if you want more info on what this means, etc. please ask).
As far as calls, puts, bull and bear spreads, you just have to constantly think about risk/reward ratio, etc. If a stock is at $20 and you think it can hit $28 and will hit $24 for sure, then maybe you can pay up to $1.50 for a 22.50 for example, but paying $4 would be high - however, if the 30 strike sells for $2, then maybe you could spread it or something.
You have to constantly consider the risk/reward in both directions - how far do I want to go out price wise and how far do I want to go out time wise.
You certainly have different options in the following scenarios for example:
1. "I know XYZ will move sharply soon, but not sure of direction" - straddle/strangle if prices are reasonable, but understand that if a stock will move sharply for sure, the prices will usually reflect that.
2. "I feel XYZ will go up quite a bit, but maybe not a ton and it could take a while" - maybe a at the money LEAP call or LEAP Bull Spread, or possibly sell a put.
3. "I feel XYZ will do down, but I'm not sure when". Here you could try a LEAP put or put spread.
4. "I am certain XYZ will go up a lot in the short term". There you have a case where you just have to decide how much risk you are willing to take and how aggressive to be, etc.
While he doesn't give exact picks or anything from the market, I do like Larry McMillian's main book - "Options as a Strategic Investment". I think in trading options, you need to get to a point where if you think you know what a stock will do, it is quite easy to quickly decide on 1 or 2 strategies to use. Then, if you are right, gains could come easily.
Off topic - I noticed in your profile, that you play poker. I enjoy poker also (almost totally online). Haven't got the big win yet, but I did win a low $ NL HoldEm with over 1000 players on Pokerstars a while back. I do pretty good in SNGs as well (in fact I'm playing right now as I type this!)
I'm not sure if I answered what you are really looking for. If you have any more questions or can be more specific, please let me know. Is there any strategy in particular that interests you, but you aren't quite sure about?
JJacksET4
I'm not sure of any book that could tell you exactly what strategy to put on at any moment or what. I guess trying to buy straddles or something like that purely based on data entered into a machine would be kind of like buying a stock just on fundamental analysis or something.
Some tips off the top of my head:
1. I will often check a stock over the last 3 months or 6 months and if it moved say 10 points from high to low, then you go look at what a 6 month straddle will cost - if it is $1500, that's probably too much, if it's $500, you could research it more. I check Larry McMillian's site to see what % of IV Pricing the option is in (if you want more info on what this means, etc. please ask).
As far as calls, puts, bull and bear spreads, you just have to constantly think about risk/reward ratio, etc. If a stock is at $20 and you think it can hit $28 and will hit $24 for sure, then maybe you can pay up to $1.50 for a 22.50 for example, but paying $4 would be high - however, if the 30 strike sells for $2, then maybe you could spread it or something.
You have to constantly consider the risk/reward in both directions - how far do I want to go out price wise and how far do I want to go out time wise.
You certainly have different options in the following scenarios for example:
1. "I know XYZ will move sharply soon, but not sure of direction" - straddle/strangle if prices are reasonable, but understand that if a stock will move sharply for sure, the prices will usually reflect that.
2. "I feel XYZ will go up quite a bit, but maybe not a ton and it could take a while" - maybe a at the money LEAP call or LEAP Bull Spread, or possibly sell a put.
3. "I feel XYZ will do down, but I'm not sure when". Here you could try a LEAP put or put spread.
4. "I am certain XYZ will go up a lot in the short term". There you have a case where you just have to decide how much risk you are willing to take and how aggressive to be, etc.
While he doesn't give exact picks or anything from the market, I do like Larry McMillian's main book - "Options as a Strategic Investment". I think in trading options, you need to get to a point where if you think you know what a stock will do, it is quite easy to quickly decide on 1 or 2 strategies to use. Then, if you are right, gains could come easily.
Off topic - I noticed in your profile, that you play poker. I enjoy poker also (almost totally online). Haven't got the big win yet, but I did win a low $ NL HoldEm with over 1000 players on Pokerstars a while back. I do pretty good in SNGs as well (in fact I'm playing right now as I type this!)
I'm not sure if I answered what you are really looking for. If you have any more questions or can be more specific, please let me know. Is there any strategy in particular that interests you, but you aren't quite sure about?
JJacksET4
I just wanted to add that personally when trading directionally, I am not real big on worrying about the "exact" cost of the option in terms of "underpriced" or "overpriced". I would much rather buy slightly overpriced calls on a stock that moves up a lot then to buy "cheap" calls on a stock that sits there or goes down. Of course, you wouldn't want to buy extremely overprices options usually.
Of course straddles are different as well since you are buying both calls and puts.
I guess some of the pricing comes with experience. If you notice a stock for example at $40 that you think can hit $50 in 3 months, then what would you expect the 3 month out $40 strike call to cost? If you check and see it is $600, that may be too much, but then if it was only $250, you might go for it. Just realize that the reason the one option costs more is the opinion of the market is that that stock could hit $50 more likely then the other one (and/or could continue higher).
Remember that high IV stocks will cost more because of built in fear or excitement towards the stock, but a slower moving stock that slowly trends upwards could actually have "cheaper" options then a stock that always jumps up and down.
I guess another good book that maybe you should look at if you haven't would be The Option Advisor by Bernie Schaeffer. Personally, I don't follow all his picks or anything, but I think he has alot of good ideas about the market and options.
JJacksET4
Of course straddles are different as well since you are buying both calls and puts.
I guess some of the pricing comes with experience. If you notice a stock for example at $40 that you think can hit $50 in 3 months, then what would you expect the 3 month out $40 strike call to cost? If you check and see it is $600, that may be too much, but then if it was only $250, you might go for it. Just realize that the reason the one option costs more is the opinion of the market is that that stock could hit $50 more likely then the other one (and/or could continue higher).
Remember that high IV stocks will cost more because of built in fear or excitement towards the stock, but a slower moving stock that slowly trends upwards could actually have "cheaper" options then a stock that always jumps up and down.
I guess another good book that maybe you should look at if you haven't would be The Option Advisor by Bernie Schaeffer. Personally, I don't follow all his picks or anything, but I think he has alot of good ideas about the market and options.
JJacksET4
Hey JJacks,
I just finished playing poker at my local cardroom. Bad session. Won't bore you with another bad beat story. Thanks for the informative reply. You sound like you are very experienced with options. How long have you been trading? Do you make consistent returns? What is more lucrative for you: poker or trading? What kind of bankroll do you have for both? I took about 90% of my bankroll out of the online sites because of the Neteller thing. I have about $30,000 in my trading account that I am trying to use to replace my income from online play. The fish have really dried up. I don't know about SNGs, but I know that live cash games have dried up a bit. Of course I could adjust and learn to play against people that think like me, but I like easy money. What size SNGs do you play? maybe i'll look for you on stars. my user on stars is: watchman5677. I play on Bodog too. email me at: watchman5677@cox.net
I just finished playing poker at my local cardroom. Bad session. Won't bore you with another bad beat story. Thanks for the informative reply. You sound like you are very experienced with options. How long have you been trading? Do you make consistent returns? What is more lucrative for you: poker or trading? What kind of bankroll do you have for both? I took about 90% of my bankroll out of the online sites because of the Neteller thing. I have about $30,000 in my trading account that I am trying to use to replace my income from online play. The fish have really dried up. I don't know about SNGs, but I know that live cash games have dried up a bit. Of course I could adjust and learn to play against people that think like me, but I like easy money. What size SNGs do you play? maybe i'll look for you on stars. my user on stars is: watchman5677. I play on Bodog too. email me at: watchman5677@cox.net
Tradingcards,
I have been trading options on and off for a while, probably about 6 years I guess. However, for a while I didn't do any trading because of not having much idea what would happen and I put some money into Real Estate.
Recently I have reentered options trading with a new determination to learn the markets, etc. and I have been trading much more frequently the last 3 months or so. I think I have done about 30 trades (open and close) in that time. My account has been doing pretty good in this time, but of course, that isn't over a very long period of time. I hedge almost all of my bets these days and my main goal is to never take a large loss.
I have been much more consistant then before at following the markets, reading alot of info, trying to decide if a stock has hit a high and will now roll over, etc. I have been trying to buy calls on stocks that were hit too hard, but weren't going to continue to drop. For example, I recently got a double on some MU calls. I can't say I had any way to know for sure it would work, but I had bought plenty of time, and I waited for MU to start to recover
before buying (i.e. don't just buy a falling knife). So, I think the best thing is if you can analyize what a stock will do, then you just trade the appropriate option and bang! My biggest problem still is trying to figure out with good certainty what a stock will do.
Right now, I only have about 10K in my options account, as I spent a bunch of money last year buying some rental properties out of state and I bought a new condo here in Orange County. The good news is that I feel like I have a good chance at improving my account in the future, but I can't say for sure.
As far as poker goes, my user name is JJacksPS. I usually play $6 range SNG and $2-$10 tourneys. I'm not as good in cash games as tourneys. I mostly play NL holdem and Omaha H/L. One quick tip you may not know of online - you can see how other players do at www.officialpokerrankings.com. They only show multi-table tourney results, but it can be real interesting to see. I guess my main thing is that I try hit a decent win (say 1st in a single table) and then parlay that into a bigger win in a large tourney. Haven't quite been able to do it yet though. I did just win an entry to the "Sunday Hundred Grand" this week - that should be fun. So, I mostly play for fun and try to hit a good win sometimes (I have about $400 in my account).
JJacksTR4
I have been trading options on and off for a while, probably about 6 years I guess. However, for a while I didn't do any trading because of not having much idea what would happen and I put some money into Real Estate.
Recently I have reentered options trading with a new determination to learn the markets, etc. and I have been trading much more frequently the last 3 months or so. I think I have done about 30 trades (open and close) in that time. My account has been doing pretty good in this time, but of course, that isn't over a very long period of time. I hedge almost all of my bets these days and my main goal is to never take a large loss.
I have been much more consistant then before at following the markets, reading alot of info, trying to decide if a stock has hit a high and will now roll over, etc. I have been trying to buy calls on stocks that were hit too hard, but weren't going to continue to drop. For example, I recently got a double on some MU calls. I can't say I had any way to know for sure it would work, but I had bought plenty of time, and I waited for MU to start to recover
before buying (i.e. don't just buy a falling knife). So, I think the best thing is if you can analyize what a stock will do, then you just trade the appropriate option and bang! My biggest problem still is trying to figure out with good certainty what a stock will do.
Right now, I only have about 10K in my options account, as I spent a bunch of money last year buying some rental properties out of state and I bought a new condo here in Orange County. The good news is that I feel like I have a good chance at improving my account in the future, but I can't say for sure.
As far as poker goes, my user name is JJacksPS. I usually play $6 range SNG and $2-$10 tourneys. I'm not as good in cash games as tourneys. I mostly play NL holdem and Omaha H/L. One quick tip you may not know of online - you can see how other players do at www.officialpokerrankings.com. They only show multi-table tourney results, but it can be real interesting to see. I guess my main thing is that I try hit a decent win (say 1st in a single table) and then parlay that into a bigger win in a large tourney. Haven't quite been able to do it yet though. I did just win an entry to the "Sunday Hundred Grand" this week - that should be fun. So, I mostly play for fun and try to hit a good win sometimes (I have about $400 in my account).
JJacksTR4
I hear lots of different Option Strategies everyday but my personal favorite theory is McMillian's "Options as a Stratigic Investment"