Options Strategy

[rgilbert93]

This is probably quite basic, but can you make the same basic return (as if you bought the underlying stock) by buying and selling options contracts in the future when the underlying stock increases the intrinsic value of the options?

Say you bought a May Put or 10 for (C) for $3.00 expecting it to go down:

The price goes from $4.86 or so to $2.00

Will the option's price scale directly with this?

It seems like this is a much better alternative to shorting, where there is unlimited risk.

My only worry would be that for out of the money contracts that less people buy, the price wouldn't be affected as much. I've heard of this being the case a long time ago, where options premiums didn't scale anywhere near their real value.

 

[spindr0]

Read up on an option's DELTA. That will explain how the option's price will track the underlying's price. Secondarily, look at IMPLIED VOLATILITY and TIME DECAY.


It seems like this is a much better alternative to shorting, where there is unlimited risk.

So buying GOOG or BIDU near 600 might be OK because they can only go to zero whereas shorting them is not OK because they can go to infinity? Reality is, stocks don't melt up. They go down far faster than they rise. Lose the fear and learn to trade in both directions.

 

[rgilbert93]

Quote from spindr0:

Read up on an option's DELTA. That will explain how the option's price will track the underlying's price. Secondarily, look at IMPLIED VOLATILITY and TIME DECAY.


It seems like this is a much better alternative to shorting, where there is unlimited risk.

So buying GOOG or BIDU near 600 might be OK because they can only go to zero whereas shorting them is not OK because they can go to infinity? Reality is, stocks don't melt up. They go down far faster than they rise. Lose the fear and learn to trade in both directions.

I trade in both directions, by simply stating a point you can't infer I only short trades. And in options there is limited risk in shorting. (The premium)

 

[Trader666]

Free software from CBOE that has a basic tutorial and the capability to construct and analyze positions containing up to 4 different options.
http://www.cboe.com/LearnCenter/Software.aspx

Quote from rgilbert93:

This is probably quite basic, but can you make the same basic return (as if you bought the underlying stock) by buying and selling options contracts in the future when the underlying stock increases the intrinsic value of the options?

Say you bought a May Put or 10 for (C) for $3.00 expecting it to go down:

The price goes from $4.86 or so to $2.00

Will the option's price scale directly with this?

It seems like this is a much better alternative to shorting, where there is unlimited risk.

My only worry would be that for out of the money contracts that less people buy, the price wouldn't be affected as much. I've heard of this being the case a long time ago, where options premiums didn't scale anywhere near their real value.

 

[dagnyt]

Quote from rgilbert93:



Say you bought a May Put or 10 for (C) for $3.00 expecting it to go down:

The price goes from $4.86 or so to $2.00

Will the option's price scale directly with this?

NO.

The option delta will give you a rough estimate of how far the put would increase when the stock moves loer by one point.

But, you are paying time premium for your option, and all things being equal, it's worth a bit less each day.


It seems like this is a much better alternative to shorting, where there is unlimited risk.

Yes, it has limited risk. But if the stock moves slowly towards 3, you lose 100% of the cash paid for the put. If you had sold stock you would have a nice gain.

When you take less risk, you get less reward.

My only worry would be that for out of the money contracts that less people buy, the price wouldn't be affected as much. I've heard of this being the case a long time ago, where options premiums didn't scale anywhere near their real value.

Implied volatility makes a big difference in the option price. Sometimes premium scale far more than you would expect (Nov 2008), so that's a trade-off. s

Mark

 

[estockandoption]

Quote from dagnyt:


Say you bought a May Put or 10 for (C) for $3.00 expecting it to go down:

The price goes from $4.86 or so to $2.00

Will the option's price scale directly with this?

NO.

The option delta will give you a rough estimate of how far the put would increase when the stock moves loer by one point.

But, you are paying time premium for your option, and all things being equal, it's worth a bit less each day.


It seems like this is a much better alternative to shorting, where there is unlimited risk.

Yes, it has limited risk. But if the stock moves slowly towards 3, you lose 100% of the cash paid for the put. If you had sold stock you would have a nice gain.

When you take less risk, you get less reward.

My only worry would be that for out of the money contracts that less people buy, the price wouldn't be affected as much. I've heard of this being the case a long time ago, where options premiums didn't scale anywhere near their real value.

Implied volatility makes a big difference in the option price. Sometimes premium scale far more than you would expect (Nov 2008), so that's a trade-off. s
Mark

thank you it did help me.. im new to options trading

 

[DannoXYZ]

I recommend the McMillan On Options book.

 

[stoic]

Quote from rgilbert93:

I trade in both directions, by simply stating a point you can't infer I only short trades. And in options there is limited risk in shorting. (The premium)

"Limited Risk in shorting" (The Premium) ????

I don't think so!!

 

[spindr0]

Quote from rgilbert93:

I trade in both directions, by simply stating a point you can't infer I only short trades. And in options there is limited risk in shorting. (The premium)

OK, there's limited risk in BUYING options. So what's your point? That you think that I think that you don't trade both directions??? LOL.