Options.

R

rtharp

I spoke with Baron about helping getting some options material over to Elite here and have emailed a few professional option trader friends of mine.


Are there any particular questions traders have about options?


Baron I'll address this thread for awhile as I was in the Bond Option Pit at the CBOT for about 7 months. I prefer trading the underlying security but will answer questions for others.


 
I would like to hear about how some use straight option plays to generate income, and with an approximate percentage amount of their trading account.(or is it all they do) Best markets, time of the month, etc.

This is in additon to how to use options to protect common stock positions.

Jeffrey
 
Jeffrey,

I use options as a balanced part of my overall trading. I do plays from naked strangles to collars (see thread entitled "Selling Puts??"), to straight put and call buying. I often will buy puts, for instance, on a stock that has had a huge runup over a week or two week period and I'm looking at for a short side swing trade. By buying slightly out of the money puts, I'm not paying a lot for the options and I'm limiting my risk of loss if I'm wrong. Likewise with buying calls.
 
Good day,

I have a question about options. I am just starting to learn options and a little confused about something, so this question may seem a little lame, I do apologize.

Now in a straight call or put transaction, your risk is only limited to the amount paid for the contracts you purchase plus commissions.
Now if your wrong, you would be able to exit that options position and get out with a small loss like in stock trades, right?, or is your equity just lost if your option position doesn't turn green.

thanks,
yk
 
yk if you buy a put or call your maximum loss it the price you paid plus commission. That is correct.
Usually you will be wrong about 70-80 % of the time but when you are right about an option it pays big.


If you sold the put or call your maximum profit is the amount of the sale minus commissions. 70-80% of options expire worthless but that other 20% of the time you can lose a bundle.

If you exit the option before it expires than your loss can be smaller than the price you paid.


 
One of the better plays to do for options Jeffery is what is known as a credit spread. These are a lot less risky than an option that is naked (no underlying contract).

A credit spread means you are making money as soon as you do the spread, unlike a debit spread.

Spreads are more liquid that outright options are (floor has less risk and recognizes this)

What you would do is find a stock XYZ which isn't a real stock.

Let's say it is trading at 50 today. It has gone as high as 55 in the last few weeks and as low as 45 also for the last few weeks.

To make money on this spread you could sell the 60 call on XYZ and than buy a 70 call on XYZ. It's the second part that is insurance. It lowers your premium but protects your from adverse news/reactions. You will make money on this part of the spread as long as it doesn't trade above 60. Once it starts to trade above 60 you will lose some of the premium you made. If it trades above 70 than the premium will be lost but the call you own will start to make some money.

Than you could also leg into the other side of this stock with puts. Sell the 40 put and buy the 30 XYZput. You make money on this part of the spread.

If the stock falls below 40 you will start to lose some of your premium but if it falls below 30 your loss will now be protected.

Find a market that has some volatility but has some very strong support and resistance levels.




This is one of the more useful types of options spreads. It works well in most markets.

rtharp
 
yk,

To elaborate on what rtharp said, in case you still had any doubts, yes, you can buy and sell options just the same way you do with stocks, so if you bought some calls and the trade goes against you, you could sell them right back for a small loss. In fact, you can daytrade options just like you can with stocks (it's a bit tougher since you usually give up the spread), and most options that are bought are rarely actually held through expiration, but rather sold for either a profit or loss.
 
credit spreads are a personal favorite of mine. The ROI is often 20%-40% for a 3 to 4-week period (but don't put all your eggs in one basket). Balanced against the maximum loss, you have to be right 60% to 80% of the time. I am currently looking into bearish call credit spreads above gapped down stocks, and bullish put spreads below gapped up stocks, *after* they make a run but fail to close the gap. Advice to a beginner would be: In general, when buying spreads go 3 months out or more -- you get the extra time at a low cost, and when selling spreads use the nearest expiration, preferably 1-3 weeks away -- you will benefit from the high time decay. Any other strategies or tips, rtharp?
 
I have a friend who is extremely good at technical analysis. He seems to be right about 85% of the time. He won't share his trading methods because he understands that once he does they will no longer work.

He used to daytrade options. He lived off his profits for awhile. During the end of the bull market he would find a stock with earnings /news, or a split announcement. He figured which stocks would give him 5-10 points minimum when he was right. Instead of buying the stock with margin, he would buy the deepest in the money option before it would explode. He was making something like 70% a month on his account, but it didn't grow because he constantly swept profits. He understood deep in the money options aren't too liquid so a small account was all he could use.

Bugged the hell out of me as I was making no where near that. I was trading a lot more capital than he was but his type of trading didn't fit me.

So yes it is possible to daytrade options but it isnt' for everybody.

If you are wondering my friend finally grew too big for options and now only trades the FOREX markets.

rtharp
 
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