Quick Trade - Options Buying Methodology

O

OddTrader

I think Qucik Trade (QT) is an effective methodlogy for options buying.

http://www.elitetrader.com/vb/showthread.php?s=&postid=3397279#post3397279

Quote from OddTrader:

"Ask not what your Options can do for you, but what you can do with your Options." --- OddTrader
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Based on his research, Schaeffer's book "The Options Advisor" has a whole chapter explaining the approach of QT methodology.

In chapter 7, he says "My investment philosophy dictates that the individual options trader needs to have an edge when buying options, and that edge usually occurs with position trades as you seek to ride (accelerated) trends over a period of days or weeks.

...

I have developed a short-term approach by which you can hold a position for a maximum 7-trading-day period and expect a major edge in your options trading. I call it the Quick Trade (QT) methodology, ..."

Since not much information has been found/disclosed publicly on the Internet (according to my experience, that would be likely and potentially an indicator of hiding an effective trading secret :D), I now would like to collect my findings about QT in this thread.

Welcome to share your expereicne/examples about QT.
 
You won't be disappointed. :)

Once upon a time:

I found an example from recent posts on ET mentioned by SteveH:
http://www.elitetrader.com/vb/showthread.php?s=&postid=3391054#post3391054

Quote from SteveH:

The few traders I know of who can make single-trade killings every so often are doing so with options (simple buy side, no hedging) on something like the QQQ (60/40 tax split, just like regulated futures contracts, btw). When they expect a big move is coming up, they'll load up with like 300-700 contracts with an avg cost no greater than $1 per option ($100, of course). So that's roughly a 30K-70K position where the expectation is a 3x-5x gain.

One of the guys I follow in a forum made 700K on QQQ options positions in the flash crash incident in Spring 2010. He regularly makes 50K to 100K on the bigger QQQ option swing trades where he has around 20K-30K at risk.

Ironically, they are scared to death of the futures markets because it's a different mindset to them (unlimited losses due to marging reqs. vs. the option bet itself being the ultimate stop-loss upfront).

But, the mindset they're really good at is with compounding their wins. When the big win comes along, they'll feed a greater initial sum into the opposing bet from the first. It's "house money" at that point so they can take the emotional hits when they fail.

Extraordinary thing to watch unfold. If you're at that level of the game, a QQQ or SPY option swing trader, it probably trumps day trading in the futures market. You get the 60/40 tax benefit, more leverage possible with less cash involved and you have a limited loss. [The time decay factor in options is not as much of an issue as you would think. They're good enough to peg a move within 1-3 days.]

I mean, can you imagine being emotionally unfazed by 10K-30K 1 trade option losses because you're good enough to produce far many more 20K to 100K wins and you also get about 2-3 huge wins per year (200K-500K)?
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http://www.elitetrader.com/vb/showthread.php?s=&postid=3332511#post3332511

Quote from SteveH:

The best option player I've ever seen tends to wait until the last 2 weeks before expiration and trades size. He mainly sticks with the QQQ with price per contract ranging from 0.25 to 1.50 and contract position size from 200 to 1200.

This morning, he bought 100 AAPL Nov 435 contracts for $3.00. He hasn't announced a sell yet but that bid got up to about 5.20 this morning. That's $22,000.

Within the past 2 days, as the QQQ was falling, he bought a little less than 200 58 Oct calls for ~1.35 and 500 around 1.25 (whole premise was market anticipation of Apple results). He sold out as it rose for around a $16,500 profit. On the 3:00 PM EST time rise yesterday, he bought 1200 contracts at 0.53 and sold at 0.75, so, just over 25K profit.

Look, I have no way of auditing his records to know if he's real or not, but, since he's a private trader posting to a board with absolutely no ties to vendoring or mentoring and since I've been watching his posts for 2 years, my conclusion is that he's on the level.

I think size matters a lot in the game of becoming a successful buy-side options trader. This guy tends to get on a roll of 3-6 wins, getting 10K to 25K per win with like 0.30 to 0.50 moves in the QQQ (super liquid and you get 60/40 tax treatment). When he gets a loser, it's like 5-10K, losing like half of what he had in the play.

It's probably not what any of you want to hear, but large contract size with sub-dollar moves on a super liquid index is the most likely way of making it in that game (for a 6-7 figure annual income).

[Personally, I have absolutely no stomach for that game]
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Perhaps another example:

http://www.elitetrader.com/vb/showthread.php?s=&threadid=227873&perpage=40&pagenumber=3

Quote from StarDust9182:

Options are a tool, like stocks, bonds, cash, futures etc. A tool is not an edge. Knowing how and when to use a tool is.

One fellow already gave you the answer you seek but it doesn't appear to have satisfied you.

Options trading is harder than say stocks because there more degrees of freedom. Those extra degrees of freedom allow many retail traders to blow their accounts out.

One "secret" is to buy at the right time and then to sell at the right time. Experience will eventually teach you the right time.
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I would consider the following article is a relevant one.

Q
http://www.ftpress.com/blogs/blog.aspx?uk=Options-Trading-timing-short-term-trades

Options Trading: Timing Short-term Trades

Market risk exists whether you own shares of stock or use options to anticipate marketwide movement. In that sense, options are not higher-risk than stocks. In fact, because one option lets you control 100 shares of stock, they are far less risky. If you can benefit from stock price movement for about 5% of the cost of those shares, your risks are lower.

The problem in these uncertain market conditions is known by most traders: When do you put money in the market, and where is your capital safe? Because the answers cannot be known, many people are simply on the sidelines waiting for a clearer picture to emerge.

The debate over tax rates has political implications; but perhaps more immediately, the debate also may have dire consequences in the market. For example, if capital gains rates were to go up on January 1, many investors would want to sell shares ahead of time to avoid a higher capital gains hit a couple of weeks later. This could have caused a huge drop in the overall market, not only because of the tax implications of waiting to sell, but because of the wider fear created by the uncertainty.

There are four ways you can use long options to anticipate expected stock market price changes, either in the entire market or individual stocks. These are:

1. Use options on broad indexes. Few strategies beat the combination of leverage and diversification. Options are one of the best tools for leverage. And buying options in broad market indexes diversifies your risk. It also enables you to expose that leveraged capital to a potential big move in the market. If you think the market is going to rise, buy calls in an index. If you think the market is going to fall, buy puts. You can also sell options to benefit from the same movements, but shorting options is a much higher-risk venture.

2. Consider ETF options as an alternative. When exchange-traded funds (ETFs) began gaining in popularity, most emphasis was placed on the diversification and fixed basket of securities they provided, not to mention ease of trading on the public exchanges. Another feature available on many (but not all) is options trading. Just as you can control 100 shares of an individual stock or index with options, you can also control 100 shares of an ETF. This is especially flexible when you are interested in commodities but you do not want to buy shares of one company or, even higher-risk, trade futures. So you can trade options on oil through the U.S. Oil ETF (USO) or in gold through the SPDR Gold Trust (GLD), for example.

3. Use sound reasoning for your timing decisions. Try to time speculative option plays based on a sound reasoning. For example, if you know capital gains rates are about to rise, you expect the market to fall, perhaps hundreds of points. Buying puts in an index fund is sensible and allows you to benefit from an otherwise catastrophic turn of events. If you expect good economic news and a resulting rise in a particular industry, buy calls in the leading competitor in that industry or in an industry-specific ETF.

4. Focus on short-term options combined with timing for market moves. Most options strategies involve an unending conflict between time value and time decay. Long options traders need time for value to develop, but the longer the time the higher the cost and the greater the risk of time decay. In a timing strategy, short-term options -- those expiring in one month, for example -- are the best candidates. There is very little time value remaining and if you are exercising reason in timing your strategy, it should play out before the options expire.
UQ
 
OTM/ATM/ITM? :D

"
http://www.optionsplaybook.com/rookies-corner/learn-options-trading/

Getting your feet wet
Without getting in up to your you-know-what

Option trading is more complicated than trading stock. And for a first-timer, it can be a little intimidating. That’s why many investors decide to begin trading options by buying short-term calls. Especially out-of-the-money calls (strike price above the stock price), since they seem to follow a familiar pattern: buy low, sell high.

But for most investors, buying out-of-the-money short-term calls is probably not the best way to start trading options. Let’s look at an example of why.

Imagine you’re bullish on stock XYZ, trading at $50. As a beginning option trader, you might be tempted to buy calls 30 days from expiration with a strike price of $55, at a cost of $0.15, or $15 per contract. Why? Because you can buy a lot of them. Let’s do the math. (And remember, one option contract usually equals 100 shares.)

Purchasing 100 shares of XYZ at $50 would cost $5000. But for the same $5000, you could buy 333 contracts of $55 calls, and control 33,300 shares. Holy smokes.

Imagine XYZ hits $56 within the next 30 days, and the $55 call trades at $1.05 just prior to expiration. You’d make $29,921.10 in a month ($34,965 sale price minus $4,995 initially paid minus $48.90 TradeKing commissions). At first glance, that kind of leverage is very attractive indeed.

All that glitters isn't a golden options trade

One of the problems with short-term, out-of-the-money calls is that you not only have to be right about the direction the stock moves, but you also have to be right about the timing. That ratchets up the degree of difficulty.

Furthermore, to make a profit, the stock doesn’t merely need to go past the strike price within a predetermined period of time. It needs to go past the strike price plus the cost of the option. In the case of the $55 call on stock XYZ, you’d need the stock to reach $55.15 within 30 days just to break even. And that doesn’t even factor in commissions or taxes.

In essence, you’re asking the stock to move more than 10% in less than a month. How many stocks are likely to do that? The answer you’re looking for is, “Not many.” In all probability, the stock won’t reach the strike price, and the options will expire worthless. So in order to make money on an out-of-the-money call, you either need to outwit the market, or get plain lucky.
Being close means no cigar

Imagine the stock rose to $54 during the 30 days of your option’s lifetime. You were right about the direction the stock moved. But since you were wrong about how far it would go within a specific time frame, you’d lose your entire investment.

If you’d simply bought 100 shares of XYZ at $50, you’d be up $400 (minus TradeKing commission of $4.95). Even if your forecast was wrong and XYZ went down in price, it would most likely still be worth a significant portion of your initial investment. So the moral of the story is:

Don’t get suckered in by the leverage you get from buying boatloads of short-term, out-of-the-money calls.
"
 
Easy? Probably Not at all!?

"
http://www.investingwithoptions.com/2011/10/26/option-trading-basics-bootcamp-week-5/

Short Term Risks

Many seasoned option traders will forego the riverboat casino that is options expiration and only trade options that have more than 2 weeks left to expiration.

Option Trading Basics Bootcamp [Week 5]This holds especially true for “income” type trades that are short gamma by nature– if you try and milk out every last penny of an income trade, you will run the risk of getting cut by the gamma knife edge and letting profits turn to losses in the blink of an eye.

The same siren song can occur for directional option traders. You may look at near term options and say they are “cheap” and offer plenty of leverage for the cost. But odds are you are neglecting the theta cost of those options, and the actual odds that you have on the position.

Or flip it around, you could think that since an option has a theta of -50 with 4 days left to expiration, that somehow you’ll be able to make 50 bucks a day just by selling those options, without any respect to the gamma risks in selling short term options.

The desire for newer traders to trade short term options is compounded by the fact that weekly options have become much more widespread in many options, so every week can behave like options expiration.

This point leads me to the next principle new option trades should follow:

Principle #5: Don’t Trade Close to Expiration

We’ll dive a little further into option greeks so you can get a better understanding of what risks you take when trading short term.

The Gamma Knife Edge

Gamma is a stock option greek that makes options trading so fun. It can be referred to as the “acceleration” of the option. If you are long gamma, you want fast moves; if you are short gamma, you want the underlying not to move at all.

It’s also known as the second derivative, which doesn’t mean much unless you are viewing a risk graph:

Gamma is a wonderful thing, and it is directly related to the amount of time decay available in an option.

You can consider gamma to be like fire: under controlled situations, it feels good and warms your house. But if it gets out of control, it can be a very destructive force.

Where It Gets Tricky

The chart below shows the gamma of a call option buy, plotted over time:

What does this tell us? On out of the money options, the gamma will start to decay, as those options lose their effectiveness. But as we approach options expiration, gamma drastically increases on at the money options. This increase is what I affectionately term the “gamma knife edge,” and it’s where many new option traders get cut.

See the other side

Remember how I said gamma and theta were linked? Here’s a chart of theta over time:

So not only do you have a significant increase in gamma, you also have a much larger amount of time decay in options.

Funny things start happening to options as we approach expiration. The pricing models start to get a little weird, and you could potentially be taking on more risk than you thought– regardless of whether you are an option buyer or seller.

Regardless of your trading style– if you are a new options trader and just beginning to understand the mechanics of the options market, stay away from short term options. Opex trading and dancing around the gamma knife edge is a dark art that requires a level of agility that isn’t often seen in new option traders.

Once you get a better feel for the market and you feel that opex trading will match your trading style, then consider adding short term options to your trading strategy.

"
 
Now starting an experiment with SPY (SPDR).

http://www.nasdaq.com/symbol/spy/option-chain

Will buy Call or Put options on weekly basis for Long-only positions.

There will be sometimes no signals/trades for many weeks.

My signal for this week is Long.

Just bought (using the well-known C2 platform :) as a tracking system) a Jan21 SPY 126 Call @ $2.44.

Plan to close this trade next week.
 
Quote from OddTrader:

Based on his research, Schaeffer's book "The Options Advisor" has a whole chapter explaining the approach of QT methodology.

In chapter 7, he says "My investment philosophy dictates that the individual options trader needs to have an edge when buying options, and that edge usually occurs with position trades as you seek to ride (accelerated) trends over a period of days or weeks.
More...
Based on his performance over the years (see Hulbert), Schaeffer's methodology involve pimping bad advice for a fee... unless, of couse, you're referring to someone other than Bernie BS
 
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