Regular Log Calls and Puts , opinions please .....

[md2324]

Good Evening,

I want to get some other members feedback on the issue of Buying regular Calls and Puts ( mainly ATM )

I know that buying Options is said to be a losers " bet " and that the real money is made in Selling Options for Premium,
but putting that aside, please induldge me for a sec.

If a trader was to have a strong feeling, and felt that a stock was really poised to make a BIG move ( a pure Directional play ) , say we're expecting the stock to move at minimum .... 5% + in price. And we wanted to capitalize on this move ..... what would be the recommended " Play " , if all we were going to do, was to buy an outright Long Call or Put ?

Some Questions / comments regarding the topic at hand :

1. What is the minimum amount of time that we would want to buy before expiration ......2-3 months ?
Or would the amount of time till expiration, be based on what timeframe chart you got your " read " from, that makes you think that the stock is poised to make a big Directional move .... say up for this example, so we'd be looking to buy a Call

2. I have also read, that an Options Time Decay increases in the last 30 days till expiration ..... so as a Safety Net , always buy an extra 1 - 2 months of Time, just incase the immediate move that we were expecting doesn't happen immediately ?

3. Would you always want to buy as close to the money as possible ( ATM ) .... or would this all be based on the Volatility within that specific stock ..... higher the IV , then the more likely the stock is to move more in price

4. Would it matter what the VIX itself was showing at the time that you wished to go Long the stock and buy a Call ?
The VIX at low Levels = cheaper to buy , which in turn , is what is recommend when Buying Options anyways

5. I know that we would only want to buy Options on stocks that had a lot of Liquidity , and of whose Options had a good amount of volume and Open Interest on those Options ( particularly the strike we were looking to buy ).
And also, we'd want the options to have tight spreads between the Bid x Ask

Just wanted to get a feel for what other Traders methods and recommendations would be, in the case of purchasing outright Long Calls and Puts
I really appreciate it - Michael

 

[xandman]

1. 45 days

2. You buy the right option for the expected time and magnitude of the move. Structuring trades is mostly about optimization.

3. You buy close to ATM or father OTM based on favorable pricing in the Skew

4. You can use the Vix as a general indicator. But it's like a momentum stock trader buying a stock because the SP500 momentum is up. It's all relative.

5. Correct. That's a favorable scenario.

 

[Jones75]

Good Evening,

I want to get some other members feedback on the issue of Buying regular Calls and Puts ( mainly ATM )

I know that buying Options is said to be a losers " bet " and that the real money is made in Selling Options for Premium,
but putting that aside, please induldge me for a sec.

If a trader was to have a strong feeling, and felt that a stock was really poised to make a BIG move ( a pure Directional play ) , say we're expecting the stock to move at minimum .... 5% + in price. And we wanted to capitalize on this move ..... what would be the recommended " Play " , if all we were going to do, was to buy an outright Long Call or Put ?

Some Questions / comments regarding the topic at hand :

1. What is the minimum amount of time that we would want to buy before expiration ......2-3 months ?
Or would the amount of time till expiration, be based on what timeframe chart you got your " read " from, that makes you think that the stock is poised to make a big Directional move .... say up for this example, so we'd be looking to buy a Call

2. I have also read, that an Options Time Decay increases in the last 30 days till expiration ..... so as a Safety Net , always buy an extra 1 - 2 months of Time, just incase the immediate move that we were expecting doesn't happen immediately ?

3. Would you always want to buy as close to the money as possible ( ATM ) .... or would this all be based on the Volatility within that specific stock ..... higher the IV , then the more likely the stock is to move more in price

4. Would it matter what the VIX itself was showing at the time that you wished to go Long the stock and buy a Call ?
The VIX at low Levels = cheaper to buy , which in turn , is what is recommend when Buying Options anyways

5. I know that we would only want to buy Options on stocks that had a lot of Liquidity , and of whose Options had a good amount of volume and Open Interest on those Options ( particularly the strike we were looking to buy ).
And also, we'd want the options to have tight spreads between the Bid x Ask

Just wanted to get a feel for what other Traders methods and recommendations would be, in the case of purchasing outright Long Calls and Puts
I really appreciate it - Michael

You can always try a front month long straddle or if you're tight on money, a long strangle if you think you know what week this jump is going to happen. Check your historical vol's and buy low, and watch the theta, or it will devour you quickly.

I changed over from directional trading to ER with long straddles. Buy one day, sell the next.
Your winners will happen and the losses are a lot smaller and easier to take. Got to pay attention to vol and if the crush is going to be to big, forget it and go to the next one.

The bull market ended in March up here in Canada, and flat markets are tough on directional traders. With ER long straddles I make more and lose less, sleep better and find I'm sitting on a bigger chunk of change, if you know what I mean.

Good luck

 

[lawrence-lugar]

trade Weekly options instead.
why wait for a month or two with the traditional options to see the end of the results of the sports game, so to speak.

 

[md2324]

Thank you for all of the replies and the advice/input

Jones75 ,
could you please give an example of a " ER long straddle "
Thank you

With trading and buying the Weekly options ..... is there a big difference in the number of Volume and Open Interest in these vs the regular month options ?
And is the spread between bid x ask , still pretty tight on the weeklies ? And I guess it is mainly dependent on the stock of who's options you are wanting to buy, that dictate the liquidity, volume, O.I. and tight spreads ...... AAPL vs a biotech like ISRG for example

Thank you again for everyone's input

 

[Jones75]

Thank you for all of the replies and the advice/input

Jones75 ,
could you please give an example of a " ER long straddle "
Thank you

With trading and buying the Weekly options ..... is there a big difference in the number of Volume and Open Interest in these vs the regular month options ?
And is the spread between bid x ask , still pretty tight on the weeklies ? And I guess it is mainly dependent on the stock of who's options you are wanting to buy, that dictate the liquidity, volume, O.I. and tight spreads ...... AAPL vs a biotech like ISRG for example

Thank you again for everyone's input

I'll use CNR.TO, earnings release date is Monday, Jul 20, after the bell. If you're ok with the iv and vega, then buy an equal number of puts and calls at the same strike price (make sure the bid/ask is tight and heavily traded). If you have to leg in, follow the trend. Add your premiums together, plus brokerage fees and that's your hurdle, up or down. If you don't make your hurdle the next day, get out, take a small loss and move on to the next trade. If you understand money management, and buy low, your winnings will far exceed your losses.

If you're not sure about vols check out this site. The U.S. version for CNR is CNI. This will put you in the ballpark as to whether you are paying too much or not. http://www.optionseducation.org/tools/historical_implied_volatility.html

One thing that I found, and that doesn't mean it's fact, the less analysts covering , the less likely of vol crush.

I have not been studying the weeklies, so I won't comment. Maybe someone else will pipe in.

Good luck.

 

[prc117f]

low VIX does not mean the option on that stock will have a low IV. if there is news expected for that stock, the IV will be higher. but you can easily buy a long options position and still lose money even if the news is what you expected.

 

[stepandfetchit]

My 2 cents. We each have to find what we are comfortable with. I only traded this with bullish positions, so weigh my comments accordingly.
1) Minimum time: Depends when the expected move is to occur with your time buffer. I typically chose a minimum of 40 days to a maximum of 120 days for the Bullish moves I expect on specific Sector ETFS -- your mileage may differ.
2) Theta decay will work against you the entire trade, but you are correct, that the latter days decay faster. I exit or roll the position before I get to 20 DTE, which minimizes this somewhat.
3) I typically buy 65 to 70 Delta Calls (ITM), and use the higher delta for shorter term (say near 40 days). Getting too close to ATM is more like gambling, from my perspective. To keep my focus, I consider buying the ITM option as a surrogate to purchasing the security outright, so this trade is heavily leveraged and results in about 6% of the cash of an outright purchase.
4) The Option Implied volatility (or VIX for SPX or SPY), should be considered Pain, in this trade, as you are effectively throwing that money away, expecting the price movement to make those high premiums you flush down the toilet a minor inconvenience. This is one reason I currently do this only for Sector ETFs, which have low IV, so I get less head-wind from this. -- Waiting for lower IV may help, but I expect this will make it difficult to get the stars lined up for your trade on the higher IV securities.
5) The liquidity is a very important factor. While you would like to see high option volume on the strike you plan to buy, it is often safe to look at Open Interest, and insure your trade is a small fraction of that amount. Sometimes, going further out in time, you can slightly relax your threshold for liquidity, as the liquidity will typically increase as the option moves closer to expiration (around 30 days to EXpiry is sometimes the peak liquidity, so a 120 DTE may allow you to relax the requirement slightly). However, this liquidity becomes critical should you need to exit your position, which may occur, if you realize you made a mistake and now find this security will NOT perform as you expected. I had a position on TUR, once, with low, but seemingly reasonable Open Interest. The bid asked spread was about 40-60 cents at the time on a position that had a mid-price between 7 and 8 dollars. One day, I observed the bid asked spread increase to over 4 dollars! I was able to close the following day @ 7.70, but have not traded TUR since, as there "could" have been a reason to exit, and I would have gotten hurt bad.

Regards,

 

[md2324]

stepandfetchit ,
I really appreciate your reply and contribution to this thread

Wanted to ask a few more questions in relation to what you wrote .

1. I like the 40 - 120 day range as well
Usually ( of course not always ) , but when I get certain setups, the move I'm expecting happens almost immediately , and if it doesn't then , the trade ( my Entry ) is Null and void at that point

Say I get an entry off of my Weekly chart .... Well I'm expecting the trade to move in my favor within 1 - 3 weeks Tops
Of course I can be right on the trade , but it takes twice as long to make the initial move in the stock that I had thought would happen.
So given this ...... I'm thinking of buying Options with a minimum of the 45 day mark ( twice the 3 week expected move timeframe for most trades to workout , as I mentioned earlier )


2. Rolling the trade when it gets to the 20 DTE is a good strategy , especially if your read on the trade is the same as when you first put the trade on

3. at the 60 - 70 Delta range ...... does this usually put you in the 1 strike iTM option ?

4. Regarding the importance of ONLY buying Options of whose Strikes have high enough Open Interest , what do you look for regarding Open Interest ..... 1,000 minimum ?

Thanks again

 

[stepandfetchit]

You are most welcome. My experience is somewhat limited, so double check anything I say with what you know to get a reference. I am still learning. This stuff is not nearly as simple as I thought it would be.
1) Your logic on your minimum time frame seems valid. ... at least 2x the expected time frame. The trades I currently do are fairly narrowly focused, so I don't have experience in modifying my time frames other than a tendency for the longer duration options.
2) Agreed! While not related to time decay, and assuming the trade is remains attractive, I also roll the position if the Delta exceeds 86 (or close to it), which has the benefit of taking some money off the table. This is similar in some respects to a trailing stop, without exiting the position. After about 3 such rolls, you will be only playing with "house" money. Sometimes this roll at Delta >86 rule coincides with a DTE remaining of about 20, which may allow the roll to the next expiration cycle also extract a small about of capital from the roll.
3) It depends. (I currently have a hard line at 65 delta as my minimum for a new position, which also requires the DTE to be >100 Days -- 70 delta is my "sweet spot") Typically I am trading ETF's priced in the 70-80 dollar range, and enter with about 120 DTE, putting the 70 Delta strike about 2-4 strikes ITM (2-4 dollars ITM). This is what I am most comfortable with now, with a good deal of "skin in the game" for each entry. While I do NOT think there is any magic in a specific "delta" value you use, I do feel that if one allows too much variation in their process (sloppy entry criteria, exit criteria, etc), it will also be more difficult to "separate the wheat from the chaff" from your trading. {Pardon my preaching}
4) A general rule of thumb could be to look for an Open Interest number that is at least 20 times the total size of your trade. I have not strictly adhered to this rule on longer term entries, in the hopes that the liquidity will improve. I have entered with 5 and 10 Times my trade size on some of these and have not been burned yet, with emphasis on "yet"! :-(

I am pasting some trades I made last year with this strategy on IYR as a reference point. Some trades were good some were bad, but overall favorable. Note: An ExitDate same as the next EntryDate signifies a Roll.