Retail options strategy?

B

Blue_Bull

Hi all,

I am curious what you folks think about using options to get leverage on directional bets? Specifically, are the odds stacked completely against the retail investor?

I've been buying 3-6 months out calls as swing trades, and it's been going pretty well. I mainly trade in upward trending stocks that have pulled back, to the point where I believe they are ready to bounce.

My main concern is that, well, everything is going well in this market. So we'll see if it keeps working in a tougher market. I'm not really sure what my specific question is, but do you guys think that such a strategy can be successful in the long run?
 
It can be a profitable strategy assuming you are actually good at picking direction.

or as the saying goes, don't mistake bull market for brains.
 
Quote from MTE:

It can be a profitable strategy assuming you are actually good at picking direction.

or as the saying goes, don't mistake bull market for brains.
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:) Timing as well.
 
This was the perfect strategy for the last seven months ... were we had the biggest bull market since decades, so this is hardly a representative period ... like MTE said allready don't mistake bulls for brains ... you will have to come up with something more sophisticated imo ...
 
Quote from Blue_Bull:

I am curious what you folks think about using options to get leverage on directional bets? Specifically, are the odds stacked completely against the retail investor?

The odds are stacked against the idiot who thinks that he can beat the system without understanding the system. And understanding it is no giarantee of success (LOL - and I'm not referring to you).


I've been buying 3-6 months out calls as swing trades, and it's been going pretty well. I mainly trade in upward trending stocks that have pulled back, to the point where I believe they are ready to bounce. My main concern is that, well, everything is going well in this market. So we'll see if it keeps working in a tougher market. I'm not really sure what my specific question is, but do you guys think that such a strategy can be successful in the long run?

It's not a question of whether the strategy can be successful in the long run. It's a question of whether you can.

When you find a strategy that works, you should bang out the trades for as long as you can. It's OK to bump up the size as well as the number of positions but always remember that sooner or later you're going to hit the wall so be prepared to cut your losses or flip to the other side or to another strategy. Know your risk and respect it.
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Here's a question though - does the implied volatility essentially cancel out any move I am anticipating? What I mean is this - assume I am anticipating a 10% move upwards, does the IV account for that 10% move already, thereby canceling out any "edge" that I may believe I have?

The IV aspect is one that I don't really understand that well.
 
Quote from Blue_Bull:

Here's a question though - does the implied volatility essentially cancel out any move I am anticipating? What I mean is this - assume I am anticipating a 10% move upwards, does the IV account for that 10% move already, thereby canceling out any "edge" that I may believe I have?

The IV aspect is one that I don't really understand that well. [/QUOTE

It probably depends on the stock you are trading and how long you're holding the contracts. You are doing the right thing buy buying further out contracts for directional plays but if you plan on staying in the position for a while if you are long calls sell some otm puts along with it to capture a decrease in vol and theta.

If the market just keeps churning like this you're going to bleed to death if you are just holding calls. Over this long weekend I'll be selling a crap load of deep otm calls and puts and just collect the time decay next week. From my short experience trading options they seem more useful when you think in terms of the probability of a price staying in a range or staying above or below a certain point. Then if you want scalp the underlying in between you can do that when you get a high prob signal to maximize your return.
Good luck and have a great holiday!
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I have a question about your strategy of selling Deep OTM options to collect the time decay: I read somewhere that it's like "collecting pennies in front of a steamroller." (Might have been Buffett?)

How do you assess the risk that the deep OTM option will remain OTM, and secondly, if the probability is indeed favorable to you, then don't you also collect an accordingly smaller premium?
 
Quote from Blue_Bull:

Here's a question though - does the implied volatility essentially cancel out any move I am anticipating? What I mean is this - assume I am anticipating a 10% move upwards, does the IV account for that 10% move already, thereby canceling out any "edge" that I may believe I have?
More...
Do you have an edge or do you hope you have an edge?

IV cancels out nothing.

Assuming that IV contraction isn't a forward factor, as a long call buyer your issue is time decay. Slower initially. Faster later. If you are buying 3-6 month long calls and you get a 10% move in in 2-5 months, you'll make good money with ITM/ATM calls.

If IV is low, your calls will be cheap and you'll probably make money regardless of when the move occurs. If IV is high, your calls will cost more, decay will be more costly and the move will have to be sooner (before last month).

But can you consistently find 10% up moves in your selections?
If you can, E-mail me your subscription rates :)
 
Quote from riskaddict:

Quote from Blue_Bull:

Here's a question though - does the implied volatility essentially cancel out any move I am anticipating? What I mean is this - assume I am anticipating a 10% move upwards, does the IV account for that 10% move already, thereby canceling out any "edge" that I may believe I have?

The IV aspect is one that I don't really understand that well. [/QUOTE

It probably depends on the stock you are trading and how long you're holding the contracts. You are doing the right thing buy buying further out contracts for directional plays but if you plan on staying in the position for a while if you are long calls sell some otm puts along with it to capture a decrease in vol and theta.

If the market just keeps churning like this you're going to bleed to death if you are just holding calls. Over this long weekend I'll be selling a crap load of deep otm calls and puts and just collect the time decay next week. From my short experience trading options they seem more useful when you think in terms of the probability of a price staying in a range or staying above or below a certain point. Then if you want scalp the underlying in between you can do that when you get a high prob signal to maximize your return.
Good luck and have a great holiday!
More...

Good luck with collecting time decay next week! Just don't be surprised when the options open at the same level they closed before the long weekend!

Market makers aren't stupid. The weekend time decay is priced in before the weekend.
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