Simple option strategy...?

let it run · Apr 6, 2006

Hi guys,

I'm a futures/spot trader and I have just set up an 'investment account' to accumulate some long term stocks for the benefit of my future wealth. Basically a buy and hold account.

Anyway, in order to get the best research out of the broker I use (an Australian firm) I either have to pay a hefty fee or do one options trade every quarter.

I understand the principles of options fine, but I'm not stupid enough to think that I can go straight in and profit from an options play. I've looked at Optionetics but I see a lot of bad stuff written about them.

Has anybody got any beginner hints for picking an option trade for somebody who is a bit sidetracked by other decisions to make!

Appreciate any help.

RichardRimes · Apr 6, 2006

I'm not sure how much of a help i can be but your are right not to PAY for option advise/service...at least until you know more about options. Educate yourself by books and free info at first. You are not a novice trader so I'm sure you will find some good and useable info from books/threads/free seminar's etc. Its important to find a strategy that works for you as well as the markets we are currently in. Something you are comfortable with. I know this is fuzzy but options are very complicated and there is no easy answer or one solution for each person.

A very simple option's trade would be a spread...either credit or debit, put or call to mirror your research/ideas about the underlying equity. ex. you are very bullish on an equity or index you can do a debt call spread. Your are bearish do a bear put spread. slightly bullish you can do a bull put credit spread. Think the equity/index will go no where for a time you can do an Iron condor/calendar. many options!!! at the very least rather than a straight put or call ... do a spread. Limit and define your risk. That is basically what options are about. Good luck! donna

Hybone · Apr 6, 2006

Does the "one" option trade have to be based on the long equity positions you hold, or just any option positon(s) based on any underlying?

Maybe if you can tell us what exactly you want, someone here should be able to make some educated suggestions.

let it run · Apr 6, 2006

Quote from Hybone:

Does the "one" option trade have to be based on the long equity positions you hold, or just any option positon(s) based on any underlying?

Maybe if you can tell us what exactly you want, someone here should be able to make some educated suggestions.

The 'one' option trade can be on anything- does not have to be related to any other position I hold and can be on any instrument. I basically want something that is not going to be very volatile and I can get out of if with my shirt still on my back I dont like it.

What Donna said was helpful and anything more you could add would be great- I'd like to ideally hold a position that has a limited downside (and therefore limited upside too) so that I can concentrate on other trading decisions.

WD40 · Apr 6, 2006

Quote from let it run:

Hi guys,

I'm a futures/spot trader and I have just set up an 'investment account' to accumulate some long term stocks for the benefit of my future wealth. Basically a buy and hold account.

Anyway, in order to get the best research out of the broker I use (an Australian firm) I either have to pay a hefty fee or do one options trade every quarter.

I understand the principles of options fine, but I'm not stupid enough to think that I can go straight in and profit from an options play. I've looked at Optionetics but I see a lot of bad stuff written about them.

Has anybody got any beginner hints for picking an option trade for somebody who is a bit sidetracked by other decisions to make!

Appreciate any help.

I trade futures to finance my options education.

segv · Apr 6, 2006

Quote from let it run:

Hi guys,

Has anybody got any beginner hints for picking an option trade for somebody who is a bit sidetracked by other decisions to make!

Appreciate any help.

In the macro context, applying a "buy and hold" methodology to option purchases will in all likelihood have a negative expectation. You can anticipate that the options are fairly priced, and that therefore transaction costs will erode any returns you might generate with these purchases in the long term. The same is true of speculative positions, unless you are remarkably skilled at predicting the future price of the underlying asset.

I recommend that you do not trade options, especially considering that option trading is not your primary focus. Further, if you do trade options, you should fully understand the characteristics and risks (and the "greeks") of these instruments beforehand. If you -must- trade options for the reasons you outlined, and you -must- speculate with significant capital for some reason, there are some well known traders (i.e. N.N. Taleb, J. Haworth) who have a bias for purchasing long term and far out of the money options. Their belief is that long term and far out of the money options tend to be underpriced, because traders fail to accurately estimate the probability of unlikely events. Taleb has several books on his philosophy, and can be readily found at http://www.fooledbyrandomness.com. There was an article on Haworth and his philosophy in last months Option Trader Magazine at http://www.optionstradermag.com (free subscription). These strategies can be long term, but like all options positions they require risk management. They are certainly not "buy and hold".

Think about this: If a single option trade per quarter is required, and if the amount of your commissions is less than the research subscription, why not buy one unit of the least expensive contract you can find? In all likelihood, the contract will expire worthless or you will loose money on commissions long term, but you will meet the requirement of your broker. In US equities, a near term far OTM call or put will cost a whopping $5 plus commissions. That is hardly an amount to loose sleep over 4 times a year!

-segv

nazzdack · Apr 9, 2006

You have to do one option trade per quarter? You're in Australia? OK, does Australia have the end-of-the-quarter "window dressing" effect? If yes, buy an at-the-money, short-dated, All Ordinaries index call option the week before the end-of-the-quarter and hope that the buying stampede kicks-in at that time. Ideally, it puts you in a low-risk situation AND you can offset the trade for a substantial profit AND send me an Outback Steakhouse gift card at Christmas.

let it run · Apr 9, 2006

Quote from segv:

In the macro context, applying a "buy and hold" methodology to option purchases will in all likelihood have a negative expectation. You can anticipate that the options are fairly priced, and that therefore transaction costs will erode any returns you might generate with these purchases in the long term. The same is true of speculative positions, unless you are remarkably skilled at predicting the future price of the underlying asset.

I recommend that you do not trade options, especially considering that option trading is not your primary focus. Further, if you do trade options, you should fully understand the characteristics and risks (and the "greeks") of these instruments beforehand. If you -must- trade options for the reasons you outlined, and you -must- speculate with significant capital for some reason, there are some well known traders (i.e. N.N. Taleb, J. Haworth) who have a bias for purchasing long term and far out of the money options. Their belief is that long term and far out of the money options tend to be underpriced, because traders fail to accurately estimate the probability of unlikely events. Taleb has several books on his philosophy, and can be readily found at http://www.fooledbyrandomness.com. There was an article on Haworth and his philosophy in last months Option Trader Magazine at http://www.optionstradermag.com (free subscription). These strategies can be long term, but like all options positions they require risk management. They are certainly not "buy and hold".

Think about this: If a single option trade per quarter is required, and if the amount of your commissions is less than the research subscription, why not buy one unit of the least expensive contract you can find? In all likelihood, the contract will expire worthless or you will loose money on commissions long term, but you will meet the requirement of your broker. In US equities, a near term far OTM call or put will cost a whopping $5 plus commissions. That is hardly an amount to loose sleep over 4 times a year!

-segv

Thanks segv, appreciate the advice. My first reaction was to simply use the cheapest instrument and be done with it but thought 'd educate myself as to how to make money doing it along the way!

I think you misinterpreted what I mentioned about "buy and hold" strategy. I intend to buy stocks for this long term strategy, not options. Like I say, I do understand options and how their pricing fluctuates quite well (and I have a degree in Maths and Economics) but I haven't traded them enough to believe I can be consistently proiftable.

let it run · Apr 9, 2006

Quote from nazzdack:

You have to do one option trade per quarter? You're in Australia? OK, does Australia have the end-of-the-quarter "window dressing" effect? If yes, buy an at-the-money, short-dated, All Ordinaries index call option the week before the end-of-the-quarter and hope that the buying stampede kicks-in at that time. Ideally, it puts you in a low-risk situation AND you can offset the trade for a substantial profit AND send me an Outback Steakhouse gift card at Christmas.

I will take a look at this. You'll either be receiving a Kangaroo Steak + cold beer in the post or an off emu egg, depending upon performance!

Thanks for the suggestion.