Thoughts on long OTM SPY calls

[VTS]

Eh....the VIX is pretty low at this point, so I dont think you're going to get crushed as much as you might think. Sure if the market pops another 10-15% by new years, you're going to have the VIX a touch lower, but its not going to be cataclysmic for your vol considerations.

If you're buying puts with deltas that close to 0, you're going to be more worried about actually getting a move in your favor that slight changes in IV.

What does the VIX being low have anything to do with it though? The fact that vol is low and the VIX is low is already priced in to all options. Do you think market participants are stupid? You think they don't know when the volatility is in it's high range or low range? You think you can just wait for the VIX to be in it's low range and then unload on long Vega trades and not get crushed simply because as you say it won't move more than 10-15% more? Vega crush is just as present and problematic when Vol is low as when it's high.

A long OTM option is no safer now than it was a month ago, three months ago, a year ago, or any time ever ago. At best, it's a hedge. That's it. There's no strategy on a constantly decaying product. That's like saying, sometimes buying a Toyota Camry is a "good" investment. No no my friend, it's ALWAYS a depreciating asset. At best, you might get a good deal.

OTM puts and calls are at best stupid trades, and would only be stupid trades if you get a very good price on the contract. They are either stupid trades, or horribly retarded trades. There is no mathematical way to avoid the problem of them being decaying products, even if the VIX was at 10, still stupid, still subject to vega crush, still not worth trading...

 

[smile]

It seems what's most important is the value of the delta and vega of the strike you buy for this deep OTM SPY trade. Also relative iv matters.

If I look at the option chart and compare it to the stock chart overlayed with the IV I see that this was a bad trade from mid august to the end of Sept. for this 225 strike.

A strike further OTM would have had less delta and less vega and would have been more protected by the huge vol spike in late August which destroyed the 225 call along with the huge price drop.

From late Sept. to recently, long 225 Jan. 2016 deep OTM calls was quite a good trade, even though the IV dropped from about .27 to the current .11.

In summary, long deep OTM calls can make sense when you have very low delta and lower iv.

If the SPY has a good drop, the IV will spike and will be much larger than any option price change due to delta

The longer term IV chart shows we are almost again at near historic lows for SPY iv so the likelihood of IV spiking is much greater than it going below 0.10


.

 

[koolaid]

What does the VIX being low have anything to do with it though? The fact that vol is low and the VIX is low is already priced in to all options. Do you think market participants are stupid? You think they don't know when the volatility is in it's high range or low range? You think you can just wait for the VIX to be in it's low range and then unload on long Vega trades and not get crushed simply because as you say it won't move more than 10-15% more? Vega crush is just as present and problematic when Vol is low as when it's high.

A long OTM option is no safer now than it was a month ago, three months ago, a year ago, or any time ever ago. At best, it's a hedge. That's it. There's no strategy on a constantly decaying product. That's like saying, sometimes buying a Toyota Camry is a "good" investment. No no my friend, it's ALWAYS a depreciating asset. At best, you might get a good deal.

OTM puts and calls are at best stupid trades, and would only be stupid trades if you get a very good price on the contract. They are either stupid trades, or horribly retarded trades. There is no mathematical way to avoid the problem of them being decaying products, even if the VIX was at 10, still stupid, still subject to vega crush, still not worth trading...

People know they are decaying products. Unlike buying a camry, they do go up significantly in value and quickly too. Sure, you can buy 100 shares of SPY or 1 call. the only stupid trade is a losing trade.

 

[OptionGuru]

Hello,

I'm currently looking at OTM SPY 225 calls for Jan 16. Right now these are going for .03 to .04.

Many S&P500 projections point towards high growth by the start of next year. Let's just arbitrarily say these end up worth $2. That's a 6566.67% gain. This $2 value could come from either surpassing the $225 mark, or volatility in some run up (correct me if I'm wrong)

This seems like a very high reward/relatively low risk route.

Given that much time it seems reasonable to expect growth and maybe some quick rising catalyst at some point. Barring the S&P500 dumping like crazy consistently over the next few months and these expiring at $0, is there anything I'm missing?

• SPY up 4% (200 to 208) since your post.
• Bid on the Jan 16 SPY 225 calls is $0.10.
• 2.5x return after one month.

EDIT: This is when decisions have to be made. Do you exit and risk leaving money on the table? - or stay in and risk losing the gains?

 

[NoVoodooHere]

2.5x return after one month.

You find that worth getting outta bed for? Presuming of course that you are not moronic enough to dedicate more than 0.1% of capital to such trade, we are talking about 0.15% return, in fact. That'll annualize to roughly a percent.

...What's that you say? It was only using how much capital?... Good point except... Did it not take up 100% of your brain just now?

...& our very own resident "options guru" gives positive reinforcement to this behavior. Guess we're boned

 

[NoVoodooHere]

the only stupid trade is a losing trade.

I like it a lot

 

[VTS]

People know they are decaying products. Unlike buying a camry, they do go up significantly in value and quickly too. Sure, you can buy 100 shares of SPY or 1 call. the only stupid trade is a losing trade.

Results oriented traders fail in the long-run. That's it, they fail. Only a results oriented person would say the only stupid trade is a losing trade.

There are countless stupid, horrendous, horribly ignorant trades that might actually go on to make money. That means nothing in the long-run.

There are also some smart, well thought out, quantifiably great trades that LOSE money. What does the result of the trade have anything to do with how good or bad it was when it was opened?


You might want to study up on the difference between process oriented trading and results oriented trading, as well as a simple cause and effect timeline of the difference between smart trades when you open them, and the later down the road results of how they turned out.

 

[OddTrader]

If you are skilled enough to buy OTM options and do well, you don't need to ask for advice.

Food for thought.

Nice food, and healthy too!

You might want to study up on the difference between process oriented trading and results oriented trading, as well as a simple cause and effect timeline of the difference between smart trades when you open them, and the later down the road results of how they turned out.