What is the point of Options?

[thyrus]

True

OP, why options vs swing trading vs long buy & hold?

All it takes is mastery to get the strategy to 'hopefully' being a winner each time.

Win some, lose some, breakeven - many just lose & lose again ... all it takes is time, skill, patience & a crystal ball.

Folks will chest thump about their winners, less or never about losing trades.

A simple example on UVXY one that is a forever decaying stock.

https://www.splithistory.com/uvxy/

Even with current events & spikes in the VIX, playing UVXY is a time game going long. UVXY went from $12 to $120 from mid February to mid March & is now down at $45.

Like many other stocks/ETF's the are tens of different strategies on the VIX & UVXY.

For now a few simple option strategy combinations, that have been discussed & written about previously.

UVXY historical price after a reverse split is approx $36, usually splits around $7 - $8 price

Using a basic option price calculator, theoretical results are approx, as follows.

http://www.option-price.com/index.php

With UVXY (long option) high IV 130%++ seeing its historical decay, an ATM 365 day to expiry covered call will pay approx $16, basically a drop to $20 is breakeven.

On the other side an DITM covered call at $18 will pay approx $24, downside to $12

Then there is the vertical debit spread, $10/$18 strike, cost $4 ($28-$24), max loss $4.

And of course with the decaying stock price & time decay its always best to close the options positions if the trade is about to lose money, or close on a profit.

Then there is the puts, just selling puts.

The ATM $36 put should pay ~$16

The $18 put should pay ~$5

The $10 put should pay ~$1.67

Combination trade

Lets take the next post reverse split, with the stock at $36, sell the long 365 day to expiry call & put ATM, receive ($18+$16) $36. Downside to $2, upside to $70

OP be interested in your personal views & opinion on swing trading, the strategies, any successes & failures?

I don't claim to be an expert, I have only been trading since Nov 2019. And picked up more heavily in 2020 because of corona.

In my short history I have been good with spotting trends and setting safety nets. When stocks begin their downward decline of corona, I had no idea what was going to happen in the first few days, but all my safety nets sold whatever stock I had before I had a loss, or in 2 cases, a small loss.

For the loss, I had bought PSX at 98, I find it very unique for the oil field, and could've lost 50% but had a stop limit at 92 as it was already down a lot for the year. It dropped all the way into the 40's, where I bought that amount again. It's now up to 60 and yes it will struggle to gain momentum with low oil demand, but still a very good stock and I was able to take advantage of price fluctuation as a swing trader because my capital was not tied up.

BA was another stock I bought twice and will sell twice, profit over $10k on a $10k investment.

With so much liquidity, I could buy BP at 16, sell at 24
Buy HD at 160, sell at 200
Buy LOW at 70, still have it
Profit heavily of cruise stock because I know people WANT them to succeed, emotionally, and will overbuy because of how undervalued they seem, but I feel out of CCL , RCL and NCL one of them has to fail. The demand will not be there for a year regardless of restrictions. So I am playing market sentiment instead of the companies themselves.
etc.

this doesn't include biotech stocks which are good for short term gains, so many small ones just shoot up based on some arbitrary study and you've already doubled investment.

We will see how it holds up long term because from a stock perspective, I have been lucky with corona as it provides relatively predictable fluctuations. My 26k initial invest is at 74 right now and there are stocks to be had.

So with puts and calls, I now see the benefit, but I rather be able to move quickly like a samurai and yes, there will be losses like psx where I lost 8% and then my limit sold, but it far outweighs just being stuck under in a crashing market or underperforming stock.

 

[unconventional wisdom]

i have an account with interactive brokers and when the markets are open you have access to a huge number of options - usually as far into the future as 2022 and with many different strikes.

another reason to trade options is the built-in leverage. a typical call/put option gives you the right to purchase/sell 10-100 shares at the strike price. of course your investment can go to 0, but you will sometimes hear about traders who buy a call/put for under $1 and sell it for over $100 (requires a big price swing, but it does happen). if you can, look at the price action on TSLA calls and puts - the swings recently have been enormous!

 

[Pekelo]

The point of options are:

-insurance
-leverage (if right most bang for the buck)
-complex trading strategies where you can bet by time, range, direction, speed of movement, etc.
-by selling options you can make money when the stock doesn't move
-limited/known risk, depending on the strategy
-no day trader 25K minimum (RH here we go!!)
-etc.etc.

 

[never2old]

We will see how it holds up long term because from a stock perspective, I have been lucky with corona as it provides relatively predictable fluctuations. My 26k initial invest is at 74 right now and there are stocks to be had.

So with puts and calls, I now see the benefit, but I rather be able to move quickly like a samurai and yes, there will be losses like psx where I lost 8% and then my limit sold, but it far outweighs just being stuck under in a crashing market or underperforming stock.

well done on your recent trades & profits.

as for timing or picking the right ones, its a difficult one for the reason you never know when the movement happens.

on options, successful traders can do it day trading, many do it by the minute, or within the first 30 minutes of open or the lunch time drops/pops to end of day.

I suppose in/out stock plays could be done in a similar time frequency.

options like stock picking, its not rocket science, it is though a skill & takes effort, tried & tested strategies to ones that work. Like stock picking many give it up.

Good luck to you & trust that you have a great 2020 outcome.

 

[never2old]

The point of options are:

-insurance
-leverage (if right most bang for the buck)
-complex trading strategies where you can bet by time, range, direction, speed of movement, etc.
-by selling options you can make money when the stock doesn't move
-limited/known risk, depending on the strategy
-no day trader 25K minimum (RH here we go!!)
-etc.etc.

agree & with that hint ...

many folks may not understand the detailed essence of your post, for its much deeper than those points, even though IMO even simple options trading 'you don't need to be smarter than a 5th grader'.

like sports betting, just have to be right better than 50% of the time to be a winner.

 

[thyrus]

i have an account with interactive brokers and when the markets are open you have access to a huge number of options - usually as far into the future as 2022 and with many different strikes.

another reason to trade options is the built-in leverage. a typical call/put option gives you the right to purchase/sell 10-100 shares at the strike price. of course your investment can go to 0, but you will sometimes hear about traders who buy a call/put for under $1 and sell it for over $100 (requires a big price swing, but it does happen). if you can, look at the price action on TSLA calls and puts - the swings recently have been enormous!

Could you elaborate on the leverage part? You can buy a call/put for a speculative price instead of the actual price? Or are you only speaking about penny stocks or something like AMC which is trading around $3?

 

[1957may10]

yet to meet anyone that has accurately predicted the market before the event, as in when stock ABC would drop or pop 5 days from the 'I called it'

after the fact anyone can pipe up ....'see, I was right'

swing trade or options, personal choice ... leaves you guessing 'which way the position will go' or when to buy/sell or exit a position.

TSLA was a good reference with a 12 mth range $176.99 - $968.99

instead of trying to guess what might be a long term single winner such as AAPL or AMZN, why not just buy & hold long on one of the indices or the leveraged 3x, sell covered calls on the long & ride the wave - it could be that simple, what could possibly go wrong?

https://www.splithistory.com/tqqq/

Then there is always BRB-B for the faint of heart

100% true

 

[thyrus]

-complex trading strategies where you can bet by time, range, direction, speed of movement, etc.
-by selling options you can make money when the stock doesn't move
-limited/known risk, depending on the strategy

Can you elaborate on making money when the stock doesn't move? It's because someone on the other end of broker will want to pick up something you have bought based on their speculation? Isn't that a crap shoot to find someone like that?

 

[unconventional wisdom]

Could you elaborate on the leverage part? You can buy a call/put for a speculative price instead of the actual price? Or are you only speaking about penny stocks or something like AMC which is trading around $3?

i really don't have the time to explain every nuance of options - do some research.

long story short, generally speaking buying a call gives you the right to buy 100 shares at a given price (e.g., if you buy the $700 TSLA call for Oct 2020 and TSLA goes to $900 your call will be worth $200 x 100 = $20,000). has nothing to do with penny stocks. same is true for puts: buy a $500 Jan 2022 put and if TSLA goes to $180 your put option will be worth (500 - 180) x 100 = $32,000.

briefly, the price of the call or put (premium) depends on the current price of the share relative to the strike, volatility of the underlying share, and of course time to expiration (time premium).

buy a call and a put and watch them and you'll learn fast, and google Black-Scholes

 

[1957may10]

You also have to consider if you invest to stock you are not gonna loose the whole money unless it gets bankrupt. For options for sure you can loose. Match higher risk. For example you bought abc stock to invest $100 it suck down to $50 you hold it in a few month it comes to $130 you sold it.
It is not the story with options...