What is the point of Options?

[never2old]

on Bullish stocks/ETF's some option traders might do medium term ITM vertical call spreads + sell OTM puts.

on options, from buy calls or buy puts, sell calls or sell puts or any combination including shorting, sell a protective put, anything that works with built in protection trade - over a straight buy & hold stock/ETF's & there isn't anything wrong with uy & hold, just have the sell order in from day one or a stop loss on stock/ETF buys.

so many variables & mindsets on trading stock and/or options ... no one fit solution, it's case by case, including the leverage & inverse ETF's options.

 

[ironchef]

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.

I am impressed.

I hope you will continue to do well. Do hang around to share your trading successes.

I only trade options because I like the nonlinear nature of the payoff curve.

 

[never2old]

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?

covered above by @unconventional wisdom, let me add ... taking a low volatility stock/ETF that has options with or without dividends will likely have low option premiums.

in an ideal world with some variables - over the long period take a nice solid stable low volatility $100/share 3% dividend stock, an IV of 20%. An investor decides on a 365 days to expiry long covered call ATM (max option premium) to get an additional 6% option money.

That's a total 9% or $9 annual return/share on a low volatility stock/ETF.

Issue will be if called away you have to give the stock away on expiry if its above the strike price. If the stock is below on expiry its a rinse & repeat

smart money would consider borrow/margin to invest at (lets say) 3% or lowest rate to get an additional return.

option only traders believe they can get consistently higher than the trade above.

could swing traders be just crap shooters or is it just option traders... who knows!

 

[Pekelo]

Can you elaborate on making money when the stock doesn't move?

Without going into them too deep: (google them for more details)

-selling vertical calls (you make money if the stock doesn't move or drops)
-selling vertical puts (you make money if the stock doesn't move or rallies)
-selling iron condors (you make money if the stock stays in a range)

Also there are other combos, the point here is that when selling options, time works for you and out of 3 directions (not moving is also a direction) you only have to guess 1 correctly.

With options pretty much you can play any kind of betting variations, like stock stays below X price, stock may raise but not too fast, stock drops quikly, etc.

What lots of people miss, that options are a tool, with a time frame attached to it. It doesn't make you automatically profitable. Just like buying a tool box doesn't make you a plumber. You still have to guess correctly about the stock's movement although you can have a higher incorrectness ratio (you have to guess 1 out of 3 correctly)

 

[BlueWaterSailor]

As @Pekelo has pointed out, options are a tool: one that provides a tremendous range of nuance and sophistication. Buying and selling stocks is like using a hammer: put a nail here and whack it, or use the claw end to yank it out. End of story, nothing else you can do with it. Mind you, there are times when that's perfectly appropriate... but there are also times when it's useless. And to someone who has a decent feel for the market, or a strong concept of what is happening in it but no way to take advantage of it, that would be tremendously frustrating.

Options, by contrast, is like having a full Snap-On tool cabinet and a scientific research laboratory. Even if you're Joe the Tune-up Guy and can't take advantage of most of the tools, there's still a lot of stuff you can use that the guy with only a hammer can't. And if you're a fully-trained mechanic, or engineer, or scientist, or even someone who likes having more possibilities than just "on/off" in your trading, then options provides you with a workbench where you can use all your skills and abilities.

This, by the way, does not prevent you from using your stock-trading skills at all - to my mind, it just enhances them. As an example, I sold some puts before the 'rona crash; when everything dropped through the floor, I got assigned on them - i.e., I had to buy the underlying stock. I waited till the two stocks, CVX and NUE, dropped low enough for me to feel like they were a solid buy (as it turned out, I called the bottom really well) and averaged down by buying 200 more of each, then selling calls on them. Result? I'm out of CVX as of this past Friday with a ~$3000+ profit, and I'm (nominally) around break-even in NUE... but I'm going to hold on to it and collect that dividend unless (like CVX) the market makes me an offer I can't refuse. And meanwhile, I've also collected a total of $88+175+550+190+220 ($1223) in option premium during this whole process.

I'm not saying this to boast, but to illustrate the point: if you don't know options, you're missing a critical skill set in your trading.

 

[ironchef]

What lots of people miss, that options are a tool, with a time frame attached to it. It doesn't make you automatically profitable. Just like buying a tool box doesn't make you a plumber. You still have to guess correctly about the stock's movement although you can have a higher incorrectness ratio (you have to guess 1 out of 3 correctly)

This is the first lesson I learned from the lectures @Maverick74 gave years ago. I will forever thank him for his wisdom: Writing call and put is not an edge. It is just a tool.

It is the first step for us newbies in our quest to be profitable traders of options.

 

[thyrus]

Alright, it's time for me to get my feet wet with options.

I've got a biotech stock in mind, a doo a diddy diddy dum diddee doo, and I want to a buy a call Monday morning in hopes of selling it off later in the week.

The earliest expiration is May 15, 2020. Does it help me to get the soonest expiration if it's a short term hold?

What is the point of a strike price? Let's stay Stock X is at $11, and I expect the stock to go up to $15 at some point in the week at which point I plan to exercise, is it more suitable to set a strike price of $8? $10? $5? Is the strike price just an insurance policy incase the stock moves the opposite way I want it to?

ANd yes, I've googled these questions + read the all encompassing options book, but I learn better through conversation.

Thank you all!

 

[thyrus]

As an update,

I've made steady profit with BIG CAP stocks like PSX , TSLA, NFLX etc but now want to get my feet wet with the small caps, even the penny stocks perhaps. Seems the smaller the stock price the more gambling it becomes and the less investing!