Which option strategy to use with the following setup ?

Autodidact

Autodidact

Typically I trade by purchasing shares or contracts. Although I know the basics of options, I don't know enough to use them efficiently in my strategy. Hoping someone can lead me the right way.

I use a strategy that detects an area that provides a good chance for price to react, since it is a trend trade, sometimes this reaction runs all the way to make a new higher high or a new lower low. However, the real edge is in obtaining that high degree of probability for price to move a considerable amount. Naturally, like all things, a stop or point of no return is required. Typically I bank profits on the high probable chance of obtaining the desired reaction and leave small portion as a runner, when the reaction is not obtained, I take the loss. Hold time is usually 1-3 days and sometimes as long as 2-3 months, depends if I took the setup based on the daily or monthly chart, stop is pretty much the same, it just depends if the trade was a failure or success. When I win, I usually do so quite quickly although some trades required more time.

Considering the above, which option strategy should I apply ?

Thank you for the help.
 
Buy a call, but at a reasonable implied volatility level. However, should an upside trend ensue, the implied volatility will drop and produce what can be inappropriately be perceived as "time decay".

Stick to the ATM strikes at first because you play at different time frames. Eventually the nuances will come to you.
 
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xandman said:
Buy a call, but at a reasonable volatility level. However, should an upside trend ensue, the volatility will drop and produce what can be inappropriately be perceived as "time decay".

Stick to the ATM strikes at first. You play at different time frames. Eventually the nuances will come to you.
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That is what Ive been doing, but I thought I could do more efficient usage, thank you for taking the time to share your input, appreciated.
 
  • Bullish = Long ATM or OTM Calls (Avoid Debit Spreads).
  • Bearish = Long ATM or OTM Puts (Avoid Debit Spreads).
  • Neutral/Bullish = OTM Put Credit Spread.
  • Neutral/Bearish = OTM Call Credit Spread.
  • Neutral = OTM Put Credit Spread and OTM Call Credit Spread (Iron Condor).
  • Neutral = Butterfly (with the body ATM).




:)
 
OTM-Options said:
  • Bullish = Long ATM or OTM Calls (Avoid Debit Spreads).
  • Bearish = Long ATM or OTM Puts (Avoid Debit Spreads).
  • Neutral/Bullish = OTM Put Credit Spread.
  • Neutral/Bearish = OTM Call Credit Spread.
  • Neutral = OTM Put Credit Spread and OTM Call Credit Spread (Iron Condor).
  • Neutral = Butterfly (with the body ATM).



:)
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Very sweet, appreciate you sharing your knowledge, thank you.

Is there ever a good reason to do ITM Calls or Puts when purchasing premium?
 
Open a long position of an ITM option (further out dat) and then sell a covered call (shorter time frame) at a higher strike against it for a little hedge. For example, if you thought AAPL had a good chance of moving up $10 between now and June:

Buy June 120 call for 11.50 (delta .68 now)
Sell April 135 call for $1.10 (delta .22 now)

The April call provides a little hedge from the stock not moving or a small drop. It does limit your max gain, but worse case is AAPL pops higher than you expected and you have a more limited gain (but still a nice gain).

Another strategy you may want to look into when you have a high confidence of a stock having a big move in a certain direction is the ratio back spread. Here is a link that gives an explanation / example.

http://www.nasdaq.com/article/ratio-back-call-spreads-for-big-moves-know-your-options-cm241291
 
I wouldn't recommend a bull call ratio. Volatility will move inversely to the position. A bear put ratio would have a favorable move in volatility.
 
These threads come up and the right answer is "it depends". It all depends on what the range you are looking the stock to move (your high probability reaction) vs what the options are pricing in. It depends on how you think the stock will behave if you are wrong vs what the options are pricing.

Suppose you think the SPY will rally 1% in the next 2 days. The ATM SPY March call is about 1.15 right now. So you think the SPY will rally $2, does 1.15 make sense? What if you think the SPY will rally 3% ($6) in two days? What if you think in both cases the downside is the SPY will sell off 1%? What if you think in both cases the downside is the SPY will sell off 5%?
 
If I am doing a trade over a few months and very confident of a move up, I will also do bull call spreads (buy an ITM call / sell a higher call with same expiration date). If the stock happens to dip, but I still feel very strongly about the upside, I will buy back the short call for gain and then as stock moves up, sell it again to reduce my overall cost of the spread.

If the stock goes sideways while I am waiting, the spread still gains in value due to theta decay.
 
Autodidact said:
Very sweet, appreciate you sharing your knowledge, thank you.

Is there ever a good reason to do ITM Calls or Puts when purchasing premium?
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I assume you mean selling the options to collect the premium. "purchasing premium" is an oxymoron.

No I would not sell short ITM options. The idea behind selling options is to hope they expire worthless so you can keep the premium, so you sell only ATM or OTM options. Also ITM options could be exercised early.



:)
 
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