good point rew
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Why do you guys trade options?
- Thread starter Chronos.Phenomena
- Start date
Why is stop order so bad?
Quote from Chronos.Phenomena:
Why is stop order so bad?
I'm sure that anyone who trades futures as had the stop hit for a loss only to see the position rebound without him. With options you don't have that problem, you can reach your maximum loss and wait it out for a possible profit.
With options your loss is capped, with futures it's unlimited and could even surpass your account balance.
OK
but it seems very hard to make a profit at all.. even to break even. Let's take an example:
Say call option for SPY with 118 strike costs $3. If I by one option, that's $300 out of my pocket.... then the market has to move to 121 so I can break even?
am I missing something here?
but it seems very hard to make a profit at all.. even to break even. Let's take an example:
Say call option for SPY with 118 strike costs $3. If I by one option, that's $300 out of my pocket.... then the market has to move to 121 so I can break even?
am I missing something here?
Quote from Chronos.Phenomena:
OK
but it seems very hard to make a profit at all.. even to break even. Let's take an example:
Say call option for SPY with 118 strike costs $3. If I by one option, that's $300 out of my pocket.... then the market has to move to 121 so I can break even?
am I missing something here?
If you think a 2.5% move is too much in one month you could sell the 118 for a $3.00 credit and cover your position by buying the 121 for $1.20. Potential profit $1.80.
Quote from Chronos.Phenomena:
OK
but it seems very hard to make a profit at all.. even to break even. Let's take an example:
Say call option for SPY with 118 strike costs $3. If I by one option, that's $300 out of my pocket.... then the market has to move to 121 so I can break even?
am I missing something here?
You are right you could just purchase 100 shares of SPY directly for $11,800. If the next day it drops to 110 then you only lost $800. With the options you only invested $300 and if SPY somehow dropped all the way to $10/share then you still only lost $300.
On the other hand if SPY rose from 118 to say 126 and you had bought those shares for $11,800 then you would make a cool $800 on your investment. That would be a roughly 6.8% return on investment. With the option, if SPY went to 126 you would only make $500 which is a measly 166.7% return on your $300 investment. Of course there is the time factor so depending on how much time it took for SPY to get to 126 you would lose a bit of time premium so you probably wouldn't make quite the full $500 but it would still be well above the 100% ROI level.
Not to mention with the option you still had $11,500 of free capital to invest in something else.
Quote from Chronos.Phenomena:
Why do you guys trade options?
Can you give your three top reasons?
you only use options when you understand no other better options than options to use.
otherwise options are not your options until one day you run out of other options.
the only option left then would be you really need some options to use. lol
Simply that options give you options - you mention one SPY call example and act like that shows that all options are bad. You SIMPLY CANNOT (sorry for the CAPS, but for emphasis) do some things with stocks only that options allow you to do. Here are some examples of why people may trade options:
1. You "know" stock will make a large move but you don't know if it will be up or down. You can buy a straddle - there is no way to duplicate that with stock only.
2. You "know" a stock won't hit a certain level - i.e. stock at 85 - you feel it could go up, but won't go over 90 - you could sell a 90/100 call credit spread - collect maybe $200 and if you are right, even if the stock moves against someone who shorted it and goes to $89, you keep the entire $200. So, again this really can't be done without options, as the person who shorts 100 shares in the example losses $400, but the spread seller nets $200. Note this can often be played on the other side as well, selling bullish put credit spreads.
3. You feel a stock/index won't move much - you could sell a straddle or long iron condor. If index remains unchanged after given time, you get to keep the credit. Again, no way to do this with stocks only. Calendar spreads can also work sometimes if a stock doesn't move much (or butterflies for that matter).
4. I do personally feel the leverage with options is much better then using stock margin, and is much, much safer. This is IMO.
To help you understand the power of options more maybe, consider your 118 SPY call in these cases instead of just a small move - what if SPY went to $128 or even $138 - now compare the profit % to buying SPY even on margin. Also, consider spending $300 and then SPY falls to say $100 - if you bought 100 shares at $118, the losses are $1800 - the one call will only cause a loss of $300.
I think there is very little limit to what options can do, but you need to decide if you want to use Theta (time decay) or Delta (price moves) or vega (Volatility changes) to your advantage and set up appropriate trades.
JJacksET4
1. You "know" stock will make a large move but you don't know if it will be up or down. You can buy a straddle - there is no way to duplicate that with stock only.
2. You "know" a stock won't hit a certain level - i.e. stock at 85 - you feel it could go up, but won't go over 90 - you could sell a 90/100 call credit spread - collect maybe $200 and if you are right, even if the stock moves against someone who shorted it and goes to $89, you keep the entire $200. So, again this really can't be done without options, as the person who shorts 100 shares in the example losses $400, but the spread seller nets $200. Note this can often be played on the other side as well, selling bullish put credit spreads.
3. You feel a stock/index won't move much - you could sell a straddle or long iron condor. If index remains unchanged after given time, you get to keep the credit. Again, no way to do this with stocks only. Calendar spreads can also work sometimes if a stock doesn't move much (or butterflies for that matter).
4. I do personally feel the leverage with options is much better then using stock margin, and is much, much safer. This is IMO.
To help you understand the power of options more maybe, consider your 118 SPY call in these cases instead of just a small move - what if SPY went to $128 or even $138 - now compare the profit % to buying SPY even on margin. Also, consider spending $300 and then SPY falls to say $100 - if you bought 100 shares at $118, the losses are $1800 - the one call will only cause a loss of $300.
I think there is very little limit to what options can do, but you need to decide if you want to use Theta (time decay) or Delta (price moves) or vega (Volatility changes) to your advantage and set up appropriate trades.
JJacksET4