If I'm thinking that ABC is going to breakout above $100, and if I would be trading the stock, my stop would be $99. If however I decided to buy $105 calls (once its broken out), but again using the $99 price level as my out for the calls. Can I somehow judge about what my calls will be trading at? Can I use a Black Sholes Model, and put in a current trading price of $99 with maybe 3 less days of trading left (3 just because say it holds that $100 for a few days then drops, as an estimate)? Will doing this give me a rough idea for where they might be trading at if the stock does trade to $99? I know volatility and theta will probably be a little different then the day I entered the trade. I'm just wondering if I were to buy calls on a chart breakout, instead of stock, how I can get a rough estimate on what my risk in the calls would be.
You could use an option chart like this to estimate how the calls would change in price as the underlying changes: http://www.optionistics.com/quotes/option-prices Here's the corresponding stock chart: http://www.optionistics.com/quotes/stock-prices/QQQ
Thank you for this, I'm going to have to look at it some more. Would looking at the delta be an accurate measurement? Say the delta is 25 and I'm risking a dollar move, can I say that if the underlying went against me $1, then my options will lose roughly .25c?
Random question, with all else being equal.. If I'm going to go long a call on a breakout trade, should I be looking at calls OTM with say a delta of 30-40 or an ITM with a delta of 60-70? What is considered to be a large gamma and how would this affect my decision?
i'd suggest going w/ itm b/c if price goes against you you'll be able to recover more value when you stop out.
You can plot gamma and delta on these charts: just check mark on the bottom what you want plotted and uncheck implied vol. for easier reading and so the right y axis gives you values for what you want plotted. http://www.optionistics.com/quotes/option-prices ..."should I be looking at calls OTM with say a delta of 30-40 or an ITM with a delta of 60-70?" Obviously, ITM calls cost much more and in my view are more suited for very short term moves... OTM calls are more suited for swing trading. Remember, any money spent on the calls can evaporate very quickly. You can only lose the amount of money you spend on buying the calls. Don't put much at risk until you get a better feel for how option prices move. The stronger the trend, the more confidence you have in the directional move, the more ITM calls may make sense for short term moves. Short term meaning hours to a couple days. I would not hold most ITM calls very long as the risk of them evaporating is too great for me.
Thanks for the replies, appreciate it. I have studied the Option Volatility and Pricing book, thought it was very good. Any other suggestions? I tend to be a breakout swing trader, holding anywhere between a few days to a few weeks. I'm just starting to get into options more and more so starting slow. Thanks again