I have been involved in stocks for 15+ years, have an options account and have read quite a few books but lack knowledge of basic option trading.. I am quite good in charting analysis.. Is it possible to be quite certain when and where a stock will be.. say in less than a week and still lose money trading the options instead of the stock? What I need to learn are the trading basics of options.. how different they are than stocks on a day to day basis.. trading hours, volume.. etc. Example.. see attachment.. I shorted FWLT from 101.4 to 89 last week.. one of a few trades like this.. this was one of the simplest trades one could ask for... Could I have done better with options or should I just be happy with the stock? Not looking for anything esoteric, just puts and calls.. Maybe there is an article somewhere.. Thanks Rashid
How far out?.. I traded roughly 20k worth of stock.. Could I have traded 20k worth of options and would I have been able to trade them as easily as the stock..? Being such an obvious trade, would it have been "compromised" by others..? Thanks for your help.. Rashid
Yes, absolutely it is possible. With both time and spreads working against you, your underlying often needs to make a pretty solid move to even begin to profit with the option. In the example you used, a put would have made a great percentage gain. But how often do you get that kind of move? If your underlying doesn't move, or pulls back even slightly, then you're looking at a pretty good percentage loss on the option, as you're paying transaction costs, spreads and time decay. IMO, and in my experience, a real suckers game. If you're good with trading equities, just stick with it. The only way you can experience this is to do it yourself. Start with just a contract or two, track it with the underlying, and you'll see the problems.
Interesting... In other words no free lunch?? Most of the stocks I trade are VERY volatile so very little chance of them sitting around... RTI, WNR, DRYS, UAUA.... I will wait for a really good setup, trade the stock as usual and try 1 contract.. Seems if one can figure out the relationship between the stock and the option for a given % move, one should be able to set a pre-planned exit and not be greedy..
If you are trading volatile stocks, as I do, then you have yet another problem with long options in addition to spreads and time decay. It often happens that a strong move sets up your entry, at which time you are going to be buying into an option that has increased in value due to the volatility. If your underlying then becomes less volatile, which is often the case, then the value of your option declines, even as the price of the underlying slowly rises. A very typical situation, and the volatility component of the option can change in a single day. As I said, trade a contract or two along with your underlying, and you'll soon get used to the frustration of watching your underlying gain and your option do nothing, or even decline in value. Sure, every once in a while you'll really hit a big one, but in the meantime with typical daily trading you'll just get slowly hacked up. And rest assured, there is no possible way for you to "figure out" a future relationship between the option and the underlying. The market itself can have an impact on options pricing, without regard for what the underlying does. The variables of what can happen during the trade between movement of the underlying, the option, the market, and historical and implied volatility are infinite.
Thanks for such "in the trenches" info book never tell you... Sounds like options are not really meant to be for what I am imagining (pure profit) but rather risk control.... etc.
Oh I wasn't suggesting predicting future relationship but past relationship which hopefully gives an idea of the future.. This has to have reasonable predictability or this is useless.. If I cannot get a clue what a 10% move in stock price usually does to the options then I cannot play..
Just start with greeks, they are very simple and should answer 99% of your questions. http://www.investopedia.com/articles/optioninvestor/04/121604.asp
What you need to learn is: 1) The relationship of option premium to stock price 2) The effect of time decay 3) The effect of change in implied volatility The short answer is yes, you could have done far better with the puts than with shorting the stock. Options provide leverage... and leverage is a double edged sword. You can make much more and you can lose your entire investment (?) as well. There are many variables to consider but to keep it simple, here are the closing prices of the Aug puts from 8/10 (101.88) and 8/16 (89.37), which is about the size of the move that you described. I was in an earnings position and luckily for you, I didn't delete the data promptly Aug 8/10 8/16 Gain % gain 115 14.50 25.50 11.00 0.76 110_ 9.80 21.00 11.20 1.14 105_ 5.60 16.70 11.10 1.98 100_ 2.85_ 9.70_ 6.85 2.40 095_ 1.50_ 6.70_ 5.20 3.47 090_ 1.00_ 4.20_ 3.20 3.20 085_ 0.50_ 2.75_ 2.25 4.50 080_ 0.30_ 1.70_ 1.40 4.67 Notice the leverage with the OTM puts? OTOH, had FWLT stayed around 100 all week, all puts below 100 would have expired worthless for a total loss. You can do the math of what the returns would have been for an equal dollar speculative bet via the various strikes.