best options technique for the retail trader

Discussion in 'Options' started by eagerbeaver, Jun 19, 2005.

  1. Hi --

    I'm wondering if folks wouldn't mind speaking to what they think is the single "best" options trading technique for the retail trader

    Granted, there is no such thing as "best". But, for the purposes of discussion, let's say that someone put a gun to your head (in a very friendly way, of course) and forced you to choose: Which options strategy would you say offered the best risk/reward tradeoff? What, in your opinion, comes closest to approximating the options trading technique for all seasons?

    For the purposes of this discussion, it might be useful to disregard our hypothetical trader's skill and experience level.

    Personally, I'd vote for the calender spread (i.e., front and back months at the same strike) where you are, essentially, selling volatility. IM(very)HO, this is the best way to overcome, or at least ameliorate, the substantial (no, make that "gargantuan") edge the "house" has over the brokerage client wherever options are concerned.

  2. KevinK

    KevinK Guest

    I think what it comes down to is ones risk tolerance and opinion on the market. For example, if I'm bearish on a stock I would either play a put credit spread, put spread or buy puts, if I was neutral I would probably play a strangle if I was bullish I would probably buy calls or set up a call spread, then again someone else might play calendar spreads, butterflies or condors.
  3. This is the double whammy with options, isn't it? You not only have the same problem of your stock-picking brethren (and sisteren), picking the right stock and the right direction, but you also have to select the right option strategy to capitalize on it.

    In other words, you must overcome a house advantage double-stacked agianst you -- i.e., the inherent disadvantage that any small investor has over institutions in picking stock direction, plus the structural edge that the retail speculator surrenders to the market maker every time he or she engages in an options trade.

    One almost wonders why anyone in his or her right mind would bother. Except, of course, they're just so doggone much fun...
  4. KevinK

    KevinK Guest

    First off, I don't play options because they're fun, I use them as a tool because of the great leverage they offer.
    Now, I don't believe that the market maker's edge in options should discourage anyone from trading options.
    There is inherent risk in predicting the way the market will move, but will a knowledge of technical analysis it is far from impossible and using options is a great way to play it.
  5. here is something I have been doing in the past few months. So far I broke even but made only a few trades like this and haven't picked the right stocks (they don't move or not enough) . I know about the spreads etc, but I don't like the idea of 1) waiting until expiration to take the max loss or max gain 2 ) limiting profit with a spread.
    Then what if I missed something and underestimated the real risk of a complicated position?

    I want big gains on a percentage basis on huge movers with limited risk and outlay.
    Instead of buying a stock which I hate doing, I buy out of the money calls at different strikes I start one or two strikes out of the money then the next strike. I usually buy twice as much on the higher strike. I want a delta at or below 0.5 so I don't suffer as much of an adverse move just after taking the position. If the stock hasn't moved in a week or so I start getting out. If a winner comes back I get out. If I have a nice move I take profits on half.
    Does this strategy have a name ? :)

    I appreciate constructive criticism from more sophisticated and seasoned option traders
  6. long Strangles can be brutal with regard to volatility collapse and time decay. Only use in very select situations (e.g. earnings or news play on a very volatile tech/drug stock).

    slightly OTM Calendars can be good if there are only 2 weeks left to expiry and you can be fairly sure the short will expire worthless.

    Debit spreads can be harder since the same time is working for/against you at once. Example: you have to be right on the long one before it expires AND right on the short one before it expires. Needless to say this means the stock has to get to, and stay in, a certain range.

    Otherwise, use long puts and calls keeping an eye on Vol, Delta, and Theta will do.
  7. =======
    Since ATM is close to OTM I would and do compare those OTM trades to ATM/ITM.

    And could give that OTM strategy a name , but i wont , since you wouldnt like that name for specializing in buying OTM.:cool:

    Not to kick you kicking but i like underlying stock.also;
    dividends, no decay, narrow bid ask. low % loss when wrong.
  8. I'm buying long calls at the money, around 1 year until expiry, low implied volatility, low bid-ask-spread.
  9. I know that it is never recommended to buy far OTM options , that you should buy ATM with a delta of 1 . But then I have exactly the same dollar exposure as with the stock. What I like with OTM is that the more it moves in my favor the more the delta will get close to 1 by that time I am already sitting on a nice profit cushion provided the move to ATM happened within a few days. If it hasn't I get out. It's really to time the moves, I can never time perfectly the very hour of the very day of the big break and I can't stand watching the stock fluctuate 1-3 points below my buy point. With options I don't care, I look at the stock a few times during the day and stop watching every tick. I have started selling naked calls as well on some ETF's when expecting trend reversals (sometimes combining with a smaller # of long puts), it's been net positive but I tend to get nervous if the move doesn't happen quickly.
    Doesn't waiting and stressing over your positions until expiration get at you?
  10. MTE


    ATM options have a Delta of 0.5 not 1. Only deep ITM options have Deltas that are close to 1 (-1 for puts). So it must be one hell of a move in the stock in order for an OTM option to achieve a Delta of 1.
    #10     Jun 25, 2005