Hi Danjuma, I like your cautious statement re selling options. Since oil hit bottom in Jan/Feb this year I have been buying both OTM & ITM options on RDS/A & BP . The best performing so far is LEAPS to Jan. 2017. I am looking to move more to LEAPS Jan. 2018. Even though it gives me less leverage I am looking to go deeper ITM, for instance BP $25.00 Jan. 2018 call (current bid is $8.00 ) my limit bid is $7.00 on 200 contracts 20,000 shares. It will only fill if there is a good drop in the underlying. If it does fill I will be at $32.00 , that seems pretty safe considering the slow drop in global production. If need be I can excerise the 200 contracts and collect the .60 quartly dividend. You seem very experienced and cautious, is this a trade you would make? Thank you for your input. Stadtmuller
Danjuma, In my opinion, buying options is mainly a directional play. It is a leverage buy similar to margin buying. Others here told me it could also be a volatility play depending on your opinion of where you think volatility will be in time. Some others may have a different views and I like to hear them too. Disadvantage: You generally pay a premium (over intrinsic value) which can be significant and it often takes a lot to breakeven. Your trade will expire some time in the future and may become worthless. Because of the interplays between underlying movement, time decay, IV etc., it is a lot more complicated than buying on margin. Often, when the underlying goes up, call options may not move up due to time decay, IV, gamma, delta and vega change. Advantage: If my guess is wrong, I maybe able to ride out a dip without a margin call. Since I was the recipient of margin calls in the past, this advantage is very real to me. In general, I found mechanically buying or selling netted me a small loss due to slippage (tried both for about 6 months and ~2000 trades). Having a mathematical model to assess the profitability and stress testing is helpful in my opinion.
Sorri I can't help, your like the complete opposite to me. I've never executed before, I've never traded around dividends and I only trade from the chart. I don't look at fundamentals like what the price of oil is doing and how its related to the share price. Best of luck Stadmuller.