Buying Naked Calls

Discussion in 'Options' started by Bushwacked9, Nov 9, 2019.

  1. I am curious how far ITM y'all would go? If you have a stock with a solid upward trend and news is all positive so there a solid chance it will still Gain another 5-10% for example in the next couple months.

    Do you go more off entry Price and what % that possible loss is to your overall account?

    Do you have certain stocks you always follow for this type of option?

    Do you base it more on RSI below 30 on a 90,120,180 day RSI trend?

    Sorry for the basic stuff... Just starting to play with some strategies here on my paper money account to see if I can come up with my own tweaked strategy
    Pkay likes this.
  2. Personally, I go for the strikes with the highest ratio of intrinsic value to time value for my trade duration without going silly, so usually within a few daily ATR.
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  3. raVar


    I'd agree with much of the above by nooby

    It's very, very rare I'll buy a single option; unless it's part of some larger Option Strategy (A Jade Lizard, IC's, Spreads, etc). Though I would buy them as part of BUYING a cheap IV credit spread if IV is really depressed. But generally, if it's not one of those situations? The math says I shouldn't be buying them.

    But if I were to buy one directionally (I think the last time was at some point in 2018)? I buy as Deep ITM as it makes sense from a Capital Allocation standpoint, and a little bit out in time.

    My reasoning is this ...

    The higher your Δ (Deep in the money calls and puts)? By definition, that means that when the stock moves, your option also moves in a similar value for $'s. The lower your Δ (Out of the money options)... the stock can move in your preferred direction? But you will not be making the same $ value, unless you time it PERFECTLY so as to get a simultaneous γ explosion.

    So if the stock is at $10.00

    And there are $20 calls, but the Δ is only 0.10? Your option will only gain $0.10 for every $1.00 in stock movement (not accounting for γ movements). This is why people cry "The Option market is fixed? I bought a $20.00 call, and it went in my direction, but I didn't make any money!! It's a scam!"

    No, they bought a sucker bet, and didn't get a gamma explosion at the same time, and they didn't understand the math of what they were doing.

    Basically, people are lured into buying what they think are "cheap" options, because they are only 0.05, but they don't really know what they are doing.

    Conversely ... if the stock is at $10.00?

    And there are $5 Calls, and the Δ is 0.90? Then the option will gain $0.90 for every $1.00 of stock movement (not accounting for γ movements)

    This is why it makes more sense, mathematically ... to buy more expensive options, because in the long run ... they're more math advantageous to what you are trying to do.

    That's Delta ( Δ ) in a nutshell, and why if you are going directionally? And buying? You want those Δ numbers as high as possible.
    Last edited: Nov 9, 2019
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  4. destriero


    "Buying a cheap IV credit spread." Guy is microcephalic.
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  5. @raVar ... When you say you go out a little in time... How far are you talking?

    Y'all can go on attacking each other later ...

    The above doesn't help me nor answer my questions ;)
  6. destriero


    Hey Genius, it's a shame for your OPM clients that you don't understand how gamma works.
  7. destriero


    Buying a credit spread is unpossible. Dude, stop accepting advice from the guy. I mean, isn't it obvious?
    BlueWaterSailor likes this.
  8. destriero


    Seriously though, why don't you buy a book rather than rely on the dubious "Tennesseeing is Tennebelieving" goatee dude in the $15 Men's Wearhouse vest?
    Real Money likes this.
  9. raVar


    I had not seen anyone attack me here in this thread, so not sure about that???

    Anyways, generally I go out about 50 days or so till expiration? The thought process there? Is that the Theta, or time, can evaporate more quickly ( which works against any buyer of an option ) the closer you get to expiration. Or at least that's the research that I've seen.

    I don't know, someone else could have research that shows otherwise.

    And generally if that time is evaporating more quickly the closer we get to expiration? If I have to buy an option and that is working against me? I would rather have that bleed off be a little more, shall we say, steady?

    So I will generally go out about 50 days, maybe 60 days or so.

    Now that means I have to pay for 50 or 60 days worth of theta. Which makes the option a little more expensive? But that way, the math really isn't working against me.

    Excellent question by the way. Because this entire scenario demonstrates why buying cheap out-of-the-money options? Mathematically is a horrendous situation for anyone to get involved in. Aspiring Traders fool themselves in thinking that the option is " " cheap " ".

    In that they are only paying 20 or $30 for the option.

    The problem being is that they have mathematically disadvantaged themselves.

    If they truly want to profit from the directional movement of the underlined? Mathematically it makes more sense to pay more money and go little further out in time and go deeper in the money maybe by less of those options. Because it has the Market moves, your option is more likely to mimic the movement of that market.

    Hope that makes sense.

    And I should mention again, that this is not something I do very often. Like I said, I think the last time I did this? I was really expecting the gamma of the underlined to explode oh, so I went ahead and did it? And that was in 2018.

    I do know a private prop Trader out of Chicago who has a strategy built on taking advantage of those situations? But that's outside of my realm of experience
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  10. raVar


    So, when you say that the above doesn't help you, nor answer your questions? Is that to say that my explanation on Delta was not clear and I need to figure out a different way to explain it?

    Happy to do so, just not clear on what you're not understanding
    #10     Nov 9, 2019