Calls or puts?

Discussion in 'Options' started by masonyes, May 8, 2010.

  1. masonyes


    The market overreacted the other day due to an "error" and the greek crisis; so how are you going to respond? Are you going to take advantage of the lower prices and buy calls or do you think the market will continue to fall and buy puts instead? Do you think the decline is temporary due to the greek crisis, a correction that is going to continue or what?

  2. piezoe


    You must be new to options trading judging from your questions. That's fine, welcome. No one knows the answers to your questions but there are plenty of folks who will answer with their opinions. It is best to form your own opinion though. As a suggestion, look at the chart of the S&P (daily and weekly) decide where the support levels are and see where we are relative to those. You'll notice that puts right now are rather expensive. There is a reason of course. They are in demand because obviously many are expecting further downside. You have to make your own mind up whether it is worth buying puts right now, depending on how much lower you think the market will go. If you're new to this, it might be best to sit this out and just observe. Use the time to read about options and learn. If you were going to buy some puts at this point you would probably wait for an up day and for the VIX to fall a little. And if that doesn't happen -- well, nothing ventured, nothing lost. You don't have to trade. It is usually best to wait for a good entry or not trade at all.

    If you thought that the market might eventually -- maybe late May, or June, get down to say the 970-1050 area, you might just wait. (The timing is the tricky part and even the best traders have trouble getting the timing right.) Then if it happens and you think we are near a pretty strong support level on say both the daily and weekly charts, and perhaps the monthly too, consider selling some puts, maybe a couple months out, on some stocks that are paying healthy dividends. A big dividend tends to put a floor under a stock's price and makes it a little less likely that the stock will fall much more -- once it is paying a big dividend it probably won't fall much more because then the dividend would be ridiculously high (maybe :D). Near the bottom the VIX should be high and puts very expensive so that is a nice time to sell them to somebody else. Then if you should get assigned on your short puts you'll end up owning a nice stock at a decent price that is paying a big dividend, and if you don't get assigned you'll make some nice cash on the short puts as the market recovers.

    We have an important election coming up in November, so you might think about what the market usually does before important national elections. Just some things to consider. (Some people will undoubtedly tell you that selling puts is dangerous. It can be, but not if you do as I suggested and wait for the market to reach strong support and back them with cash.)

    And, if you are not new to trading and options, then why would you ask the questions you did? You should know the answers.

    P.S. Though i said nothing about put and call spreads, you should consider them because that is a nice way of limiting risk, but of course you give up some profit potential in exchange for lower risk. If I think the market has fallen quite a lot and is at strong support and will very likely rise some I would generally favor just selling a put over a spread, but spreads are more conservative.
  3. The calls are NOT cheap. Just because the market declined, that does not mean calls are lower price than they were a day earlier.

    Implied volatility increased rapidly, making both calls and puts more expensive. I'm sure you are not yet ready to grasp implied volatility, but make an effort to learn.

  4. If you think that might happen, why wait? Why not just use a SPY put ratio spread for June expiration?

    If you're wrong and the market moves up, you barely lose any money or you can even keep the small credit you pulled in (if you got one).

    If you're right and the market does move to that level, it pays off huge. I think now is a good time to use put ratio spreads, especially considering the high price of options right now.

    But that's just my opinion.
  5. what about long some vix puts? or a long vix put spread?

    thinking the vix will have to pull back.
  6. piezoe


    I'm thinking he is a neophyte, traderlux. I don't think beginners should be fooling with Vix options. To be trading VIX puts I think you should understand how the VIX is computed, their cycle and how they settle, and be a little more experienced. Just my opinion.

    Because he is obviously new at this, i tried to give him conservative advice.
  7. 3.14,
    i agree the vix is a complicated construct, and i was in no way throwing it out for a new trader, should have made that clear.

    i am thinking for a very spec trade i want to look at long puts, i was looking at some long calls and did not get a chance to trade them before the vix took off.

    i did like your conservative advice and agree with it.