Can I be profitable simply by going long calls/puts?

Discussion in 'Options' started by trader46, Jan 25, 2010.

  1. trader46


    At the moment I'm trying my hand at options spreads and am finding that it isn't fitting into my trading style as well as I would have liked. I mean a credit spread for instance, will profit if the underlying goes up or stays where it is or even goes down a bit, right? Why would anyone even be trading if they didn't have a good idea at least in their mind of a feasible price target? Also when I generate risk profiles, I keep getting very poor risk/reward.. usually negative.. risk 600 to make 200, etc. Not comfortable with that. Would rather risk $150 to make $450 if the price goes to where I think it will based on my system. If it doesn't fine, I exit. Move on to the next trade. I'm obviously trying to make the transition from buy/sell stocks to options.. and I realise there's more to it, but I would be a lot more comfortable just doing straight calls/puts.

    I was making good progress by simply buying calls and puts by themselves in small quantities and exiting when the underlying would hit a certain price. Need to work on the greeks a bit more, like gamma and vega, but am reading a fair bit on it now. Did about 100 trades during most of last year and came short of breaking even but I had good discipline and money management in place, there was certainly light at the end of the tunnel. I certainly understand charts, support and resistance, fibonnaci retracements, divergence, high probability trading, money management, etc. The thing that put me onto options was the idea of using less capital per trade.. the idea of owning 1000 shares of a stock and watching it make a huge gap down move the next morning scares me.. at least with options you can only lose what you put in. period. Which is vastly smaller than stocks. I'm not looking at making 600% gains, slow and steady is what its all about, but spreads and condors are just too.. indecisive I guess you would say and add a degree of what would seem unnecessary complexity to the game.
  2. MTE


    With stocks you only need to get the direction right. With options you need to get the direction right (or lack thereof), timing of the move as well as volatility. Get one of them wrong and you may lose money.

    So just because you are profitable with stocks doesn't automatically mean you will be profitable with options.

    The adverse risk/reward ratio of OTM credit spreads is a normal thing, but you cannot just look at the risk/reward in isolation, you need to take into account the probability of each.

    If you'd rather have 200 loss/600 gain then reverse that credit spread and you have a debit spread with the risk of 200 and a max gain of 600. However, the probabilities of the outcomes will also reverse.
  3. A lot of people suggest that options vs. stocks is a lot like chess vs. checkers. Having competed in USCF tournaments for a good number of years, I think chess is a lot easier :)

    Options allow one to be conservative or aggressive. You can tailor the risk graph to suit any outlook and fine tune it to your liking. You can shoot for the moon (leverage of OTM long puts and calls) or have no clue about direction and chase the decay in the middle (iron condors, etc.). You can trade direction, non direction, volatility or insults on ET.

    And once you've determined your strategy, you also need to administer that strategy (adjustments, money management). You have to determine your ability to identify what stocks will do in what time frame and then select the strategy that best fits your ability and outlook and hope you picked the right one from column A and column B. It ain't easy :)

    Some thrive on complexity. Some abhor it. There's no correct answer. You go with what works for you.
  4. Hey spindr0, you in the Bay Area? In medicine? Me too!

    I am also known as TimeCorrosion.
  5. Yeh, I'm in medicine. I'm a Psycho Therapist (two words)

  6. he self-medicates... booze and narcotics
  7. stocks are obviously easier than options...the problem with stocks is you need a lot of money to trade with to be profitable...example: can make much $ trading options with $2,000 but nothing $ trading stocks with $2,000...
  8. You can lose it a lot quicker too.
  9. Yep but if you can crack the 25g level, you get 4:1 leverage intraday (pattern day trader) and you can turn your money over as often as you like.
  10. sonoma


    USCF not UCSF. Maybe spin lives on Parnassus?
    #10     Jan 28, 2010