I just opened a brokerage account to trade options. I am thinking making my first options trade, but I don't want to make any mistakes. I have a balance of 5K for this trade. So let's say that I think Sears will drop to $8 on ER day next week. Sears is at $9.45 per share at the moment. How do I short Sears to make the most profit using option chains? Would something like this looks right if my predicted target price is $8? SHLD 06/09/2017 8.00 P Any assistance you can provide is greatly appreciated. Thank you in advance.
Can you elaborate please? I am just trying to find out if I should buy a put option or write a put option if I think Sears is going to below 8 next week. Can you give me some examples please?
I would go with an ATM put vertical to negate vega and theta and make it stricly a delta play. Please pay attention to the spreads. If the spread market is wide, I would reconsider and stick to liquid names. Spreads on stock that cheap will eat up most of your potential profits. Implieds will be very high pre-earnings and will collapse post earnings so model it out correctly otherwise you might be right on direction but still lose $$.
All of that is really greek to me as I am trying to make my first option play? Would buying a put option with a strike price of 8.50 that expire on June 30 works for my case?
If I were to do this, I'd look to something slightly ITM-- $10.50 or $11 look like attractive strikes. But, I'd hold back enough cash to buy it after hours when it dipped (something like 10-20 mins after the release). There's a tiny number of shares outstanding that can be borrowed, and Eddie Lampert has a history of picking them up immediately after the release (no points for guessing who's been screwed on this one before!) The problem here is the price frequently moves against expectations. You can be 100% right about the release, 100% right about the broad sentiment, and wrong because the broad sentiment is a fraction of two institutional investors (who actually are the creditors who get to liquidate is vast real estate holdings when this goes bankrupt).
KISS is fine and dandy but took a really quick look at iv of SHLD and it is 100% from 60% and will undoubtedly creep up more leading into earnings so a put purchase pre earnings unless it is really deep itm (> 90 Delta) will have juice in it which will get crushed post E/D... I have been right 1.5 sigmas on the stock and still lost money ... would've make lots if I have done verticals.
Buy Put options at the $9 strike price. -- if you think Sears stock will fall. If you're right...the new value of those options will be a beautiful thing. Like another person said: KISS...keep it simple stupid. I'm personally not a fan of complex and weird options strategies.
You can apply any theory and analyze it to death and still lose $. As you know, there are no guarantees in options trading. Rather than baffling beginner with complex theories, pointing them in the right direction is more helpful. They've got this far, reading more and experimenting helps beginners figure out what works best for themselves.