For Directional traders

Discussion in 'Options' started by palawan, Jul 22, 2005.

  1. palawan


    Greetings and Good Trading to everyone.

    After about 4 losing years, I think I may finally have a winning one this year.

    I've had my share of winners (profits) in the past, but I eventually lost them all and then some. I've always played options (calls or puts) on the long side and from reading this forum, I see that the majority trade some kind of spread and/or delta neutral positions. That's good, but I'd like to start a thread where people who wanna take a position based on an idea of the direction of the underlying can throw them and maybe let people follow them or maybe even take the opposite side of the direction.

    A background on where I'm at right now will explain what I'm trying to do here. As I've done in the previous years, I put a position that has a small dollar risk capital and finally hit a home-run. Specifically, I bought 7 Sept call options 260 on CME back in late April when they were around low 190's. Reasoning for the trade was that CME at the time announced very good earnings and had good guidance going forward. Market cap was around 6.5B and I visualized in my mind that their market cap should be around 10B which would put the share value at around 300/share. I thought in my mind that they can at least hit 275 by Sept.

    Lo and behold, they hit 250 a share after a month, and even though I was still 10 points out of the money, my position was worth $9,000. CME was extremely volatile at the time and I finally just said, hey cash out now before losing that much money. A week or so later, right before lunch (California time zone) I noticed that CME was up 10 points and looked at the news and there were rumors that CME and CBOT may merge. CBOT was planning to go IPO before that time. I bought 7 call options 320 on CME that cost me around $1600, the next day, I sold the 7 calls for $10,800 when it was confirmed that CME did approach CBOT about a merge.

    So, those 2 positions have wiped out years of losses (over $17,000 in profits on a capital that started as a $1,000). The thing that hurts though is that if I only was able to hold on the original 7 Sept 260 calls.... :D

    OK, on to the purpose of the thread....

    I've made some trades since then, and luckily for me, I've had more winners than losers and made more money the last 3 weeks. Nothing crazy like the CME trades, but then again, I'm not really going for homeruns anymore and I'm quick to take profits. A few times, too quick and left substantial money on the table.

    Here's the bottom line:

    I have a lot of stocks that I watch and I spend a lot of time every night trying to look for something to play on any of them. Strictly options plays and strictly directional. Sometimes, there's just not enough of a reason for me to put a trade. If we throw ideas around, then we could benefit. The positions that I took will give an example of what "ideas" I'm talking about.

    DWA Dec 30 calls - Currently a mark-to-market loss of $1260 for me. At the time I put this position, I visualized that DWA would hit 35 by Dec based on the fact that they have a low PE and madagascar did very well in the box office. They already warned the previous quarter and in my mind, have already lowered expectations. The entry point was very good as they were near their 52-week low. I was wrong, they warned again last week and... The position is still open

    KSS Jan 50 puts - currently losing $700 on it. KSS in my mind is like Circuit City against the likes of BestBuy. How can they compete with Walmart, Costco, Target? My problem on this is maybe I'm just not that familiar with this company... A few months ago, they opened one near my house and my GF insisted we go there. She's into shopping. We both were not impressed. I'm not into shopping, but I'd rather go to Target or Walmart as they have better products and better prices. The position is still open.

    CME Aug 250 puts - I didn't think CBOT would pass up on the chance of cashing out big if they go IPO, so they would probably say they're still gonna go ahead with it. An article came out the next night stating that is still their plan. I was jumping up and down as I was waiting for the morning for CME to crash about 30 points. They didn't, but they were down a few. I closed the position for a profit of $300

    KLAC Sept 47.5 calls - Very good company, very good margins, no debt, lots of cash, still have growth, nice free cash flow from operations and good entry when the stock was around the high $43/share. Earnings will be reported in a few weeks but will cashout if the target price was hit before earnings. Target was $48/share. Cashed out for a profit of $1445 on a risk capital of $1600

    Goog July 300 calls - interesting play and one that I had been thinking of doing for a while. On options expiration week, I look for a very high volatile stock and if it's generally down monday and tuesday morning, i will buy calls and either cash out for profit when the target is hit, or whatever i can get for it sometime on Thursday. This position was put on Tuesday morning, when GOOG was around 291 with the target of 298 by thursday. wednesday morning, cashed out for a profit of $720 on a risk capital of $560. I wish it didn't hit my target on wednesday, as some guy from Lehman raised the price-target on GOOG to 350/share on thursday morning and i could have made another $3000. BTW, if GOOG was up monday and tuesday, i would have bought puts...

    VPHM Aug 10 calls - pure earnings play! they had phenominal earnings announcement last quarter and I was hoping they'll do it again on 8/2/05. I got shaken out today (with the London bombing news, they went down a lot and luckily recovered enough for me to cash out). I cashed out for a profit of $1100 on risk capital of $1600. I may re-enter tomorrow.

    QCOM Oct 37.5 calls - pure earnings play! Lately, good earnings have been rewarded very well - AAPL, IBM, etc. QCOM mostly does well on earnings and they didn't disappoint me this time. Target price was $38/share and I cashed out for a profit of $1400 on a risk capital of $1550.

    So, how about it? Throw a stock, state the idea of which direction it will move and a price target, and the reasoning. The reasoning can be anything - FDA decision about to come out, earnings play, a pattern (like my trade on a highly volatile stock on options expiration week), etc.

    I only have one right now, and it's closer to expiration the first time I played it so, choose your time frame and strike:

    VPHM Aug 10 calls - same reason as before. Good entry point would be if each call can be bought below $1.4 Target is $13 if hit before expiration, otherwise gamble that the earnings will be good on 8/2/05 and hope that they announce spectacular earnings as previous quarter. I'm not buying longer term options, as this is really a hit or miss position. If they miss, I don't know how low they'll go. They've gone up from around $3 a few months ago. Why not a straddle? As the title of this thread suggests... I'm a directional player and I only pick one direction.

    My purpose is to be right more times than wrong.... or at least less wrong than right. If I'm wrong and the position doesn't go anywhere, I only lose a little. I only hope to make enough on the ones that I'm right more than the ones that don't go anywhere and bleed time value and the ones that go wrong and lose big.

    Sorry for the long post... I must fess up that because I have a full-time job, I actually am running out of ideas and after the earnings season, I'll just have the one idea on options expiration. I think sharing ideas wouldn't hurt your original idea, but if you think it would, then of-course you don't have post it.

    Thanks for your time... Best of luck on your trading.

  2. i never post on here and im sure these dudes could school me but ill just go ahead and say that youre use of options without a proper understanding of their premium is probably the biggest reason youre not getting what you want out of them. using a specific strike to cover your position may make you percieve a barrier that your money wont cross. the movement of an option can be quite different that the stock (for several reasons).

    the least you should do is learn how to do backspreads. trading one strike against another can allow you to leverage different percentages of your stock position at different price levels. it can also take some of the cost out of putting on that option position (up to a point).

    um, thats about all i got. try reading "option volatility and pricing" by sheldon natenberg. its a snoozer but its an excellent first step to understanding how your atm calls keep fucking you in the ass.
  3. palawan


    Thanks for the advice, arbmaster... I'm not the most sophisticated options player (not by a long-shot), but I am no beginner. I've read McMillan's and I do have the Natenberg book (for over a year but have been so intimidated by it that I haven't read it). I've read many books on trading and psychology involved (from Taleb to Schwager to Schwartz to Douglas, etc.)

    I'm not interested in spreads, backspreads, or delta-neutral positions. They may be right for a lot of people, but they're not for me. I'm not complaining about my trading results or trading style. In fact, I'm not asking for help at all in that area...

    I'm trying to start a thread where people who might have an idea on a stock (or actually, anything optionable i.e index or ten-year bond) that's gonna make a move (up or down) and state the reasoning behind it. Kind like a think-tank repository... If someone posts an idea, you don't have to follow it. You can even go against it, but at least you know that there will be a move in that underlying.

    Since I'm always long the the options premium, I need underlyings that are gonna make a move. I use options to limit my risk capital and also have leverage when the underlying goes my way

  4. Anseld


    uhm.... this thread actually has very little to do with options.

    it seems more like a thread about "hey! what stock do you think will go up?" or "hey! what stock do you think will go down?"

    guy, i hope you're clever enough to not take stock tips from the internet. :p
  5. sorry if i came across as a know it all. i certainly know little, but what youre saying doesnt make sense to me. its easier to just buy or sell the underlying if a move seems certain to happen. even option traders use the underlying for directional plays. using options directionally has several drawbacks (bid/ask spread, gamma/vol risk, liquid execution, probably greater commissions).

    i dont know, buy options that cost a nickel. you never know what might happen.
  6. alot of the things you explained about your trades are vol plays, not directional plays. if you can think that way you can trade the volatility "directionally" with positive or negative gamma, resulting in a position that favors whichever direction you desire, all while collecting decay instead of spending it.
  7. Palawan;
    Like your trades on CME;
    William O'Neil has had some good fund/articles & tek charts on

    As far as making money this month like long underlying [cash]homebuilders;
    and long calls , occasional long puts in liquid things like QQQQ.

    As far as cutting a loss [business exspense] which is part of plan also;
    bought to close this month , a short call position of August $40.o QQQQ .

    Could tell you the exact amount, but that trade confirmed;
    wisdom of sticking to plan ,especially occasional countertrends,
    and do more buying long ITM, ATM calls or ITM ,ATM,long puts.

    And still think sellers can have advantage in sideways trends.
  8. palawan


    Anseld brought up a good point that this may not belong here in the options forum. I only trade options, so that's why I put it here. I don't do OTC stocks or stocks with no options. And to address the 2nd issue of being smart enough to recognize pump-and-dump, I have mentioned in the first post and 2nd post that I may actually go opposite your idea. If you say that biotech so-and-so is gonna get approved on this phase III and I read about it and come to the conclusion that they won't, I'd like to buy puts on it. I wouldn't know about the potential move had you not brought it up.

    Arbmaster brought up issues regarding "disadvantages" with the long volatility positions, which is what my trading style is. There's no free lunch. If it's such a money-maker, then everyone would be selling volatility and whoever sold the options on my recent plays certainly didn't get their free money from me as I have about $20,000 from a start of $1000 in a matter of 2 1/2 months. Let's not forget the advantages of being long the options, limited risk (I only risk at the most about $2000 on each play now), big returns if I'm right. I can play high-priced stocks, while most everyone I know who play the market on the side, can't (won't) do anything with any stock that's over $100/share. Second point that Arbmaster pointed out is that you can be long volatility without paying the full premium. You also limit the returns. Certainly, if I can't trade and can't be right at least as much time as I'm wrong (time limits added to being right on the direction), then I will lose money. Period. After having made a lot of trades over the years, I hope I've gained enough experience and have become a better "speculator". One thing I know is that I have to risk money if I want to make money. I'm not fortunate enough to have millions of dollars and live-off the interest...

    Murray, Thank you very much for sharing your ideas. This is what I really wanted to do. Exchanging ideas give us information that we can use and help us to become better "speculators"

    Here's an example of how posting ideas could enhance our trading knowledge. I left money on the tables when I cashed out of the KLAC calls and the QCOM calls. They both hit my target price for each one, and they both made money for me. Only one of them I feel bad about leaving the extra money. Here's why... Both plays were put-in for at least 3 reasons, good fundamentals on the underlying, a good entry point based on the trading range of the underlying, and the major reason was the upcoming earnings announcement which I believed at the time I put in each trade would be positive for each stock. So, how come I only feel bad about leaving money on my QCOM calls play? Because I cashed out of the KLAC calls BEFORE the earnings announcement. I didn't have anymore risk of them announcing a bad quarter or guiding lower for the future and the stock tanking the next day. The QCOM calls I sold when it hit my target price AFTER the earnings announcement and they did announce a very good quarter and have positive guidance. I should have raised my target price by a point which hit on the same day as my target was hit. Maybe if that was posted, someone could have pointed out that taking the extra risk of holding through earnings should be worth an extra point on my target price for the underlying...

    I entered my VPHM Aug 10 calls for $1.50. Not the best price, but not bad either... If they hit $13 before 8/2/05, I'll close it out. If it doesn't hit before earnings and they announce spectacular earnings on 8/2 same as previous quarter, the experience from the QCOM trade tells me to raise my target price to 14 or maybe 15...

    Thanks and Good Trading.
  9. Intimidated by Natenberg? That's kindergarten stuff compared to Hull. Hull is the minimum one should read before investing - just make sure you've had up to calculus III and some linear algebra.
  10. Chagi


    To the original poster, I have the following comments.

    I haven't formally studied risk management in too much detail yet, since I didn't realize what I was getting myself into the first time I signed up for a risk management class at my university (dropped it last year, going to be taking it again this fall, fell on my face originally during an assignment that involved valuing swaps).

    The above said, my current view on options has more similarity to your trading style than it does to the other, more complex trading styles. I am very interested in trading in the long term, and the largest issue that I currently see with equities trading is one of leverage - one needs access to substantial capital in order to be able to effectively trade for a living.

    Options trading provides a solution to this, due to the higher volatility in options valuations associated with movements in the underlying value of a stock. The other thing that I find really, really attractive with options is that your risk/downside is fixed, since the most you can lose is the cost of the option. The curve is just plain beautiful, since you can have "unlimited" upside with limited downside.

    Equities trading books talk a great deal about risk management, specifically keeping your losses very small, and letting your losers run; it would seem to me that this is what options are all about. Essentially I view it as trading a stock with a built-in stop that cannot be violated.

    Shorting something like GOOG right now for example (if it was a good time to do so) would take loads of cash ($30K per board lot), and involve potentially huge levels of risk, since your losses could theoretically be unlimited (though of course your broker will cut you off sooner...).

    Another thing that I find very interesting is the timeframe involved. You can either choose to purchase puts and calls with shorter contract durations, or puts and calls with much longer contract durations, so if you aren't right at first, you maintain the ability to be right at a later date (assuming you don't immediately realize your loss). Doing the same thing with equities is much tricker, particularly if one were to involve the use of margin.

    Finally, our tax laws in Canada allow the purchase of call options (as well as the selling of covered calls, but that's more of a risk management strategy) within a tax sheltered account (self-directed RRSP), and there aren't many other (actually none that I can think of) leveraging options available in that type of account.

    Anyways, I'm going to be learning as much as I can about options over the coming months, since I'm not yet at the point of having enough capital to trade seriously, but I think I am much more interested in options trading than direct equity trading at this point in time.
    #10     Jul 23, 2005