Thank you Jeff, for your post. I have been trying to learn more and more about options, and doing so with real money is the best way for me to learn, yes, paper does not teach me well. Anyhow, the most profitable trade for me has been to buy index options, deep itm, but I was wondering if there was something wrong with that approach... (other than, if you swing for the fence too often, you tend to strike out a lot). My success rate has been pretty high, but, that could be this easy market. Anyhow, I switched to trading the index futures, and abandoned the options, as the futures provided the same homerun, but without worrying about the bid/ask spread on the RUT or SPX. Jeff, would you say the futures are a better choice than the options? or is it simply an equivalent, and up to the persons taste.
I agree with that. Subjectively I feel very uncomfortable with selling puts. People that don't are the ones that don't mind owning the stock. I hate owning stock, too risky. Ursa..
First off, options "shouldn't" be used to do anything. You should use options to fit your own strategy. If you want to use them to reduce risk, then that's what you SHOULD do, if you want to use them to speculate, then that's fine too. There's no one main purpose for options. Writing naked calls and puts is a great way to make money, provided you understand what's involved. Also, if you do that, keep positions on both sides of the market (I'll write puts on some stocks, then write calls against others, then write puts against VIX if VIX is low as a hedge. Then if my put/call positions arn't balanced, I'll write put/calls on indices/ETFs to balance it). When i hedge a short option position, I usually do it with another short option position, although it sounds counterintuitive, it does work to a certain extent. Of course, if there's a 10% correction, you get screwed on your short puts. At least if you have 50% short puts and 50% short calls, your losses arn't too terrible.
I see your point. I agree that indexes almost never take massive leaps up, but individual stocks do gap up and can put a hurting a call seller just as they can gap down and hurt a put seller. I personally like to sell puts because I've only had one company(Actrade, ACTRQ) in seven years go bankrupt after I sold puts. I also like to receive $ rather than pay it and only sell puts on stocks I wouldn't mind owning at the reduced prices. I think defining risk as $ or % should be considered. If you BUY options you run the risk of losing 100% of your investment. That 100% might only be $50 for an option way OTM, but it's 100% of the entire trade. That's why I stopped doing it as often. I agree that your rewards can be MUCH MUCH greater by buying since selling limits you to what your premium received is, but believe that losses in % are often less. discipline is required either way. _____________ http://mytradersjournal.com/stock-options/
I agree with the way you wrote the rest of this reply except for the math at the end. $10k in an account, 10% for each trade = $1k per trade 4 wins = +$4,000 6 losses = -$2,400 4000-2400 = +$1600 1600/10,000 = 16%, not 160%. Then again, you can do that over and over throughout a year and end up with more than 160%. If my psyche could handle 6/10 losses, even knowing I'm coming out ahead, I'd follow your advice. That's why I stay small time I guess...
Yes, but keep in mind w/ short options, you can easily get stuck w/ a 500% or more loss.. I know it's happened to me. It doesn't take a company to go bankrupt for you to mount massive percentage losses w/ short options.
Well, if the 10% correction happens in 1 day, your account will head toward zero pretty fast, as the short calls will barely offset the losses on the short puts.
Highest risk would be very deep OTM long positions, especially the ones trading for a nickel. The risk of losing your principal is nearly 100%. Potential gain could be hundreds of %, perhaps thousands. This is called the lottery trade.
Paden, As I have mentioned here before on E.T., I don't trade futures, but I do monitor the SP futures daily on my trade station. I primarily day trade and swing trade index options (primarily OEX options) and some stock option trades. Jeff
I think high risk is referring to large amounts of risk in a position. Long calls or puts are debit positions with limited risk and unlimited rewards. Of cours you can put every penny you own into a long call position and it becomes risky realtive to your account but overall it is not a risky strategy compared to naked straddles.