i appreciate your reply. thanks. i would just like some clarification on your recommendation. ¿are you saying that buying calls for any particular individual stock or future contract is much better if i pay for deep in the money strike prices? i'm having trouble understanding where any advantage might lay if prices for deep itm calls are proportionately super high and currently i'm of the idea that one should only buy the cheapest options possible as the lowest price to pay minimizes the risk of the trade and maximizes the possible profit.
also, with the qqq at 168.54 as of the most recent close, as an example, ¿how much lower a strike price would you recommend to buy a call at? ¿do you recommend looking for some particular delta level, or some percentage of the price lower? ¿what number of days to expiration? ¿and is this kind of trade more suitable to close before expiration or to hold until the contract gets assigned? thanks.
Aww thanks for noticing the resemblance! You didn’t wish the creator a happy birthday! And if you understood theta, you would realize buying options is a losing proposition!
Are the premiums of these stocks really that ridiculous? If all else is constant, time premium is linear, considering price. FB and AMZN have similar IVs in the low 20's. AMZN is 8.5 times the price of FB so the time premium of its options will be approximately the same. Low 20's IV for such stocks isn't whacked out. The reason that these stocks are better instruments for speculation is because of the volatility of the stocks. The option is just the vehicle.
He's giving you poor advice: ITM calls tend to have higher IV's, making them overpriced when compared with OTM calls. They also are more expensive, so they are not only overpriced but entail far greater risk of loss. Their greater probability of expiring in the money comes with those two costs and one more: lower leverage - one of the main purposes of options in the first place. What you give up in return for higher probability is extremely overpriced.
well, deep itm options still seem attractive to me. leverage is something i need to stay away from until i'm sufficiently profitable and otm options are in fact pricier in terms of extrinsic value and probability of the instrument losing 100% of what one paid for it. what i have learned about very long term options (lteas or leaps) is also really attractive. i'm have been trying to find ways (platforms) to backtest which of the different strategies that exist to speculate on individual stocks with options would have been the best.
well, i have continued to do some investigation into the importance of rabid, deranged speculation around any particular instrument and how it affects the price of its options and have arrived at some interesting conclusions i want to share here. the following are some ratios i calculated on the openoffice suite from freely available data (i think every options trading platform should generate ratios and charts like these by default). all data is for prices paid to buy itm to atm call options. the first two charts are for amzn and the ratio of the strike price for the call options divided by the last price for the underlying instrument is always charted on the horizontal axis. on the vertical axis the first chart has the last available price for the option divided by the last price paid for the underlying instrument. the second chart has the last price paid for the option divided by the strike price in the vertical axis. the next two charts have the exact same information for call options on the nq futures contract. first of all, it is evident that all options for amzn are proportionately far cheaper than for nq futures. also, liquidity is far more abundant for options on amzn than on nq futures where it is obvious that all quotes are only from market makers. not only that, but the outlying points below the trend lines on amzn show that some traders were able to buy calls at very significant discounts relative to the value they got. all of this has further convinced me to stay away from options on futures and trade preferably where the deranged, froth mouthed mobs are.
All of this is a trade off decision. ITM options cost more and risk more to the downside but participate in the upside sooner (higher probability of a smaller profit). OTM options cost less and minimizes the potential loss (compared to ITM), offer the potential for a big profit but with a much lower chance of attaining that large profit. See the delta of the option for a loose approximation of that probability. Buying high delta ITM long dated options such as LEAPs minimizes the time premium paid and they are often used as a surrogate for the stock as well as for covered positions. Google "stock Replacement Strategy" and the "Poor Man's Covered Call" for more info.