how would you play options like roulette?

Discussion in 'Options' started by OTCkrak, Jul 3, 2013.

  1. the cool thing about basic spreads is that while on its own, has less risk than outright buying an option, the implied leverage huge.

    For $240 you can buy a 890/895 bull call spread on GOOG with a max profit of 117% closing above 895.05 in Aug. By comparison just buying a $895 call will cost you $2800 and would have to close above about $920 to profit $260 a 9% profit.

    so with the spread if GOOG rises from current price of 886.43 to 895.05 (a +0.97% move) you make 120x the movement of the underlier. Your doubling your money or losing everything (BE at 892.35). Practically the trade is binary. you risk $240 to make $260 with a risk reward ratio of 1.1..

    in roulette betting on red or black pays out 1-1 and the odds are about 53% against you. the difference is that with an option, you can actually have an opinion on if it lands on red or green. with options you dont even need to be right 50% of the time because depending on the spread.. the reward to risk ratio can be vary (upto 3 or 4x). combine this with a modified martingale betting strategy and this type of trading is the only i can think of exponentially growing your account. (although that $240 spread can be pretty conservative depending on your equity. the risk is defined by how many contracts you want to float.

    i think trading like this is much more efficient than swing trading stocks. admittedly, not every stock has a liquid options market like GOOG or AAPL. the good thing about expensive stocks like GOOG/AAPL/PCLN is that they move through strike prices quickly, whereas less volatile and cheaper stocks need 10% plus moves to move across strike prices. i understand some of the benefits of day trading stock but for position trading spreads are more effective.

    in comparison to FX where leverage is upto 50x.. with options you cant actually get stopped out.. the trade can go against you but your still in it.
  2. CBC


    Yup it's exactly like playing roulette.

    Great comparasin.
  3. Diamond50


    agreed. however, I would look for another for of money management not related to a martingale system. All 'modified' systems that I have seen still show a higher risk of ruin than I'd prefer.