looking for solicited advice

Relatively new to options but have had some early success with them, maybe beginners luck. Anyway here is my scenario looking for some advice.

Monday bought MRK jul 27.50 calls for 10c, they shot up to 35c yesterday- whats the best plan of action
a. just sell now take the quick profit
b. buy the july 24 put for 15c to play the swing if it goes back down
c. hold tight- be a pig a little longer

 

The BEST plan of action is to stop buying chap, out of the money options.

The second best plan is to stop buying out of the money options, period.

The third best plan is to understand how options work and what they can do for your investment portfolio. And the best time to do that is now - before you continue gambling - because that's what you are doing.

To answer your question: Buying the put is the worst possible choice - and that's not predicting anything. But what will happen is you will own calls and puts and watch them disappear into oblivion.

Mark

 

[If you're going to gamble foolishly with cheap OTM near term expiring options, at least do it wisely

You'll know in 3 weeks what the best plan of action is/was. As for today, it depends on how much of a day at the track you think this is.

Prudent man takes his new found money and runs. Cautious man takes some of the money off the table, recouping at least the seed money. Track man lets it ride.

If you bot more than just a couple calls, you can play the swing. At a minimum, pull your seed money off the table. My bet (for you and your money) for a pull back would be the Jul 26 puts, financed by selling (to close) some more of your profitable calls.

Don't get enamored with the quick money you made. Over the long haul, most people lose with specs like this

 

I do look at options as gambling, actually all investing is gambling- its just how one perceives the odds of there gamble. A pro craps player has ways to skew the odds to almost favor themselves over the casino. Option investors have ways to increase the probability of making money on their trade. The first response seems misguided at best and just plain wrong at worst. To say that buying a MRK option to expire in 35 days from purchase date that is 10% out of the money, ie. buying the 27.50 option when stock at 25.00 and only costs 10c I think is a legitimate investment (bet). My thesis for this is: if you look at the past 3 months the stock has moved 10% or more in each of the past 3 months, one direction or another. It announces earning 3 days after option expiration, Mrk typically runs up into earnings then pulls back (as do most stocks), and third-big pharma reached a deal w/ Obama that was better then most expected. My working theory on options is too look for "cheap" OTM options that in recent history the stock has seen and could legitimately re-test. I fail to see the difference to buying a cheap OTM options that’s net 10c vs. buying a vertical call that is still net 10c but caps your upside. To answer others questions, I bought 100 10c options, sold 3 to get a little more then my money back and am currently letting the rest ride. The option is currently in the money closing at 0.95c today, will likely let it go a few more days, but do not anticipate the stock moving much above 28.00.

 

As others have already mentioned buying inexpensive out of the money calls or puts for that matter strictly as a directional guess has been shown throughout history to be a losing strategy. I would also not confuse betting and gambling with investing, again that’s a common theme of those who ultimately lose money in the options markets. Both “cheap” and “inexpensive” are relative terms and they need a qualifier to have any real meaning. What you believe is “cheap” because it trades for a dime other traders would consider a ridiculously high IV to pay.

If MRK or any other stock “typically” did something the opportunity to make money on that would have long ago been pounded out of that event. The real fact is that nothing is so “typical” that would give you a consistent edge in the way the options are priced. Any “deal” struck is already priced in and is a moot point.

As far as what someone did in the past to make money, again that a moot point since we’re not opening our books in real time for all to see exactly what we each have done. Chatter about money, profits, wealth and material goods is pretty much pointless on the internet.

 

I would argue that this trade had a cheap IV: 10c for option 10% out of the money w/ 40days to expiration in this current market, with still histroically high vix. I intially posted a question as to how to proceed in a trade and was attacked by the iuvory tower po pooing a succesful trade (bet), because it was not overly complicated and did not involve a iron condor, or reverse cowgirl strangle crossing the gamma with the theta. I was not trying to brag about a succesful trade but merely asked for advice, sadly I have yet to receive any thus far

 

I didn’t attack anyone. You never mentioned IV anywhere that I saw and the implication was 10cents was cheap. I just pointed out that "cheap" has no meaning without a qualifier and that the actual premium amount is not always a good yardstick for "cheap"

Whether you made a trade or not is not really relevant

 

All trading without an edge and good money management is gambling.

But a skilled gambler has nothing to do with a skilled trader. Gambling (poker, black jack, etc.) is all about odds, card counting, bluffing, etc.

The market does not operate according to simple odds (like on doubling down), the market cannot be bluffed, and there isn't a person alive who knows more than the market.

And the market is constantly changing, so it is not like, "should I hit on a dealer X when I have Y showing." Or "if I start with pocket aces, what are the odds I will beat poker player W or Z???

 

You did get advice, good advice, but what you wanted was specific advice on this specific trade.

In reality, how could I, or anyone else give you advice? I don't know your goal when you entered into the trade. i don't know your price target for the stock. I know nothing as to why you bought this option, other than it was 'cheap.'

You must understand that there is a lot more to winning with options that just buying a cheap option. And if that's the way you want to play, that's fine. But how can anyone give you advice on a play he/she would never have made. I would never own this option at today's price, and thus would sell it 100% of the time that I was asked. How does that advice help you? the fact that I don't want to own it doesn't matter because you do want to own it.

You want specific advice: Here's my best shot (agreeing with SPIN, who also gave advice): sell it. Be happy the gamble worked.

Mark

 

while we're on the subject...

anyone see anything wrong with this strategy? (aside from getting hit on the spread)

I've had small successes with ITM options (delta ~ 0.65 - 0.75) with 3-4 months left.

I go for 20% - 30% return on premium, then get out.

Underlying has to move typically $2 - $3 (the ones I trade).

Is this a loser strategy long term?

I want to get into spreads but need to understand them more, so I'm doing this now...

thanks!