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looking for solicited advice

  1. 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
     
  2. 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
     
  3. [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
     
  4. 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.
     
  5. 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.
     
  6. 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
     
  7. 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
     
  8. 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???
     
  9. 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
     
  10. 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!
     
  11. There are many more things you could do (beyond the three things you mentioned) when faced with the happy problem of having long calls moving in your favor.

    Another possibility is selling half as many itm calls, e.g. at the 26 strike to create a backspread with less-than-zero risk. You bought the 27.50 for a .10, you can sell half as many 26c for about 2.00, creating a call backspread for a 1.80 credit where the max risk is 1.50. Yummy.
     
  12. If you don't have a serious edge, then just because something "has been working" does not mean it is valid.

    Some peolpe write/sell options for years, under the belief that "90% of all options expire worthless." Then one day, they get hammered and give back years worth of profits, when all they were doing was playing a game that wins 90+% of the time, but the 10-% of times it loses, it removes all the profits.

    But there is nothing inherently profitable about any mechanical strategy. Option Market pricing, decays, time, etc. is amazinlgy efficient most of the time. What looks like a simple strategy usually has some unforeseen aspect a "trader"is not considering.
     
  13. Question for you:

    Were all of your plays buying calls in a rising market?

    If yes, then you know this idea has zero viability long-term.

    Mark
     
  14. thanks for the replies.

    Mark: The underlying (Canadian Oil Sands on TSX - COS.UN) was moving sideways,

    But yes, either up or sideways...
     
  15. I would like to thank wewilly for his advice on a strategy going forward. I may not have been clear, but what I was meaning to ask is: what strategies do people use in situations like mine, you have a succesful option trade going do you simple get out and take the profit or by downside protection or what? It really is irrelevent if you like the trade or not most people only like there own trades anyway. What I meaning to ask is what people do to lock in a profit on success or risk downside besides just selling the option. Again thanks wewilly for your two cents-those are the kind of ideas I was hoping for
     
  16. Speaking in generalities, the success of a strategy is usually dependent on selecting the appropriate one for your outlook as well as the environment you're in plus managing the position whether it gets ahead or behind.

    There's nothing wrong with your parameters as long as you're finding situations where it succeeds. When they don't, you have to take a hard look at why and consider if another strategy would be better.
     
  17. Yep, weewilly's replies were well thought out and covered a number of possibilities.

    There isn't a cookie cutter answer to your question. What one does going forward depends on your outlook for the underlying as well as your reward objective versus risk tolerance (fear and greed).

    Sometimes it's useful to play with a risk graph, adding or subtracting legs to see if you can shift the risk graph to something more attractive. What that is might be different for everyone.
     
  18. thanks spindr0


    I guess I never thought of "managing" it if the underlying tanks.

    I suppose I could turn it into a bear call spread depending on how much it tanks.

    thanks again!
     
  19. You can turn it into a lot of things and it's important to know what those things are. Or maybe you just tweak the position a bit in order to shift the risk graph bit. But don't wait for a tanking to act/react.

    One of the things that Mark W posts and that I seriously agree with is that risk management is far more important that choosing a strategy. You have to protect your principal in order to survive.

    I have a meat and potatoes approach to option. I'm no quant. I have no lock on what an underlying might do but I surely know a fair amount of what I can do to give myself a decent chance to profit... or avoid serious losses. I guess it might be better described as being like a bookie. You lay off part of the bet so that the bet never kills you if you're wrong.

    IOW, if a spread gets ahead, if you want to stay in it, take off some risk, add some more protection, write the other side (turn it into an iron condor or calendar strangle). Adjust positions to keep their risk profile in your comfort zone.
     

  20. That's a delicate balance I have to learn. Since it's hard to sit there and watch the price go down, but I believe (when I've been long the call) that it'll come back, and it has.

    But had I reacted I would have put myself in a more complicated position... its hard to find that balance of

    "okay, it's down but it'll come back up"

    to

    "oh, it's down, and it doesn't look like it'll recover"

    Any of the books I've read (granted they're geared towards value investing and long term horizon) preach 'you get killed when you trade often'. I can see this being true, the problem is when the market moves down significantly, that's when I would get caught with watching the price move.

    I was long a 45 ITM Call on CM, and it wasn't moving. So to reduce my exposure, I closed the position about a week ago. Had I waited until today, I could have closed with a small profit after commissions.

    I guess it's something I have to learn, balancing between letting the price move to adjusting my position (in addition to options).

    Thanks for your input. My apologies for the hijack!
     
  21. Keeping records is important for various statistical and psychological reasons. Ignore that for now:


    Here's how I think and it works for me. It may not work for you.


    I don't consider the results.

    I do not second guess myself - except to see if I made a bad decision: Bad is defined as: was the a better decision, not 'did the decision make or lose money.'

    My job as risk manager of my portfolio is to make the best decision I can at the time the decision must be made. I make that decision and move on.

    If I made an adjustment, I may have to make another later. But that is a separate decision and has zero to do with the first decision.

    I do not hang on to losing trades because I refuse to take a loss. Money is money and I want my money invested in positions I believe will work going forward.

    If I lose $$ in position one but earn an equal amount in position two, then I am even. I do not have to make the gain from position one. I do not marry a trade.

    Profits represent my money. I do not hold a winning position just because I am playing with house money. It is not house money - it's my money. I hold the position only if I like it's prospects going forward.

    Mark
    http://blog.mdwoptions.com
     
  22. >> That's a delicate balance I have to learn. Since it's hard to sit there and watch the price go down, but I believe (when I've been long the call) that it'll come back, and it has. But had I reacted I would have put myself in a more complicated position. <<

    There are times when acting is correct and others when it's not. You act because current price action is giving you a PITA. There's no way to know what will happen after you act.


    >> Any of the books I've read (granted they're geared towards value investing and long term horizon) preach 'you get killed when you trade often'. <<

    I disagree. You get killed when you trade poorly. I trade heavily (for a retail kinda guy). That's what I do and it's what works for me. It's not right or wrong.


    >> I was long a 45 ITM Call on CM, and it wasn't moving. So to reduce my exposure, I closed the position about a week ago. Had I waited until today, I could have closed with a small profit after commissions. <<

    It's non productive to do the woulda coulda shoulda routine. If it's not an issue that you trade regularly, when you close the position, delete the symbol. Look forward not back.


    >> My apologies for the hijack! <<

    No need to apologize. No one owns the chain.


    Now if everyone would get back from lunch and start moving things around, I could go back to ignoring all of ya! :)
     
  23. For the average retail trader (and that's not you, SPIN), studies show that the more often they trade, the worse they do.

    Mark
     
  24. I don't disagree with the statistic since I have no stats to support or refute it.

    If one aspires to being the "average retail trader" then one should accept w/o question what the books and studies say. I'm just suggesting that one needs to figure out what works for you... not what someone else TELLS you is the best way

    :)
     
  25. Right on!
     
  26. thanks again Mark and spin, that really helpful advice.

    That's very true... something I have to work on.