Mistruths about Options

Discussion in 'Options' started by aphexcoil, Oct 20, 2002.

  1. There seems to be a lot of mistruths floating around about options, in my opinion. This probably stems from sheer ignorance about how they work. EliteTrader should have FAQ, but here are some of my opinions about options. Feel free to jump in.

    First of all, places like Motley Fool and other sources say that options are generally unprofitable -- especially for those who purchase them because of the wasting time value asset of the option.

    Well, I think they are wrong. Options have something called "Delta" that determines how much they move in response to a move in the underlying commodity price. "Gamma" measures how much Delta changes, but I'll just keep it simple for now.

    Let's say you don't have enough money to daytrade because of this stupid rule by the SEC meant to protect people with much more money than you have. Let's also assume that, right now, you expect us to retest lows within the next month or two.

    You could purchase an ITM $25 November QQQ put that has a higher Delta than a OTM option. This currently costs about $1.95 (you could probably get it for $1.90 -- I have never hit the bid or ask on a QQQ option yet always get a fill). Now, you are paying about 80 cents in pure time premium on this option, the rest is in the money.

    You could then do one of two things. If you are REALLY bearish on the one month outlook on QQQ, you could just stand pat on that option and wait. If, however, you are only moderately bearish, you could sell perhaps a NOV QQQ $22 PUT for .50 cents.

    What this does is partially finance your time-premium of the higher strike put. In essence, you are cutting the ability for your profits to run in exchange for reduced risk on your initial capital.

    I personally think this run-up is a retracement up from a stronger trend down -- but that's just my opinion and not based on anything but a mere hunch.
  2. Other things I have learned about options that weren't obvious.

    a) An American Style option can be excerised at any time -- even if it is out of the money.

    b) Options are not always priced correctly -- so research before you buy. If the option is priced to high, sell it -- if it is priced too low, buy it (considering other things).

    c) Implied volatility does not always equal actual volatility.

    d) Volatility plays on options are a powerful tool.
  3. You must be looking for more bricks .:)
  4. cheeks


    18.24 posts a day.

  5. Quah


    Where are the mistruths?
  6. mdmbud


    aphexcoil - will you be using SSF when they come out instead?
  7. You are going to lose the rest of your money; fucking around with options the way you are talking ...
  8. Michael,

    You are right OTM (On The Money - in this case) with this comment.

  9. Ahhh fuck it, everything I do is apparently wrong to someone.

    I'll just learn through experience.
  10. Why do I get the feeling that those bricks were aimed at the head and that more than a few found their mark.
    #10     Oct 20, 2002