Optionpro007 & Others I believe the AAPL analysis by cnms2 is very good. As he very accurately points out, it is very important to keep an eye on your risk reward ratios as well as your total risk. I have found my options approach to be very successful over a number of years. Although for the last 2+ years (since my son has been at the CME) I trade mostly emini futures. Optionspro007 Maybe I wasnât really clear on my balancing puts and calls. What I was getting at is that often if a person is only playing the market from one direction, long side (buying calls) or the short side (buying puts) often a huge wave or tide in the opposite direction comes along and catches him and his position off guard moving it against him. Often if I have a STRONG opinion on short term market direction, I will only play that one direction. But most often, I will try to neutralize this overall market risk by having long call positions that are offset with long put positions in other stocks. Generally I do this by matching up delta to near neutral. Usually I am buying deltas of 90+ percent (Yes 1 or 100% as someone pointed out the other day and I am sorry I forgot to respond to them.) Since I am generally buying deltas in this 90 to 100% range it is usually just a one to one offset in different stocks. By using this approach it comes down to more of an approach of being able to identify strength, weakness, support, resistance, etc. in the individual issues. In this way when the big wave or tide comes along unexpectedly (as they often seem to have a way of doing) I am positioned to capitalize on it no matter what the direction. Generally, the selected issues bet in the direction of the tide, will have a much greater positive move than the negative move experienced in the issues bet against the tide.. I am definitely not invested all the time. Fairly selective in letting price get to where I like it. Maybe this will help someone or maybe it is worthless to most except me. Someone mentioned earlier, when trading, it really comes down to being RIGHT. There are degrees of being RIGHT and this is what causes most option traders to loose money. There is being right on timing, direction, & volatility and the degree to which we will consistently be right on each of these. This is where I believe the very complete, accurate analysis of AAPL done by cnms2 begins to loose value. If I expected to consistently be RIGHT to a high degree on timing, direction and volatility, I would buy just the right amount of time of puts or calls of the correct strike to give me the most leverage. But I know I (and I suspect others) can only consistently be right to degrees. I will use the AAPL example proposed by cnms2. Underlying price $57.03 Nov 65 Put $8.20 ask $65-57.03 = $7.97 intrinsic value $8.00 bid $8.20-7.97 = .23 time value .20 spread 7.97/8.20 = 97.2 % .23/8.20 = 2.8% Nov 60 Put $3.90 ask $60-57.03 = $2.97 intrinsic value $3.70 bid $3.90-2.97 = .93 time value .20 spread 2.97/3.90 = 76.15 % .93/3.90 = 23.85% By buying the Deep In The Money (DITM) option ($65 put) I am spending only 2.8% of my investment ($8.20) for the SAME amount of time that the ($60 put) is spending 23.85% of their investment ($3.90). In addition, if I decide to bail out .20 spread/$8.20 = 2.44 % of investment lost .20 spread/$3.90 = 5.13 % of investment lost I donât recall the deltas on these options at that time, but I suspect around 91 or 92% and 71 or 72% respectively. Which means if I am right to a LIMITED DEGREE (which is the best I can consistently expect) my option (65 put) will increase at roughly 91 or 92 % correlation to the underlying as opposed to 71 or 72 % correlation for the 60 put. Obviously the delta is a double edged sword and if I am wrong this correlation will work against me. Here we arrive at the degree of being wrong. As cnms2 correctly points out, you are always at risk of loosing 100% of your investment in an un hedged position. But if your analysis is accurate, it is not probable but it still is possible. It appears to me most option tradersâ expectations are wrong and this is a major problem. If I am right, I expect to be right to a LIMITED DEGREE. But more importantly, if I am wrong, I expect to be wrong to an even MORE LIMITED DEGREE. Now Iâm sure some of you are thinking, as my dad used to say, âGo ahead and expect in one hand and crap (not exactly his word) in the other and see which one fills up firstâ. For my DITM option trades I generally EXPECT to allow no more than a 2% move against me in the underlying (generally needs to be closer to 1%). This is fine tuned based on perceived support or resistance. I normally EXPECT a positive move of around 3% although I will stay with the trade through 4 or 5% or even more as long as price is moving in my direction with only moderate retracement or showing the proper signs. With the AAPL example from October 26th cnms2 uses an example of being stopped out at $60. See attached chart two post down. I forgot to attach it originally and now in edit mode I am not getting the option to attach it. If I were in an option trade I would be out if the AAPL put up a print above $57.75. I use the DITM options trades as hit and run one to five day (one preferably) trades. Let me break the two options down at expiration in table form relative to investment based on percentage move in the underlying. (The table didn't format right in this post. I attached it in the next post.) One of the major issues is CONSISTENT EXPECTATION. The DEGREE of right or wrong. It appears to me if an option trader expects to consistently catch rather short term moves of greater than 4% he will be disappointed (see table next post). If he can do that, there are better buys than DITM options. Also, it is very risky over time to let the underlying move more than about 1.5% against you. One of the keys is to enter trades where you can get a very tight stop. Also, the DITM options with a delta very close to 100% present many opportunities to trade around the position very close to expiration. Also, depending on your capitalization it is much easier to hedge off the overnight risk cnms2 mentioned relating to a fear of a gap. Multioption I have really enjoyed your thread. I hope you donât let some of the negative posts discourage you from continuing to frequent ET. Good Luck in your Quest!!
Thanks for sharing your knowledge. Do you use stop / stop limit / oto / oco orders? What's your experience with them? How do you minimize the slippage? Also, regarding profit and loss percentages: I size my positions based on the risk percentage to my trading account. So, when I buy a less expensive option (less ITM) it doesn't mean that I risk the money difference in another trade, it stays in cash or margin.
BBY at over $48/share....! I'll reach my goal by December ending because my trading rules have been modified. A capture of $2-$3 move in 2-3days will help! Stay tuned!
Just something exotic, betting on yes/no 100k Seriously, you focus on your trades now. While the BBY option part did not do well, the stock call is just.... well, remarkable. Stay the course.