Hello, I am primarily a swing trader but I think NKE will drop after the upcoming split and wanted to buy some puts to capture the fall. Questions: If I buy in the money puts, do I stay within a month or two. If Out of the money puts- how far out. I typically would short it, but I think my timing may be off a littler and think that options could reduce my risk. I know very little about the Greeks but enough about options that a swing play could pan out well. Just not sure best route to take. Anyone can offer some help?
This is a lot like asking, "I think a stock will go up, how many shares should I buy?" How much risk are you willing to take? How much money do you want to make when you're right? How fast do you think it will move? The choice of strike and expiration is a balance of all 3 of those questions.
Ok, fair enough I expect 10-15% drop, time frame about 1 month from split (give or take) I was thinking of buying May 110 puts
Those are the 2 big issues to consider for option buying. IV is another, but for simplicity, let's ignore it. If you are certain of your time frame, go with a shorter month. If not, go with a longer month. As for which strike to buy, the OTM put will give you a greater percentage gain if NKE drops substantially and conversely, it will be a big loser if it doesn't. The ITM put will do better if there's only a small drop but could lose more, dollar wise, if NKE rises. All of this would be evident if you had an option graphing program since a picture is worth a 1,000 words :->) The poor man's way to get an idea of what might happen is to look at an option chain and extrapolate some possibilities. From today's closing quotes: NKE 108.80 Apr 110p 2.40 - 2.55 Apr 115p 6.20 - 6.40 May 105p 1.25 - 1.35 May 110p 3.10 - 3.30 May 115p 6.40 -6.60 Suppose you bought the May 105p today for 1.35 and NKE dropped 5 pts tomorrow. The 105p is currently 3.8 pts OTM. It would be 1.2 pts ITM after a 5 pt drop. What May put is 1.2 pts ITM today? Yep, the May 110p. So if NKE dropped 5 pts tomorrow, your May 105p would be worth approx 3.10 (+ 1.75). And if it dropped 10 pts, it would be worth 6.40 (+ 5.15) Suppose it took 28 days for this drop to occur. Then, you'd do the same process but you'd use the Apr put chain to get the expected value (the May puts today have 53 days until expiration and 28 days from now, they'll have 25 days of life which is what the Apr's have today). So if NKE dropped 5 pts in 4 weeks, your May 105p would be worth approx 2.40 (+ 1.05). And if it dropped 10 pts, it would be worth 6.20 (+ 4.85). And to repeat, this quickie analysis ignores implied volatility changes. For any time periods in between or price change different than option strike intervals, you'll need an option model - eg. spreadsheet, calculator or graphing program. Clear as mud ??
Thanks, that does offer some insight. I have a small budget I am playing with so Options seem like the way to swing trade high flyers. Thanks for the input .
Ouch. This is setting yourself up for some serious pain. Unless you have a pretty thorough understanding of the convex nature of options, you're going to end up in odd situations where you pick the right direction, but lose money anyway. If you're really looking to swing trade on a small budget, buy a small number of shares. Too many people think of options as a "lottery ticket" that, with a small amount of money, they can win big. While there are positions that the win can be 10 or even 100 times your risk, the odds sure aren't in your favor.
Have not looked at the numbers but here are a couple of other ideas: 1. Buy close to the money put, sell further out put, outside the range you expect the market to fall. This is far superior to purchasing out of the money put. or, if the expected move is large== 2. Sell a close to the money put, buy two puts further out. 3. Sell close to the money call, buy a call further out.