Options instead of underlying

Discussion in 'Options' started by rrover, Nov 21, 2009.

  1. rrover


    Let's say I expect SPY to bounce at $100. Instead of putting out $10k for a position in the ETF, I buy 1 call option.

    If price is currently trading at $110, how could I put that options order into the market now, so it's ready should SPY drop to $100?

    How can I predetermine actual risk/reward of the option? I know I want to be in SPY at $100, with my stoploss at $95 and my profit target at $107.50. How can I make sure my option offers the same risk/reward?
  2. who is your broker? at opxprs you can use these kinds of orders. they have training videos. i would imagine other brokers can do it also.
  3. spindr0


    Chances are, a conditional order might do the trick.

    You can't predetermine the actual risk/reward of an option position to be taken in the future since you don't know when it will occur (possibly determining the month you'll buy), you haven't selected a strike nor do you know what the price will be at that time.

    In addition, the risk/reward of the option isn't determined by a stop loss on the underlying. Assuming you can close the option when the underlying is at $95 (a gap may prevent that), the option's price at that time will be determined by multiple factors (delta, time remaining, IV).

    If you want to select a month, a strike, a future date for purchase and assume that IV will be the same as today then you can determine the option's cost. Then state how long it will take for the bounce to occur. With a similar IV assumption, you can then determine what the option will be worth. Then do your calculations.

    It's a lot of work for a what if. Why not just set a price alert on the SPY at 102 or 101? If and when it gets there, all you'll have to do is look at the option chains and pick one. :)
  4. “Buy 1 dec spy 100 call at the market when spy trades at 100”, which is a contingent order. “Sell 1 dec spy 100 call at the market if spy trades at 95 or 107.50” which is a OCO, one cancels the other. If spy trades at 100 the delta of the 100 call will be probably be 50, which means the profit or loss will be half as much as if you owned 100 shares. The front month decay, theta, will be greater than the further out months so you need a quicker move.

    You can use http://www.optionvueresearch.com/webtools2/FairMarketValueCalculator.asp to put in the price, days to expiration and i.v. to get a theoretical price.
  5. esu2


    you could buy a 100 put
    and sell a 95 put

    risk $22 to make $480
    per contract

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  6. piezoe


    Do as Spindr0 recommended. Set an alert for the spy value you are interested in, then evaluate the options available at that time. There are too many variables that can affect the desirability of your trade between the present and the unknown future. When spy hits 100 the market complexion may have changed enough to cause you to reconsider. Therefore, wait until spy hits your alert price then decide on your trade.

  7. That's way off base.

    He is NOT bearish - I may be incorrect but it seems to be he believes that if it dips to 100, it will rally.

    He just wants to buy if it drops to 100.

  8. My broker (TOS, but as mentioned, I'm sure others do as well, but I'm familiar with TOS) allows you to enter an option position based upon movement in the underlying. For example, you can trigger to buy a $100 SPY call when SPY drops to <= $100. Further more, it allows you to place a limit order based upon the option price at the time of the trigger, which is very handy.

    Figuring your risk reward is still pretty simple, but not quite as automated. What I usually do is check the theoretical option price based upon the stoploss and profit target prices (of SPY). So you check your option price at SPY=$95 and also at the profit target price and there you go. This is not exact, but it is nice and quick and I find this works for me. I normally enter the position quickly after my setup (same or next day), so the greeks don't change too much. If you won't be triggering your trade for awhile, you can still calculate the theoretical options as I said above, but it takes more effort, so I'd just set an alert and re-evaluate when it triggers in that case (as mentioned by others).
  9. Why don't you buy a simple call spread 95/110 ? That way you'd know exactly your risk and reward.