I wanted to hear from some of the options players out there. I'm curious how you would play this situation. GDX is the example, let's say on the 2/12, you felt that GDX would rise to 23.00+ before March 15th option expiration. How would you play this? would you just buy out of the money calls? Would you play some sort of hedged strategy? Also, let's assume too that you play this setup fairly often and you are correct only 60% of the time, would that influence the way you play this? What would provide the best bang for the buck? My guess just buying out of the money calls.
If you had a back tested strategy (of course won't predict the future, but at least it's somethin') then I'd probably split my buy into three chances at it with ATM Mar 15 calls. Just 1 decent win could easily pay for 1 or two losers, if you averaged in over a few days. I do it all the time, but with no where close to account-destroying leverage. OTMs might do better, but ATMs are much more consistent for me. Watch IV and spreads. I've tried to play GDX, but just never got a handle on it... Hopefully the options experts here will chime in with better advice.
Option Attack, thanks for the response So for GLD (instead of GDX) You are saying you would buy: (1/3 position) 123 calls March 15 (1/3 position) 125 calls March 15 (1/3 Positions) 127 calls March 16 An even better example would be GLD, instead of GDX, same date and everything. Buy at about 2/12 or so:
No I meant, if you just have to make a profit - not just a lottery ticket type play. If your system says to buy at the open tomorrow, buy the closest ATM Call. If GLD drops more than, say 1% in a few days, then buy another ATM. But with GLD I would go to two month calls. I have played GLD and it seems like I had to wait longer for profits than I thought. So be prepared to average in up to 3 times. If your system shows about a 60% chance at profit, this IMHO is a good way to make sure you get it, or not lose a lot. Just, as always, use a very small portion of account. With long options that's usually all you need to make a profit, and you don't have to swing $20,000 stock trades to get it. And of course model, model, and model! With an options risk grapher use real quotes and check the various outcomes to see what strikes/months you think will work best for your system.
FWIW I know the usual advice on averaging in losing trades - don't do it. But in my systems it is not desperation, it is systematic. It's all the same trade. Yes you lose more when it doesn't work, but I have found it greatly increases profits and win rates, for a net positive. Would it be better to only add to winners? Not in my trading. My trades are usually too short term for that to do much good. Good trading to all.
I understand what you are saying, especially in options with the decay. Averaging in makes sense because 95% of the time the option will go against you 20%.
A strangle will cover you both ways. And iron Condor will cost you less but not make you as much. Selling a call/ put spread outside the range would give you a credit but risky. All depends on option pricing and volatility