You can play with it all you want...but it seems to me you want to have your cake and eat it too. Only thing is, in options, somebody else usually eats it first. (Problem with options IMO is that the transaction costs remove any profit from the trade over the long haul). Its like trying to make a profit on your homeowners insurance policy. It may also be a sign that you're not "confident" enough with the trade in which case, don't take it.
Increasingly I find myself agreeing with IndexTrader and shying away from patefern's approach. I think it is important to minimize the number of option trades due to the huge transaction costs involved.
AAA and Index, you are correct about the costs, and like everything else there are drawbacks and benefits to everything. As to being confident about a trade, I'm never confident and always wary, and yes, if I can figure a way to eat my cake and yours too I'll try. Would either of you, or anyone else, tell me if this is a viable option trade: If you are long ABC stock at 30 and long a 30 put for 1 1/2 and the stock goes to 26, and the 30 put is now 5 1/4 and the 25 put is 1/2, what would you suggest doing? Not trying to convince myself or anyone else about any methods but like the exchange of ideas.
First of all, I'd suggest cashing in/closing out any/all options positions, then reconsider if you still want to own the stock outright...if not then dump it. Forget options...they're an illusion like now you see it...and soon it's gone! Consider also that when you buy an option to hedge your position, what does the seller of that option do many times? That's right he'll go and sell/buy the stock to keep himself position-neutral and of course as the buyer you just paid for the privilege of someone doing all these transactions for you. I just can't make the math work no matter what!
u really don't like options. I love them... make most of my profits that way... not saying there may not be other (better?) ways; but your blanket condemnation of them is not becoming to any trader who desires to be open-minded, flexible and willing to consider all "options" and ideas in seeking profits in his/her trading biz. An example... short MNX calls (mini-ndx) at 6-7... can close today for .85; but legged into a backspread to protect and lock in profits, and seek out an opportunity to sell more credit, at resistance on any significant NDX retracement. I do that a lot. Why? How? It's like chess. I'm confident in my analysis of the underlying, look at key volume and open interest and have experience which gives one a feel for how to use options to obtain a favorable R/R ratio; and in my ability to "repair" my positions, or "trade out" if you will... if necessary. So I'm curious (since I'm new and don't know your prior posts) ... what do you trade that has more "certainty"?! Iceman
I actually have no problem with options in *some* situations. It seems to me that people who make a profit using options do so because they're trading with the right market direction. But when you have no clue/bias as to what a stock will do next, why would you buy options?
Quote from patefern: If you are long ABC stock at 30 and long a 30 put for 1 1/2 and the stock goes to 26, and the 30 put is now 5 1/4 and the 25 put is 1/2, what would you suggest doing? -------------------------------------------------------------------------------- Indextrader wrote: "First of all, I'd suggest cashing in/closing out any/all options positions, then reconsider if you still want to own the stock outright...if not then dump it. Forget options...they're an illusion like now you see it...and soon it's gone!" Thanks for taking the time to reply. Your breakeven on ABC is 31.50 at inception, 30 stock price plus 1.50 for the put. At 26 you sell the 30 put for 5.25= +3.75 Buy 25 put for .50 = -.50. The difference between stock price and put 1.00= -1.00. A -4.00 loss on the stock, a +3.75 profit on the 30 put, a -.50 cost of the 25 put, a -1.00 stock/put difference totals -1.75. You increased your risk .25, 1.75 vs. 1.50, and lowered your breakeven to 26.75, greatly improving your chances of profiting on the position without undo risk. That's what I like about options.
Interesting case study. I see your point but I probably would look at it differently. Of course, why you were in the stock in the first place would be important. I would say you took a 4 point loss in the stock but becasue of the put, you are only out $.25. I think a very good case could be made for doing two things, either just blowing out the entire position and swallowing the $.25 loss, or closing out the put and playing for a rebound in the stock. I don't agree you are only increasing the risk $.25 by rolling to the 25's. You are trading a $.25 loss for an immediate loss of equity of $1.50. You have created a loss zone of $24.50 to $26.75. I think the only way I would want to do that would be if for some reason, say tax considerations, I couldn't sell the stock, and I was dealing with rather long-dated options. I don't pretend to be an expert on this type of analysis, but my experience as a trader is the first loss is usually the best one.
AAA wrote: I don't pretend to be an expert on this type of analysis, but my experience as a trader is the first loss is usually the best one. Nor am I an expert and the more I post the more evident it will be, and I agree wholly with first loss best loss. Everyone is different and for me some sort of hedge makes sense so I wouldn't be without the put looking for a bounce back and the lower breakeven point makes it attractive.
So your intent would be to repeat this process over & over? Usually what happens after the stock makes a move in such situations is that at least 1 or both of those options could only be liquidated for less than you had assumed. (Not exactly a very liquid marketplace and VERY opportunistic). Now if such a move was to happen overnight/out of the blue, then yeah those prices would probably be realistic. Option prices tend to trick many people. It's kind'a like negotiating for a lower insurance premium...you'll either wind up with a higher deductible or less coverage but somebody is STILL gonna make a profit from you. There's just no way to make a risk-free profit which is what you're attempting?