Retail options strategy?

Discussion in 'Options' started by Blue_Bull, Nov 23, 2009.

  1. Hi all,

    I am curious what you folks think about using options to get leverage on directional bets? Specifically, are the odds stacked completely against the retail investor?

    I've been buying 3-6 months out calls as swing trades, and it's been going pretty well. I mainly trade in upward trending stocks that have pulled back, to the point where I believe they are ready to bounce.

    My main concern is that, well, everything is going well in this market. So we'll see if it keeps working in a tougher market. I'm not really sure what my specific question is, but do you guys think that such a strategy can be successful in the long run?
  2. MTE


    It can be a profitable strategy assuming you are actually good at picking direction.

    or as the saying goes, don't mistake bull market for brains.
  3. :) Timing as well.
  4. cvds16


    This was the perfect strategy for the last seven months ... were we had the biggest bull market since decades, so this is hardly a representative period ... like MTE said allready don't mistake bulls for brains ... you will have to come up with something more sophisticated imo ...
  6. Here's a question though - does the implied volatility essentially cancel out any move I am anticipating? What I mean is this - assume I am anticipating a 10% move upwards, does the IV account for that 10% move already, thereby canceling out any "edge" that I may believe I have?

    The IV aspect is one that I don't really understand that well.
  8. I have a question about your strategy of selling Deep OTM options to collect the time decay: I read somewhere that it's like "collecting pennies in front of a steamroller." (Might have been Buffett?)

    How do you assess the risk that the deep OTM option will remain OTM, and secondly, if the probability is indeed favorable to you, then don't you also collect an accordingly smaller premium?
  9. Do you have an edge or do you hope you have an edge?

    IV cancels out nothing.

    Assuming that IV contraction isn't a forward factor, as a long call buyer your issue is time decay. Slower initially. Faster later. If you are buying 3-6 month long calls and you get a 10% move in in 2-5 months, you'll make good money with ITM/ATM calls.

    If IV is low, your calls will be cheap and you'll probably make money regardless of when the move occurs. If IV is high, your calls will cost more, decay will be more costly and the move will have to be sooner (before last month).

    But can you consistently find 10% up moves in your selections?
    If you can, E-mail me your subscription rates :)
  10. MTE


    #10     Nov 24, 2009