1) First you said naked long options for $1000, and then it's spreads for $1000. Which one is it? Obviously spreads for $1000 is a smaller position and less risky than $3000. But that wasn't the point. 2) and 3) I agree with what you're saying, but it's not really about the stop-loss orders. When you take a loss, a wide and fast-moving market aside, that's the risk you're taking. You have to have a rough idea of what the worst case may be - sometimes zero of course, but sometimes nowhere near that. And in those cases the premium isn't the risk. For a spread I'd say the risk isn't for the position to go to zero, unless it's very near expiration.
1) Scores of options over 6 years is a finite sample. It only proves that YOU would have done better being directionally long with the stocks/strikes/time frame that you chose. 2) Different strategies work better in different circumstances 3) Hindsight is 20/20
"The intelligent option trader - one who understands risk - knows that you do not buy 30 spreads at $100 each instead of 10 naked long options at $300 each. You buy an equal quantity and invest LESS money. " That's like saying the intelligent trader doesn't allocate the same percentage($) of his portfolio to each stock position he buys, instead he buys the same number of shares for each position he takes and reduces his risk by investing less money. I think you will find alot of intelligent traders do determine position size by cost, say 10% for any one position.
You are deliberately changing the meaning of what I wrote. Here's what you said : "Whenever I've brought up this topic I get responses like this. Option traders who think that risking $500 on a spread is different than risking $500 on a naked potion. Five hundred is five hundred no matter how you risk it." 1) Yes $500 is $500. 2) But the intelligent trader does NOT risk as much money on a spread as he does on a straight call or put purchase. If the correct size of the trade (for your portfolio and risk profile) is buying 10 contracts, then to HEDGE YOUR INVESTMENT, your spread size should be 10 spreads. If you chose to invest the same cash total, then you are <b>not hedging</b>. You are just finding an alternative method of investing the same number of dollars in a given position. That is not hedging. That does not reduce risk. Options were invented as risk-reducing investment tools, and that's how I use them. There's no need for you to use them that way. 3) Yes, you allocate a specific portion of your account net worth per position, but if you HEDGE positions, then the investment is smaller because it is reduced by the hedge. Mark
I did not say it was an equal number of dollars. It was the original poster who did. I claim a hedged position uses fewer dollars - and hence has reuced risk. Mark
Mark, Thanks for the referral to your blog. How many strikes otm do you place your IC, especially for a volatile index such as the RUT? Thanks, Walt
"If the correct size of the trade (for your portfolio and risk profile) is buying 10 contracts, then to HEDGE YOUR INVESTMENT, your spread size should be 10 spreads. I never referred to using options to hedge positions in stocks or ETF's. I'm talking about initiating long positions to benefit from a price movement. And my point was that if you were to say post on ET that you thought a stock was going up and had bought a few calls for $500, for sure you'd be accused of being a gambler. Whereas if you posted you had bought call spreads for $500, those same people would think you were an intelligent trader. Yet in my case, I would have been more successful financially with the naked options because usually if my options finished in the money, my long leg finished DITM but had the short attached.
I know that. Youcan buy a naked long or a spread. You are obviously more comfortable with owning individual options, so that's the best choice for you. Mark
Chris, You point is well taken; however, a long naked position is at risk to the Greeks. For example, with a long naked position, if the implied volatility drops, then you're short vega in addition to being short theta. Depending on how far otm you entered your position, gamma & delta positive may be of no material benefit. Whereas, being in a spread, you'll be able to mitigate much of the negative effects of the Greeks. Nonetheless, for short term (especially intraday) earnings plays, I think your view may have merit, as long as your risk:reward is favorable and you diversify. Thanks, Walt
Hi Walt, I don't have a general rule. What I <i>prefer</i> to do, when possible is choose spreads 8-9 weeks from expiration, go as far OTM as possible and collect more than $300. If I 'feel' the options are not far enough OTM, I'll move further out and settle for less cash. If you use technical analysis, you can choose strikes that are above resistance and below support. My most recent trades involved iron condors that expire in Feb and Mar. The sold options were 80-110 points OTM. The lower IV goes, the less the premium and I'll be sellling spreads that are nearer to the money. Mark PS as a kid in Brooklyn, I went to PS 247. I'm curious as to the meaning of the 247 in your username.