for aiki

[wallstreetsedge]

aiki wanted me to post this along with how i trade my options..

dealing with almost 0 time value options... aiki says bad idea, could lose all, etc etc. when dealing with options with almost no time value, its always spot month, so what i do is i buy options deeper in the money based off of how much capital im willing to risk. lets say im willing to risk a total loss of $5k and a company like aapl spot month. based on aapl's volatility and the kind of moves i know it can make.. if i were to be long on it and aapl is at $180, id probably be buying the $175 or $170, assuming extremely small time value.

reason for using those calls: seeing 30¢ swings on aapl is very easy, even seeing $1-2 moves on aapl is very easy. 30¢ off a $175 call ($5) is roughly 6% or on the $170 is roughly 3%


now aiki wanted me to compare PBR at $110 with tgt of $130 to feb, april, july, buying stock vs. buying calls i would personally buy. comparison will include % return and benefits of option vs stock

for simple math, lets assume $10k to spend to buy 100 shrs

first buying stock outright would create an approx 18% gain or $2k

i would probably buy the feb 95 for 15.60, affording 6 calls. breakeven is about 110.6. assuming it hits the tgt on expiration, my calls would be worth 35 or profit of 14.4 or 92% or $8640. to make the same return as stock i could either lower my price tgt to about $114 or invest about $2k

april 80 cost 30.40, can afford about 3 calls with breakeven at 110.4. if it hits tgt on expiration, its about 66% return or $6k. to make the same return as stock i could either lower my price tgt to about $116 or invest about $4k

since the mkt just opened, prices fluctuate and i wont bother with the july... but i would probably buy higher strike calls.. probably the $100 for about $20, b/e at $120.. profit 50%.. you get the idea

[aiki14]

Originally Posted by kthomllc

aiki wanted me to post this along with how i trade my options..

dealing with almost 0 time value options... aiki says bad idea, could lose all, etc etc. when dealing with options with almost no time value, its always spot month, so what i do is i buy options deeper in the money based off of how much capital im willing to risk. lets say im willing to risk a total loss of $5k and a company like aapl spot month. based on aapl's volatility and the kind of moves i know it can make.. if i were to be long on it and aapl is at $180, id probably be buying the $175 or $170, assuming extremely small time value.

reason for using those calls: seeing 30¢ swings on aapl is very easy, even seeing $1-2 moves on aapl is very easy. 30¢ off a $175 call ($5) is roughly 6% or on the $170 is roughly 3%


now aiki wanted me to compare PBR at $110 with tgt of $130 to feb, april, july, buying stock vs. buying calls i would personally buy. comparison will include % return and benefits of option vs stock

for simple math, lets assume $10k to spend to buy 100 shrs

first buying stock outright would create an approx 18% gain or $2k

i would probably buy the feb 95 for 15.60, affording 6 calls. breakeven is about 110.6. assuming it hits the tgt on expiration, my calls would be worth 35 or profit of 14.4 or 92% or $8640. to make the same return as stock i could either lower my price tgt to about $114 or invest about $2k

april 80 cost 30.40, can afford about 3 calls with breakeven at 110.4. if it hits tgt on expiration, its about 66% return or $6k. to make the same return as stock i could either lower my price tgt to about $116 or invest about $4k

since the mkt just opened, prices fluctuate and i wont bother with the july... but i would probably buy higher strike calls.. probably the $100 for about $20, b/e at $120.. profit 50%.. you get the idea

For the sake of anyone reading this, I asked Kthomllc to explain why he would use deep in the money options with little time value, which was the strategy he stated in the other thread in the options section. I believe the risk reward is better holding the closer to the money options. The value of using options to add profit decreases as the positions get deeper in the money.
So if you take xyz stock trading at $100 and see it go up, the at the money calls would go up by a higher percentage than the deep in the money calls.
So you might see a 2% increase in stock price reflected by a 25% increase in the 100 calls, a 20% increase in the 95 calls, a 15% increase in the 90 calls, etc.
So my point would be that as the calls go deeper in the money the risk goes down but the reward goes down further. A 2% reduction in risk corresponds to a 3% reduction in reward. Most of the intrinsic risk in options is inherent in the leverage, which is the same at all strikes, and the time value which is removed in the above example. Since the reward is higher as you get closer to the at the money price, I postulate the risk reward is optimal nearer that price.

That was the comparison of one option versus another. The risk of the options versus the stock itself of course is if the stock tanks the options price will move down more drastically as well, and the much smaller volume of options traded may make it more difficult to exit the position compared to the stock, which would result in increased loss.

I also believe it is a better risk reward to play the options with more time value, granted the reward is reduced by being longer out in time since you pay for the time value in premium, but the volatility is also reduced allowing you to exit losing positions more safely.

As those of you who have read my previous posts know, I use options primarily to protect long stock positions, to straddle earnings or to fund those positions buy being short options. I evaluate each position based on many factors to achieve the optimal risk reward for me. I acknowledge that the balance of these factors, and the value I assign to them, is a somewhat subjective matter, and that everyone has different requirements of their investments, so what's right for me may not be right for someone else. I asked Kthomllc to explain his methods in more detail because I disagree with them, as I understand what he posted, and hoped he would make things more clear, or back up his thinking so I would understand better.

[netwrangler]

In my view, the essential question here is whether buying or selling deep in-the-money options offers better leverage than other strategies.

That question brings out the analyst in me. This is a question that can be determined analytically. That said, much depends on two things:

• What are your alternatives? Many folks do not have the funds to buy a stock, so they use deep in-the-money options as instead.
  
• At this point in time, are the options in question overvalued or undervalued? This is a hugely important question that is usually ignored by stock traders who migrate to an option trade. If you believe a stock will go up in price, you can buy a call or sell a put. Both trades should make money. But if the options are undervalued, buying the call is favored, while, if the options are over valued, selling the put is preferred.

Rather than seeing a slate of option trades, such as kthomllc has posted, I would rather see a closer analysis of a single trade.

• Why was this option chosen?
• Why this strike price and expiry date?
• Why is this better than buying or shorting the stock itself?
• Why is this better than other option tactics?

Looking at option trades in this way will, imo, benefit all members of the OTF.

[wallstreetsedge]

for aiki..

true that for closer strike prices, you get a higher reward but with a higher risk but when you gamble with a closer strike price to stock price, you have no time value and want the ability to hope out quickly. the difference between the two of us are very common... you focus more on upside and i focus more on downside. lets make an example, the day after rimm reported earnings... a friend of mine as well as i were both plaing options the day after earnings.... rimm sat at about 118 and fluctuated between 118 to 119.. i was involved in the 115 calls and he was in the 116.6 calls.. because he was closer to the stock price, his % gains were higher thanmine. but if the stock was at $118 when we both got involved and the stock happened to pull down to 116.6, he losses 100% while i lose about 50% which is my reason gor going deeper in the money for shorter term calls. i use a lot of comparisons when i get involved in options, i go based on time value, % in profits vs my target price, downside, premium %, etc

also, let me ask you this... if you owned the 116.6 and i owned the 115, wif rimmm pulled back to 117, would you stil take more chance and lower your cost avg on the 116.6 even when t heres no time value and the chances are even igher for them to expire worthless?



for netwrangler...

1 - not true at all. many people use options because of the high multiplier, options are bgreat when it comes to leveraging! think about this, you may have $100k in your acct to buy stock but wouldnt you wanna max out your margin and buying power on certain trades rather than being cash only? some people do, some people dont.. its really upto them

2- very true on buying clal or selling a put.. HOWEVER, when you buy a call, your risk is what you put into the options. when selling a put, your risk is multiplied. if you buy puts on a $100 stock, it can virtually go up 0 and your risk iis that $100 x the # of contracts right?

in my opinion, i prefer to go with naked puts only if i believe the stock is near a bottom and the volatility is extremely low. i sell naked puts on axp all the time because i know the company well but you wouldnt catch me selling naked puts on a company like FSLR.. id rather buy calls and limit my risk.. i prefer knowing where my downside is compared to my upside

as for why i choose options.. i compare the stock itself and my tagret price to the options strike price, cost, premium, and time value.. scanning through my choices vary... also, i wont go into just any option trade.. i put alot of thought behind my trades and unless i can make at least 20-30% broken down into a monthly basis, i wont bother with the trade

as for why its better than buying aor shorting a stock itself.. i think that my first post was cler on that. another plus side on it is that you can buy puts on a stock that has a short restriction without having to cover in a certain time frame or being sure that someone has the stock for your to borrow

[AJLightning]

[netwrangler]

Originally Posted by kthomllc

for netwrangler...

1 - not true at all. many people use options because of the high multiplier, options are bgreat when it comes to leveraging! think about this, you may have $100k in your acct to buy stock but wouldnt you wanna max out your margin and buying power on certain trades rather than being cash only? some people do, some people dont.. its really upto them

You are correct that many people use options because of the high multiplier. But I am also correct that many people use options because they do not have the cash to buy the stock. Your opening in this response to me is, "not true at all." That's a little harsh — especially when you end by saying, "some people do, some people dont.. (sic)"

Originally Posted by kthomllc

2- very true on buying clal or selling a put.. HOWEVER, when you buy a call, your risk is what you put into the options. when selling a put, your risk is multiplied. if you buy puts on a $100 stock, it can virtually go up 0 and your risk iis that $100 x the # of contracts right?

in my opinion, i prefer to go with naked puts only if i believe the stock is near a bottom and the volatility is extremely low. i sell naked puts on axp all the time because i know the company well but you wouldnt catch me selling naked puts on a company like FSLR.. id rather buy calls and limit my risk.. i prefer knowing where my downside is compared to my upside

I agree with most of what you are saying here, HOWEVER, there are actually two different volatility values that are important with selling puts:

• The volatility of the stock price should be low. You described those conditions well: "the stock is near a bottom...." Moreover, this is a stock you know. You are, in essence, channel trading with options. This can be a very rewarding pass time.
• The implied volatility of the put should be high — at least higher than your perception of the volatility of the stock price. It is the difference between the implied volatility of the option and the perceived volatility of the stock that makes for "over-priced" options — puts in this case. The extra premium you get for the put is what makes the trade worthwhile.

I think you understand this intuitively. It is the extra premium that makes you want to sell this put on this stock, rather than some other put on some other stock that may have been channeling in the same market.

Originally Posted by kthomllc

as for why i choose options.. i compare the stock itself and my tagret price to the options strike price, cost, premium, and time value.. scanning through my choices vary... also, i wont go into just any option trade.. i put alot of thought behind my trades and unless i can make at least 20-30% broken down into a monthly basis, i wont bother with the trade

Right. I think along pretty much the same lines. However, my question was, "Why was this option chosen?" Perhaps the question would have been more clear if I had underlined the word 'this'.

Originally Posted by kthomllc

as for why its better than buying aor shorting a stock itself.. i think that my first post was cler on that. another plus side on it is that you can buy puts on a stock that has a short restriction without having to cover in a certain time frame or being sure that someone has the stock for your to borrow

Again, the operative word is 'this'.

• As you point out, selling puts works well on a stock that has a short restriction.
• Shorting works well for a stock that doesn't have much [or any] open interest and/or sales volume on the option side.
• Shorting is great for riding a long-term decline in a stock — financial stocks in the 2nd half of 2007 being a prime example.
• Buying puts often offers excellent risk/reward rations for near-term trades.

My point is that each tool has its use.
I wasn't trying to say one strategy was better than the other so much as I was trying to describe the specific conditions when a particular tool is favored over another.
I think that is best done with specific examples.

Beyond all this, there is the question of meeting investing/trading objectives. In options, it is possible for people to be on opposite sides of a trade, and still have both parties meet their objectives. This is counter-intuitive to a trader with an "I won, you lost" approach to life. Having both parties meet their objectives in a trade is what hedging brings to the table.
Fascinating stuff.

[wallstreetsedge]

i say some people do, some people dont to prove a point. lets say you and i both have $100k in our trading accounts and we want to buy ABC for the week while its at 200... you go into your acct and max it out, tying up your full 100k on margin to buy 1000 shrs

i go off and buy feb 180 calls which cost me 27 per contract. now if i want to control the same number of shares as you, i buy 10 contracts costing 27k and have another 73k to play with in whatever way i choose - whether its with more options, playing around my positions, or just plain equity



as you mention implied volatility - of course i prefer that - id rather sell naked puts 600 puts on goog vs. 32.5 puts on msft but when we talk about an extreme premium - i say to avoid it. when you see extreme premiums, your chances of being put to the stock are very high.. its similar to when you see the premium diff on a call vs. a put, it gives you an indication on which direction people favor the stock to go more. otherwise we would always be buying underpriced options and selling overpriced options all the time




i didnt say sell puts against stocks with short restrictions. i say to buy puts on stocks with short restrictions. if theres a short restriction on a stock, it tends to go down but with there being a short restriction, you would not be able to short the stock or if you managed to borrow some to short, there would be a time frame which you would have to cover which is why i recommend buying puts instead of trying to short a short restricted stock

as for long term, i try not to look at long term positions especially when it comes to options. a company can announce that theyre going bankrupt and your calls go worthless when you bought them going out 2 years or a company you bought puts on would go worthless if they announced in a year that theyre getting bought out.

when i work with options i try not to go out more than 3 months. i rarely buy anything longer term than that... the only companies i ever purchased leaps on were for msft, wu, and mo - companies with solid backgrounds that i know wont be going out of business no matter how many lawsuits may occur and are extremely undervalued. i do this more for diversification rather than putting money into a bond fund or treasuries. a year and a half ago, i bought msft 25 jan 08 leaps for $5, expiring friday, its nice to know that after just a yr and a half, im up 64% on them vs. some sort of fund being up 12%. 64% is great but if thats what i were looking for in options, i would just load the boat on wu calls

as for playing both sides, thats exactly why i enjoy using options you can play both sides on aapl, wait for an extreme, get out, and double or triple up on the losing position and make money again

[netwrangler]

Originally Posted by kthomllc

i say some people do, some people dont to prove a point. lets say you and i both have $100k in our trading accounts and we want to buy ABC for the week while its at 200... you go into your acct and max it out, tying up your full 100k on margin to buy 1000 shrs

i go off and buy feb 180 calls which cost me 27 per contract. now if i want to control the same number of shares as you, i buy 10 contracts costing 27k and have another 73k to play with in whatever way i choose - whether its with more options, playing around my positions, or just plain equity



as you mention implied volatility - of course i prefer that - id rather sell naked puts 600 puts on goog vs. 32.5 puts on msft but when we talk about an extreme premium - i say to avoid it. when you see extreme premiums, your chances of being put to the stock are very high.. its similar to when you see the premium diff on a call vs. a put, it gives you an indication on which direction people favor the stock to go more. otherwise we would always be buying underpriced options and selling overpriced options all the time




i didnt say sell puts against stocks with short restrictions. i say to buy puts on stocks with short restrictions. if theres a short restriction on a stock, it tends to go down but with there being a short restriction, you would not be able to short the stock or if you managed to borrow some to short, there would be a time frame which you would have to cover which is why i recommend buying puts instead of trying to short a short restricted stock

as for long term, i try not to look at long term positions especially when it comes to options. a company can announce that theyre going bankrupt and your calls go worthless when you bought them going out 2 years or a company you bought puts on would go worthless if they announced in a year that theyre getting bought out.

when i work with options i try not to go out more than 3 months. i rarely buy anything longer term than that... the only companies i ever purchased leaps on were for msft, wu, and mo - companies with solid backgrounds that i know wont be going out of business no matter how many lawsuits may occur and are extremely undervalued. i do this more for diversification rather than putting money into a bond fund or treasuries. a year and a half ago, i bought msft 25 jan 08 leaps for $5, expiring friday, its nice to know that after just a yr and a half, im up 64% on them vs. some sort of fund being up 12%. 64% is great but if thats what i were looking for in options, i would just load the boat on wu calls

as for playing both sides, thats exactly why i enjoy using options you can play both sides on aapl, wait for an extreme, get out, and double or triple up on the losing position and make money again

Ya think you could match your comments with mine so the average Joe has a wounded chance of figuring out what is going on?

Just hoping here.

Happy to comment further when what you and I are commenting upon is clear.