Let's talk about options

[MadMarketScientist 11]

Here's my opinion on that.

 

I'm going to take the approach of less is more in options trading. This is what I have found. I know there are math wizards out there who can take it way beyond my intellect who may differ.

 

I just have found over the years, and talking to thousands of traders, and of that bunch a decent amount have tried options that the ones who seem to do the best are really just directional option traders -- and they pay attention to delta primarily.

 

I know there are dozens if not more ways to slice and dice the math on options and I'm sure there are people much smarter than me -- but I come from the standpoint of just keeping it as simple as possible as long as it's profitable. Directional and delta for me is the key -- of course maybe add time decay so knowing what that is going to be as well to be sure you have the time for the stock to move your way.

 

Simple? Yes. It probably would offend those who like to make everything sound like you need a PHD and to be the smartest in the room but I bet more profitable than them.

 

MMS

[Save_trader 10]

Hi MadMarketScientist

 

THANKS a ton for this strait forward words. My trading plan gets more and more clear.

 

It could look like that :

 

Check the volatility and the direction from the market. If up or down, choose directional trades or directional strategies. If the direction is sideways choose hedge strategy. Enter with one leg or use a math approach for sideways strategies. Choose a certain kind of stop loss which can be a fixed money amount or a certain move in the underlying.

 

If in the trade, check the volatility and the theta. Exit the trade, when in a loss, with market order or if placed a limit order for that stop loss, check if filled.

 

Now, what when the trade is in profit ? If the market is in a trend, do I go like in future trading and use some kind of trailing stop or should I hedge to save some profit or I even could add to the trade.

 

Any comments on that ?

 

Save_trader

[MadMarketScientist 11]

Your trade plan is definitely developing - good work!

 

I would suggest that you use a more dynamic approach to the risk on the stock. I'm not a huge fan of saying "I'm going to risk a 7% move on the stock" because I think market conditions vary wildly -- there are times that 7% is way too much, and others it could be way too little. In particular on stocks as well -- some stocks are highly volatile others for them to move 7% would take global war. If you get my point.

 

Instead, try to use something like Average True Range and use some multiple of that to start to help you develop a more dynamic approach to the stop. From there, I'd say your fixed profit target before any trailing should be around 1:1 - whatever you're risking for a first portion of the trade -- that should be your fixed target -- from there then on the balance, if you're trailing that is, you could use a trailing strategy - whether it's a trailing moving average (close above/below) or some kind of bar pattern like a trailing 3 bar stop, etc... you would then use that to exit balance looking for the bigger move.

 

MMS

[thalestrader 14]

It's threads like this that scare most people competely away from trading options. It is made to sound like it is incredibly complicated. While that certainly can be the case, it doesn't have to be at all.

 

A while back I completely shifted away from actually trading stocks themselves to using a very simple and straight forward option strategy to position trade stocks. No spreads. No worrying about B-S and getting all tied up in Greeks (and yes, I am very familiar with option pricing models and methods). The options give me a fixed downside and don't use up nearly as much of my capital as holding the stock would.

 

I have used options as a surrogate for common stock for years in my swing trades. The only use I have found for the Greeks to have any relevance to my trading is on the rare occasion that I will open an option position on an index/ETF that is intended as a day trade. In those cases, I prefer to select front month options based upon delta, and I prefer strikes where the delta is between .70 and .85.

 

Best Wishes,

 

Thales

[Save_trader 10]

Hi MMS

 

Thank you and thanks to thalestrader for the help and ideas.

 

I hope war does not come with this stupid guys in Nordkorea. Any way, As I went over the TP yesterday, I also added the ATR approach. You speak about the risk approach on the stock by itself. If I analyze the IMV and the history volatility and then use this to set a stop loss point, would that not be enough ? Beside that,I plan for each trade a so called " worst case SL ",which would be very far otm. This is just for the case, if market would go crazy.

 

The other SL would be build on the volatility approach which would give me a realistic idea, how far the underlying could move in a certain time frame. Price action is an other point to look at.

 

To the targets. I was thinking to work with fixed profit targets. Thanks to point that out. To spot and trade the trade, I would use price action combined with a trailing strategy.

 

The next point to clear for me is : How many positions should I take, when I enter a trade. Some speak about three position. The first one you take back when having the amount back you invested, the next one would be in the trend and the third one you let run. Three would be also good for the delta strategies, where I combine other derivatives in one strategy. The other open question is the adding, like the turtles did it in there trading. If the trend is moving, should I go in with more options or how to handle that ?

 

Any comments are welcome.

 

Save_trader

[GTNew 10]

One strategy that works for me over and over again is selling GOOG option spreads that are way OTM. My latest was selling the Dec 630/640 bear calls. I like GOOG because the OTM premiums are high enough to make the trades worthwhile. I usually try to enter the trade with 2-3- weeks remaining until expiration. I look for a recent swing high/low and sell the spreads with strikes outside the range of the bollinger bands(20). It's not the most sophisticated strategy, but it it high probability and very forgiving. I look at it as a monthly dividend.

[MadMarketScientist 11]

GTNew - thanks for the post and giving the specifics of what you look for in the trade - that's valuable.

 

MMS

[cuttshot 11]

I really enjoyed working through this thread on options. Trading options has been very profitable over the years. I have traded many different strategies but have really found my sweet spot with simple strategies such as straight calls and puts as well as vertical spreads.

 

Options can become very complicated quickly. There were a few posts in here about how different premium collection strategies can work very well in many different conditions but then when the market changes you can just get pounded. This is the problem with some of the advanced strategies. You might win 4 out of 5 times but on that one time it doesn't work you wipe out all your profit from the winning trades.

 

The reason so many people get intimidated by directional trading is that they don't have a system that gives them a consistent edge. Let's face it there aren't too many people that know how to pick direction over time. If you have a system that gives you an edge you can make some impressive returns by using very basic strategies.

 

If you are struggling to profit with options I would encourage you to keep things very basic. Don't over analyze things. Trade what you know and understand and the profits will come.

[Save_trader 10]

I really enjoyed working through this thread on options. Trading options has been very profitable over the years. I have traded many different strategies but have really found my sweet spot with simple strategies such as straight calls and puts as well as vertical spreads.

 

Options can become very complicated quickly. There were a few posts in here about how different premium collection strategies can work very well in many different conditions but then when the market changes you can just get pounded. This is the problem with some of the advanced strategies. You might win 4 out of 5 times but on that one time it doesn't work you wipe out all your profit from the winning trades.

 

The reason so many people get intimidated by directional trading is that they don't have a system that gives them a consistent edge. Let's face it there aren't too many people that know how to pick direction over time. If you have a system that gives you an edge you can make some impressive returns by using very basic strategies.

 

If you are struggling to profit with options I would encourage you to keep things very basic. Don't over analyze things. Trade what you know and understand and the profits will come.

 

Hi cuttshot

 

Thanks for your post.

 

Systems and directional trading. Systems for trend trading is not a problem. Good MM and clever stop loss can handle that.

 

Systems for side way markets are a more sophisticated problem. Do you have any comments or ideas or experience with good systems on side way markets ?

 

Save_trader

[cuttshot 11]

Save_trader,

 

Sideways markets can be difficult to deal with at times. I like to trade products that move consistently over time. I have my watch list of 10-20 names that I track all the time. These are names that all show a 65-70% win rate going back a few years. I don't change my watch list all that often. This way I don't have to be a great stock picker all the time. I focus in on the volatile names and trade them knowing that I will have losing trades or even losing streaks from time to time. By looking at the same names I get to know how they move and also get to know their options.

 

Once you get more advanced with options there are certain strategies that you can use in sideways moving markets. Putting on a calendar spread or an iron condor are strategies that you can use when the names on your list aren't moving much. If you setup your watch list correctly then you shouldn't have too much time where you are stuck in sideways markets with nothing to do.

 

The bottom line is you need to decide what type of trader you are. If you are a directional trade then make sure you are trading names that have good volatility. If you like to use premium collection strategies then use names that are less volatile and stay in predictable trading ranges. Hopefully this makes sense.

[Save_trader 10]

Save_trader,

 

Sideways markets can be difficult to deal with at times. I like to trade products that move consistently over time. I have my watch list of 10-20 names that I track all the time. These are names that all show a 65-70% win rate going back a few years. I don't change my watch list all that often. This way I don't have to be a great stock picker all the time. I focus in on the volatile names and trade them knowing that I will have losing trades or even losing streaks from time to time. By looking at the same names I get to know how they move and also get to know their options.

 

Once you get more advanced with options there are certain strategies that you can use in sideways moving markets. Putting on a calendar spread or an iron condor are strategies that you can use when the names on your list aren't moving much. If you setup your watch list correctly then you shouldn't have too much time where you are stuck in sideways markets with nothing to do.

 

The bottom line is you need to decide what type of trader you are. If you are a directional trade then make sure you are trading names that have good volatility. If you like to use premium collection strategies then use names that are less volatile and stay in predictable trading ranges. Hopefully this makes sense.

 

Hi cuttshot

 

This makes really sense. Thanks a ton for the idea.

 

As I trade options on futures, I will make this selection in the future market. Until today, I only changed time frames to see different charts from the same underlying. I then saw some times in bigger time frames sideway ranges and in smaller ranges I could trade some directional moves.

 

Choosing the right options ( Mainly strikes and expiration ) for different time frames. Time frames like two days, two weeks or one months. If you leg in a strategy for example on a two week time frame ( For example a condor ), what option expiration do you choose for this ?

 

Doe's any one like to share his experience about that subject or any good comments or ideas about it ?

 

Save_trader

[cuttshot 11]

Save_trader,

 

Couple of comments on your post. First, the strikes and expiration really depends on my outlook. As much as I would love to say I have a defined rule set for picking expiration cylce and strike price it really does depend on the type of trade I am taking. If I anticipate being in a trade for a short amount of time (less than a week) I will consider ATM options. In all other cases I prefer ITM options.

 

I have started to use weekly options with some of my strategies so that also comes into play when selecting my options. I would say I am using front month options most of the time with my directional strategies. If I'm putting on some of the more comples spreads then I will go out further in time (calendar spread).

 

One of the main reasons traders get frustrated with options is the fact that there are so many different strategies to use. It isn't as black and white as some other ways of trading. You really have to have a clear outlook for the trade and then create the position to reflect that outlook.

 

You will also want to be careful when legging into/out of a position. If you aren't filled on part of the trade you can be left with a position that has a completely different risk profile than you were going for.

 

I know I got a little off topic there but hope that helps.

[ReynaFan 10]

Hi All,

 

I'd like to jump in with my strategies for a little feedback. I've been trading options for over a year and have had mixed results. What I have been able to accomplish to learn a lot and develop some strategies that I'm in the process of honing. As you'll see, I like using the option as a proxy for the instrument (in most cases) because I like the leverage.

 

Strategies I currently use:

 

Covered Calls: I know they're generally not popular, but I look at them as a steady way to earn 6-10% monthly. I can identify companies in an uptrend that I'll track in the first days with a month left to exp. I by the asset after a day retracement and/or at beginning of an up day confirmed with volume. I leg out the sell of the call (ATM or OTM depending), usually by the end of that day. Getting called out is fine. Sell instrument at exp if not. I'd like to lower the risk profile as the higher premiums are come with a volatility that can be unnerving when upside is capped and risk in not. I'm thinking of lowering my target % by using ETFs more as the underlying instrument.

 

Choppy & Volatile: I find high volatility assets that establish a range. When the asset hits the end of the range buy OTM call/put. Determine exit strategy based on % change for asset, not other end of range. I'd like better ways to identify companies for tracking. Less volatility, definitive channeling stocks would be great, how do you id them?

 

Going Long: Find assets that are in a strong bear trend, but fundamentals don't warrant it. side note: I base most of my set-ups on technical analysis. I do have parameters for my covered call companies (learned lesson) and this strategy. I track these companies until the trend looks to have reversed and I buy a call OTM for a couple months exp (all depending on technical analysis of targets. I'm looking to control a large amount of shares relatively cheaply for bigger returns.

 

Strategies I'm considering:

 

Identifying small cap biomed/pharms that are all in on one drug and in FDA approval process. As drug moves along process, wait until a determination is soon to be made. Buy OTM put AND Call with same current month exp. When news of approval or not comes, I've noticed the assets explode, up or down. Sell off the wrong option and determine exit point (even if calling away actual shares at exp to sell) for correct option.

How hard is it to know when determinations about trials are to be released? Anybody ever purposefully try anything like this?

 

I also want to watch for specific sectors or other companies show the same spikes up or down based on earnings announcements to try the same as above. If I knew sectors and companies that exhibited this behavior after earnings announcements, knowing the earnings dates is easy and exact. Any thoughts?

 

Thanks,

David

[Options Kid 10]

The best advice I can give:

 

Keep it simple. I made a 60% return on the equity in my portfolio this week. I'm 17. Keep it simple, guys.

[MadMarketScientist 11]

The best advice I can give:

 

Keep it simple. I made a 60% return on the equity in my portfolio this week. I'm 17. Keep it simple, guys.

 

what strategy are you using? I've just been selling puts and calls for some income ... at most annualized to 20% or so ... far below what your doing!

 

MMS

[jwhtrades 10]

Hello, Wondering if anyone has heard of, or had experience with "Doc Severson" OptionsMD. He's offering his options trading course for $1,997. Seems a bit steep to me and I can't find any reference to him anywhere. He's associated with Trading Concepts, Todd Mitchel who I also don't know.

 

Appreciate any feedback.

 

jwhtrades

[javakitty 10]

I am looking around, too, and can't find anything except several pasted in sources that are identical across the internet. the overview sounds good. I might come to the webinar to find out about it.

[jwhtrades 10]

Hi javakitty,

 

I went through all the videos. I can't justify paying someone I've never heard of $1,997 for his training course. It might be well worth it but without any background investigation I'm reluctant to invest. I'm currently taking the free training mentioned in another thread from Newsletter Sites and More for free. not an endorsement just what I'm doing. I'm also enrolled in the InvestView training and it's pretty good but will cost you $99 per month after the 10 day look see that costs you $9.95. I guess at this point my feeling is to keep investing in another options trading course is like buying another set of golf clubs hoping will improve your game. I need dedicated time to digest what I've got so far and then lots of practice with my virtual account on select option strategies that I can relate to to prove to myself that options trading is for me. Again, I'm not endorsing any of the above but the 21st century site is free and has great detail. You have to put in the time, takes lots of notes and master those modules and exams.

For what it's worth,

jwhtrades

[ericmoles 10]

I listened to Doc's seminars. He advertises a money back guarantee if you aren't profitable after a year. I asked about this in his webinar and instead of answering to the group, he sent me a private message saying he wasn't going to discuss it in the webinar. He also said that if I was interested in the money back guarantee, that this program probably wasn't for me. I say, hey, you offered it and I want the details.

 

He uses a lot of gimmicky sales techniques like, I can only accept a limited number of students so act now, and ' we're holding an EMERGENCY webinar'. I don't know what to think of this crew.

 

He said to expect to make one percent a month. So to pay for this program in a year, you would need to be trading a 20000 account (roughly).

 

I'd be curious to hear of other's experience with or thoughts of him and his program

[ericmoles 10]

Here is his latest email. He references the guarantee in the p.s. section. Funny he wants you to be swayed by this but he isn't willing to explain the details of it or talk about it. And if you want to know the details of an agreement, i.e. you've done your homework and due diligence, then this program probably isn't for you.

 

"OK, I have a couple secret bonuses that I was only planning on telling you AFTER you enrolled in the class, but I'm just so excited ... I couldn't help but share ONE of them with you....

 

Those of you who enroll in the class before we close the doors will receive a limited series of 'LIVE Insider Webinars.'

 

We'll gather together a few times a week and I'll present a LIVE analysis of the market and which trades I'm looking at ... PLUS, I'll answer a few questions before the market opens!

 

This gives you a real life INSIDER look into a Professional Trader's game plan ....

 

And, if you like that, there's A LOT more in store for you!

 

Yours in trading success,

Doc Severson

 

P.S. Many of my colleagues think I'm crazy for offering such an outrageous guarantee ... but, I'm so sick and tired of all the B.S. sold on the market!

 

I figured it was about time for someone to step up to the plate and put their money where their mouth is ... so, here you go!"

 

 

Caveat Emptor

[Options Kid 10]

what strategy are you using? I've just been selling puts and calls for some income ... at most annualized to 20% or so ... far below what your doing!

 

MMS

 

I don't have the margin power to sell puts and calls for decent money. I buy calls and puts- mostly puts though, to make more money on volatility. Since I trade markets such as gold indexes, spy, and oil, I don't lose much on wide spreads, and usually day trade or use very short swing trades.

 

I ended up doubling my entire account in one month, but I'm getting into forex instead.

 

Good luck! FYI: 20% returns on your capital is probably a lot more than 100% returns on mine!

[ante_up 10]

1%?!

 

HAHAHA WHAT A JOKE

 

Don't by that idiot's class, you could make a 1% return listening to Jim Cramer. I made 30-100% a month and I'm no "pro"

 

 

I still can't believe he promises 1% hahahahahahahaha

[ericmoles 10]

Well, I bought his program. So far, I like what I see. His intentions seem good. His material is thorough and well presented. He actually trades and has skin in the game.

 

I addressed my concerns with him over him not describing his guarantee.

 

Ante_up. 1% per month is nothing to to laugh at. This actually sold me on his program more than anything else. A big part of trading is realistic expectations. If you can consistently compound 1% per month for the rest of your life, you'll do very well.

 

You may have made 30% or 100% in a month, but I would be willing to wager that you aren't consistently doing it, have high variability in your returns and that you are probably taking on too much risk and will blow up sooner rather than later. Besides, if you could consistently return 2-3% per month, you would have offers to manage BILLIONS of dollars and have to turn clients away.

[Timo57 10]

This is my first post ever on a TL blog and I selected the options thread because I am very new to this. I have options privileges but have yet to actually trade real money. I am very comfortable with trading stocks which seem pretty straight forward vs. options.

I use TOS with TDA and have gone through all of their free options seminars, and also have Investools access and have taken their free options webcasts.

It seems that every time I start to evaluate costs, possible return, etc. the premiums for buying or selling using various strategies, the upside is so minimal (vs. risk and commissions) that it just doesn't make sense. Obviously, I am missing something in my understanding on a basic level.

I own some pretty high volume stock with heavy option trading (BMY for example).

I've got lists of strategies and when and why they are used, but it's the actual application of it and clearly understood advantages that elude me. And I am not against taking moderate risk if I understand the process.

I realize my problems may be too basic for this thread. I also know I need more education on this topic.

Any references or advice of any kind would be most appreciated.

Timo

[mslk 10]

It seems that every time I start to evaluate costs, possible return, etc. the premiums for buying or selling using various strategies, the upside is so minimal (vs. risk and commissions) that it just doesn't make sense.

 

it depends on what strategies you are thinking of applying ... but i would stay away from buying options if you are just beginning. try selling some options, it is a 'safer' way to extract money from the options markets. take a look at some of my trades on this thread. http://www.traderslaboratory.com/forums/options-trading-laboratory/10170-monthly-option-trade-log.html

 

i sell puts on companies i want to own, essentially trying to buy them on discount. i can explain in more detail if you like ... just let me know. good luck!

 

- mslk