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Re: Option strategies ernie  01-01-2008, 1:29 AM | Post #2471155
1  

OK.  Let me try again.

 

Do you have access to level 2 streaming quotes? If you don't, option trading is probably best limited to LEAPS.  As I generally buy deep in the money and "large" " quantities of options, I pay less for volatility. The close to the strike price, the more you pay for time delay. And time delay is the karma of options. The minute you make a trade the clock starts ticking. An even money option  (20 call with 20 underlying) may have a premium 500% higher than a 15 call on a 20 underlying.   You will pay 5 bucks more, but far less for  time delay. That is an option that expires in a month, for instance, has a much lower premium, the further in the money it is.

 

 Unless you are looking at streaming quotes it is hard to determine  what premium you are paying.   If you don't know that, you don't have a chance of plotting a strategy. A five dollar premium on a volatile stock like LDK is typical for an at the money option ( 50 call with  underlying 50 might cost you five bucks for  a one month duration. )  So your strategy needs to grasp that you will probalby lose $1.25 a week in volatility premium as the option ages. Thus a 50 stock that goes to 54 in four weeks means that you have paid $5 for the privilege of saving $4 if you exercise or sell. (You sell the option you paid $5 for a month ago for the $4 it is worth now, as the stock has appreciated from 50 to 54.   LOSE!!

 
But if you bought strike  40 calls on the underlying 50 stock , you would probably have paid the $10 difference plus a much smaller volatility premium. Maybe $1.50.  Thus the $11.50 cost of the option you pay when the stock is at $50, is less than you will sell the option for by appreciation less premium. In this case, if, in as the previous example, the stock appreciates to 54, the option at expiration will appreciate to $14 from $11.50.  WIN!  You bought deep  in the money at $11.50 and sold at $14. The $1.50 premium you paid evaporates as the time period shortens.

 

I hope that makes some sense. It is pretty basic. Options can get quite compicated, but that just means more opportunity to make or lose money.  Stick with what you understand, and by all means do some fantasy trades and see what happens. 

 

I think a lot of option traders stick to a few stocks and indexes and play hunches. You can get technical and plot put call combos that are very exotic and guarantee and income if all the parameters are met, but a static market can often destroy those strategies. Options are extremely powerful ways to manipulate money, but they have no loyalty and can help you lose money in a jiffy as well.

 

Topics options trading Stocks volatility View Complete Thread
 
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