Options - Why?

[wayneL]

Thsi is in response to a post made by Tech/a over at reefcap, where he enquired as to the motives for trading options over shares.

Well I think this is a great question.

I personally am using options more and more in my longer term trades. (that for me means 7 - 30 days)

My reasons:

Limiting risk

Nothing is worse for a short term trader than gaps against his position which may be mulltiples of intended risk. I hate risk!!! And it is a beast that can be tamed somewhat with the use of options.

Flexibility

You can contruct strategies where the optimum outcome will match your view of the particular market. If your view of the market changes, mid trade, you can adjust the position to reflect your new opinion. This is what Charles Cottle calls option metamorphisis.

Trading without stops

I have had some really great profits when my position has NOT done what I thought through this concept of option metamorphisis. For example, a vertical bull call spread can turn into a reverse ratio spread (synthetically) and then finish of as a diagonal bear spread.

I DO NOT use options for additional leverage. My maximum risk per tade is the same as with ordinary shares. However my ultimate risk is known absolutely, with the strategies I like to use, whereas with ordinary shares this is not possible in absolute terms.

On rare occasions I will write naked puts and covered calls, but only on bottom drawer stocks.

Well that my view. Any others?

 

[positivecashflow]

Re: Options-Why?

My Reasons:

Can trade any market direction: Up Down Sideways Gaps (yes there is a way!)

Fits my time frame of trading: Short Term (30 days to expiration) Medium Term (60-90 days to expiration) Long Term (1 year - 2 years)

Knowing my Limited Risk: I know the maximum risk per trade

Flexibility and Creativity: Creating the perfect trade (in my eyes) using the risk graphs and seeing the effect of time decay, and making ADJUSTMENTS if I get it wrong so I don't get hurt. Strategies can be used that generate income or can be grown as a longer term portfolio.

CONTROL: Control of the underlying asset with less money down

Bottom line is STOCKS have an ugly looking risk graph!

 

[crashy]

Re: Options-Why?

well that is pretty concise, except the average person has no idea what you just said :

for me, its the ability to "be a seller of hope and a buyer of despair". This means writing calls when the bulls have lost momentum, and vice versa with bears and puts.

also, the idea of making money through time decay appeals.

then theres things only options can do. Like buying a straddle before major news, when you know the stock will move big but dont know which way. no other derivatives can be used in that situation.

often options can provide risk-free profits. My fold-line strategy is an example. all other derivatives contain unlimited risk.

there is also another strategy which I am developing which is not only 100% risk free, but is self funding and returns around 36% p.a. on other peoples money.

dont think Im going to share that one, if everyone starts doing it they will close the loophole before I get rich off it. But as always, if I invent an even better system I will share the previous one

and just to hammer home one of wayne's comments:

OPTIONS ARE A RISK-LIMITING INSTRUMENT

and their main use is to gain exposure while limiting risk.

people have misconceptions and think options are highly risky. this is usually not the case unless the options are short dated, well out of the money or have very high I.V.

it is the leverage and the abuse of it that causes damage, dont blame the option.....

 

[crashy]

Re: Options-Why?

CONTROL: Control of the underlying asset with less money down

Bottom line is STOCKS have an ugly looking risk graph!

bingo!

think of it in real estate terms:

would you build a property portfolio by paying cash for every property?

or would you put down the minimum deposit and mortgage the rest?

then why are so many people fully funding shares?

 

[positivecashflow]

Re: Options-Why?

people have misconceptions and think options are highly risky

The person trading without knowledge is risky not the option!

 

[crashy]

Re: Options-Why?

the bedford guppys and tembys of this world will ensure there are always plenty of those kind of people.

a book titled "how options will kill you" wouldnt sell well would it? so they prefer to say:

"like to work a few minutes a day, working from anywhere with minimal effort and making copious amounts of easy cash? buy this book and I will show you how"

 

[DTM]

Re: Options-Why?

Options can accomodate what ever style of trading you prefer and you can make more money than shares.

 

[crashy]

Re: Options-Why?

hope that didnt look like I was saying options are bad, I was trying to say that options book authors tend to omit many negatives and underplay the risks involved, and thats why newbies get fried. Had they been told the truth and known how to handle the risks they may have had more success.

 

[positivecashflow]

Re: Options-Why?

Options can accomodate what ever style of trading you prefer and you can make more money than shares.

Hi DTM,

It's not that you can make MORE money than shares, the underlying factor is that the ROI (return on investment) is much higher when you trade options strategies.

 

[DTM]

Re: Options-Why?

Thanks Posi

I stand corrected.

How do you put those quotes from other peoples posts into your own?

 

[positivecashflow]

Re: Options-Why?

Click the QUOTE button on the right hand corner of a persons post!

 

[DTM]

Re: Options-Why?

Mucho gracias

Click the QUOTE button on the right hand corner of a persons post!

 

[positivecashflow]

Re: Options-Why?

book titled "how options will kill you"

Where can I buy that book mate? :microwave

 

[The Mortgage Adviser]

Re: Options-Why?

My Reasons:

Flexibility and Creativity: Creating the perfect trade (in my eyes) using the risk graphs and ...

Bottom line is STOCKS have an ugly looking risk graph!

Do you know anything outside 'risk graphs'?????

I can't believe you know nothing else!

I noticed you have very limited funding. Maybe you should invest more in the actual investment rather than on useless software that you obviously cannot interpret properly.

Have you actually come to a conclusion whether I know what risk graphs are or not???

If you really want to get into a PROPER discussion instead of being a little *** all the time, I am happy to tell you the strategy I used to make heaps from covered calls and what information I would use to make a decision. Human nature and their reactions is a HUGE PART of investing. Try looking at things outside of just a 'risk graph'!

They are called 'risk graphs' for a reason. Using them alone is very RISKY!!!

Damn I am funny!

 

[Bingo]

Re: Options-Why?

Do you know anything outside 'risk graphs'?????

I can't believe you know nothing else!

If you really want to get into a PROPER discussion instead of being a little *** all the time, I am happy to tell you the strategy I used to make heaps from covered calls and what information I would use to make a decision.

Damn I am funny!

The Mortgage Adviser,

I must say that I am starting to find your comments offensive.

Bingo

 

[tech/a]

Re: Options-Why?

Thanks Wayne for posting the question here.

I asked once--

If you had one options Trading Method or Stratagy that you thought everyone should know how to trade what would it be?

What do those here say?

 

[wayneL]

Re: Options-Why?

Rob,

The more you talk on this subject, the more you lose credibility.

The software used for risk analysis on options is as cheap as....in fact the one I use is excel based and cost me nix.

My charting software and data costs are about $80 per month.

My only other expense is my computer. I'm sure pos's situation would be similar.

From these, my income would be in the top 5% in the country.

No offices to lease, no staff, no insurances, etc etc and NO STRESS.

I would like to to compare that to the expenses column in yours or any other conventional business.

So your comments about the costs of software are clearly out of order.

So instead of bluster and insults, how about adding something constructive.

If you have a valid methodology, share it! Thats what these forums are for. Or don't mention it at all!

Cheers

 

[wayneL]

Re: Options-Why?

Thanks Wayne for posting the question here.

I asked once--

If you had one options Trading Method or Stratagy that you thought everyone should know how to trade what would it be?

What do those here say?

Its a fair question Tech. But I don't think there is an answer it.

But I think that is the attractive thing about options; there is a strategy for any scenario you can think of, and, once a strategy is initiated, it common to adjust the strategy to suit a new and emerging scenario.

I know Nick likes the ratio backspread when asked this question, but there are many situations where backspreads are not ideal.

I like them as a defence when a vertical spread is going agaist me. But I never construct a backspread as an initial strategy...buts thats just me.

If I was forced to choose one strategy to use to the exclusion of all others, I wouldn't trade options at all.

Cheers

 

[DTM]

Re: Options-Why?

Thanks Wayne for posting the question here.

I asked once--

If you had one options Trading Method or Stratagy that you thought everyone should know how to trade what would it be?

What do those here say?

I like only buying ITM calls and puts.

 

[Bingo]

Re: Options-Why?

Thanks Wayne for posting the question here.

I asked once--

If you had one options Trading Method or Stratagy that you thought everyone should know how to trade what would it be?

What do those here say?

I have been trading options for around 20 years and so you naturally develop a trading pattern that suits you.

The way I trade depends on which way I see the market going. At the moment I see the market continuing to rise and so I sell ITM put options which either expire or I roll near expiry or I take delivery. I trade options on stocks that I see as on a rising trend. If I take delivery then I sell covered calls against this stock and so on.

Bingo