Options: Low Cost Investing

[spikefader]

I think Near The Money is better...I called for Feb 45's calls and puts yesterday near the close on AMZN...Can you see how those would do at the open tomorrow?...I have some prices(I am just doing this on paper...worked pretty good w/ YHOO)...Not sure if I have legit prices from yesterday though... Calls $1.75...Puts $2.70...Thanks

Those prices you've got look legit there. The charts show the range. So that's $4.45 per set of contracts on the straddle.

I'm guessing from the chart action if it opens at $39.00 your puts gonna pop to at least $7.00 and the calls drop to maybe $0.10. So your straddle will be worth $7.10 per set, which is $2.65 (or +$265) profit per set, which is roughly 60% profit on the play.

Now it all depends on supply/demand, and bias at open. $38.00 should support well. If it doesn't and sells hard closing at lows, then $28.00 is possible longer-term. But for your play it'll be worth taking profits at either 38.00 or or 34.00.

Let's see how good my guestimates are hehe

[IIC]

These are todays closing bid and asked prices. I was only assuming that this would be how they are going to open unless there is some news or some other factor that would influence the pre-market or afterhours. It was just an assumption on my part. I'm sure it will change once the market opens and the price either goes up or down or perhaps stays the same.

SKI...WAKE UP!!!...The idea was that they would blow it A/H on the EPS...But you never know...Maybe they would have surprised positive???...It is a protection strategy...Just in case...They blew it as expected...But you never know...AND...You never know how investors will react in the morn...Sometimes wacky...Maybe it wasn't as bad as first thought and they think it's a bargain at the open???

[skiracer]

SKI...WAKE UP!!!...The idea was that they would blow it A/H on the EPS...But you never know...Maybe they would have surprised positive???...It is a protection strategy...Just in case...They blew it as expected...But you never know...AND...You never know how investors will react in the morn...Sometimes wacky...Maybe it wasn't as bad as first thought and they think it's a bargain at the open???

Doug,
Sorry but I didn't know that they were reporting earnings in the AH. They actually did blow the report and their numbers are way off concensus. I missed your point originally but the earnings report will most likely drive the price down and the puts should go up proportionally. But the thing with options is that they don't always follow the stock price or do what logically looks correct.

[spikefader]

I see those ZQNNIs are 7.00x7.10 and the ZQNBIs are 0.00x0.05! Congrats Doug.

[spikefader]

[IIC]

Doug,
Sorry but I didn't know that they were reporting earnings in the AH. They actually did blow the report and their numbers are way off concensus. I missed your point originally but the earnings report will most likely drive the price down and the puts should go up proportionally. But the thing with options is that they don't always follow the stock price or do what logically looks correct.

I was teasing you...Doug

[skiracer]

I was teasing you...Doug

Doug,
I should have known that beforehand. Ya know all the women say "that Doug is such a teaser" and all those women can't be wrong.

[IIC]

Doug,
I should have known that beforehand. Ya know all the women say "that Doug is such a teaser" and all those women can't be wrong.

I guess you are right...IIC

[nrugby]

Options trading on ROth IRA

Folks.. Does anybody know of broker's letting trade options (not covered calls & puts):

1. Buy and sell Calls -
2. Buy and sell puts
3. use of straddle /strangle's

Thanks
Rugby

[DSteckler]

Nrugby, most brokers will let you buy puts and calls as well as purchase straddles and strangle, provided you meet the income and net worth requirements. What broker are you currently using?

[nrugby]

Options

Curently i use fidelty and they only allow covered calls on IRA's and i check etrade and interactive broker.. they also fall on the same path.

anything newer wud be good..and thanks for ur reply..

[DSteckler]

Oh, you didn't say you had an IRA account. Most brokers allow only covered calls in qualified accounts although there are some that allow long option positions. Check with TradeStation Securities and see what they'll let you do.

[New-born baby]

Here's some rules to live by

Looking for some good advice on the option advice? If you plan to buy long, then here is some outstanding advice to live by.

Some Option Buying Principles
by Bill Kraft - Editor MarketFN.com Option Trader

In my last article, I spoke about the limited risk (limited to the initial investment) and high leverage attained when buying options. Those can be fantastic plusses for the option trader. Astounding returns sometimes can be achieved but that possibility also can lead to some serious trading mistakes.

I trade for a living and sometimes teach various levels of stock and option trading seminars. In those capacities I have had the opportunity to watch many traders. These traders have had various levels of experience from novice to expert and ranged from successful to failures. Unfortunately, many traders lose, particularly those new to option trading. What factors cause traders to fail?

While this article isn't intended to be exhaustive, there are a number of recurring patterns I have seen in the trading of those who lose consistently. Of course, ANY trade has risk and can result in a loss. On any given day, there is a 50% chance a stock will go down and a 50% chance it will go up. However, that isn't what I'm talking about here. Unsuccessful traders often have unrealistic expectations. They see the possibility of huge returns and tend to think option trading is a way to "get rich quick." Rarely does that happen! If one is going to get rich trading options, it is going to require study, patience, and the application of sound trading principles. An option trader must not only know the adage "cut your losses and let your profits run," he must also know HOW to do that. The trader must realize that not every trade is going to be a winner. In fact, many trades may result in losses, but if the trader can make more on the winners than he loses on the losers, he profits.

So, my first 'rule' is to have reasonable expectations. If you make a trade that results in a 30% gain in a month is it reasonable to annualize it and say it is a 360% annualized return? Of course, that is mathematically correct, but is it a realistic expectation? Certainly not. While I have had trades that returned more than 100% or more in a short time, I do not have the expectation that they are going to occur all the time. I expect that there will be losing trades as well. Last year, for example, in trades I closed that were announced in our subscription service, 68% were winners. That means 32% were losers, but the critical fact is that I made a profit overall. Keep your expectations reasonable. If your expectations are unreasonably high, you may be disappointed and discouraged even if you do well. If you're disappointed and discouraged, your trading may well suffer. I once heard an excellent teacher say: "Worry about making good trades, the profits will take care of themselves." Remember, a good trade can even be one that suffers a loss. If a play turns against the trader and he exits appropriately, a loss will be suffered but a greater loss will have been avoided.

One of the glaring mistakes I have seen over and over with novice (and sometimes experienced) traders buying options is that they buy the wrong option. They buy the short term (less than 2 months) out of the money option. They think the options are cheap, I guess. They are cheap, but there are reasons they are cheap. Options expire. When a trader buys an out of the money option he is buying nothing but time. If the stock price doesn't move much and the volatility stays close to the same, the value of the option drops every day, and the closer to expiration, the faster it drops. The option will be worthless at expiration unless the stock moves in the direction the trader wants and that move must be made at least by expiration at the latest. If the trader didn't buy enough time for that to happen and holds on until expiration, he will have lost his entire investment! That could be true even if the trader was right on the direction, but the option just ran out of time before the move happened. It doesn't take long to run out of money (or patience) if the whole investment is lost in each trade. I believe that buying short term out of the money options can be a quick route to the poor house.

When I buy options, I know time is against me so I buy as much time as I can afford. That does not mean that I expect or intend to hold the option to expiration. On the contrary, I probably won't hold it that long. Buying the longer term option (at least 4 to 6 months out) means that time value is not running out as fast as it would in the shorter term option and gives the underlying stock more time to move.

I don't usually buy out of the money options and I rarely buy at the money options. The 'at the money option' is the one where we pay the most for time and since time runs out, I don't like to do that. My personal choice is often a longer term (6 months or more) 'in the money' option.

Another common problem I've seen is staying in a position too long. I don't remember ever holding an option I've bought to expiration. Before I ever enter a position, I know my initial exit. My exit is based on the stock price. If I know that initial exit before I ever enter the play, my loss will be cut almost automatically if the stock turns against me soon after I buy the option. Knowing and adhering to that preplanned exit is one important way to cut losses.

Though there are many other factors, having reasonable expectations, cutting losses by knowing the initial exit before buying an option, and refusing to buy short term out of the money options are three ways the average or below average trader may be able to improve his trading.

Good Trading!

[diogenes]

Looking for some good advice on the option advice? If you plan to buy long, then here is some outstanding advice to live by.

Some Option Buying Principles
by Bill Kraft - Editor MarketFN.com Option Trader
(SNIP)

Neat read. Thanks for posting it.

[New-born baby]

How to Use options for LT gains


How to Make Bullish Bets
for Less Risk, by Jeff Carter
One lower-risk way to play the stock market is to buy long-term options that don't expire for several months or more. A long-term option can be an excellent surrogate for the underlying stock and allows you to participate in the action of the stock for a lot less risk.

Time is a key to success when you buy options. Long-term (LEAP) options buy you a lot of time, in some cases more than two years. And stocks can make gigantic moves over this time period.

The major problem with long-term options is that they are usually quite expensive. One way to get around this higher cost is to use a vertical debit spread. A debit spread involves selling an option to offset some of the cost of the option you are buying, but still has the same limited risk as if you had simply bought the option.

The word "spread" seems to scare some options players, but a debit spread is quite simple.

For example, recently we recommended a long-term play on Texas Instruments (TXN) when the stock was at 20.8. The recommendation was to buy a TXN Jan 2006 22.5 Call. To offset some of the cost of this long-term option we also recommended selling a TXN Jan 2006 30 Call at the same time. This created a "vertical" debits pread and reduced the cost of the TXN 22.5 Call to 2.4 points($240).

Your total risk with this position was the cost of the spread, 2.4 points. From a risk standpoint, opening a debit spread is exactly the same as buying an option.

But unlike buying an option, your potential profit with a debit spread is limited. Once the stock crosses the higher strike price, the gains from the option you bought are offset by losses from the option you sold. In our example, once TXN crosses 30, the gain in the TXN 22.5 Call will be offset by a loss in the TXN 30 Call.

The total profit potential with a debit spread is the amount of the spread minus the cost of the spread. So for the TXN spread the total profit potential was 5.1 points (30 minus 22.5 equals 7.5, minus 2.4 equals 5.1).

But keep in mind that your maximum risk with a debit spread is also limited to what you pay for the position. With the TXN debit spread that was 2.4 points. So the potential return was 112%, and there was 18 months remaining for the stock to move when we made the recommendation.

Debit spreads usually don't generate maximum profits until expiration or the options move deep in the money (in our example, if TXN moves well above 30). They are more of a "slow and steady" road to profits instead of the quick hits that buying options can provide.

But there is much less monitoring and decision-making involved with a debit spread. Your focus is almost completely on whether the stock will reach the upper strike price, not on option profit goals and profit-taking.

Because of this slow-and-steady nature, if the spread generates a 100% gain in the first few months, it is a good idea to close half your position and take some money off the table.

If the stock moves against you in a debit spread, another good tactical move is to buy back the option you initially sold if it has lost most of its value. Then you will own the long-term option without the profit limitations of a debit spread.

For example, if TXN fell instead of rallied and the 30 Call fell to a couple tenths of a point in value, you could buy that option back and then own the TXN 22.5 Call with no limit on possible gains.

Debit spreads might sound confusing to new option players. But once you become familiar with how debit spreads work they likely will become one of your favorite trading strategies.