Experienced option buyers advice sought...

[Strawboss]

I have decided to utilize some call options as I think we are at a turning point in the mining sector. I would appreciate any insights that anyone has that is knowledgeable about options - specifically, I am trying to better understand the process involved in selecting which strike price and expiration.

I am familiar with the greeks and use the basic calculator from ivolatility.com to get a sense for the options true current value.

Couple of examples - lets say I am using a daily chart and expect price to rise 30% over the next 6-8 weeks. If price is currently at 15 and I expect it to reach $20 - how much time should I buy? What strike price would be best? I am looking to better understand the thought process behind the selection and what the various points to consider are.

2nd example - lets say that I am using a weekly chart and I expect a rather large move over the next several months. Should I buy longer term options deep out of the money - and if so - how far away from the current price; or, should I stick with the daily charts and keep buying/selling as price gets overextended?

Would really appreciate some insight from those of you that are more knowledgeable about using options intelligently.

[Weatherman]

I am no pro with options. I discovered early that I am one of the 90% who make it possible for the 10% to win. Buying options is a very difficult way to make money because the time decay eats up the potential profits, even if you buy in the right direction. The one rule that I forced myself to follow was to only buy the half life. If a put that I bought had three months to expiration, I would force myself to sell no later than a month and a half before expiration. If a call had two weeks to expiration, my rule required me to sell no later than one week before expiration. That was the only way I could overcome the "Hope springs eternal" problem of riding options into zero because they became too cheap to sell.

My suggestion is to look carefully at selling options instead, unless you have rock solid insider information that the position will perform on your timetable. Of the people who think a position will go up, those who sell puts short are far more likely to profit than those who buy calls long. Obviously, when selling an option short it is necessary to have an exit plan in case the market moves against you, and even with that plan there are risks that you may not be able to fully control, but overall I think the option sellers make more profits than the buyers.

The one excellent way I found to use options is to sell covered calls against your long position (or covered puts against your naked short position). It is sweet when the options you sold expire worthless because the underlying position did not move as far as the strike price, so you get to keep the premium and the position too. But that is a different discussion. Good luck!

[southfork]

It depends on your timeline, dont forget they will go kicking and screaming trying to prop the dollar, If your going miners I would go over a year out and out of the money, you get more bang for your buck providing they are appropiately priced. Going longer also allows for blips in the matrix to smooth themselves out. I normally average a positon over 3/4 trades to dca the position and help soften any corrections contrary to my opinion

[Strawboss]

It depends on your timeline, dont forget they will go kicking and screaming trying to prop the dollar, If your going miners I would go over a year out and out of the money, you get more bang for your buck providing they are appropiately priced. Going longer also allows for blips in the matrix to smooth themselves out. I normally average a positon over 3/4 trades to dca the position and help soften any corrections contrary to my opinion

Given a hypothetical stock with a current price of $15, with a 6 week projection of it hitting $19-$20 and a 6 month projection of it hitting $25 - can you share what strike price you would target and the thought process behind that decision? Also - assuming you bought when the daily was favorable and it would take 2-3 cycles for price to reach the 6 month target of $25, would you sit on the option when price corrected periodically (even if it caused your option value to cough up all its gains) or would you exit and re-enter multiple times in the 6 month period?

[Strawboss]

The one excellent way I found to use options is to sell covered calls against your long position (or covered puts against your naked short position). It is sweet when the options you sold expire worthless because the underlying position did not move as far as the strike price, so you get to keep the premium and the position too. But that is a different discussion. Good luck!

I am not familiar with selling covered puts against a naked short position (I understand selling covered calls).

If I sell short 1000 shares, I can then sell puts using those shares I sold short as ???? Man that sounds like rehypothecation of some sort...

Help me understand that better - much appreciated.

[Weatherman]

I am not familiar with selling covered puts against a naked short position (I understand selling covered calls).

If I sell short 1000 shares, I can then sell puts using those shares I sold short as ???? Man that sounds like rehypothecation of some sort...

Help me understand that better - much appreciated.

So . . ., You have to ask me for details about the one thing in my post that i have never done! A guy has to be careful here!!

There is no rehypothecation or any other magic here. Say you sell 100 XYZ short at 22, and sell a put short at a strike of 20. If XYZ closes above 20 when the put expires, then you keep the premium that you sold the put for, and you keep the 100 XYZ short position. If XYZ closes below 20 (in this example), then your account will buy back the 100 XYZ at 20 so you can deliver that short stock position to the buyer of the put. Then you would be flat with no naked short stock, and your account would have gained the 10% from selling short at 22 plus the premium the put buyer paid to you when you sold the put short, minus the commissions. The best part of doing this is having the option close worthless (at a stock price above 20 in this example) so you keep the base stock position and you keep the premium the option buyer paid to you. Rinse and repeat.

[phideaux]

Boss,

Keep both eyes on open interest and liquidity.

Unless you are talking about a major, it might be extremely difficult to get in and out of an illiquid option exactly when you want to, and at the price you want to.

[Scorpio]

you can play the game, but don't bs yourself,

Man that sounds like rehypothecation of some sort..

you want to play games with paper on paper, ie writing derivatives against a paper stock,

make no mistake about what you are asking,

after that,

IMO, the only way to go is to buy calls close to the money, and sell calls over the top,

it caps your gains, but someone helps you pay the time,

your biggest losers in options are the buyers of out options, betting on them being right in BOTH time and price,

risky risky risky,

you can sell puts but you have other margin and dividend requirements for those, need to school up on that you do.

does it sound like I am negative on options, sure,

there are people that make big dough doing it,

I don't play in that sandbox no mo'

----------

How Much Should I Expect To Make A Year?

Posted by Pete Stolcers on June 17
Option Trading Question

Today Rich asks such a great question that I will post it all. “This is more trading goal oriented. I would like to setup goals to measure progress. Is this a good idea? What can be reasonably expected as far as a rate of return? I hear about these great trading systems that will make me a gazillion percent return. I've read articles about professional traders that try to beat the return on bonds or to generate 12% a year no matter what the markets do. These are very low returns compared to what the people trying to sell me their products claim. What would be considered a reasonable rate of return for somebody that is a "part-time trader" utilizing somewhat conservative stock/options trades? Should the goal be based off of the market's return or something more static like 3% a month? Personally I am not looking to hit a home run. I'm more of the slow and steady wins the race mentality. I am trying to be realistic and don't know at what rate of return can be considered realistically obtainable? Could this be something that you could write a piece on?"

Option Trading Answer

One of the first key phrases is “trading goal”. Your portfolio needs to have a diversified look and trading represents the speculative portion that takes greater risks and offers higher rewards. It is important that you are realistic. The answer lies in your risk profile.

I have three goals. My first is not to lose money. While this may sound ridiculous, we are talking about trading and losses are very real. I continually take money out so that I have to start from scratch. It keeps my ego in check and I’m more cautious than if I have a wad to throw around. If I start to draw down, I cut way back and pick my spots carefully. Remember, the market does go down. I won’t accept that as an excuse to lose money.

My second goal is to beat the S&P 500. If I can’t do that then I might as well put my money in the SPY and find another job. Considering that I don’t want to lose money even if the market is down, but I want to have at least the same upside, this goal is more ambitious than it sounds. To put it into perspective, any large fund would put billions into a program that could produce these results. My advantage is that I can move quickly in and out of positions and I can adjust my exposure. The more money you work with the more normalized your returns will eventually be.

My third goad is to make 25% a year. I have found that reaching for more opens me up to too much risk and it brings in too much volatility. There are years when I do better and that is a bonus. Given my past performance over many years I know this is attainable. I was up 10% going into May and it looked like a banner year. I carry a long/short portfolio and my shorts were outperforming my longs by a ratio of 3:1 when the market was making multi-year highs in March/April. I was able to unwind my positions and keep what I had made. I considered that a big victory.When you can weather a storm like that it sets up the rest of the year. I have found that my style generates small choppy returns - and then I go on a run. I may have two or three of those a year and that’s when I make my money.

To Richards point, there are many “snake oil salesmen” who are selling get rich schemes. They “cherry pick” their trades and numbers like 300% are tossed about like candy. They just want to sell you their crap for $3,0000. Before you sign up for their programs ask to see a 3-year and a 5-year end-of-month brokerage statement. If you find someone that will do it, let me know. I’ll take the seat next to you. I could learn from someone like that. If you asked that question you would hear, “I’m too busy teaching and I can’t watch my positions so I don’t trade or these are back tested results.” People that are greedy will line up for these programs. These commercials have the affect of setting up unrealistic expectations. People will also look at the hottest sectors and rationalize, “Why should I listen to someone who can only make 25% a year. I could have made 40% if I would have just invested in basic materials stocks.” We all know what’s happened to that sector in the last month.

Richard also asks about big professional traders who aim to make 12% a year no matter what. That is a fantastic return when you are moving large money. It is the hedge fund mentality and there goal is to reduce volatility through a variety of trading methods. What I do is similar, However, I’m not managing hundreds of millions of dollars so I can move quickly and produce higher results.

There are also Wall Street traders who make millions of dollars a year. Realize that they are working with an enormous capital base on a leveraged basis. These are the “Michael Jordans” of trading. There aren’t many of them and they had to prove themselves before they got their shot. I’m sure any of them would be elated to make 25% a year on their capital base.

As a trader you need to feel comfortable with the risks you are willing to take to generate the desired return. Aim too high and you run the risk of losing your money. As time elapses, you will know what to expect.

As for Rich, I think he has the right attitude. Look for consistency. IF YOU CAN TRADE BOTH SIDES OF THE MARKET, I think a 20% rate of return per year is attainable for a part-time trader who puts in 2 hours of research a day and does not take unnecessary risks. The problem is that most people only know how to be long. If you want to be a good trader you have to learn how to short.

If you want to rip on some of these “get rich” schemes you’ve seen or experienced, post a comment. It might help other traders.

==============

Option Trading Comments

On 06/19, Ricky S. said:

I got suckered into one of these programs. The name of the program is TEACH ME TO TRADE. It was a free class that I signed up for. Then you had to pay a little fee for the 2nd class. It was three days worth of what you could do and how much you could make in the market. Then they pitched the real classes that were priced at around THREE TO FOUR THOUSAND DOLLARS a piece. To me they just spoon feed you enough to make you really excited (GREED). I learned enough to loose alot of money. Now I know there is not a holy grail to trading. It is a learning process that takes time. So watch out for the get rich classes because they are the only ones that are getting rich.<br><br>Thanks,

On 02/26, Dubai said:

Bravo, there is no such thing as a free lunch. People get scammed every single day and their own greed gets them into it.
On 03/07, BoundForHell said:

I have been option trading for two years and lost all of my money, ( $60000 that I started with ) sure I had some fantastic returns and was up for a while, and dreamed of the big returns that would make me a millionaire. I even started writing a book with my so called secrets, it all turned out to be beginners luck and then came the stark reality of trading and lost everything to mostly very bad trades, my timing was way off. I was down to my last $500 just a few weeks ago and I have crawled back up to $12000. Now after doing this for two years I realize that there is no fast track and Peter is absolutely correct there only a hand full out there that have had the good fortune of being at the right place at the right time, the rest are all “ SNAKE OIL SALESMEN” and they are the only ones getting rich. For the rest of us it’s hard work and emotional abuse.

Good trading everyone
BoundForHell

On 03/11, NO LONGER A SUCER said:

hi,
I have been in numerous things to learn how to do a thing that is supposed to take me to the riches. I have learn there is no such thing. But what i can do is do the same thing that they are doing. I can develop and market my own money machine. I just take and learn the system and make it work for me. hahaha lol, sound bad. but every man for him self.

sincerely,
NO LONGER A SUCKER

On 03/11, Pete Stolcers said:

The market is flooded with wanna be “gurus” who failed as traders and now want to teach others what they don’t know.

That was one of my motivations for providing research. I want to be the guy people can count on.

I have traded successfully as a professional for many years and it was my sole source of income.

Learn, prove yourself and then if you want to teach, do it. Only about 50% of what you need to be successful can be taught. The other 50% comes from within. Dedication, patience, discipline, creativity, and greed are inherent traits.

I’m not slamming you, I feel bad that you have been lead down the rags to riches road by others.

On 04/27, Pick a Trading Guru/System said:

It seems that all trading systems that we receive via mail promise high returns. All have the same thing in mind, “To make money from the useless pamphlet/book” and sucker you in to buy a seminar or newsletter.

These newsletters,seminars etc are really what they want you to buy because they generate revenue, often several thousand dollars. I have an idea why not offer a challenge to all these “Gurus” selling their highly touted trading systems through Tradewinds Publishing, to face off on CNBC and prove it?

If their systems are as fool proof as they say, “85-90” percent winners, let them pick an average person off the street set them up with a 5-10k brokerage acct and lets see the results!

I guarantee only a handfull will take this challenge, and here is the catch, they can only use the material that we get for let’s say $49-$95. This should once and for all settle the battle of the Trading Gurus and save us time and money which we don’t have.

On 04/27, Pete Stolcers said:

Amen! I couln’t agree with you more.

First, it is a great idea. Second, very few will do it. The guru image they have created would be lost overnight. If you find a challenge please let me know.

I tried to get Mark Hulbert (third party) to rate my service and I sent him trade by trade results for over 8 months. He said he was too busy to include any new results. I decided to make my performance available to the public with links back to each original research report with analysis,dates, entry/exit points, and concluding commentary.

In my Free Event I describe my systematic approach, I show it in action and then I reveal my current trades so that visitors can evaluate my analysis.

As a newsletter writer, my best subscribers have been burned before and they do their due diligence before they sign up with OneOption. You need to be cautious and that is why I am very open about what I do.

You sound like you have been burned. Attend my Live Event and I will show you around.

On 05/05, DonnaL said:

Pete’s reports are awesome, well worth it! Often I’m about to trade his recs because I learned from his webinar what to look for, and the report adds the confirmation I need to feel confident. Before I found this resource, I made a ton of mistakes in not setting stops quickly enough, but I have no problem taking losses early now, and I learned to relax more with back month options (thanks especially for that wisdom). This site is great; glad I found it in my first couple months of trading. You don’t need a magic formula to make money, just the ability to put your ego and greed aside. Here’s the the real magic formula: I’ve had more losers than winners, but the winners have been far bigger and I’m up 10% in a couple months.

On 06/28, darkwriter said:

I am an options writer, writing OTM strikes on ultralong/ultrashort ETFs, very profitably on a rolling monthly basis. I choose my strikes based on margin utilisation returns, for example: selling 10 OTM SDS calls, 3 weeks to expiry, requires holding margin of say 8% of the received premium.

My question is, are you aware of any academic research that has been done to determine which level OTM strikes generally expire OTM? Example: generally, ATM strikes, and 1/2/3 level OTM generally expire ITM (within weeks), however Far OTM, generally expire worthless.

So I am interested in proper academic research that may have analysed these types of scenarios. Thanks.

On 06/30, Pete Stolcers said:

You can feel like a genius with this strategy. There will be 2-3 instances where you have to make key decisions each year. how you react will determine if you make money. sometimes you have to buy the spreads back, sometimes leaving them on was the right move. You will go through prolonged periods where the market cooperates. However, all it takes is one major move to take it all away. Don’t be fooled into thinking you will adjust once the move starts. Stops aren’t the safeguard you think they are and huge overnight moves are a killer.

I have found that selling condors that are 1 standard deviation OTM with a 5-point strike differential is the most efficient risk/reward strategy.

Read through my blogs and you will find that I am not a big fan of neutral trading strategies.

On 11/12, Brian said:

I just want to make 50,000 dollars in a year or so. I’m hoping this is pretty small scale cash compared to what other people are thinking

On 11/12, Pete Stolcers said:

It all depends on your risk tolerance, capital base and experience. If you have less than $50k to start with (100% return), that would be a very tall order. If you have $200k (25% return), that would be a reasonable goal with solid research and good risk management.


http://www.1option.com/index.php/ask...o_make_a_year/

[southfork]

Given a hypothetical stock with a current price of $15, with a 6 week projection of it hitting $19-$20 and a 6 month projection of it hitting $25 - can you share what strike price you would target and the thought process behind that decision? Also - assuming you bought when the daily was favorable and it would take 2-3 cycles for price to reach the 6 month target of $25, would you sit on the option when price corrected periodically (even if it caused your option value to cough up all its gains) or would you exit and re-enter multiple times in the 6 month period?

Boss there's no technicals to the way I trade, I do simple calls and puts based on the stocks daily average volume and the number of existing puts and calls out there, every trade I make is based on different factors involving not only the particular stock but trends for the industry ect. I base what Im willing to pay on a risk reward ratio. I do sit on a loss if I feel it's not genuinely induced by legtimate factors.

[Fiat Metaler]

1. the biggest mistake you can make is position size. there is the temptation to go big because of the leverage inherent in options. but they can very easiliy expire worthless. for a portion of my portfolio, i write calls on names like MSFT, MO, WAG, WMT, and i count on them expiring worthless.

2. spend $99 for a subscription to matt badiali's letter. you get S&A research's daily digest for free. lots of good advice about the blocking and tackling of investing, esp re 'safe' option strategies like covered calls and naked puts.

3. the real danger of going long calls is the uncertainess of price and finite time. a way to get similar exposure is to buy hoarders like SA or NAK - they are like a perpertual option on the metal. if you don't like those, then look at SLW or RGLD.

4. if you do buy some calls, limit it to one of your positions. For example, i generally hold 12-20 positions. so limit whatever cash you put on this to 1/20th of your portfolio. realize that what you are doing is swinging for the fence, which is an emotionally unstable position. this is usually when one has losses.

5. consider allocating none of your present portfolio and instead sell some puts at the current strike or below, and use the premium to buy calls. the stock could get put to you but it sounds like you like it anyway. and this is a way to generate cash to buy calls. i might buy a call about twice the time period out as i expect to sell it, so that when i sell it it has a healthy amount of time remaining.

[MarinePride]

I use options to buy stocks I'm already interested in. If I want to buy a stock, but not commit the money immediately, I just sell some puts. Even if the put doesn't go into the money, I can still make several hundred or more on the premium. If it does go into the money, I should be happy, key word is SHOULD. If I liked Marathon Oil at $26, I should love it at $25 ,right? Barring some type of catastrophe, I should.

Call options have cost me a lot of potential upside and I really don't like selling calls because of it. Most of my trades are options trades over the last several years.

Sometimes this market is so full of it, you really have to wonder if you want to play in it anymore. Like today, what really justifies a 217 point gain on the DOW? Gotta be the shorts covering. I'm not convinced that anything getting better.

[Strawboss]

I found this site which gives IV on many stocks. Essentially, the higher the IV - the more expensive the option. So, if you buy a call on a stock that has been falling and you think is ready to rebound - the IV will be high. As the stock rises - the IV will fall making the option less valuable. You think you made a good move buying an option at the bottom only to find out that you paid far too much for the call option because the IV was high. An example would be GSS - the IV is almost 100 right now.

One that looks attractive is SLW - the IV is on the lower end of its scale over the past couple of years.

http://www.optionstrategist.com/calc...olatility-data

[Hystckndle]

What Scorp said.
" No mo"
unless viewed as an "insurance policy " of sorts...
The power is at the money or near.
And understanding the delta.
Some volatiity and the right side will keep you even.
A grail there is not.
JMHO

[Au-myn]

So . . ., You have to ask me for details about the one thing in my post that i have never done! A guy has to be careful here!!

There is no rehypothecation or any other magic here. Say you sell 100 XYZ short at 22, and sell a put short at a strike of 20. If XYZ closes above 20 when the put expires, then you keep the premium that you sold the put for, and you keep the 100 XYZ short position. If XYZ closes below 20 (in this example), then your account will buy back the 100 XYZ at 20 so you can deliver that short stock position to the buyer of the put. Then you would be flat with no naked short stock, and your account would have gained the 10% from selling short at 22 plus the premium the put buyer paid to you when you sold the put short, minus the commissions. The best part of doing this is having the option close worthless (at a stock price above 20 in this example) so you keep the base stock position and you keep the premium the option buyer paid to you. Rinse and repeat.

I did something similar to that. I wrote call options and made my money.

Example:

Often investors cite their fear of risk as the reason why they might shy away from trading options. And while the level of risk can increase with some of the more complicated options strategies out there, that’s not the case with writing covered calls.

In fact, writing covered calls is one of the most frequently used and safest options strategies, because it is one of the most conservative plays a trader can make.

On the surface, writing covered calls seems like hitting a home run. Also known as a “buy-write,” this strategy involves selling call options against stock that you already hold long.

When you sell an option, you immediately collect a premium up front, and because options settle in one business day, the credit you collect hits your trading account a day later. It’s like you get to make money just because you decide to.

Suppose you’re sitting on 1,000 shares of the hypothetical XYZ Corp. with the stock currently trading at $34. Suppose the shares are trading pretty steadily and haven’t made a significant jump in a while.

Instead of waiting around and hoping for the stock to receive its own version of a stimulus package, you can take the opportunity to sell calls at the $35 strike against your position.

Let’s say the XYZ Oct 35 Calls trade at $1.95 per share. That’s $195 per contract, and as one contract covers 100 shares, you can sell a 10-lot, or 10 contracts, for $1,950, so that’s the amount of money that you would take in by selling your calls.

Why the XYZ Oct 35 Calls? Well, for two reasons.

One, the strike price is higher than the current market value, which means that you are agreeing to sell your shares for $35 each should the buyer wish to exercise his or her right to buy the stock (i.e., call it away from you). This means that in addition to the $1,950 that you took in, you’d be selling the shares for $1 more than the level where they’re currently trading.

Two, insofar as choosing the October calls, their expiration date is far enough away that if you are expecting the stock to move up (so that the options become more valuable), you’re giving yourself enough time to be right.

But what if the stock doesn’t go up to, or through, that $35 strike by that third Friday in October?

Well, then you’d keep your premium money — as well as your stock — because the option buyer wouldn’t want to call the shares away from you at a cost that’s above the market price. His or her option would likely expire worthless.

[Scorpio]

Au has the right idea IMO,

you can always get out of your position in multiple ways,

ie buy back the calls,

buy back the stock if you lose it,

etc.

only qualifier is to choose when to go in and how close,

if you go in after a recent stock push, the volatility will be higher, and a better price received,

then let time work for you,

watch the seasonals for the metals markets, and you can work your timing off of those also,

etc.

S

[dacrunch]

Some people have a "balanced plan" with options...

But for myself they're just "casino gambling"... so a bet on a big move in a short time... double/triple/10times or zilch...

That's just a tactic for "throw-away" money... in my case...

[Fiat Metaler]

Some people have a "balanced plan" with options...

But for myself they're just "casino gambling"... so a bet on a big move in a short time... double/triple/10times or zilch...

That's just a tactic for "throw-away" money... in my case...

well there are a lot of different strategies with options, so you can't make blanket statements.

Straw is attempting to swing for the fence by buying calls. Selling calls or selling puts is like playing small ball and is much more conservative.

here is what i do with my dividend portfolio. i buy stocks like Walmart that yield say 3%. I then writer quarterly options (sell calls) and pick up roughly another 3% which on an annual basis is another 12%. There is a fine line between option premium and having the stock called from you. I am philosophic about it and its not the end of the world to me. when i choose a strike price to sell the call at, i put it in a spread sheet to see what sort of gain i'm getting. i generally want the annualized option premium and capital gain if i'm called to exceed 12%. some people will ask, aren't you leaving upside on the table if the stock is called from you? Well, yes and no. In my dividend portfolio, i would rather take a guaranteed 12%+ rather than a chance for a greater capital gain which frankly are not that likely and when they come are not that large in magnitude.

i have sold calls in my miner portfolio over the last year. because these stock are more volatile, the option premiums are greater. the plus side for me of the flatness of the miners has been i have been collecting fat option premia nd reinvesting in the stocks, generally at lower prices! and stocks like NEM and GFI are paying dividends > 3%, and SLW and RGLD >1%. Those are amazing values. Now, we are entering a change in the cylce where the miners may move. At this time, i don't want the stock called from me. So i'll write puts instead. you have to have some capital capacity to do this, and i create a spreadsheet showing how much potential out of pocket cash i will need if the shares are put to me. its important to do this to keep your risk and position sizing reasonable, which is the biggest mistake you can make. but the premiums can be big, especially if you go out time wise.

[Montecristo]

Good stuff in here. I'm subbing this thread for future reference.

[Strawboss]

Here is what I have learned thus far in my research. The 3 primary factors in the pricing of an option are:

1. The underlying stock movement
2. Implied Volatility (IV)
3. Time

Another consideration is the delta (one of the greeks) that tells you how much the option will move with each $1 move in the underlying.

The biggest factor that determines the price of an option (relatively speaking) is the IV. In general, the IV will rise when a stock is falling in price, and will decrease when a stock is rising in price. Because of that, as a general rule of thumb, you want to buy options when the IV is relatively low and sell options when the IV is relatively high.

So, with the above in mind (and in conjunction with the comments made above), lets take a look at the most recent IV readings for some silver plays. The data comes from
http://www.optionstrategist.com/calc...olatility-data



Ok, so now we can clearly see which stocks are are extremes in terms of their IV. SLW, SLV, HL and AGQ are all at historically low levels of IV which implies that the options for them are also very, very cheap. So, the play with these is to buy calls.

On the other hand, we can also see which stocks are at the high levels of IV, namely PAAS. So the play with this one would be to sell puts (because with an IV at current levels those puts are EXPENSIVE).

[Fiat Metaler]

you don't have to make it so complicated.

IV is important to an extent. but IV is highly correlated to the market in general, so be careful placing too much faith in it. its easy to focus on the trees and miss the forest. if there is a big gap between market price of the stock and strike price, that can be the largest determinant on price. also, if there is a lot of time left it has a big effect on price.

i have swung for the fence a few times and missed, so now i only do that with play money i get from selling puts. but you have to think these trades through because you can have put strategies or position sizes that are very risky as well. you also need to think this through in terms of where it fits in your overall portfolio. i have other buckets for metal; if i didn't, i might now swing for the fence at all.

also, i generally hold an option position to expiration. my positions are generally akin to a short position, so normally the time decay accretes in my favor. occassionally i'll do something more agressive. say i have a $14 stock and i sell a 3 month call with a strike of 15. if the stock moves down to 12, i might buy the 15 calls back at a profit and sell new calls at a lower strike price. this can be agressive depending on why the stock fell and its prospects for a rebound. i did this with walmart a few months ago after it fell sharply with the mexican bribery news. the stock rebounded faster than i anticipated and i had the stock called from me. now, i received basically one and a half option premiums and had the stock called at me at a price that had a nice gain above the market value when i wrote the options, but still i would have been better off having kept the stock. but i look at this as taking a sure thing, or one and a half sure things, and don't lament the possibility of more when i'm on first base. its low risk small ball.

[Strawboss]

Now, lets look at some call options for SLW.
Here is the option chain for Sept for near the money.



Next, lets take a look at what happens to the price of these if the IV rises.

[Au-myn]

I use P & F charts in several scales which identify support and resistance levels. I apply market conditions within the sector and I am very selective on the chart patterns which issue buy and sell signals.

[Strawboss]

For the purpose of this example, we will select the Sep 30 call. Below is a screenshot from IVolatility.com which shows the current value.



So, first, lets see what would happen to the price of the option if the IV was higher but everything else was the same.



Price has increased almost 50%.

[Scorpio]

IV is probably just Implied Volatility,

No big deal, as the skirt changes with whomever is promoting whatever,

they all come up with marketing names to use,

but basically, it is all derived from Black-Scholes option pricing model,

--------------------------------------

You might have had success beating the market by trading stocks using a disciplined process that anticipates a nice move either up or down. Many traders have also gained the confidence to make money in the stock market by identifying one or two good stocks that may make a big move soon. But if you don't know how to take advantage of that movement, you might be left in the dust. If this sounds like you, then maybe it's time to consider using options to play your next move. This article will explore some simple factors that you must consider if you plan to trade options to take advantage of stock movements.

Option Pricing
Before venturing into the world of trading options, investors should have a good understanding of the factors that determine the value of an option. These include the current stock price, the intrinsic value, time to expiration or the time value, volatility, interest rates and cash dividends paid. (If you don't know about these building blocks, check out our Option Basics tutorial.)

There are several options pricing models that use these parameters to determine the fair market value of the option. Of these, the Black-Scholes model is the most widely used. In many ways, options are just like any other investment in that you need to understand what determines their price in order to use them to take advantage of moves the market.

Main Drivers of an Option's Price
Let's start with the primary drivers of the price of an option: current stock price, intrinsic value, time to expiration or time value, and volatility. The current stock price is fairly obvious. The movement of the price of the stock up or down has a direct - although not equal - effect on the price of the option. As the price of a stock rises, the more likely the price of a call option will rise and the price of a put option will fall. If the stock price goes down, then the reverse will most likely happen to the price of the calls and puts. (For related reading, see ESOs: Using The Black-Scholes Model.)

Intrinsic Value
Intrinsic value is the value that any given option would have if it were exercised today. Basically, the intrinsic value is the amount by which the strike price of an option is in the money. It is the portion of an option's price that is not lost due to the passage of time. The following equations can be used to calculate the intrinsic value of a call or put option:

Call Option Intrinsic Value = Underlying Stock's Current Price – Call Strike Price


Put Option Intrinsic Value = Put Strike Price – Underlying Stock's Current Price

The intrinsic value of an option reflects the effective financial advantage that would result from the immediate exercise of that option. Basically, it is an option's minimum value. Options trading at the money or out of the money have no intrinsic value.

For example, let's say General Electric (GE) stock is selling at $34.80. The GE 30 call option would have an intrinsic value of $4.80 ($34.80 – $30 = $4.80) because the option holder can exercise his option to buy GE shares at $30 and then turn around and automatically sell them in the market for $34.80 - a profit of $4.80. In a different example, the GE 35 call option would have an intrinsic value of zero ($34.80 – $35 = -$0.20) because the intrinsic value cannot be negative. It is also important to note that intrinsic value also works in the same way for a put option. For example, a GE 30 put option would have an intrinsic value of zero ($30 – $34.80 = -$4.80) because the intrinsic value cannot be negative. On the other hand, a GE 35 put option would have an intrinsic value of $0.20 ($35 – $34.80 = $0.20).

Trade options, stocks, futures + forex on a single platform. thinkorswim by TD Ameritrade. Advertisement
Time Value
The time value of options is the amount by which the price of any option exceeds the intrinsic value. It is directly related to how much time an option has until it expires as well as the volatility of the stock. The formula for calculating the time value of an option is:

Time Value = Option Price – Intrinsic Value

The more time an option has until it expires, the greater the chance it will end up in the money. The time component of an option decays exponentially. The actual derivation of the time value of an option is a fairly complex equation. As a general rule, an option will lose one-third of its value during the first half of its life and two-thirds during the second half of its life. This is an important concept for securities investors because the closer you get to expiration, the more of a move in the underlying security is needed to impact the price of the option. Time value is often referred to as extrinsic value. (To learn more, read The Importance Of Time Value.)

Time value is basically the risk premium that the option seller requires to provide the option buyer the right to buy/sell the stock up to the date the option expires. It is like an insurance premium of the option; the higher the risk, the higher the cost to buy the option.

Looking again at the example from above, if GE is trading at $34.80 and the one-month to expiration GE 30 call option is trading at $5, the time value of the option is $0.20 ($5.00 - $4.80 = $0.20). Meanwhile, with GE trading at $34.80, a GE 30 call option trading at $6.85 with nine months to expiration has a time value of $2.05. ($6.85 - $4.80 = $2.05). Notice that the intrinsic value is the same and all the difference in the price of the same strike price option is the time value.

An option's time value is also highly dependent on the volatility in that the market expects the stock will display up to expiration. For stocks where the market does not expect the stock to move much, the option's time value will be relatively low. The opposite is true for more volatile stocks or those with a high beta, due primarily to the uncertainty of the price of the stock before the option expires. In the table below, you can see the GE example that has already been discussed. It shows the trading price of GE, several strike prices and the intrinsic and time values for the call and put options.

Read more: http://www.investopedia.com/articles...#ixzz22bBmXN7J

[Scorpio]

It is in your best interests to be a buyer when volatility is low, and a seller when volatility is high

[Fiat Metaler]

for a long time, i avoided selling calls because i was afraid of losing the capital gain. now, i do it with my dividend stocks and any stock i want to pare from my portfolio. for example, i used to own walgreens and lost their contract with a pharmacy benefits organization to CVS, so i wanted to exit WAG. I sold in the money calls and got paid for my eventual exit.

as for collecting monthly income, i have a slightly different approach for each stock but in general i look at the spread of the strick price over fmv in percentage terms and then annualize it. i follow how the stock trades, and i make a judgment about how likely the stock is to get called from me. if your stocks get called from you each month, its a big record keeping burden so i shoot for a 10% annualized gain or more on top of the dividend and option premium. i figure if i have the stock called away from me for a gain that large, i'm ahead. also, if a stock rises above and aggressive strike price, then its often overbought and you are effectively selling high, which is not a bad thing. but keep in mind, i'm writing these on names like Walmart and Coke, not Seabridge or Northerny Dynasty. On the latter, i'm selling puts for income.

[keef]

Buy options on "I just shlt my pants" diapers, with this aging boomer population, you can't go wrong

[Fiat Metaler]

It is in your best interests to be a buyer when volatility is low, and a seller when volatility is high

this is accurate but not all that helpful to how i use options. i'm writing options 12 months out of the year. yes, the vol for a particular issue is fundamental to its price, but that just explains why an option on Walmart might be cheaper than on Apple. Once you have decided to trade walmart options, volatility is largely a constant.

the one exception - which is more about the price of the underlying security than volatility - is that you want to wait until the market is up to sell calls, and wait for down days to sell puts.

[Au-myn]

On the other hand, we can also see which stocks are at the high levels of IV, namely PAAS. So the play with this one would be to sell puts (because with an IV at current levels those puts are EXPENSIVE).

I have calls on PAAS using P & F. Lets see how it plays out.

[Au-myn]

Question for all Point & Figure technicians: When I purchased PAAS JAN 16 2013 Calls on July 24, what technique did I use?

Remember, there was NO buy signal. Use the traditional scale chart from www.stockcharts.com for reference.

[Strawboss]

Question for all Point & Figure technicians: When I purchased PAAS JAN 16 2013 Calls on July 24, what technique did I use?

Remember, there was NO buy signal. Use the traditional scale chart from www.stockcharts.com for reference.

I have no idea but am very interested to find out. The only thing I could guess is that you placed a buy order at $13.50 because that was 1 box above the previous long term low at $13 from back in March 2009?

[Au-myn]

I'll walk through the steps of P & F TA on this trading tactic.

In April of this year PAAS sold off from a "failed" Bullish Signal formation. The sell signal occurred at 20. The sell-off was a downward spike of 17 squares (15-25 squares is a spike). With a pull-back over 50% which was 9 squares (52.9%) we also have a Low Pole. Low poles in bearish markets may signal a correction. Although low poles do not pinpoint the precise timing for an up move, they usually indicate the worst of the slide is over. This is where a timing advantage emerges because chartists may buy stocks or calls once the 50%+ retracement is completed. Do not wait for buy signals. Although undervalued issues with low poles may not get an advance right away, investors can feel confident the purchase was made near a bottom.

Now that I have a green light to purchase "Calls", the next step is an entry point. I move to the Relative Strength P & F charts (HUI & XAU) and its companion tool - the HUI & XAU Bullish Percentage Indexes and my supplement tool the Last X entry. On July 19 the HUI BP is 6.25% and the last X entry is 18.7%. XAU is 12.5% in both categories. Further down side is limited and I conclude that a bottom is near. PAAS is up against its bearish support line and with very low BP numbers from the HUI and XAU I expect the stock to bounce off of the line. PAAS closed at $14.21. I chose a Jan 2013 16 Call because I anticipate a buy signal in the 15-17 range and the January 2013 expiration allows enough time for two buy signals on the chart. I executed my trade on July 23 (light blue overlay on chart). The stock was trading at $13.50. The contract cost is $1.05 ea.

[Au-myn]

Sold my PAAS contracts. 100% profit in three weeks. I'll take it.

[Strawboss]

So far so good with my options. I am selling 50% of the ones that have exceeded 100% with the intent to let them ride with the other 50%. So far, SLW, AUY and ANV have exceeded 100%.

AGQ and HL look like the next ones to hatch with a whole bunch of others still incubating.

Most of them are Jan/Feb 2013 calls so I have plenty of time left on them (except the AUY ones as those are Sept).

[Au-myn]

Funny you should mention HL, Strawboss.

I purchased some calls last week. I am up 50%. Anticipating a certain powerful formation.

Also purchased SSRI Dec 14 calls last week. Up 68%. The buy signal from a #2 Double Top (market bottom) formation occurred at 13.5.

[Strawboss]

Funny you should mention HL, Strawboss.

I purchased some calls last week. I am up 50%. Anticipating a certain powerful formation.

Also purchased SSRI Dec 14 calls last week. Up 68%. The buy signal from a #2 Double Top (market bottom) formation occurred at 13.5.

A certain powerful formation, eh? Sounds cryptic...

[Au-myn]

A certain powerful formation, eh? Sounds cryptic...

Find the formation.

[Strawboss]

I knew you were going to say that...

On the traditional chart (.50 box size) it is a continuation bearish pattern reversed - although it hasnt yet confirmed which wont happen until we get a double top buy signal at $6.00.

How do you calculate a price objective for this?

Find the formation.

[Strawboss]

If I use the horizontal count (15 columns) x .50 (box size) x 3 (reversal) = $22.50 + $3.75 (pattern low) = $26.25 (Price Objective).

Is that math correct?

The vertical count cant be done until we get a row of X's followed by at least 3 O's.

[Au-myn]

If I use the horizontal count (15 columns) x .50 (box size) x 3 (reversal) = $22.50 + $3.75 (pattern low) = $26.25 (Price Objective).

Is that math correct?

The vertical count cant be done until we get a row of X's followed by at least 3 O's.

On HL? NO. Read the chapter on how to calculate the horizontal count.

[Au-myn]

I knew you were going to say that...

On the traditional chart (.50 box size) it is a continuation bearish pattern reversed - although it hasnt yet confirmed which wont happen until we get a double top buy signal at $6.00.

How do you calculate a price objective for this?

Yes, it is a Bearish Signal Reversed formation. And No, it is a reversal pattern. Read what I wrote about reversal and continuation patterns again.

The price objective? Study the chapter on Price Objectives. Try to solve this one.

[Strawboss]

And here I was thinking that I had gotten something right...

Back to school...

On HL? NO. Read the chapter on how to calculate the horizontal count.

[Strawboss]

I also see an inverse H&S pattern developing with the right shoulder forming.

The book says that in order to construct a horizontal count there has to be sideways congestion - which the HL chart doesnt have. That effectively rules out using a horizontal count. Considering that you have bought options on it, I am assuming that a consolidation isnt what you have in mind for this.

If the pattern is correct (you didnt say otherwise), how do you figure out a count once there is a confirmed buy signal? Do we have to wait for a 3 box reversal and then do a vertical count?

[Au-myn]

If the pattern is correct (you didnt say otherwise), how do you figure out a count once there is a confirmed buy signal? Do we have to wait for a 3 box reversal and then do a vertical count?

Yes, a vertical count will be used.

Your book should have a detailed definition of the Bearish Signal Reversed. Snippet: "The first six columns give us the classic pattern of lower tops and lower bottoms. The seventh column, however, shows a price reversal by a steady influx of demand without forming any sort of base of accumulation."

Identifying formations and fully understanding their definitions is key to linking the continuation and reversal patterns. You need to study how they interconnect.

[chris_is_here]

Great thread, I love playing options, the mathematics behind it is complex, but ultimately, you have to go with your gut.

I'll assume you know about the fundamentals of Black Scholes, which is the theoretical basis for option pricing...however, in practice, I've noticed that option prices tend to include an additional component not factored into the Black Scholes, which is a trend premium...meaning that the price on a call option on a stock making a strong up-move, for example, will always exceed the theoretical Black Scholes price. Vice versa for a put on a stock getting hammered.

I've won and lost on options (mostly lost) but I'll share one of my successes I've had here, maybe it will give you some insight.....always, the best trades I've made have been "against the grain". For example, several years ago, I bought out-of-the-money puts on a company that had received a take-over bid. The stock doubled overnight in response to the offer, even though management made no move to accept it. The prevailing view at the time was that management was just being coy and waiting for a stronger offer before accepting the buyout. However, I noticed that the management of the company held no shares and, thus, had no stake in the company. They also had comfortable salaries so I wagered that they would not sell at any price, since they would be signing their own termination notices, without any gain to themselves.

At the time of the offer, I put in low-ball bids for out-of-the-money puts with a 6-month expiry and a strike price just above the pre-offer stock price - I was pretty surprised when my bids got taken, since the prices I was bidding at were well below the theoretical prices. What I think happened was that there were so few put buyers at the time, that there was no frame of reference for a reasonable offering price on puts - all the action was on the call side, in anticipation that the buyout would eventually get approved. Whoever took the other side of the trade probably figured that it was free premium for them and that the theoretical pricing was moot.

Needless to say the deal fell through and the payoff was nice. Opportunities like that are rare but they are nice when they do come around. I will also say that I've never made money trading with the conventional wisdom. For example, right now, everyone is down on Facebook and people are saying "buy puts on FB, it is coming out of lockup and the insiders have billions of shares to sell" - all of which is true. However, when everyone is thinking and moving in the same direction, it is more likely than not reflected in the prevailing prices. FB may be a dog, but at $19, it is down 50% from it's opening price and a lot of the downside has already been factored into the price of the stock and the options. Prevailing wisdom says FB is a $10 stock, but I'l bet it will be a while, if ever before it ever gets to that level. The November at-the-money puts on FB are at $2 right now. If FB catches a bid and moves back up to $22 or so in the coming weeks, you will need a real big down move after that to move those puts into the money. But then again, who knows?

[Au-myn]

I'll assume you know about the fundamentals of Black Scholes, which is the theoretical basis for option pricing...however, in practice, I've noticed that option prices tend to include an additional component not factored into the Black Scholes, which is a trend premium...meaning that the price on a call option on a stock making a strong up-move, for example, will always exceed the theoretical Black Scholes price. Vice versa for a put on a stock getting hammered.

Nice post.

Great point, chris_is_here. I use that trend premium concept as part of my entry and exit strategy.

[Strawboss]

Here is what my book says:

The bearish pattern reversed is a series of X/O columns with consecutive lower highs and lower lows, indicating bearish downtrend behaviour. A column of Xs then breaks above the high of the previous column of Xs and the pattern, and trend, is reversed. Some writers specify that there must be 7 columns in the pattern in order to qualify. Some specify the exact make-up of the columns. Both are too rigid. It is better to observe that there is a potential pattern in the making, understanding that it may not look just like one in a book, and then wait for the signal. As with most Point and Figure patterns, there is one essential ingredient that defines the pattern. In this case, it is that there must be a series of lower highs and lower lows, the trend of which is eventually broken by a double-top buy signal. Remember what lower highs and lower lows means: it means repeat double-bottom sell signals but no doubletop buy signal until the one that breaks the pattern.

Furthermore, there should be no strict specification as to the number of these columns, nor that each high and low must be only I box lower than the previous column. Point and Figure patterns should not be learnt by heart, but rather fully understood so that any variation in the pattern can be catered for. You will know by now that the greater the number of columns, the greater the potential from the breakout, the reason being that complacency has set in and those who have confidently taken positions with the trend are shocked when it suddenly reverses leading to short covering and position altering.

Yes, a vertical count will be used.

Your book should have a detailed definition of the Bearish Signal Reversed. Snippet: "The first six columns give us the classic pattern of lower tops and lower bottoms. The seventh column, however, shows a price reversal by a steady influx of demand without forming any sort of base of accumulation."

Identifying formations and fully understanding their definitions is key to linking the continuation and reversal patterns. You need to study how they interconnect.

[Fiat Metaler]

Great thread, I love playing options, the mathematics behind it is complex, but ultimately, you have to go with your gut.

I'll assume you know about the fundamentals of Black Scholes, which is the theoretical basis for option pricing...however, in practice, I've noticed that option prices tend to include an additional component not factored into the Black Scholes, which is a trend premium...meaning that the price on a call option on a stock making a strong up-move, for example, will always exceed the theoretical Black Scholes price. Vice versa for a put on a stock getting hammered.

I've won and lost on options (mostly lost) but I'll share one of my successes I've had here, maybe it will give you some insight.....always, the best trades I've made have been "against the grain". For example, several years ago, I bought out-of-the-money puts on a company that had received a take-over bid. The stock doubled overnight in response to the offer, even though management made no move to accept it. The prevailing view at the time was that management was just being coy and waiting for a stronger offer before accepting the buyout. However, I noticed that the management of the company held no shares and, thus, had no stake in the company. They also had comfortable salaries so I wagered that they would not sell at any price, since they would be signing their own termination notices, without any gain to themselves.

At the time of the offer, I put in low-ball bids for out-of-the-money puts with a 6-month expiry and a strike price just above the pre-offer stock price - I was pretty surprised when my bids got taken, since the prices I was bidding at were well below the theoretical prices. What I think happened was that there were so few put buyers at the time, that there was no frame of reference for a reasonable offering price on puts - all the action was on the call side, in anticipation that the buyout would eventually get approved. Whoever took the other side of the trade probably figured that it was free premium for them and that the theoretical pricing was moot.

Needless to say the deal fell through and the payoff was nice. Opportunities like that are rare but they are nice when they do come around. I will also say that I've never made money trading with the conventional wisdom. For example, right now, everyone is down on Facebook and people are saying "buy puts on FB, it is coming out of lockup and the insiders have billions of shares to sell" - all of which is true. However, when everyone is thinking and moving in the same direction, it is more likely than not reflected in the prevailing prices. FB may be a dog, but at $19, it is down 50% from it's opening price and a lot of the downside has already been factored into the price of the stock and the options. Prevailing wisdom says FB is a $10 stock, but I'l bet it will be a while, if ever before it ever gets to that level. The November at-the-money puts on FB are at $2 right now. If FB catches a bid and moves back up to $22 or so in the coming weeks, you will need a real big down move after that to move those puts into the money. But then again, who knows?

this is good advice, although buying out of the money puts on a takeover stock is like going for a straight in poker - it can be done but its the low probability play.

i also agree with you about gut vs math. The book When Genius Failed talks about the failure of Long Term Capital Management which was caused, in part, by Myron Scholes. Scholes beleived volatility was constant, which it is not. market participants know it is volatile and subject to trends. if you pull prices for options on a stock in straddle view, you can compare the open interest at different strike prices and see what the market thinks - if there is more open interest at a higher strike, it generally means the market expects the stock to move up, and vice versa.

[Au-myn]

Here is what my book says:

The bearish pattern reversed is a series of X/O columns with consecutive lower highs and lower lows, indicating bearish downtrend behaviour. A column of Xs then breaks above the high of the previous column of Xs and the pattern, and trend, is reversed. Some writers specify that there must be 7 columns in the pattern in order to qualify. Some specify the exact make-up of the columns. Both are too rigid. It is better to observe that there is a potential pattern in the making, understanding that it may not look just like one in a book, and then wait for the signal. As with most Point and Figure patterns, there is one essential ingredient that defines the pattern. In this case, it is that there must be a series of lower highs and lower lows, the trend of which is eventually broken by a double-top buy signal. Remember what lower highs and lower lows means: it means repeat double-bottom sell signals but no doubletop buy signal until the one that breaks the pattern.

Furthermore, there should be no strict specification as to the number of these columns, nor that each high and low must be only I box lower than the previous column. Point and Figure patterns should not be learnt by heart, but rather fully understood so that any variation in the pattern can be catered for. You will know by now that the greater the number of columns, the greater the potential from the breakout, the reason being that complacency has set in and those who have confidently taken positions with the trend are shocked when it suddenly reverses leading to short covering and position altering.

I don't agree with the writer. And the six P & F books I read hold a different opinion. JMO.

[Rip Van Winkle]

Could someone post a good list of titles (books, web sites, youtube channels, magazines, etc.) that would help my understanding of not only p&f but investing and the markets? Thanks