Options Strategies

[lytle]

I've read about everything on options such as implied volatility, open interest, etc. It explains it all very well but I have yet to find anyone offering an actual sequence to making a purchase. I trade options and my system consists of analyzing the stock and what I think it's going to do. I confess that I have been relatively successful (perhaps lucky) but there is much more to it than that such as where is the implied volatility, historic volatility, open inerest, etc, etc, and combined, what do they tell you to do and why.

I have read some articles implying that a person should consider making a purchase on what the price is relative to the value of the stock. However, the article never explained how you decide this.

If a professional options trader makes a purchase he does so based on a number of criteria. What criteria?

Does anyone know where this information is or is it a secret?

Thanks for any info. Make lots of money!

Don

[WallStGolfer31]

I'm extremely well read on options as well Don, but I don't quite understand what you're asking. But I'll try answering what I think you're asking.


It's really about sentiment on the underlying; is it going to have a lack of volatility? Is it going to have a excess of volatility, is this already being relfected in the options implied volatility?

haha I'm sorry, but can you state exactly what you want to know?

[lytle]

Sorry I didn't make myself clear. What I'm asking is if I take a position what have I based my decision on. At the moment I base it only on what the underlying stock is doing, going up or down.

A knowledgeable options trader would base his purchase on more than that. He would take into account implied volatility, etc. How would he do that? What would he consider along with the increase in the stock price?

Assuming the stock I'm interested in is moving up from a pullback. If I think this is a good prospect to purchase a call would I also look at the implied volatility, open interest, etc. to confirm my decision, and if I did what would I look for? A rising implied volatility? Increased open interest? What?

Thanks for your interest and reply. I hope I've made it a little clearer.

Don

[WallStGolfer31]

ahhhhhh, alright I see where your getting now!

I'll sum up a chapter from Options Made Easy by Guy Choen (the first options book I ever read) and suprisingly the only options book that answered your question, at least from what I can remember.

What your doing, basing the purchase of an option on opinions about the underlying is by far the most common. Normally you could do this with just the underlying, but using options allows you to get leverage in a way that otherwise you could not. Using options also allows you to tailor the position you're taking to the exact specifications of what you're forecasting. Like seeing a rise to price X in the underlying, becasue you're price target is price X, you can buy a call right now and sell the call at price X, both having the same strike. This would reduce your net debit and allow you have less capital at risk as well.


And yes, people do make decisions about positions taken just off options themselves. One I can think of is a simple arb strategy. Becasue of the nature of this, a retail investor will not be able to preform it because of the high exercise feee involoved at most brokerages houses.

It's called a box spread. attached is the calculator I made for it. You're using 2 lines of options, at 2 different strike prices.

Buying the box involves creating a bull call spread and a bear put spread on the same strikes with the same expirations date. To sell a box you must create a bull put spread and a bear call spread. The payoff at expiration is the difference between the stirkes. If the box is selling below that price buy it, if its above the price, sell it. A decision based entirely based off the options components.



Attached is a calculator I created just the other day for it.

[lytle]

I think you understand part of what I'm asking. It isn't you, the problem is with ME not being able to make myself clear! I really appreciate your patience!

Like I said, and you understand, I now take an option position based only on the action of the underlying stock. However, I think I should be considering more than that. Shouldn't I be looking at the implied volatility, greeks, etc. and also considering these before I decide to take a position?

I know they publish all the information such as volatilities, greeks, etc. and I am sure an accomplished investor takes these into account before he takes a position, but I don't know how. Shouldn't I consider, as an example, if the greek delta is too low and perhaps because of that the position wouldn't be unwise?

What I was asking is what I should look at and consider besides the action of the underlying stock.

The way I tried to put it initially was; before a wise investor placed an options order wouldn't he go through a sequence of checks to see if it was a smart postiion to take. Such as:

The action of the underlying stock.
Volatilities
Days to expiration
Greeks
etc.

And I wanted to know if there was a simple explaination of how to do this.

Again, thanks for your patience with me.

Don

P.S. Thanks for the download

[WallStGolfer31]

If you want something very good to read, I'd suggest Options as an Strategic Investment By Lawerance G. McMillian. It's about 1000 pages and well worth the read.

It starts out on a very simple level and ends with very advanced text, good for any level of options trader.

I personally think the more you know about options the better you will trade them.

The times where you are going to use the greeks are the times where you are setting up what are known as synthetic positons. A synthetic positon is one where you are buying and selling options and possibly the underlying to create a position or payoff that could otherwise not be recognized by using the components individually.

Implied volatility is a good indicator of how "expensive" an option is as it is basically a "plug" factor for excess value. If it's too expensive, you might consider setting up a spread (bull or bear)


What exactly do you want to get out of options trading? If you're sticking to the sytle you've been using and have been successful with, I'd say knowledge of the greeks and such is not absolutely needed, but it might help.

[WallStGolfer31]

I have a good book in .pdf format if you'd like it on the topic, just send me a private message with your email and I'll send it to you. I would post it on here but it's alot bigger then the max file size allowed .

[toittoiger]

Hey WallStGolfer31, I would be interested in a good book in pdf format on the topic of options. My email is: toittoigers@hotmail.com

That would be awesome if you could send that over. Greatly appreciated!

Cheers,
Derek