From time to time, I'll post some ideas for positions and what I think some stocks might do tomorrow. Here are my picks
VZ - Verizon - Probably too late to get into it because earnings will become available before trading tomorrow, but I predict they go down. Have a feeling they'll miss earnings. May set tone for the rest of the telecoms. Put position, let it ride 2-2.5 points
RIMM - Research in Motion - Think they'll go up a little tomorrow - maybe two points. Options are a bit pricey though. Call position,
MNST - Monster - Down about 1.5 - 2 points tomorrow.
Sunday, April 29, 2007
Saturday, April 28, 2007
Options Pricing - A Simple View
Options pricing is a complex science. Its won a nobel prize for the authors of a pricing model. However, it can be broken down into 2 components: Inherent/Intrinsic Value of the option + "Premium": Option Value = (Value of Option) + Premium
The first component, Value of Option, is easy. If its "in the money", its the difference between the strike price and the current price of the stock. If its "out of money", its zero: at that moment, the option has no "face value." For instance, if you buy a call option for a stock trading at $25 with a strike of $20, this option has a $5 inherent value. You could excercise this call option and immediately have a $5 gain. On the other hand, a call with a strike of $30 on the same stock woudl have an inherent value of $0, you can't excercise this option (or wouldn't want to). Puts work in the opposite direction.
Premium is the component that is far more complex. Premium can be broken down into other factors: time value of the option (expiration), volatility of the underlying stock, and many other factors. Namely, for the same stock, the premium will be higher for options that expire further out than ones that expire sooner. Now, take an option on a stock with low volatility versus one with high volatility: the premium will generally be higher for a highly volatile stock than one that is less volatile, holding other factors constant. Look at the option chain for Google versus IBM. For options with the same expiration and similar inherent value, the prices will be much different.
With options trading, the bottom line is what the market is willing to pay for an option. I'm not really well-read in terms of option theory as it applies to trading, so some of my ideas that I have gathered from practical experience may not be original. One thing I take into account when I look at an option chain and deciding which strikes to buy is taking into account how far out of the money an option is. Let's take an example.
Example 1: Stock XYZ is currently trading at $25. I look at the options chain for calls and focus on 3 in particular (with same expirations):
Strike Price Option Price Premium "Virtual" Premium
$20 $6.25 $1.25 $1.25
$25 $2.75 $2.75 $2.75
$30 $1.00 $1.00 $6.00
Let's check out what the "premium" I'm paying for these options. The $20 strikes, I see its $5 in the money and thus has a $5 inherent value. The option price is $6.25. I see my premium is $1.25. You can see this in the table above. I've laid out the premium according to the simple formula I presented. However, I consider a "virtual" premium as well. As you can see, this "virtual" premium is the same for at the money and in the money options. However, for out of the money calls, it is different, namely is higher than the other premium. I use this number because I consider it a "hidden" premium. With the $30 strikes, I am $5 out of the money. In other words, I am giving up $5 to the writer of this contract. Its a hidden cost. It would be akin to buying a new car versus an old car in need of repairs. The new car may be more expensive but you won't need to put any work into it (thereotically!). However, the old car may have engine problems, transmission problems, etc. You may need to pump $5,000 or $10,000 into the car to get it in working order. So its a hidden cost. I apply the same principle to this option. You may not be outlaying it in cash up front, but you do "pay for it" which I will discuss next.
So why is this important? Because this will affect how well your trade goes. Generally speaking, the more premium you pay, the less it will move with the underlying stock's price. You'll see this on an options chain. Take a look at list of strikes for stock. Say the stock we used as an example shot up $3 points right after we purchased the option. Options generally do not track poitn for point in movement, but rather a percentage of the movement. And you'll see that optiosn with higher premiums have a worse movement as a percentage of price movement of the stock. So, for a 3 point gain, we'd probably see the $20 strikes move about 2.5 points up. The $25 strikes might move up a point. And the $30 strikes might only move $0.50. Looking at the same options chain, the best gains are seen in more "in the money" options. The smallest gains occurs as you move more to "out of the money." Likewise, look at an option with the same strike and expiration but a different underlying stock. The option with the higher premium won't move as nicely. For instance, let's look at IBM vs. Google. Google is far more volatile and hence their options and much more pricey than IBM. Say both IBM and Google move up 3 points. IBM's call options will track much, much better than Googles.
This is a very simplistic overview of looking at options. When I decide which strikes to buy for a particular option, I take into account the "virtual" premium. In my opinion, even though you aren't paying for it in cash, with out of money options you are giving the amount it is out of the money away to the writer of the contract.
So why is this? One might think that the "Premium" on a given option chain for the same stock with same expirations should be the same. I'm sure there are books and such that explain this, but I break it down to simply demand. I beleive as the option gets more in the money, its gets far more expensive because of its increased inherent value and thus has a smaller market. Most people trading options do so for the increased leverage. If they are paying half the value of the stock on an option, they may figure they'd be better off buying the stock itself. And there are options so far out of the money that it more than likely won't hit that price any time soon. I chalk it up to lotto type mentality. The options are cheap, might make a bet on them and make a huge return percentage wise if something does happen.
So how do I apply this on trading? I generally stay away from options with abnormally high premiums. Google for instance. Also, it depends on how much cash you have to trade with. I've found that options that are $4-$6 in the money work best for me. I might outlay $5,000-$7,000 for a trade, but they will move well with the stock price. Anything more than that, I just don't want to lay out that much cash for a trade. If you do buy out of the money options, you are looking for a quick spike and to get out as soon as possible (aside from betting on good earnings which could boost stock up tremendously). Out of money options are hard to get a good "raw return" on. Percentage wise, you may do very well, but for a given number of contracts, the dollar amounts will be smaller. You could get much more leverage for a given dollar amount on more out of the money option, however, it gets riskier and as discussed, doesn't move as well. If you have the cash, I prefer less leverage and "in the money" options versue more leverage and "out of the money" options. Your rate of return may not be as great, but raw dollar amounts will be better in general (unless the stock really skyrockets, or dips, depending on your position). But trading on smaller intraday fluctuations is easier with in the money options.
I will discuss more in detail as time goes on. Again, I'm nto a professional and am simply basing opinions on my observations, so nobody slam me too hard. I have some analysis tools that I've developed to help me price options, look for how they move with the stock price and other factors to help me pick a trade. But overall, this is how I do it.
The first component, Value of Option, is easy. If its "in the money", its the difference between the strike price and the current price of the stock. If its "out of money", its zero: at that moment, the option has no "face value." For instance, if you buy a call option for a stock trading at $25 with a strike of $20, this option has a $5 inherent value. You could excercise this call option and immediately have a $5 gain. On the other hand, a call with a strike of $30 on the same stock woudl have an inherent value of $0, you can't excercise this option (or wouldn't want to). Puts work in the opposite direction.
Premium is the component that is far more complex. Premium can be broken down into other factors: time value of the option (expiration), volatility of the underlying stock, and many other factors. Namely, for the same stock, the premium will be higher for options that expire further out than ones that expire sooner. Now, take an option on a stock with low volatility versus one with high volatility: the premium will generally be higher for a highly volatile stock than one that is less volatile, holding other factors constant. Look at the option chain for Google versus IBM. For options with the same expiration and similar inherent value, the prices will be much different.
With options trading, the bottom line is what the market is willing to pay for an option. I'm not really well-read in terms of option theory as it applies to trading, so some of my ideas that I have gathered from practical experience may not be original. One thing I take into account when I look at an option chain and deciding which strikes to buy is taking into account how far out of the money an option is. Let's take an example.
Example 1: Stock XYZ is currently trading at $25. I look at the options chain for calls and focus on 3 in particular (with same expirations):
Strike Price Option Price Premium "Virtual" Premium
$20 $6.25 $1.25 $1.25
$25 $2.75 $2.75 $2.75
$30 $1.00 $1.00 $6.00
Let's check out what the "premium" I'm paying for these options. The $20 strikes, I see its $5 in the money and thus has a $5 inherent value. The option price is $6.25. I see my premium is $1.25. You can see this in the table above. I've laid out the premium according to the simple formula I presented. However, I consider a "virtual" premium as well. As you can see, this "virtual" premium is the same for at the money and in the money options. However, for out of the money calls, it is different, namely is higher than the other premium. I use this number because I consider it a "hidden" premium. With the $30 strikes, I am $5 out of the money. In other words, I am giving up $5 to the writer of this contract. Its a hidden cost. It would be akin to buying a new car versus an old car in need of repairs. The new car may be more expensive but you won't need to put any work into it (thereotically!). However, the old car may have engine problems, transmission problems, etc. You may need to pump $5,000 or $10,000 into the car to get it in working order. So its a hidden cost. I apply the same principle to this option. You may not be outlaying it in cash up front, but you do "pay for it" which I will discuss next.
So why is this important? Because this will affect how well your trade goes. Generally speaking, the more premium you pay, the less it will move with the underlying stock's price. You'll see this on an options chain. Take a look at list of strikes for stock. Say the stock we used as an example shot up $3 points right after we purchased the option. Options generally do not track poitn for point in movement, but rather a percentage of the movement. And you'll see that optiosn with higher premiums have a worse movement as a percentage of price movement of the stock. So, for a 3 point gain, we'd probably see the $20 strikes move about 2.5 points up. The $25 strikes might move up a point. And the $30 strikes might only move $0.50. Looking at the same options chain, the best gains are seen in more "in the money" options. The smallest gains occurs as you move more to "out of the money." Likewise, look at an option with the same strike and expiration but a different underlying stock. The option with the higher premium won't move as nicely. For instance, let's look at IBM vs. Google. Google is far more volatile and hence their options and much more pricey than IBM. Say both IBM and Google move up 3 points. IBM's call options will track much, much better than Googles.
This is a very simplistic overview of looking at options. When I decide which strikes to buy for a particular option, I take into account the "virtual" premium. In my opinion, even though you aren't paying for it in cash, with out of money options you are giving the amount it is out of the money away to the writer of the contract.
So why is this? One might think that the "Premium" on a given option chain for the same stock with same expirations should be the same. I'm sure there are books and such that explain this, but I break it down to simply demand. I beleive as the option gets more in the money, its gets far more expensive because of its increased inherent value and thus has a smaller market. Most people trading options do so for the increased leverage. If they are paying half the value of the stock on an option, they may figure they'd be better off buying the stock itself. And there are options so far out of the money that it more than likely won't hit that price any time soon. I chalk it up to lotto type mentality. The options are cheap, might make a bet on them and make a huge return percentage wise if something does happen.
So how do I apply this on trading? I generally stay away from options with abnormally high premiums. Google for instance. Also, it depends on how much cash you have to trade with. I've found that options that are $4-$6 in the money work best for me. I might outlay $5,000-$7,000 for a trade, but they will move well with the stock price. Anything more than that, I just don't want to lay out that much cash for a trade. If you do buy out of the money options, you are looking for a quick spike and to get out as soon as possible (aside from betting on good earnings which could boost stock up tremendously). Out of money options are hard to get a good "raw return" on. Percentage wise, you may do very well, but for a given number of contracts, the dollar amounts will be smaller. You could get much more leverage for a given dollar amount on more out of the money option, however, it gets riskier and as discussed, doesn't move as well. If you have the cash, I prefer less leverage and "in the money" options versue more leverage and "out of the money" options. Your rate of return may not be as great, but raw dollar amounts will be better in general (unless the stock really skyrockets, or dips, depending on your position). But trading on smaller intraday fluctuations is easier with in the money options.
I will discuss more in detail as time goes on. Again, I'm nto a professional and am simply basing opinions on my observations, so nobody slam me too hard. I have some analysis tools that I've developed to help me price options, look for how they move with the stock price and other factors to help me pick a trade. But overall, this is how I do it.
Basics of Equity Options
With the purchase of an equity option, you've purchased the right to buy or sell a stock at a specified price. You have not purchased or sold the underlying asset at this point, you've simply purchased the right to do so during a specified period of time. When the stock price moves in your favor, you can either excercise the option or you can trade the option. I'm mainly concerned with trading the option rather than excercising. Options are a great way to hedge a particular position - simply put insurance for you in the event of adverse occurences to help limit your losses.
There are two types of options available: call options and put options.
Call - The right, but not obligation, to buy the underlying asset at a specified price.
Put - The right, but not obligation, to sell the underlying asset at a specified price.
In a nutshell, the value of a put will tend to increase as the price of the underlying stock decreases. The value of a call option will tend to increase as the price of the underlying stock increases.
There are two main components of a stock option:
Strike Price - The price at which the option can be excercised for.
Expiration date - The date the option expires.
With options, time works against you. Every day that passes means you have come closer to the option expiring. Options expire every third Friday of the month. So if you have options with an expiration of August 2007, this means your option will expire August 17, 2007. On this day, your option must be excercised (or traded) if it has value or if not, it will become worthless.
Why options? There are two main reasons one may purchase an equity option. As discussed before, it is a great way to hedge a position. For instance, say you own 100 shares of IBM. Its currently trading at $100 per share. You may want to protect yourself in the event IBM goes down. You may want to be guaranteed that you can sell IBM at $90 per share. So you do this buy purchases a Put option, Strike $90. The expiration date you choose can be however long you'd like to be covered. You also might do this if you wrote covered calls against your shares of IBM. Because you wrote covered calls against IBM, you cannot sell your shares of IBM as long as those covered calls are out there. That means you'll need to hold IBM, even if it starts going down. Puts will help hedge you against this downside.
The other reason, and the reason I'm into it, is trading. Options are traded on the open market. The risk from options comes from the fact that they eventual expire. However, options enables you to gain leverage. You may be bullish on a stock but may not have the funds to have a position in that stock that would make it worth it. Options will allow you to capitalize on stock gains without having to own the stock. Because the price of options are below the price of the actual stock, you can have "control" over a large number of shares than you normally would if you purchased the stock outright. In addition, you've limited your downside to the money you laid out to by the calls (or puts). For instance, if you paid $3,000 for options on a certain stock, worst case scenario is that you lose that $3,000. Nothing more. But on the upside, you can get a lot of leverage. Let's take IBM as an example (I'll make up values, but they'll get the point across). IBM is currently trading at $100. You believe that IBM is going to go up in the near future, let's say it will go up 3 points. You have $1000 available to make a purchase. You can buy 10 shares of IBM and if it goes up 3 points, you've made $30. However, let's say you purchase a call option instead. Let's say you buy IBM calls at a strike of $100. Each option may cost $2. You can buy 500 options (5 contracts). You now have the leverage of 500 shares of IBM with the same amount of money. Ignoring options pricing for now, let's say the option price increases $3 (it won't increase dollar for dollar, but that will need to be another post, but it will increase enough to make good money). You've made $1500 on this transaction. More realistically, with the way options are priced in the market, the option may increase anywhere from .75 to 2 points. Doing the math, you are still in good shape and still making more.
Those are the basics of options. It gets much more complicated, but you should have an idea of the instruments and how they work.
There are two types of options available: call options and put options.
Call - The right, but not obligation, to buy the underlying asset at a specified price.
Put - The right, but not obligation, to sell the underlying asset at a specified price.
In a nutshell, the value of a put will tend to increase as the price of the underlying stock decreases. The value of a call option will tend to increase as the price of the underlying stock increases.
There are two main components of a stock option:
Strike Price - The price at which the option can be excercised for.
Expiration date - The date the option expires.
With options, time works against you. Every day that passes means you have come closer to the option expiring. Options expire every third Friday of the month. So if you have options with an expiration of August 2007, this means your option will expire August 17, 2007. On this day, your option must be excercised (or traded) if it has value or if not, it will become worthless.
Why options? There are two main reasons one may purchase an equity option. As discussed before, it is a great way to hedge a position. For instance, say you own 100 shares of IBM. Its currently trading at $100 per share. You may want to protect yourself in the event IBM goes down. You may want to be guaranteed that you can sell IBM at $90 per share. So you do this buy purchases a Put option, Strike $90. The expiration date you choose can be however long you'd like to be covered. You also might do this if you wrote covered calls against your shares of IBM. Because you wrote covered calls against IBM, you cannot sell your shares of IBM as long as those covered calls are out there. That means you'll need to hold IBM, even if it starts going down. Puts will help hedge you against this downside.
The other reason, and the reason I'm into it, is trading. Options are traded on the open market. The risk from options comes from the fact that they eventual expire. However, options enables you to gain leverage. You may be bullish on a stock but may not have the funds to have a position in that stock that would make it worth it. Options will allow you to capitalize on stock gains without having to own the stock. Because the price of options are below the price of the actual stock, you can have "control" over a large number of shares than you normally would if you purchased the stock outright. In addition, you've limited your downside to the money you laid out to by the calls (or puts). For instance, if you paid $3,000 for options on a certain stock, worst case scenario is that you lose that $3,000. Nothing more. But on the upside, you can get a lot of leverage. Let's take IBM as an example (I'll make up values, but they'll get the point across). IBM is currently trading at $100. You believe that IBM is going to go up in the near future, let's say it will go up 3 points. You have $1000 available to make a purchase. You can buy 10 shares of IBM and if it goes up 3 points, you've made $30. However, let's say you purchase a call option instead. Let's say you buy IBM calls at a strike of $100. Each option may cost $2. You can buy 500 options (5 contracts). You now have the leverage of 500 shares of IBM with the same amount of money. Ignoring options pricing for now, let's say the option price increases $3 (it won't increase dollar for dollar, but that will need to be another post, but it will increase enough to make good money). You've made $1500 on this transaction. More realistically, with the way options are priced in the market, the option may increase anywhere from .75 to 2 points. Doing the math, you are still in good shape and still making more.
Those are the basics of options. It gets much more complicated, but you should have an idea of the instruments and how they work.
Texas Challenge - Week Wrapup
So far I'm up $550 from a starting balance of $900 on two trades. I need to get more active. I had some good predictions that I didn't act on. Namely Research in Motion and IBM. IBM announced strong earnings and went up about 5 points. From the charts it looked like it was good for another 3-4 poitns the next day. Sure enough, the stock did go up at least 2 or 3 points but I didn't trade on it. Same with Research in Motion, the charts indicated it would be bullish and sure enough, it was up about 4 points. IBM has some decently priced options too, Research in Motion's are a little more pricey.
On average, to meet this challenge I need to bring in about $2500 a month or about $650 a week. However, I know that this will be skewed with the bigger profits seen in the later half. So from that perspective I'm doing fine. I'm being overly caution and not as trusting on my instincts which I need to overcome. Since it is a small amoutn of money, any losses at this point will be detrimental. If I can bring in $400 a week over the next four weeks, I should be in great shape to start reaping better results. Playing with a small amount of money forces me to buy out of money options most of the time, thus I need to have big movers to realize any gains. By big movers, at least 2 points. Once I can purchase in the money options, I can make money off smaller movement, like .75 to 1 point.
Off to a good start, need to play a little catch up from my DNDN fiasco.
On average, to meet this challenge I need to bring in about $2500 a month or about $650 a week. However, I know that this will be skewed with the bigger profits seen in the later half. So from that perspective I'm doing fine. I'm being overly caution and not as trusting on my instincts which I need to overcome. Since it is a small amoutn of money, any losses at this point will be detrimental. If I can bring in $400 a week over the next four weeks, I should be in great shape to start reaping better results. Playing with a small amount of money forces me to buy out of money options most of the time, thus I need to have big movers to realize any gains. By big movers, at least 2 points. Once I can purchase in the money options, I can make money off smaller movement, like .75 to 1 point.
Off to a good start, need to play a little catch up from my DNDN fiasco.
The Texas Challenge Trade
Underlying Asset: Microsoft
Underlying Asset Ticker: MSFT
Option Type: Call
Option Strike: $30
Expiration: May 2007
Quantity (Contracts): 10
Buy Date: 04/26/2007
Purchase Price: .32
Sell Date: 04/27/2007
Sell Price: .82
Net Profit (not including broker fees): $500
% Return: 156%
Cumulative Net Profits: $550
Comments:
I purchased this call option the day they were going to announce earnings. They were announcing earnings after market close, so I purchased these calls first thing. The stock didn't do a whole lot that day during normal trading hours, but the calls jumped in price (from .32 to .50) without a movement in the stock in anticipation of the earnings report. Obviously they reported strong earnings and the stock went to about $30.50 in after-hours trading. I held the calls for a while. The stock went to a high of around $30.70, where the option priced at an even $1.00. I should have bailed at this point. My exit was .95 but I was getting a bit greedy and hoped I could turn an even $1,000 profit on this trade. The stock sat at this level for a few minutes then sharply declined by 20 cents. I waited a while to see where the new "peak" would be at. I sold at this "new peak" for .82. Not a bad trade. I had figured that there would not be a "run on the stock" like what was seen with Amazon. I had guessed the stock would hit $31.00 - $31.50. It still could on Monday but I went ahead and took my profits and ran. Not a bad trade. I'm behind on the challenge and need to start bringing in some more profits.
Underlying Asset Ticker: MSFT
Option Type: Call
Option Strike: $30
Expiration: May 2007
Quantity (Contracts): 10
Buy Date: 04/26/2007
Purchase Price: .32
Sell Date: 04/27/2007
Sell Price: .82
Net Profit (not including broker fees): $500
% Return: 156%
Cumulative Net Profits: $550
Comments:
I purchased this call option the day they were going to announce earnings. They were announcing earnings after market close, so I purchased these calls first thing. The stock didn't do a whole lot that day during normal trading hours, but the calls jumped in price (from .32 to .50) without a movement in the stock in anticipation of the earnings report. Obviously they reported strong earnings and the stock went to about $30.50 in after-hours trading. I held the calls for a while. The stock went to a high of around $30.70, where the option priced at an even $1.00. I should have bailed at this point. My exit was .95 but I was getting a bit greedy and hoped I could turn an even $1,000 profit on this trade. The stock sat at this level for a few minutes then sharply declined by 20 cents. I waited a while to see where the new "peak" would be at. I sold at this "new peak" for .82. Not a bad trade. I had figured that there would not be a "run on the stock" like what was seen with Amazon. I had guessed the stock would hit $31.00 - $31.50. It still could on Monday but I went ahead and took my profits and ran. Not a bad trade. I'm behind on the challenge and need to start bringing in some more profits.
Friday, April 27, 2007
The Texas Challenge Trade
Underlying Asset: DENDREON CORP
Underlying Asset Ticker: DNDN
Option Type: Put
Option Strike: $15
Expiration: April 2007
Quantity (Contracts): 10
Buy Date: 04/17/2007
Purchase Price: .45
Sell Date: 04/17/2007
Sell Price: .50
Net Profit (not including broker fees): $50
% Return: 11%
Cumulative Net Profits: $50
Comments:
This was a mistake and I was lucky to even make this amount back. This was more of an emotional trade without reading any of the charts or taking into account the premiums of the option. This stock was featured in tradingmarket.com's article "7 Options You Need to Know." This company skyrocketed. Take a look at its chart. It was at $5 for a long time, shot up to $25, pulled back to the teens. I got in too quickly and realized almost immediately this was a bad idea. Plus it didn't help that within 10 seconds of purchasing this option,
Underlying Asset Ticker: DNDN
Option Type: Put
Option Strike: $15
Expiration: April 2007
Quantity (Contracts): 10
Buy Date: 04/17/2007
Purchase Price: .45
Sell Date: 04/17/2007
Sell Price: .50
Net Profit (not including broker fees): $50
% Return: 11%
Cumulative Net Profits: $50
Comments:
This was a mistake and I was lucky to even make this amount back. This was more of an emotional trade without reading any of the charts or taking into account the premiums of the option. This stock was featured in tradingmarket.com's article "7 Options You Need to Know." This company skyrocketed. Take a look at its chart. It was at $5 for a long time, shot up to $25, pulled back to the teens. I got in too quickly and realized almost immediately this was a bad idea. Plus it didn't help that within 10 seconds of purchasing this option,
The Texas Experiment/Challenge
Challenge: Turn $900 into $10,000 in 4 months time
Start Date: April 9, 2007
End Date: August 9, 2007
Overview
That's right, I have funded a trading account with $900 and will attempt to bring the balance of this account to $10,000 within a four month time period. This is a difficult challenge because of the buying patterns I will be using as opposed to what I would normally do. Starting with a low balance such as this will force me to buy options with a lower premium. Thus movements won't track as well as they do with the options I normally buy. I will make a separate post giving an overview of my buying strategies. Once I get the account in the $3,000 - $4,000 range it will get easier, but initially it will be slow moving. Plus, I'll have to be more cautious than I normally would be so I don't get wiped out early in the game.
My overall strategy will be three fold. I will have one strategy for my account balance being below $3000, one for $3000 - $6000 and finally one for over $6,000.
Strategy 1 (Account balance less than $3000)
I will attempt to pick stock options with low premiums, out of money, and where the underlying stock will be making moves of 1.5 to 2 points (or greater obviously!). My aim is to invest around $400-$600 per trade, trying to buy 10 contracts (1000 options, 100 options per contract). I will look to make at least $200 per trade and try to complete a full trade (buy and sell) within 2 days.
Strategy 2 (Account balance between $3000-$6000)
This strategy will be similar to the first strategy, however, I will attempt to buy in the money options if at all possible. Depending on the time of the month, this may or may not be possible. Main difference also will be that I will try to find simultaneous trades as well.
Strategy 3 (Account balance over $6,000)
At this point, the trades will be a little easier. I will have enough cash to buy in the money options. In the money options track with the stock price much better than out of money options. For instance, let's compare two strikes: one that is $1 out of the money and the other that is $1.50 in the money. If the stock moves 1.40, the out of money options may move $0.40 while the in the money options will move $0.85. This is a generalization but you should get the idea. While out of the money options are cheaper, they are harder to turn a profit on. I will attempt to buy options that are in the money $3-$5, depending how close to expiration I am. The options should track much better with the stock price than the ones I am buying in the first two strategies. Thus, it should be easier to turn a profit.
That's a good generalization of what I plan on doing. I plan on posting my trades, I'm not sure if it will be after the fact or while I have a position opened. I might be trading sporadically as well. I might trade heavily for a few days, then stop for a few days. All strategies will call for buying the earliest expiring options (with the possible exception of options that expire within a week, I may be the next month depending on prices). Let's see if this can't be done!
Start Date: April 9, 2007
End Date: August 9, 2007
Overview
That's right, I have funded a trading account with $900 and will attempt to bring the balance of this account to $10,000 within a four month time period. This is a difficult challenge because of the buying patterns I will be using as opposed to what I would normally do. Starting with a low balance such as this will force me to buy options with a lower premium. Thus movements won't track as well as they do with the options I normally buy. I will make a separate post giving an overview of my buying strategies. Once I get the account in the $3,000 - $4,000 range it will get easier, but initially it will be slow moving. Plus, I'll have to be more cautious than I normally would be so I don't get wiped out early in the game.
My overall strategy will be three fold. I will have one strategy for my account balance being below $3000, one for $3000 - $6000 and finally one for over $6,000.
Strategy 1 (Account balance less than $3000)
I will attempt to pick stock options with low premiums, out of money, and where the underlying stock will be making moves of 1.5 to 2 points (or greater obviously!). My aim is to invest around $400-$600 per trade, trying to buy 10 contracts (1000 options, 100 options per contract). I will look to make at least $200 per trade and try to complete a full trade (buy and sell) within 2 days.
Strategy 2 (Account balance between $3000-$6000)
This strategy will be similar to the first strategy, however, I will attempt to buy in the money options if at all possible. Depending on the time of the month, this may or may not be possible. Main difference also will be that I will try to find simultaneous trades as well.
Strategy 3 (Account balance over $6,000)
At this point, the trades will be a little easier. I will have enough cash to buy in the money options. In the money options track with the stock price much better than out of money options. For instance, let's compare two strikes: one that is $1 out of the money and the other that is $1.50 in the money. If the stock moves 1.40, the out of money options may move $0.40 while the in the money options will move $0.85. This is a generalization but you should get the idea. While out of the money options are cheaper, they are harder to turn a profit on. I will attempt to buy options that are in the money $3-$5, depending how close to expiration I am. The options should track much better with the stock price than the ones I am buying in the first two strategies. Thus, it should be easier to turn a profit.
That's a good generalization of what I plan on doing. I plan on posting my trades, I'm not sure if it will be after the fact or while I have a position opened. I might be trading sporadically as well. I might trade heavily for a few days, then stop for a few days. All strategies will call for buying the earliest expiring options (with the possible exception of options that expire within a week, I may be the next month depending on prices). Let's see if this can't be done!
Intro
Welcome to the Equity Options Trading blog. I am a software architect by profession but a passionate stock options trader. I've been trading off and on for about 7 years. I worked for an investment bank that didn't allow options trading except to cover your positions, so I had to give it up for a while, even though I was a lowly software guy (and I don't cover positions, I trade speculatively). My best trading period was earning 300% return within six months on a decent sized account (low five figures). With the exception of my retirement accounts, I have only made one or two actual equity trades, everything else has been stock options. I enjoy the risk, leverage, and the potential returns on relatively small sums of money in a short period of time. This blog will post my commentary on the world of options trading, recommendations from time to time, and a small experiment/challenge I am currently doing (which will be another post). I am not a professional trader and have never held a trading position of any type. I trade in my spare time and for the thrill.
I welcome anybody's advice, questions and ideas. I don't pretend to know it all and generally do what works for me. My trading pattern is fairly basic, for the most part I buy either calls or puts. I've done other strategies (butterflies, spreads, etc) but most of my trades are directional guesses.
Options trading is an excellent way to generate income for those of us who are not risk adverse. Don't be fooled: options trading is very risky and most do not fare well. You must be prepared to lose. If you decide to get into this type of trading, start with an amount that you are comfortable parting with, possibly fairly quickly. The upside to options trading is that you can earn a rate of return you couldn't possibly with simple equity trading and investing. A trade can generate 20% return in a single day or a 100% return, the sky is literally the limit.
I welcome anybody's advice, questions and ideas. I don't pretend to know it all and generally do what works for me. My trading pattern is fairly basic, for the most part I buy either calls or puts. I've done other strategies (butterflies, spreads, etc) but most of my trades are directional guesses.
Options trading is an excellent way to generate income for those of us who are not risk adverse. Don't be fooled: options trading is very risky and most do not fare well. You must be prepared to lose. If you decide to get into this type of trading, start with an amount that you are comfortable parting with, possibly fairly quickly. The upside to options trading is that you can earn a rate of return you couldn't possibly with simple equity trading and investing. A trade can generate 20% return in a single day or a 100% return, the sky is literally the limit.
Subscribe to:
Posts (Atom)