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Registered User
Joined: 12/19/2004
Posts: 457
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Those who take the time to understand options will have a significant advantage over those who do not.
I'm curious to know who here implements options strategies in their trading.
I've had some success using options to limit risk and increase profits and have some strategies that might be useful to others.
I also know people who curse options, and blame them for losses in trades that would ordinarily be profitable.
What strategies has anyone used? Does anyone trade spreads, or do you simply buy calls or puts? Anyone buy or sell volatility? What software do you recommend?
Thanks in advance.
Sir Knowledgable Skeptic
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Registered User
Joined: 11/26/2004
Posts: 68
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I trade options in a limited way. Most of my trading is from newsletter recs. My personal trading in options is based on price signals for the underlying stock. I do not evaluate option pricing models as a method of investing. When I get a price signal I only buy LEAPS. So far it has only been for calls. I do not have a short signal for stocks that I have enough confidence in to risk an option purchase. My trading has been marginally profitable but I have only been trading LEAPS for less than a year. I have had limited practice selling options as a hedge against a position. All of that was strictly newsletter recs. Just as a specific example: Yesterday I bought 3 contracts of JCOM June 30 calls (JQFFF) for 6.50 on an order that I had placed last week and forgot to cancel. Today I sold those contracts for 7.60. So I made an overnight profit of 16%. That is what attracts traders like moths to flames. However just to counter the itch to rich reaction here is another trade. This one was made on 3/31: Bought 5 contracts of DRL Aug 20 (DRLHD)calls at 4.10. Sold them 4/7 for 2.70. The loss was 36%. It is a bold game for sure. It is particularly brutal to hopes and dreams. If you have any kind of stomach disorder I suggest you play on a different pitch.
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Registered User
Joined: 12/27/2004
Posts: 13
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hi,
I use covered calls almost exclusively. use them to hedge against stocks that show technical indicators that indicate that they may be real movers. I generally sell calls in the money or at the money and buy to close when I reach the break even point.
I have been dong this for about 4 months and so far I am a little ahead. I made good money on aapl and lost on ctic. However ctic fell almost 50% overnight my covered calls let me get out with about a 20% loss I wasn't happy but this strategy helped limit my loss.
Jerry
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Registered User
Joined: 12/19/2004
Posts: 457
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Thanks for the responses.
In the past, I've done some call/put purchases. They were profitable on average, but I understand the risks involved in strict long options. Long options will not work in a market environment without strong trends.
My focus now is on spreads. I'm focusing on time spreads: ie. OTM calendars, diagonal backspreads, etc. As I take a longer term approach to the marekt (weeks to months), I can see how options would enable me to increase leverage while limiting my risk simultaneously.
With decent technical analysis skills, I can see trading option spreads as improving the winning percentage of a typical trend following system to over 50%.
Even better, once you know how to adjust the position, you can turn a loss into either a breakeven trade, or a small gain. You can even combine stragegies into a portfolio that will profit regardless of market direction.
What options strategies seem appealing to you, aside from the ones you already use? Which strategies leave you asking "Why would someone what to do that?"
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Registered User
Joined: 12/19/2004
Posts: 415
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Covered calls for me, as I am in retirement accounts that don't allow anything else. But they have mostly been good in this market environment.
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Registered User
Joined: 10/7/2004
Posts: 1
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My method is to use put spreads. I do one trade a day using put credit spreads. I only do this on stocks that i would like to buy anyway. I limit my risk on the spread and if the stock gets put to me i am in for less money than an outright purchase. Also if the stock gets put to me then it is selling calls on the stock. Also i close out the spread if it is going against me when the lost is two times the profit. Stocks that i want to own for income i keep selling the spread one or two months out till the short opition gets assigned.
Since I am now retired this is my income generator. Each person will have their own method that fits their own likes. I have doing this for the last three years.
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Registered User
Joined: 1/21/2005
Posts: 11
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Dear Sir Knowledgable Skeptic,
Having traded stocks and mutual funds for 30 years I have added options to my quiver this past year. With a son-in-law who had his own options business (e.g. Market Maker with 11 people trading his money) I realized that options were well worth the look. With his endorsement I plunked down several thousands of dollars to take the Optionetics Course. They are probably the best out there for teaching options correctly and believe me there is a lot to learn. Optionetics teaches you the safe way to trade and specializes in delta neutral trading. This limits your risk. One key that can save your financial life is never, never, never, sell naked options (i.e. not covered with an opposing asset, stock, put or call depending on your trade). The nice thing about options is that you can make money in any market up, down, or sideways with the right strategy (e.g. Calls, Bull Call Spreads, Call Ratio Backspreads; Puts, Bear Put Spreads, Put Ratio Back Spreads; Calendar Spreads, Butterflys, Condors, etc. etc.). I still use TC2005 to analyse stocks I'm interested in and enjoy Don and Peter's comments and great knowledge. None of us can hope to know it all. Once I know my market (e.g. Stock) and trend that's just step one. I then use software called Advanced GET which does further analysis (e.g. Elliott Wave, Gann) which helps me determine my expected profit, stop loss, and time frame. Next I decide on my likely strategy (e.g. Put, Call, Spread)and consult the Optionetics Platinum website to test and compare the best option risk to reward. Finally, and most important I further manage my risk by determining the number of contracts to trade. Optionetics suggests limiting each trade to 4-5% of your Option account. My son-in-law suggests 2% (i.e. $400 trade on $20K account)and he's a pro. Have I made mistakes? Oh yes. After paper trading for 6 months and getting to 60% winners I was cocky and bought 8 contracts on my first trade when I should have limited myself to 2. I also didn't give myself enough time in the trade (i.e I picked an option too close to expirition date - 1 month instead of 3). My hunch on the stock was correct as was my analysis and option strategy - a Bull Call Spread. But, the stock hit my target two weeks after my options expired. This was a painful lesson on why it's important to have rules and stick to them. Know your exit strategy before you enter the trade. Give your trade enough time. I can't stress enough the importance of good education. You pay in one way or another. Optionetics allows you to take their courses over for life. I learn something new each time I go which is about every month or so in my area or elsewhere. Hope this helps.
Happy trading,
Terry
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Registered User
Joined: 12/19/2004
Posts: 457
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Terry,
I've known about Optionetics for awhile. They do provide good info, and for most people, it is correct that they should avoid so called "naked" options, especially on individual stocks.
You should also check out Larry McMillian's Option Strategist. He provides lots of free data on his website. I also strongly recommend his monte carlo probability calculator. It is great for setting stops.
The strategies that I focus on are various forms of diagonal spreads. I'll diagonalize bear spreads, bull spreads, and even backspreads. Essentially, I'm looking to "freeroll"--ie. get a risk-free trade.
If you know about poker (particularly hold 'em or hi/lo split games), there is a term called "freerolling." If 2 people have the same hand, but one player can draw to an even better hand, he is guaranteed 1/2 of the pot, and has a chance to win the whole thing.
With an option spread, there is a chance to earn a profit on one leg that completely covers the risk of your long options. It almost as if someone is paying you to enter a lottery, but with even better odds.
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 Gold Customer
Joined: 10/7/2004
Posts: 1
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I have used cover calls a few times to protect my profits. Covered calls have worked fairly well for me in the past. I sell a call when I consider taking a profit. I use them for stocks I want to hold long term and not swing trade. I never buy a call and I have only bought a few puts over the years. It's really hard to make money off of puts. I haven't fully learned about the Delta and the Vix to understand what is a good price to buy or sell a call. Feel free to email me at richr@cesitservice.com.
Rich
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Registered User
Joined: 3/9/2005
Posts: 71
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Lots of good information here on this thread to consider. Hedging your stock assets with options is always a wise move. Spend time to understand the Bear call / Bear put strategy also the Bull call / Bull put strategy. Something about using a known limited risk / loss / profit possibility is about as good as it gets in the market. I suggest you base any play in the market with known spelled out best / worst case scenario elements. A covered call can work yet usually to really be wise it needs a protective put to be in place. But, that usually will have made it cost prohibitive to do. So pure options only works for me. A coved call only is a dangerous highest risk combination if it goes against you. I know it all to well!
Protect your capital!
Minimize risk as much as possible.
Work with known & limited risk scenarios.
Hedge - protect every move.
Rob
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