Options Trading Thread

[thegreatgate]

I recently was approved for an options account through Scottrade. At first options are going to seem 100x more complicated than trading stocks but I have a feeling options really are not going to be that much more difficult to learn. I would say on a scale of 1-100, where 100 is a complete understanding of options, I am about a 3 or a 4.

What I do know about options is that if you 'have a hunch' that a stock is going to double (or move drastically) in the next two months, the same options are probably going to go up between 400 and 800%. It is not uncommon at all for the right options play to jump 300% or more in one week. If you don't believe me, here is the proof, a gain of 17,530% in 24 hours, lol. Could you imagine turning $1,000 into $175,000 in less than 24 hours......

Google Earnings Gave Options Traders a 17,530% Gain
April 18, 2009 (Bloomberg) -- Options traders who predicted Google Inc. would beat estimates earned as much as 17,530 percent on their investments today, the most-profitable bet among all U.S. equity derivatives.

Contracts giving the right to buy Google shares for $530 before the close of trading today jumped as high as $17.63 from their 10-cent closing price yesterday. That gain almost matched the 18,760 percent advance in the Dow Jones Industrial Average since the beginning of 1900, according to Bloomberg data.

On the other side of the token, if you do not know what you are doing, the options will expire worthless. I figure that when I am ready to make my first trade, I will only risk a few hundred dollars max, because chances are I will lose everything on my first trade. I am looking at Citigroup January or March $10 calls, PCX January $15 calls, UNG October $14 or $15 calls, possibly some HIG December $15 puts.

From my limited understanding, you just need your prediction to hit a week or sooner than when the options expire. For example, if you buy C January $10 calls right now in August while C is around $5, and C is trading around $10/$11 by the middle of December, chances are your investment is up 5 or 6x.

Also, if you are certain or almost certain that a bottom is in, it can be very lucrative to buy the calls a month or two out. What comes to mind is WNR (see the August 21st post). Right now it is possibly in the process of making a double bottom around $6. The WNR December $10 calls are trading for around 15 cents per contract right now. If WNR hits $10 sometime in November or early December I would venture a guess that the 15 cents being paid right now/contract would fetch about 90 cents/contract (6x) or better.

Any members that are more familiar with options please chime in on this thread....

[rtace]

Couple things to look out for too are the Greeks
Delta - sensitivity of the option to a change in its underlying price
Gamma- sensitivity of delta to change in the underlying price
Vega - Sensitivity to option to a 1 percent change in volatility
Theta - Time decay of an option

Those are all important things to take into account when holding an options for a few months, Generally options close to the underlying price, have a high delta and thus easier and more reliable to trade...options are a lot of fun and dangerous

[thegreatgate]

Bought 15 contracts of the WNR December $10 calls for 20 cents a contract. Total order was $300. From what I have learned over the last couple days, these options will go up about 3x or more if WNR gets to $10 before December. The higher the better and the sooner the better.

Just a warning, I was told that if WNR peaked at $10.05 a week or so before the options expired (end of December) then the December $10 calls I paid 20 cents/contract for would only be worth 5 cents. I was told that for a rough estimate I simply subtract the strike price ($10 strike) from the peak price ($10.05 hypothetically) and the leftover is 5 cents.

There are two big positives though:
1) I can sell the contracts at any time so if WNR runs up closer to $8 I will most likely be able to sell my 15 contracts for a decent profit.
2) The sooner WNR exceeds $10/share the better. I was informed that if WNR hits roughly $10.50 sometime in November then the $10 calls would be trading at around 60 or 70 cents per contract (I paid 20 cents today).

A couple of observations from my day or two experience with options. They are extremely fun as Rtace (member above) said. They are very volatile but they are not like stocks where the price is changing every millisecond. You might have days with 0 trades or days with very low volume. For example, there have only been 128 contracts of the $10 WNR December calls exchanged today. It is cool because it doesn't matter what happens to WNR in the next couple weeks, my calls don't expire until December so I have a good 4 months to weather the ups and downs. Finally, I can sell at any time just like a normal stock so if WNR gets a nice jump and the $10 Dec calls jump to .25 or .30/contract, I can sell there (25 cents would be a 25% gain and 30 cents would be a 50% gain).

I do feel fairly confident about this trade and WNR being at bottom to the point where I should probably buy some more calls! But, I know how common it is for the calls to expire worthless so I am going to just enjoy the ride for now.

Here is a snap of the chart today at 2:20pm, WNR could get a nice boost if it breaks the 50dma which is at $6.74 right now:

[stockzilla]

I put a thread here on trading options about a year ago. I focus on selling premium more than buying premium because every option has time decay that reduces the price of the option. By selling premium, you put time decay in your favor instead of against you. I focus on selling puts and vertical spreads in uptrend cycles and selling vertical spreads in downtrending cycles.

Here's the thread I made.
http://www.stockmarketcats.com/f46/s...ions-1948.html

[thegreatgate]

Bought the AMED September $40 calls @ 50 cents a pop

[thegreatgate]

Originally Posted by thegreatgate

Bought the AMED September $40 calls @ 50 cents a pop

Sold AMED September $40 calls @ 55 cents

I'm trying to figure out why the profit was so low. Just called Scottrade and they charge $1.25 per contract + $7 per trade. I bought 10 contracts and sold 10 contracts (20 contracts times $1.25/contract = $25 + $14 in buy/sell commissions ($7/trade times two) for a grand total in commissions of $39!! I made $50 off the quick trade but the commissions are so high I really only made $11. I guess when you are only willing to risk $500 at the most in options (because they can expire worthless) a 10% gain is nothing after commissions. I will keep a close eye on these calls because they should move to about a dollar a contract if AMED can get to the $37 range within two weeks....

[thegreatgate]

AMED last at $33.50 and the $40 September calls have a bid of 65 cents and ask of 70 cents now!!! Can't complain cause I am just learning how crazy volatile these things are!

[rtace]

If you try buying less contracts and use closer to the money options, they will move a higher percentage cause of higher delta and you save on commissions

Originally Posted by thegreatgate

Sold AMED September $40 calls @ 55 cents

I'm trying to figure out why the profit was so low. Just called Scottrade and they charge $1.25 per contract + $7 per trade. I bought 10 contracts and sold 10 contracts (20 contracts times $1.25/contract = $25 + $14 in buy/sell commissions ($7/trade times two) for a grand total in commissions of $39!! I made $50 off the quick trade but the commissions are so high I really only made $11. I guess when you are only willing to risk $500 at the most in options (because they can expire worthless) a 10% gain is nothing after commissions. I will keep a close eye on these calls because they should move to about a dollar a contract if AMED can get to the $37 range within two weeks....

[thegreatgate]

Just going to write this down for a future reference, not in but could be a 5-bagger (options 5-bagger, not stock):

DPTR call options:
October, $4 strike, current ask is 30 cents, bid 20 cents, last 25 cents
December, $4 strike, current ask is 45 cents, bid 35 cents, last 35 cents

[thegreatgate]

Originally Posted by thegreatgate

Bought the AMED September $40 calls @ 50 cents a pop

Originally Posted by thegreatgate

Sold AMED September $40 calls @ 55 cents

Just an update. I bought the calls @ 50 cents when AMED was @ $32 and sold for 55 cents when AMED was @ $33. Then the following sessions AMED went up a dollar or two and was trading around $35 for a couple days. Well, the same Sept $40 calls dropped to 40 cents over this same period. This was due to time decay because all options expire on the third Friday of the month (which is next Friday, 9/18). So even though AMED was @ $35 the options dropped to 40 cents because the chances of getting over $40 in a week were slim.

Today AMED is trading up 6.5% to about $39.10 right now. Well, the same calls I bought for 50 cents @ $32 and were worth 40 cents @ $35 because of time decay are now trading @ $1.00 (last trade $1, ask $1.10!!!).

Now I sold @ 55 cents, I could have bought back @ 40 cents (with AMED @ $35) and sold just now @ $1.

That my friends, is a 150% gain with AMED only going from $35 to $39.xx (+11%).

Gotta love options!!!!! Now if only WNR could get to $10 I will probably turn my $300 investment into $700 or more....