Why are long term options expensive?

safvan

safvan

Established member
Messages
515
Likes
34
The time premium on at the money options for $100 plus seem to be around $20 to $30.

How can one buy substantial amount of shares with that premium?

Perhaps its cheaper just to trade the underlying security. Why do people trade options if the returns are marginal only?

I am amazed at people claiming making 10000% returns on option trades.

Rant over.
 
For example today 29th November 2011 I want to buy the put option for symbol CRR but ATM on this is around $17 or $1700 per contract without commissions. If I am right to reach the target the profit margins are not that great.

It costs $1700 to buy a contract in that security with expiry in March 2012.

My question is that for any real money making opportunity how can one buy atm options cheaply? I want to buying and selling options for stocks above $100.
 
I second Martinghoul

It would help if you actually knew why you wanted to use options to make certain bets in the first place. Do you have an opinion on volatility, implied vs realised or just direction? Are you planning on hedging these options? Depending on what bet you want to make, it might be cheaper to use another instrument (futures or stock) to make the bet.

Also longer term options are going to have a higher sensitivity to changes in volatility than near term options.
 
I do not understand them as much. I have grasp of the direction that bit is perfect because I make money trading stocks. Options are out of my league at this time because I cannot seem to get a good price for them for the time period I am looking at it hitting the target price.

Need to study them more but I do not want to make it complicated. The reason I make money in normal stock trading is because I have kept is very very simple.
 
fiftyfifty said:
I second Martinghoul

It would help if you actually knew why you wanted to use options to make certain bets in the first place. Do you have an opinion on volatility, implied vs realised or just direction? Are you planning on hedging these options? Depending on what bet you want to make, it might be cheaper to use another instrument (futures or stock) to make the bet.

Also longer term options are going to have a higher sensitivity to changes in volatility than near term options.
Click to expand...

My whole idea and I think the whole freaking idea of trading options is to be able to control a large amount of stock with a fixed risk.

Easier said than done. I have everything in place and through testing almost all bets I have tested in the recent few months have worked out perfectly for the time period also. The only thing I cannot get is a good cheap price for the options I am suppose to buy. Some times looking at the prices it makes more sense risk management wise just to trade the underlying stock.
 
safvan said:
My whole idea and I think the whole freaking idea of trading options is to be able to control a large amount of stock with a fixed risk.
Click to expand...
That is most definitely not the idea and your risk is anything but fixed...
 
I am assuming by fixed risk, safan might be referring to limited risk or defined risk. Some strategies do offer that but not all of them. If you are going to trade outright calls and puts than like fiftyfifty said need also an opinion on volatility.

A better strategy for a beginner is actually the long vertical spread or debit spread. The reason why i say that is because it reduces the role of volatility and time decay while still giving you a directional bias.

There is a probability element involved in options pricing. So the more time you have associated with an option the more possibilities or chances that option has to reach certain price levels. As you get closer to expiration you have less chances (cheaper) and that is why the option reaches it's intrinsic value.

I am actually doing a webinar on the very basics behind option pricing tomorrow for the PFGBEST Options Room...it is free to attend and it will be held at 10 am eastern time. here is the link if anyone is interested: PFGBEST | Options Room
 
QuestOptions said:
I am assuming by fixed risk, safan might be referring to limited risk or defined risk. Some strategies do offer that but not all of them. If you are going to trade outright calls and puts than like fiftyfifty said need also an opinion on volatility.

A better strategy for a beginner is actually the long vertical spread or debit spread. The reason why i say that is because it reduces the role of volatility and time decay while still giving you a directional bias.

There is a probability element involved in options pricing. So the more time you have associated with an option the more possibilities or chances that option has to reach certain price levels. As you get closer to expiration you have less chances (cheaper) and that is why the option reaches it's intrinsic value.

I am actually doing a webinar on the very basics behind option pricing tomorrow for the PFGBEST Options Room...it is free to attend and it will be held at 10 am eastern time. here is the link if anyone is interested: PFGBEST | Options Room
Click to expand...

English is not my first language so probably I am not able to ask the question properly.

Will try again.

1. I see a stock trading at $150.
2. I know that it has broken some important support points and eventually going to hit $30 which can give me a potential target of 120 points.
3. At this time the stock is quite volatile because the market is volatile.
4. The put option on this stock ATM $140 is selling for $210 or $2100 per 100 shares for the expiry in 12th March 2012.
5. I know for sure I would be deep in the money by then.

What I am uncomfortable is the price of $2100 per 100 shares I am paying for the money tied up till 12th March 2012. I could trade this stock multiple times over the course of that period.

The only reason I would buy an option would be I would like to make a big profit with $2100 risk. With that type of pricing I am not sure how I can do that.

Unless I buy a little out of the money puts instead and reduce the profit potential.

Ah in any case I guess there is no such thing as a perfect strategy.

Thanks for your help guys.
 
safvan said:
English is not my first language so probably I am not able to ask the question properly.

Will try again.

1. I see a stock trading at $150.
2. I know that it has broken some important support points and eventually going to hit $30 which can give me a potential target of 120 points.
3. At this time the stock is quite volatile because the market is volatile.
4. The put option on this stock ATM $140 is selling for $210 or $2100 per 100 shares for the expiry in 12th March 2012.
5. I know for sure I would be deep in the money by then.

What I am uncomfortable is the price of $2100 per 100 shares I am paying for the money tied up till 12th March 2012. I could trade this stock multiple times over the course of that period.

The only reason I would buy an option would be I would like to make a big profit with $2100 risk. With that type of pricing I am not sure how I can do that.

Unless I buy a little out of the money puts instead and reduce the profit potential.

Ah in any case I guess there is no such thing as a perfect strategy.

Thanks for your help guys.
Click to expand...

Try this book (lots of examples)
http://www.amazon.com/Options-Tradi...9172/ref=sr_1_1?ie=UTF8&qid=1322586212&sr=8-1

Or Natenburg
Option Volatility & Pricing: Advanced Trading Strategies and Techniques: Amazon.co.uk: Sheldon Natenberg: Books

I'd suggest reading one of these before you go any further.

You could look at buying a put spread (buying a closer ATM put to sell put with a lower strike price). You could sell a call to finance the purchase of your put (though your loss potential won't be limited).

Your money (premium paid) doesn't have to sit there till March, you can sell the option at any time. Presumable it's American (single stock option) then you will be able to exercise at any time also.

The out of the money puts will cost less so you could buy more of them.

If you are going to trade options then I'm afraid there is no short cut. You need to understand what your exposure is for each position that you are putting on. Not taking the time to do this will undoubtably put you on course for an expensive education.
 
fiftyfifty said:
Try this book (lots of examples)
Amazon.com: Options Trading: The Hidden Reality ("Options: Perception and Deception" & "Coulda Woulda Shoulda" revised & expanded, Printed in Color) ("Options: Perception and Deception" & "Coulda Woulda Shoulda" revised & expanded, Printed in Color)

Or Natenburg
Option Volatility & Pricing: Advanced Trading Strategies and Techniques: Amazon.co.uk: Sheldon Natenberg: Books

I'd suggest reading one of these before you go any further.

You could look at buying a put spread (buying a closer ATM put to sell put with a lower strike price). You could sell a call to finance the purchase of your put (though your loss potential won't be limited).

Your money (premium paid) doesn't have to sit there till March, you can sell the option at any time. Presumable it's American (single stock option) then you will be able to exercise at any time also.

The out of the money puts will cost less so you could buy more of them.

If you are going to trade options then I'm afraid there is no short cut. You need to understand what your exposure is for each position that you are putting on. Not taking the time to do this will undoubtably put you on course for an expensive education.
Click to expand...

Thanks. I will trade paper options until I can get a few trades right.

Thx .
 
safvan said:
The time premium on at the money options for $100 plus seem to be around $20 to $30.

How can one buy substantial amount of shares with that premium?

Perhaps its cheaper just to trade the underlying security. Why do people trade options if the returns are marginal only?

I am amazed at people claiming making 10000% returns on option trades.

Rant over.
Click to expand...

you probably only hear of the winning claims but this is like living in fantasy land. most option traders are doomed to fail and lose. no matter what you hear or see on these public forums.
in you example, you can see for yourself that whatever the sentiment you have on the stock, a lot of traders might have the same feeling and bid up the price of those puts. the trick is to be able to predict (guess) the direction and buy your puts before the crowd.
option trading is a gamblers fantasy world. you will lose, i guarantee.
 
Most option trading is relative value, buy something that is cheap relative to something else that you can sell. If you want to trade them like lottery tickets then you should expect a similar payout to lottery tickets. Occasional small wins that don't cover all the tickets you bought in the past but still the chance that there will be a mega payout some time in the future.

Spend a couple of hours trying to understand the basics otherwise paper trading them isn't going to help either. You will lose money when it comes to trading them for real. Single stock options are generally less liquid (wider bid/ask) and sentiment as pointed out above may already be priced into the curve.
 
It takes more than a 'few winners' to be able to handle options.

Save your money, listen to Dave, you and most people (including me) who aren't willing to study option trading for a minimum of 3 years are doomed to lose money overtime. Think about it, because 98% of people making the money in options HAVE taken the years to study and perfect their craft. So a newcomer with a few trades under his belt is NOT going to get their money, there is only a finite amount of profit available.

Having said that, the option boys will LOVE you if you come into their house to play, they'll be ALL smiles :)
 
You must log in or register to reply here.

Similar threads

K
capture Equity premium with derivatives
Replies
1
Views
1K
Thermal Ebb
Thermal Ebb
Elvin Mirzayev
  • Article
Options Getting Started Options Trading Strategies For Beginners
Replies
2
Views
13K
Cantafford
C
K
Options trading and stop loss order
Replies
2
Views
7K
Incerto
I
N
Does anyone trade options via spread betting firms?
Replies
0
Views
2K
normandysr2
N
B
Weekly Option Premium and Earnings
Replies
0
Views
2K
Brennen81
B
Top