most profitable puts

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rtrs111

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Hello,
I never traded options before and I need a quick advice: a stock is now $60 and I predict it will go to $1 by the end of the year - just an example. I'm thinking to buy Jan 11 puts. ITM are like $8 for example and furthest OTM are $0.08 for a strike price of $2. If stock is $1 in Dec 10, through which of those 2 choices I make biggest profit (of course if I'm right)? What if stock go to $1 in Aug 10 - it changes the situations in choosing between those two puts?
Thanks a lot!
 
You ought to consider not just profit but what position size you'd like to spend in relation to your total capital. Accepting less profit but with a smaller risk-reward ratio and a much less capital outlay may be the way to go.
 
My position size will be quite small and only risk what I can afford to loose, but don't know how to calculate profitability yet; my question might seem very naive, I know, I hope some of the experts of this forum can clarify it for me; I know far OTM will be most profitable but the riskiest, but don't know why and mostly, how much will be r/r compared to ITM. Will it worth the risk or better play safe and gain just a little less?
Sorry, just don't have time right now to read books.
Thanks a lot!
 
options greeks...
You can't work out the profitability unless you know the delta, then you need to consider the gamma.
I got r4ped by gamma after an announcement the other day because I tried an arithmetic approach. Lucky it was demo. Anyway, point being, I wouldn't say trading options for real cash is simple enough that it's a good idea following what a someone on a message boards tells you because you can't find the time to study them.

Just my opinion

PM me if you get a better answer and share if you will :)
 
OK, for the ITM: gamma is 0.015, volatility 71.35, vega 0.075, theta -0.006;
OTM: gamma is 0, volatility 115.79, vega 0.003, theta 0.
Do these help?
Thanks again.
 
Not to me. I was using arithmetic for a reason lol.
Gammajammer
Mr Gecko
Gooseman
Arabiannights
Martinghoul

I'd say these are you guys
 
rtrs111 said:
Hello,
I never traded options before and I need a quick advice: a stock is now $60 and I predict it will go to $1 by the end of the year - just an example. I'm thinking to buy Jan 11 puts. ITM are like $8 for example and furthest OTM are $0.08 for a strike price of $2. If stock is $1 in Dec 10, through which of those 2 choices I make biggest profit (of course if I'm right)? What if stock go to $1 in Aug 10 - it changes the situations in choosing between those two puts?
Thanks a lot!
Click to expand...


If you already know the stock will finish at $1 value by end of year.
A. You don't need to know about the GREEKS

b. Both will expire ITM

c. The $2 JAN OTM strike at December will have a value [if stock is at $1] of 100=$1,000 plus time value on EACH contract. (assuming contract option price is at $10 per point)

d. The other OTM will also show a HUGE profit plus time value of one mth but you forgot to mention the strike for the ITM.
 
The question you should have asked is: If I invested $1.000 in Jan $2 OTM strike long put and $1.000 in the ITM strike long put, which one will give best return if both were closed in December when stock is at $1.
 
rtrs111 No problem pm ing me, but please put that here in the open forum. That way others can learn and others can chip in. Don't worry. It won't affect your trade in any way.
 
Sure, I just didn't want to influence anybody in their trading decisions or be like advisory service or anything like that, that's why I used an example.
The stock that I have in mind is HGSI, now is 26.47, it was 0.45 in Mar 2009, I would invest some limited money in this, thinking it would go down again, probably even sooner than Dec, but the earliest puts they have are for Jul 10 and not that cheap. So, looking at the puts chain, I see farthest OTM: $2.5 strike are $0.08 premium and $5 strike is $0.3. Those two they haven't changed in a while, I don't know if it's all right. First ITM then is $30 strike with $8.6. So, if I go long put $1000 in Jan 2.5 OTM and long put $1000 in Jan 30 ITM, which one will give best return and aprox how much, if both were closed Dec 10 (or even earlier) at $0.5? If it goes to $1 in Sept 10 let's say, it's safer to take them out in Sept 10 or wait for more money until Dec 10?
Thank you very much and good luck with your trading!
 
rtrs111 said:
Sure, I just didn't want to influence anybody in their trading decisions or be like advisory service or anything like that, that's why I used an example.
The stock that I have in mind is HGSI, now is 26.47, it was 0.45 in Mar 2009, I would invest some limited money in this, thinking it would go down again, probably even sooner than Dec, but the earliest puts they have are for Jul 10 and not that cheap. So, looking at the puts chain, I see farthest OTM: $2.5 strike are $0.08 premium and $5 strike is $0.3. Those two they haven't changed in a while, I don't know if it's all right. First ITM then is $30 strike with $8.6. So, if I go long put $1000 in Jan 2.5 OTM and long put $1000 in Jan 30 ITM, which one will give best return and aprox how much, if both were closed Dec 10 (or even earlier) at $0.5? If it goes to $1 in Sept 10 let's say, it's safer to take them out in Sept 10 or wait for more money until Dec 10?
Thank you very much and good luck with your trading!
Click to expand...

Long OTM puts have less than 2% chance of making profits and you may as well throw your money down the drain/toilet. Long ITM puts have less chance than the above for success. All long puts traders will lose their money in short or long term. Long put options are mainly there for hedging purposes on stock. Options on their own are best used in strategies that have more than 2 strikes and in this case you would need to know the Greeks formula. My advice is find out why HGSI went up and then decide if your thinking is right that the stock will tumble. My guess is that it went up because a takeover is planned and the price reflects the possibility of a takeover.
 
Taken from the forum Re: For those Who see a buyout coming. 30-Jan-10 04:15 pm I think Benlysta is a lot different than Abthrax in regards to fda approval. Lupus clearly has an unmet need. Benlysta has a very very good saftey profile. Benlysta appears to have potential off label uses. I could see a public outcry if Benlysta is rejected, with the lupus association begging for this drug. Having said that, anything is possible. But with pretty much no side effects in 2 long term studies which also showed efficacy it is unlikely they will reject it. Also it is difficult to test Abthrx on humans...a problem that Benlysta obviously does not have. As for pps after approval, I keep saying that this company has got to be worth more than millenium Pharma, which just went out and bought valcade, and thet got bought out for 8.8 billion?
 
hgsi looks good for longs

This chap is LONG "Re: For those Who see a buyout coming. 31-Jan-10 01:30 am I agree with you that Big Pharma is probably willing to pay a bigger price tag for a sure thing. Or they appear to like buying early stage promising drugs for cheap. Many mouse and/or primate studies sucesses are not duplicated in human studies unforunately. With Benlysta we do not need to worry about if it is effective on human beings, because it was tested on humans. I was never excited about Abthax and always thought it was just a reaction to the anthrax scares around the time of 911. I questioned why the company would bother, it was not going to be a blockbuster drug from the begining, however it did bring in some needed revenue at a critical time. No doubt we could get hit with a left hook from no where, but i guess thats what makes the unknown the unknown. This looks like a great risk to take". But DYOR and come to your OWN and no one else's opinion. Your the only person who will lose your money or make your money.
 
Thanks options, stock went up last year because of another approval first, then, because of Benlysta news, which I guess it's already weighted in the current price. On the other side I have a feeling a big correction is coming for the markets and I am looking to short stocks that went up too high, too fast. Now, after your latest calculations it doesn't look like the reward will be much higher than the risk using farthest OTM puts. If I just short it and I'm right, I'd make 60 times profit, if use riskiest puts it's just about 4 times more than that (240 times all together), if I understood correctly?
Thanks again!
 
shorting STOCK is better than long puts if your trading small amount with stops at level your comfy with. As for options strategy on HGSI I would do a wide SHORT STRANGLES strategy or short PUTS DOTM
 
rtrs111 said:
Hello,
I never traded options before and I need a quick advice: a stock is now $60 and I predict it will go to $1 by the end of the year - just an example. I'm thinking to buy Jan 11 puts. ITM are like $8 for example and furthest OTM are $0.08 for a strike price of $2. If stock is $1 in Dec 10, through which of those 2 choices I make biggest profit (of course if I'm right)? What if stock go to $1 in Aug 10 - it changes the situations in choosing between those two puts?
Thanks a lot!
Click to expand...



Keep Learning bud... glad to see you asking questions and taking matters into you own hands... best of luck!
 
Hi rtrs111,

Here's the way I see it. Feel free all, to correct me if I'm wrong.

We don't know the strike of the ITM Put, but presumably it can’t be much above the forward value of $ 60 + 8 at expiry (i.e. $68 growing at the risk free rate to expiry), or else I could, borrow $68, buy the stock and the put, exercise the put at expiry (is this a European option?), pay back the $68 + interest and walk off with the risk free profit = arbitrage. So let’s say it’s about $65.

Now, if you KNOW that at expiry the stock’s going to be $1, you’ll make some $64 from the ITM put (which cost you $8), and $1 from the OTM put (which only cost 8 cents). From that point of view, the OTM seems much more profitable.

If the stock price has collapsed to $1 (ouch!) by that time, then the vol’s not really going to mean too much for the ITM put, since it is so deeply ITM by that point. It’s delta is going to be about –1. For the (currently) OTM one, that will now only just be ITM, so the delta is going to be closer to –0.5. The vol absolutely matters for this one.

If the stock price is $1 by Aug 10, if it’s American, exercise the hell out of it. The theta’s only going to work against you in that situation. If it’s European, the heavily ITM put isn’t likely to change much in percentage terms, while the other one could go either way. It really does depend on the vol then to see which is better.

If you do have all the information needed for BS (i.e both vols), I guess you could plug in the numbers, and see which one is most ‘mispriced’ in the market in percentage terms relative to the vols you’ve used. You’d also need to balance that with your acceptance of risk (especially gamma and it’s ‘inverse’ theta), as has been mentioned here.
 
Thanks, Scouser76,
I got in a little DOTM, as u can see, I believe they are US options, I have to research more about the other stuff that you guys said (I started to read already a book about basics and strategies). Good luck to all of you!
 
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