Anybody making good money just with buying straight calls and puts?

ralph659

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Hi everybody,

After having traded e-mini futures for several years, I am thinking of switching completely to buying straight calls and puts on US stock and -indices.

In my opinion, the advantages with options are that you are able to choose the amount of leverage and since there are options on hundreds of stocks and indices, there are just more interesting trades available compared to futures.

The disadvantage would be the time decay I suppose.
However the papertrading with options that I have done for almost 2 months now has been very profitable!

Are there other traders here that just buy straight calls and puts on US stock and –indices? Or are most of you trading the more complicated options strategies?

I look forward to talk with some straight calls and puts buyers here.

Regards,
Ralph
 
Ralph, in one on my much earlier forays into trading the markets, I also thought like that.

After taking a couple of accounts down, I realised I was on the wrong side of the transaction.

You need to be SO right with timing, direction, volatility and pricing to have any chance of making money on the buy side. You get to choose the first two elements only - it normally requires the seller to screw up or the markets to twitch in your favour in one or both of the final two elements listed for you to have a reasonable chance. Sellers don't screw up that often...markets twitch randomly - your odds aren't that good.

I'd suggest you'd need a bit more than a couple of months and certainly not just papertrading to confirm your market savvy in these instruments - and then, when you are completely convinced, switch to the SELL side.
 
Thank you for your reply.

I think I understand what you are saying. It is true that the price of the options can go a little against you if you consider the things you mention.

But if you trade In The Money options with at least 1 month to expiration (preferably more) and you are good at swingtrading stock, then I would assume that buying options definitely can be a good idea, no?

In my papertrading, I realized 5-10 times more ROI than if I would have bought the underlying stock and this buy only buying ITM options with 30-60 days until expiration.

So even if the price of the options goes a little against me, I would say that's still a lot more money, no?
Of course, when the trade goes against you, you will also lose more money, I agree.

But if you consistently have 2 out of the 3 stocks trading in the direction you predicted and you observe good risk-reward rules (regarding target and stop), I think there aren't many investment vehicles that can be more profitable than buying options.

I understand that you have to be careful with buying Out The Money options close to expiration but if you do it like I do, is there so much risk then?

I guess if you are good in swingtrading stock, I suppose buying calls or puts on that stock just gives you the extra leverage, no?

Please correct me if I'm overlooking something.

Ralph
 
Ralph, the people selling you options are normally pros. The money is in the selling, not the buying.

The price of an options can go A LOT against you for very little obvious reason. Buying ITM is expensive and will lower your ROI.

I strongly suggest you do your research into Volatility and Pricing. If you're buying as an outright speculation rather than a hedge or counter you're unlikely to win in the long run.

There are a number of threads (some quite humorous) on this site relating to the BUY v SELL Premium issue - none of which will actually help you a great deal other than with some light relief.

If you're set on buying rather than selling then at least get hold of one or more of these for a gen up before jumping in.

The Options Edge; Gallacher
Way to Trade; Piper
Options as a Strategic Invetment; McMillan
 
I'm actually going to contract TheBramble here - amazing, but true. :LOL:

I personally almost never trade individual stocks outright anymore. I do it all through options when possible.

That being said, I do so in a very specific way. I do not trade them short-term, but rather with a weeks to months type of time horizon because the vagarites of movement in implied vol over the short-term can overwhelm changes in the underlying at times. I only trade ATM. I only base my trading decision on intrinsic value pricing as defined by my expectations of the trade. If the trade doesn't make sense from that perspective, I don't do it.

For me, this allows me to avoid questionable trades, take less risk, and to let trades run better.
 
I do not trade them short-term, but rather with a weeks to months type of time horizon because the vagarites of movement in implied vol over the short-term can overwhelm changes in the underlying at times. I only trade ATM. I only base my trading decision on intrinsic value pricing as defined by my expectations of the trade. If the trade doesn't make sense from that perspective, I don't do it.
Glad you're having good fortune John.

Purchasing options ATM over a number of months (mid to far series) indicates relatively expensive premium. Providing your intrinsic analysis provides gains greater than the losses due to time decay over that same period, you're going to make money - except perhaps if you hold it into the last 30 days when TD becomes potentially, the largest component working against you in your purchase of premium.

However, if you’re in a CALL say and the stock is performing well, but IV becomes an issue (expectations of a lull without there actually ever having to be one), the pricing of your option will take a hit regardless. It’s just an extra bunch of stuff to go against you.

That’s the thing, the odds are quite literally against the trader who purchases premium over the long run. If you are having success it is more likely down to your superior skills and knowledge in selecting, analysing and executing your trades. Would you recommend your style of options trading to anyone in Ralph’s position generally?
 
Ralph,
go back and evaluate your paper trades if you can and see how you would have fared had you written NPs instead of buying Cs.
Okay, people will tell you that there's limited profit potential because your profit is limited to the amount of premium received, and that the "risk" is unlimited (except I've never seen an equity trade at minus-0 before)
But if you take into consideration all the point Monsieur Bramble makes about the factors eroding your profitability potential on Cs, you can see that these same arguments work to justify writing NPs.

Plus, often times a NP will drop so much in value so quickly that it's worth closing out, even if not at zero, so that you can re-deploy your capital again with another NP write.
Critics never happen to mention that one little magical benefit !

I don't do many equity options plays now, but when I do, i aproach it as if I'm going to BUY the stock/Call option (usually a pull back to 8ema on daily in direction of weekly, blah blah)
but then I usually write the Put.
Often times I'm able to close out long before expiration.

And if you get caught out and the trade goes against you (they will), take the hit or buy the stock and write a CC on it ...
 
Purchasing options ATM over a number of months (mid to far series) indicates relatively expensive premium. Providing your intrinsic analysis provides gains greater than the losses due to time decay over that same period, you're going to make money - except perhaps if you hold it into the last 30 days when TD becomes potentially, the largest component working against you in your purchase of premium.

I almost never hold into the last month of the contract.

However, if you’re in a CALL say and the stock is performing well, but IV becomes an issue (expectations of a lull without there actually ever having to be one), the pricing of your option will take a hit regardless. It’s just an extra bunch of stuff to go against you.

That's exactly why I look at the prospective returns on the basis of intrinsic value should the stock perform as expected. That takes all the extra stuff out of the equation. If the return on the option from that perspective is acceptable, then I do the trade. That means two things. First, I don't buy "expensive" options. Second, presumably there will be some more value to the option above and beyond the intrinsic value by the time I sell it which is a nice bonus on top of what I expected to make regardless of whether IV rises or falls - though of course rising is better. :cheesy:

If you are having success it is more likely down to your superior skills and knowledge in selecting, analysing and executing your trades.

I would totally agree with that. Trading options is just the way I seek to most efficiently put my trades into play. I look at it not dissimilarly to the way I would decide whether to trade spot forex, currency futures, or currency ETFs. Trading calls and puts is what is most effective for me given the way I trade stocks. I can be very specific with the risks I take, be more patient with positions, and often spread my trades around better - or I can lever up a bit if there's a trade I really think looks good.

Would you recommend your style of options trading to anyone in Ralph’s position generally?

Without knowing the specifics, I couldn't say. Depends on timeframes, the size of the moves he's playing for, and some other factors.
 
Hi everybody,

After having traded e-mini futures for several years, I am thinking of switching completely to buying straight calls and puts on US stock and -indices.

In my opinion, the advantages with options are that you are able to choose the amount of leverage and since there are options on hundreds of stocks and indices, there are just more interesting trades available compared to futures.

The disadvantage would be the time decay I suppose.
However the papertrading with options that I have done for almost 2 months now has been very profitable!

Are there other traders here that just buy straight calls and puts on US stock and –indices? Or are most of you trading the more complicated options strategies?

I look forward to talk with some straight calls and puts buyers here.

Regards,
Ralph

Ralph,

It's a matter of Personal preferrences.
Selling vs Buying
Both can work.

This thread is right on the money on advice.
The trick is to find a strategy YOU"RE comfortable with.

I'm primarily a Iron Condor and Collar trader so yes I trade both Buying and Selling options.

If you do decide to B-Calls/B-Puts only (John is right) on the fact that most dont carry the final month of the Expiration. Time Decay is the worst in the last month. So good luck and Happy trading...
 
Thanks a lot for your replies and warnings!

I also think it's a matter of personal preferences.

I guess if you are good in predicting short term stock movement, then buying options can be very profitable, regardless of the slight depreciation in value of the options due to volatility, time decay and so on.

However I will follow your advice and do some more papertrading!
But if the results stay consistent, I don't think that will be for long :)
(after all I have been daytrading futures on indices and single stock futures for several years, so I'm not really a newbie)

If there are traders here that are making good money buying short term (few days to few weeks hold) options on stock, I would love to hear from you!

Regards,
Ralph
 
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I daytrade options, buying straight calls and puts. i can make 5 out of 6 trades profitable. my experience tells me that if the one losing trade is not exited timely, it's very likely that it's going to erase all the gains you had previously because of the time decay, volatility risks... if you are good at exiting/minimizing losses, i still think that buying options can make you money. use limit orders only, buy at discounts, i use 10% discount of the previous close. set a profit target of 20%, sell at limit. good luck!
 
Ralph

Some of the responses in this thread are for you to pay extra attention to. Buying Options Vs Selling Options is really an individual choice - it better be a learned choice.

To wit,

Stocks go up a lot - Option buyer wins
Stocks go up a little - Option seller (writer) wins
Stocks stay where they are - Option seller (writer) wins
Stocks go down a little - Option seller (writer) wins
Stocks go down a lot - Option seller (writer) wins

In this simplistic illustration as above, you can see, the odds are loaded against the buyer - only 1/5 th of the time does the buyer win. You have to be "right" to win, when you buy.

Having said that, there are ways to buy options. Do go for free or cheap education courses in your area. The local stock exchanges usually have some form of ongoing education. Do go for all the previews on options education - they are usually a preview to sell you an education program. Do not be taken in by tall claims in the previews, unless the speaker is willing to open up his personal track record of at least a year.

Trust this helps.

Good Luck
 
:D cool post, singaporelink as far as probabilities are concerned.
but every option writer knows that you also have to take probable outcomes into consideration.
if you win 4 times out of 5 and the 1 time out of 5 loss costs you all the gains, you are behind.
just ask an option writer, who sold puts into the 9/11 event..

to be honest, buying or selling options is not only a choice of personal preferrence, you also have to look at each trade and each scenario per se.

I normally spread when I do options, but from time to time, I write naked and daytrade long options

as far as writing naked goes, I look for opportunities in individual stocks which took a beating and IV is highly inflated. if a stock goes from 90$ down to 8$ and the IV´s are at 400% this is an eldorado for writing puts. if you get 1.50$ for the 5$ strike expiring in 30days with the stock at eight, your risk is 3.50$ so even, when the company goes bankrupt, you just risk 3.50 bucks. happens perhaps twice a year but those are the scenarios, I want to be a seller.

my bread and butter trades are usually outright stock or futures with a frequency of 10-20 trades per day, but for swing trades I almost exclusively use long options, or spreads depending on the timeframe and volatility scenario.
Long options are great, if you want leverage and far better for swingtrades then outright stock or futs.
The key here is gamma. when you have a 2:1 reward/risk you will get 2:1 with a future or stock outright. if you trade a long option, you maybe can shift it to 2.2:0.8
Because gamma makes you loose less, when you loose and gives you more, when you win, long options are great for trades between 1-3 days (the shorter the timeframe, the less days to expiration, I also do intraday scalps with options expiring in a week, especially in the Cubes)

for every position I hold longer then three days, I use spreads...but this ain´t the topic of the thread...

Key for selecting the right option for directional play is the gamma per delta ratio.
All of us understand, that the ATM options have the highest gammas, so they look like being the best for directional plays. But if you look at the chain with a different perspective, what would you like more?? a long put wih 50 delta and 10 gamma or a long put with a 12,5 delta and a 8 gamma??
I would favour the second option because I can trade 4 times as many giving me a delta of 50, too, but my gamma is 32 so new deltas are manufactured faster.

depending on IV rising or falling, it´s necessary, that you know, what option is best. shorting a potential top on low IV? use OTM puts, as the curve might be relatively flat. Want to buy a bottom at high IV...well thats bad...I guess the writer wins here :D
Buying calls here is a sure loss, because IV tends to decline, when markets are rising...I either trade a directional butterfly or short a calendar spread..

OK, lot of text here...I hope that helps to understand, that there is no such thing as just buying calls for a long trade and buying puts for a short. option selection is critical and should be based on the scenario. everything else is just gambling


One last thing:
The Bramble states, that usually pros are the writers...thats right, but writing options as a main strategy is a completely different game. you dont neccessarily make directional plays, you want to play vola, theta, dispersion or term structure. the reason, why banks are better at this, is because you need excessive capital that allows your positions to be large enough. If you ever tried to hedge away delta and gamma using single lot positions, you know what I mean. it´s nearly impossible...at best, you shold be able to trade thousands of options. You simply cannot juggle and adjust your positions with an 25K account.
 
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