Basic options questions

[momothebored]

Hello

i usually trade equities, i know how options work etc but have some basic gaps in my knowledge:


(i) Let's say i'm willing to risk 2% equity on a trade. Pretty straightforward calculating position size for equities. If i bought the equivalent of 2% in call options, would the reward / risk be a LOT higher?

If it was so straightforward to getting a better reward / risk ratio, then why hasn't option trading replaced equity trading?


(ii) How do i choose the right option?

Let's say i expect stock A to rise to $50 in 2 months, from it's current price of $35.

Should i be looking for in-the-money options? what kind of expiry date should i be looking for optimally? Should i look for the ones with the best open interest? etc..


tyvm

 

[WklyOptions]

Hello

i usually trade equities, i know how options work etc but have some basic gaps in my knowledge:


(i) Let's say i'm willing to risk 2% equity on a trade. Pretty straightforward calculating position size for equities. If i bought the equivalent of 2% in call options, would the reward / risk be a LOT higher?

If it was so straightforward to getting a better reward / risk ratio, then why hasn't option trading replaced equity trading?


(ii) How do i choose the right option?

Let's say i expect stock A to rise to $50 in 2 months, from it's current price of $35.

Should i be looking for in-the-money options? what kind of expiry date should i be looking for optimally? Should i look for the ones with the best open interest? etc..


tyvm

Hi, tyvm,

Your questions on options are too open-ended. The answers depend on multiple factors not in the information presented above in your scenarios.

Basically = please go to CBOE.com and then go over the many tutorials there. At least get a strong grasp of the concepts of:

(a) Calls vs Puts.
(b) In-The-Money (ITM) vs At-The-Money (ATM) vs Out-of-The-Money (OTM) strikes.
(c) Max Risk vs Max Profits for ITM vs ATM vs OTM strikes.

The "leverage" depends precisely on the Expiry date, ITM vs ATM vs OTM, vs total debit or credit, and the precise structure of the final option(s) position selected.

Sorry I can't be more specific - but you need to study options basics first. Then formulate your trading scenarios expected or desired. After that, it becomes much easier to setup options strategies that can optimize leverage, risk, sensitivity to price moves, etc.

CBOE.com is just one of many resources available. ThinkOrSwim.com also has tutorials. YouTube has many videos focusing on basic options-education.

Good luck and get working and put time in - you will raise your options standards quickly!

Regards,

WklyOptions

 

[xyannix]

Hello

i usually trade equities, i know how options work etc but have some basic gaps in my knowledge:


(i) Let's say i'm willing to risk 2% equity on a trade. Pretty straightforward calculating position size for equities. If i bought the equivalent of 2% in call options, would the reward / risk be a LOT higher?

If it was so straightforward to getting a better reward / risk ratio, then why hasn't option trading replaced equity trading?


(ii) How do i choose the right option?

Let's say i expect stock A to rise to $50 in 2 months, from it's current price of $35.

Should i be looking for in-the-money options? what kind of expiry date should i be looking for optimally? Should i look for the ones with the best open interest? etc..


tyvm

You need to focus on the option expiration date. Risking 2% in equities, you will only realize that loss when you sell which could be a year from now.

With options, you can be right on direction and wrong on the time frame and lose everything!

The best way to start in options is with a covered call.

 

[lloydbee]

Hello

i usually trade equities, i know how options work etc but have some basic gaps in my knowledge:

(i) Let's say i'm willing to risk 2% equity on a trade. Pretty straightforward calculating position size for equities. If i bought the equivalent of 2% in call options, would the reward / risk be a LOT higher?

If it was so straightforward to getting a better reward / risk ratio, then why hasn't option trading replaced equity trading?

Not trying to sound arrogant but options are too advanced for the average equity trader and or people are too lazy to learn about them or it would replace equity trading as there is far more advantages to trading in derivatives than equities. Ignorance is bliss so they say.

(ii) How do i choose the right option?

Let's say i expect stock A to rise to $50 in 2 months, from it's current price of $35.

Should i be looking for in-the-money options? what kind of expiry date should i be looking for optimally? Should i look for the ones with the best open interest? etc..
tyvm

Trade 1 Looking for the big move:
If you are talking about just straight out buying a Call option for this scenario then you would want to buy at least 3 months+ of time and around a $40 - $43 strike if you were looking at riding the trade to $50.

Trade 2 Looking to make money:
If you are about making money on a Bullish trade on 'A' then you're better play would be with a $33 or $33 striked Call option allowing you to take profit sooner if a number of other factors go your way.

With options, you can be right on direction and wrong on the time frame and lose everything!

The best way to start in options is with a covered call.

You'd only lose everything (option value) if you held it far too long, and why do that? But yes you can get direction right and still lose, thanks to the Greeks.

As for starting out with Covered Calls I don't see why you would do that unless you've been led on by seminar circuit clowns. There are better strategies to start out with like Verticals that earn a lot more than covered calls can for ROI.