JamieSorres said:
Dear forum members,
I have recently started to look into options trading and faced with a couple of questions regarding buying LEAPS Jan2007. The main question I am trying to answer is what kind of difficulties I may face in trading options, and particularly, trading this LEAPS Jan2007 one.
I do not want to offend anyone but browsing thorugh forums I heard that there are cases in options trading and particularly in LEAPS trading in which a brocker can significantly alter the price. So, I wonder what else can I expect when buying a LEAPS Jan2007 and buyand hold strategy execution?
Also, what would be the optimal bid/ask spread? I had read that it should not go over 10%. What about slipage? Would 10% of slipage be fine? What about 5%-10% commisions? Is it feasible?
I also know that there is a time when LEAPS turn into short-term
options and change their names. Can there be any problems with
renaming for me if I still hold such an option?
I will appreciate any help and feel free to critique my questions.
Jamie.
Hi Jamie,
Regarding bid-ask spreads, options that have little liquidity (not many people buying or selling) will have large bid-ask spreads. The market maker has to hedge his position and if you're buying an illiquid contract its hard for him to do so. Hence he will widen the spread to compensate for his risk. Options in a highly volatile market will also have large bid-ask spreads for the same reason.
In general, the nearer month At-The-Money options will have the tightest bid-ask spreads.
I do not think your broker can alter any prices, all traded contracts are bound by time of sales. Unless of course there're very creative tricks that I'm not aware of. To protect yourself, just enter a limit order, in that way you only pay what you specify, however in this case, the execution is not guranteed.
Regarding slippage, you should not trade options in a highly volatile scenario, wait for things to settle down before entering your order, in that way the slippage will be minimal. Pick a good broker for tihs.
The percentages you mention for slippage, bid-ask spread and commisions are not feasible if you want to be profitable. Imagine, 10% for bid-ask, 10% for slippage, 10% for commisions, you have to make a 30% profit just to break even. Definitely not feasible. You also need to be properly capitalized, you cannot stay in this business unless you have a large enough capital that you're willing to lose, to start with. Do not even think of making money in the first year, just think of preserving your capital and learning as much as you can.
On LEAPS turning into short term options, no you will not have any problems, the contract will not change, there is basically no difference between LEAPs and regular options technically. LEAPS are just long term options. LEAPs turn into regular options when it becomes one of the 4 options traded in the normal options cycle. Depends on whether the options you trade is a Jan, Feb or Mar cycle, the LEAP will turn into a regular option at different months of the year. I can't explain in detail in this short space, you need to do some reading yourself. You however need to know that once your LEAP becomes a short term option, it will suffer from time decay at an accelerated rate. This is common to all kinds of options.
A friendly advice, from the questions you're asking, I do not think you are ready to trade options. Pls do not be offended if you're already a seasoned trader, I'm just saying this to help in case you're new to trading.
You must know the ins and outs and have done a lot of study and research before you even put a dime to trading options. You cannot make money at this without being an expert and done your homework. I've been working on this full time for the past 4 months, studied a lot of options books (not read, studied!) and I still don't think I'm ready. Remember who you're competing with out there, don't listen to all those seminar "gurus" who tell you options trading is easy money, there's nothing further from the truth. There is no free lunch out there, whether doing covered calls with LEAPs as a substitute, selling options, etc. There's a lot of lies perpetuated by seminar "gurus" who only care about making your money. I've been through that phase and thankfully did not make the mistake of believing them.
Options are not an easy thing to understand, there's lots of facets that will affect the price. You need to have a solid understanding of the Greeks, and have papertraded for at least 6 months to a year profitably before you even think of putting any money trading.
HL
sally
