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Good ole fashioned .... Buying Long Calls and Puts


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Good ole fashioned .... Buying Long Calls and Puts

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  #1 (permalink)
 mdsvtr 
Memphis,TN
 
 
Posts: 232 since Sep 2010

Good Evening,

I want to get some other members feedback on the issue of Buying regular Calls and Puts ( mainly ATM )

I know that buying Options is said to be a losers " bet " and that the real money is made in Selling Options for Premium,
but putting that aside, please induldge me for a sec.

If a trader was to have a strong feeling, and felt that a stock was really poised to make a BIG move ( a pure Directional play ) , say we're expecting the stock to move at minimum .... 5% + in price. And we wanted to capitalize on this move ..... what would be the recommended " Play " , if all we were going to do, was to buy an outright Long Call or Put ?

Some Questions / comments regarding the topic at hand :

1. What is the minimum amount of time that we would want to buy before expiration ......2-3 months ?
Or would the amount of time till expiration, be based on what timeframe chart you got your " read " from, that makes you think that the stock is poised to make a big Directional move .... say up for this example, so we'd be looking to buy a Call

2. I have also read, that an Options Time Decay increases in the last 30 days till expiration ..... so as a Safety Net , always buy an extra 1 - 2 months of Time, just incase the immediate move that we were expecting doesn't happen immediately ?

3. Would you always want to buy as close to the money as possible ( ATM ) .... or would this all be based on the Volatility within that specific stock ..... higher the IV , then the more likely the stock is to move more in price

4. Would it matter what the VIX itself was showing at the time that you wished to go Long the stock and buy a Call ?
The VIX at low Levels = cheaper to buy , which in turn , is what is recommend when Buying Options anyways

5. I know that we would only want to buy Options on stocks that had a lot of Liquidity , and of whose Options had a good amount of volume and Open Interest on those Options ( particularly the strike we were looking to buy ).
And also, we'd want the options to have tight spreads between the Bid x Ask

Just wanted to get a feel for what other Traders methods and recommendations would be, in the case of purchasing outright Long Calls and Puts
I really appreciate it - Michael

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  #3 (permalink)
 shodson 
OC, California, USA
 
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1) your timeframe should coincide with a catalyst or event that you expect to occur, and frame your expiration date with that event date in mind. seasonality is your friend. so for example, if you want to buy Best Buy calls because you think they are going to have a great Christmas season, look in the past at which months BBY tends to run into the holiday season, if at all. then time your trades accordingly.

2) the statement about decay is correct, usually. there might be some elevated implied volatility (IV) also keeping the prices inflated and you may get a sudden drop or increase in IV irregardless of someone's time decay schedule.

3) it depends on what kind of trade it is. ATM is the strike that is costing you the most premium, so you must really want that strike if you're willing to pay up so much for it. you can buy further away from the money but your chances of success is lower. you can buy in the money (ITM) but that's going to cost you more and it's starting to look more like a stock replacement trade but with wider bid/ask spreads.

4) the VIX is the IV of the S&P 500 Futures. you really need to pay attention to the IV of the individual stock and see where it's at relative to its historical volatility (HV). if the IV is lower than it's cheap-ish, if above it's expensive-ish. even better is to consider IV rank, see these links for more info:

Links
- IV Rank
- OptionAlpha Podcast - Why Implied Volatility Is The Key To Your “Edge” Trading Options

5) I agree

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  #4 (permalink)
 cory 
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shodson View Post
...
4) the VIX is the IV of the S&P 500. ..

VIX always looks identical to invert ES, invert ES in red.

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  #5 (permalink)
 shodson 
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cory View Post
VIX always looks identical to invert ES, invert ES in red.

In the short term, yes, but longer term the VIX is mean-reverting whereas the S&P has the ability to exhibit long trends


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 vitrader 
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mdsvtr View Post
Good Evening,

I want to get some other members feedback on the issue of Buying regular Calls and Puts ( mainly ATM )

I know that buying Options is said to be a losers " bet " and that the real money is made in Selling Options for Premium,
but putting that aside, please induldge me for a sec.

If a trader was to have a strong feeling, and felt that a stock was really poised to make a BIG move ( a pure Directional play ) , say we're expecting the stock to move at minimum .... 5% + in price. And we wanted to capitalize on this move ..... what would be the recommended " Play " , if all we were going to do, was to buy an outright Long Call or Put ?

Some Questions / comments regarding the topic at hand :

1. What is the minimum amount of time that we would want to buy before expiration ......2-3 months ?
Or would the amount of time till expiration, be based on what timeframe chart you got your " read " from, that makes you think that the stock is poised to make a big Directional move .... say up for this example, so we'd be looking to buy a Call

2. I have also read, that an Options Time Decay increases in the last 30 days till expiration ..... so as a Safety Net , always buy an extra 1 - 2 months of Time, just incase the immediate move that we were expecting doesn't happen immediately ?

3. Would you always want to buy as close to the money as possible ( ATM ) .... or would this all be based on the Volatility within that specific stock ..... higher the IV , then the more likely the stock is to move more in price

4. Would it matter what the VIX itself was showing at the time that you wished to go Long the stock and buy a Call ?
The VIX at low Levels = cheaper to buy , which in turn , is what is recommend when Buying Options anyways

5. I know that we would only want to buy Options on stocks that had a lot of Liquidity , and of whose Options had a good amount of volume and Open Interest on those Options ( particularly the strike we were looking to buy ).
And also, we'd want the options to have tight spreads between the Bid x Ask

Just wanted to get a feel for what other Traders methods and recommendations would be, in the case of purchasing outright Long Calls and Puts
I really appreciate it - Michael

1. You ultimately have to chose that based on your own analysis. Ask yourself how much time you want or believe you need. For example, a day trader likely wouldn't buy and sell options with 60 DTE. They would chose the options with the lowest DTE.

2. In principle, yes, but the answer for the first question sort of applies here too. Remember that not all sellers of options make money.

3. It depends on what your strategy is, how much capital you'd like to risk, commissions, et cetera.

4. The VIX doesn't matter. It all has to do with the underlying's implied volatility.

5. I agree on liquidity of the underlying and the options and the tight bid/ask spread and generally agree on the open interest but it ultimately depends on what you're trying to do. See my answer to question 3.

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  #7 (permalink)
 mdsvtr 
Memphis,TN
 
 
Posts: 232 since Sep 2010

I appreciate all of the feedback

and shodson,
that OptionAlpha podcast on IV Rank through TorS was great

I have it uploaded onto my Daily chart now.... very great for narrowing it down through TorS stock/Options screener, just those stocks with .....

IV Rank below 25% ( for buying regular Calls and Puts and or Debit spreads )

IV Rank above 50% ( for selling naked and or Credit spreads )

Something that dawned on me while watching that video, was how to use the Implied Volatility that it listed next to each Options " time Frame " till expiration .... whether its 9 days till expiration, 21 days, 33 days, 45 days, 90 days , etc. ..... That the " Expected move " is plotted right next to that Expiration period.
And with knowing this information , we can use it to buy Long Calls and Puts, as well as sell debit spreads on the Strikes , that are within that Expiration periods 1 Standard Deviation Price ..... thus increasing are likely hood of making money

Also, we can use this knowledge, and sell Naked Puts and or Credit spreads, that are X number of strikes , outside of this 1 SD Implied Volatility price range

Thanks again for the link

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