Don't be in such a rush that you take positions you don't fully understand, the market will give you plenty of opportunities in the future to lose your money.
Regards,
TMFT
I'm just a simple man trading a simple plan.
My daddy always said, "Every day above ground is a good day!"
The following 7 users say Thank You to ThatManFromTexas for this post:
I don't have a dog in this fight and I don't try to tell others how to trade... just trying to offer a balanced point of view ... my 2 cents worth .... from a realist
Good Luck and Good Day , Sir.
I'm just a simple man trading a simple plan.
My daddy always said, "Every day above ground is a good day!"
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worth a shot.
my prediction, Tuesday comes, amateurs keep buying and pros keep selling, price doesnt change, amateurs start to sell, pros keep selling, price goes down. By Wednesday it opens down amateur start a selling stampede, pros start buying, price moves up slowly...
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Thanks, TEX... I'm just going to keep my eye on AT&T... It won't move as much as Verizon so I have a bit more time to study...
I've always wanted to trade Options so I might as well just jump in. I've already scaled back my position size in half
not realizing the $1.50 per contract on top of Premium....
I will have tech support on the line the whole time I set up the position , to make sure I get it right.
Ha!! I doubt this will be entertaining. Educational, certainly... as I will most assuredly lose. I just have a feeling that
won't leave me alone and I can spare the cash....
Taking these long shot calls are as close to gambling as I have ever traded. .... Only for THIS news event believe me.
the rest will be the tighter, more long term positions. Of coarse, after I have paper traded a while....
but you need to figure out what your bet is first.. if you want to long a call, then for how long, what is the time horizong for the trade? what price do you think you want to buy at? what price do you think it will go up to? those are all questions you need to answer to determine your strike and expiration, before you decide the order type..
as with anything, the order type will be based on your conviction (market/limit/etc) ... and since you want to long a call, it would be a "buy to open"..
I would suggest a free class to educate yourself a bit more, unless I missunderstood your question..
Looking at all the excitement here, I might conclude that volatility is going to rise, whatever the result of the announcement will be. In this case, I would go long volatility. Here are some alternatives:
- a long straddle (long calls and puts)
- a long delta-neutral straddle
- a short butterfly
The long straddle has the simplest structure. If volatility rises it will be profitable. However, volatility is already high.
Looking at the chart, expectations may drive price up again prior to the event and then there could be some professional selling into strength.
The following 4 users say Thank You to Fat Tails for this post:
Chances are a move is priced into the volotility of the underlying instrument. Keep an eye on delta and theta those are the tings that will make and lose money for you. And as a side not 2-5 dollars is not a cheap options. I am sure out of the money calls may go as low at .05 pending strike price. The problem with priced in Implied Volotility is that the prices are inflated. so when a non even occurs you lose your premium faster than a sailor on shore leave.
The following 2 users say Thank You to timmyb for this post:
No... You didn't misunderstand. I was willing to enter this trade blind, but now I'm not so sure.
I have been educating myself all day... I'll check out the link.
I have a question about risk. When the strike price is reached on my long call what happens if the trade goes sharply
against me. Do I need stop losses like my futures trading? I'm I responsible for the underlying equity?
I think you're underestimating how heavily a Verizon iPhone is discounted in both company's share prices. This isn't anything new - the market isn't just figuring out about this. There's been talk about this for YEARS. While there still might be some opportunity there, you need to understand the risk/reward in this situation... or have an iron stomach to muscle through the stress. Shorting AT&T? Did you see the Atrix release at CES? I don't believe in basing my decisions on a single product (I wait for a larger catalyst), but this isn't going to hurt AT&T by any means.
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I hope you are right. I'm a big Apple fan, I bought and sold numerous times Apple shares, even holding some of them for over 2 years but then selling them, and re-entering at a higher price again.
I don't think there is a stock of a company of that size that has been evaluated so wrong. Apple is going to be the biggest USA company soon, now they are number 2. They have so much cash and have no loans or any credit, they own all their buildings and patents.
Well, when you are trading options, you are trading implied volatility. Think of options as insurance and the implied volatility as the insurance premium. When things become uncertain, the insurance premium goes up.
When you look at the implied volatility over the next three expirations, they are all within a point of each other. If there was a short term catalyst that was expected to move the market, say the front month IV was 5 or 6 points higher then the next expiration then a short term move is expected and priced into the market.
Over the last 6 months, IV has range has been about 14 to 23, moving up from 15 a month ago. It has been 31, but that was a while ago. I think a lot of punters are buying OTM calls as a bet.
I would say sell the spread, take the IV fall of a few bucks and be on your way before earnings on the 25th.
Jan 6 was a dividend by the way.
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Let's do simple math, for a long Straddle, strike=36, expiration Mar 18 2011:
- you buy 1 Call and 1 Put, cost is 1.26+1.31= $257 before commission.
- if on Mar 18 2011, VZ quotes $40:
-> Call 36 value = $400
-> Put 36 value = $0
-> your gain is $400 - $257 = $143
- if on Mar 18 2011, VZ quotes $30:
-> Call 36 value = $0
-> Put 36 value = $600
-> your gain is $600 - $257 = $343
- if on Mar 18 2011, VZ quotes $36:
-> Call 36 value = $0
-> Put 36 value = $0
-> your loss is $0 - $257 = -$257
Your upper breakeven point is strike price of long Call + net premium paid, so 36+2.57 -> 38.57
Your lower breakeven point is strike price of long Put - net premium paid, so 36-2.57 -> 33.43
That means: if VZ is not moving more than $2.57 before March 18th, your spread will lose money.
This is a simple case, at expiration date...
Like @traderwerks, I would sell the spread, but as the OP is a an options newbie, my advise would be to paper trade first.
Unlike @Fat Tails, I don't think a Short Butterfly is a good idea for a newbie, too many legs .
Success requires no deodorant! (Sun Tzu)
The following 2 users say Thank You to sam028 for this post:
So, the consensus is that I'm not going to outsmart anyone by betting on a long break out, giving me the ability to place a down payment on a Shelby Cobra.
How bitterly sobering...
Seeing as options have been traded since the Tulip Crash, I suppose there are a few tricks to learn before I jump in.
Back to school it is. Paper Trade
Thanks to all...
I will be in the corner with my dunce cap on. Studying...
I have an idea that the market may retest the prior high, so I might go long on Monday, if the market confirms my idea. Confirmation means failure to go lower.
The straddle is not a hedge against risk. It is a non-directional trade with a long volatility position. But as @timmyb pointed out: If implied volatility is already high any long options positions - including straddles and strangles - might lose premium very quickly, so maybe it is a bit late for a long options position.
I am not an option trader, and I am not a gambler. If I do not understand something, I do not trade it.
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So did you throw caution to the wind and take a position? I'm expecting yes.
You had stated you were limiting your risk to $300, so it wouldn't be the craziest move anyone has ever made,
but what were your assumptions to turn $300 into $50k (or even $25k)?
Call 33 March 2011 was quoting $3.00 this morning.
So if you buy this call ($300), and if VZ quotes more than $503 before March 18th, you'll win $50k:
(503 x 100) - $300 = 50.000.
Ok, it's only +1400% of the stock value in 3 month...
I saw these going for 0.07 yesterday and 0.01 today on a buck spread between the 39's and 40's so it would have done a few percentage points in a couple of days. So sold at 0.05 or 0.06 , buy back at 0.01
Shares in Verizon Communications fell 82 cents, or 2.3 percent, to $35.10 in afternoon trading Tuesday. The shares are still close to a two-year high of $37.70, set last week. Apple shares lost $1.20, or 0.4 percent, to $341.29, while AT&T lost 53 cents, or 1.9 percent, to $27.81.
I'm just a simple man trading a simple plan.
My daddy always said, "Every day above ground is a good day!"
The following 2 users say Thank You to ThatManFromTexas for this post:
Dear @tderrick, as you're not (already) an option expert, my very humble advice will be: don't trade stock options with stocks quoting more than $50.
An option is the right 100 shares, so the option price is directly related to the share value. So choosing AAPL or GOOG as an underlying is not a good choice if you want, to try options without risking too much.
Correct, you need to know "where" and "when", or "where not" and "when".
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That's remind me a real story, with one of my trading mates, who was only trading futures, but just had an option course, and absolutly wants to trade options "now !!!". That was a friday, 30 minutes before the US RTH close, the following monday was the Apple results announcement (or very important news another, I forgot). The guy was very febrile, really wants to short the volatity, and it was supposed to be a low risk trade, two legs, small potential loss, small potential gain.
Few minutes before the close, he calls me to check the trade he has done.
Instead of being delta-neutral, his position was like being naked short for 10 AAPL options, the day before a very big news... He makes some money on this trade, but that was pure gambling, and a very very bad R/R ratio.
[/off]
Success requires no deodorant! (Sun Tzu)
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(1) Avoid any complex trade, such as strangle, straddles, butterflies, vertical spreads, calendar spreads
(2) Avoid selling an option, as this is a high risk trade. Selling call options involves unlimited risk.
So you will want to buy an option. If you are buying an option you will suffer from a reduction in time value, so you do not want to keep it for too long. You need a directional move pretty soon, the option basically adds leverage to the directional move and you have a limited downside, which is the option premium.
Otherwise I really recommend to get some knowledge on how to trade options before starting anything. The best book would be the "options bible":
Lawrence G. McMillan : Options as a Strategic Investment
You only need to read until page 962 for your first options trade. The book costs you less than what you will lose from options trading if you do not prepare yourself.
The following 2 users say Thank You to Fat Tails for this post:
If you're able to watch your position, and cut your loss if needed and not late, a covered Call (if bullish on the stock) or a covered Put (if bearish).
You can take a look at this webpage, where most common options strategies and their associated risk graph is described.
Success requires no deodorant! (Sun Tzu)
The following 2 users say Thank You to sam028 for this post:
you must be kidding. A covered put - selling a put and shorting the underlying - is the equivalent of selling a naked call, but more difficult to implement, because you have to borrow the stock and therefore generating higher commissions for the broker and fee income for the party who is lending the stock.
This is the option trade with the highest possible risk - actually unlimited risk - as an answer to the question, which is a conservative trade to start with.
Congratulations!
I hope you don't mind my mockery. Je n'ai pu resister à retourner ta balle....
Our friend wants to learn options, let's start by what must be avoided first .
The unlimited potential risk of this strategy is only theorical, and as always when shorting options, Theta is working for us.
In options trading, imvho, you can't use only the safest strategies. Well, it's possible, but it's harder to make money with only these.
But for sure, the conservative/safe trade is a long call, no doubts.
The potential loss is limited, and you are cool enough to look at the time value of your option decreasing a bit more every day.
Success requires no deodorant! (Sun Tzu)
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I have read many articles on options trading. Most of them explain, how different types of positions work, how you should manage them and what are the risks associated.
Understanding how the option mechanism works does not give you an edge. If futures trading is one-dimensional, as it is all about price, options trading is three-dimensional, as it depends on
Standard options models - for example Black-Scholes - only can be used for approximate options evaulation. As far as I know, they cannot explain the volatility smile. So I am incapable of following any systematic approach in options trading.
So the nly way to trade them is to apply some technical rules. Buy options if they are cheap, i.e. that implied volatility is low, sell them if they are expensive and you have reason to believe that implied volatility will drop back to normal levels. But this is not trading, it is like walking in a foggy forest during night. Won't touch that stuff until I understand what I am doing.
Actually buying cheap and selling expensive volatility is option trading Option trading is more multidimensional. You may get the price direction right but you were wrong on the implied volatility and the amount of time it takes to get to a price ( or not get to a price ) and still lose money.
That is the beauty of options. You have your opinion on what the market/stock will do and you find a way to express it using option.
As for the volatility smile, it is natural. I think it is just that people tend to sell the near the money and buy further out to cover. There is a saying "sell the meat, buy the wings".
I learned option trading by trading and from exchange members. I look in horror how places like Optionetics teach people to trade options. Follow people like that and you will lose money.
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many books on options but start with this easy to understand Options For The Stock Investor: How Any Investor Can Use Options to Enhance and Protect their Return by james Bittman
The following user says Thank You to cory for this post:
I never exercise and my trades last a few days only. As long as you buy and not write; you basically have the right, but not the obligation to buy/sell the shares.. which means you just risk your premium as long as you long calls/puts.. nothing more..
there are so many ways to slice and dice the cat with options.. and I am simplifying things a lot... I mean, a flavor for everyone to the point it can get so complex that it will bore the hell out of you.... IMO, start out small and only buy(never write, and if writing, dont do go naked) until you learn to do more complex trades with more legs(condors/butterflies/strangles/etc)..
that was my approach, and it worked for me... doesnt mean it will work for you, so just grab what you think will work.
I added writing calls against my portfolio for income about 4 years ago, but I have not held equities outright on my account for close to 2 years now, so I dont really write unless as part of a strategy.. if writing, ensure you always protect yourself but there is still risk, and one never knows.. so ensure you define and accept the risk clearly.
I second @sam028 advice... stay away from stuff over $50... and unless you have $250K+, stay away from appl/goog... risk and money management rules still apply to options trading...
there are plenty of opportunities on the $10-$30 range .. just use NT7 to do the market scan for the parameters that will work for you..
That book is from one of the instructors of the CBOE Options Institute. You can buy it for less than USD 7.00 from Amazon. Some time ago the text could be downloaded for free.
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