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Et tu NQ: Trading the Nasdaq e-mini


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Et tu NQ: Trading the Nasdaq e-mini

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  #61 (permalink)
 Bermudan Option 
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Closed out my trade after a little run higher from 8.7-8.9... a change of 2.5% in the stock




Slow and steady wins the race but this is ridiculous lol.

The problem with this trade was that I was bullish on the short term trade and played the bounce @ 8.75 support. Once the bounce reached resistance, I remembered how crappy the intermediate timeframe was for KBH and bailed. The profit was limited from the onset but it wasn't until I had it that I realized this.

The second problem was the calls had too much intrinsic value for what I was trying to accomplish. Next time I am trying an intraday flip with a small bounce anticipated, I will buy calls deeper in the money. This will have a higher delta and so the call price will mirror the stock price better.

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  #62 (permalink)
 Bermudan Option 
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back in KBH but playing the short side right now with some April 11 puts. Lets see if buying ITM options works to my advantage for day trading:


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  #63 (permalink)
 Bermudan Option 
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so far so good right now. KBH gapped lower yesterday and is currently trending lower today as well. Adjusted my stop to the stock breaking above 8.65 resistance and might adjust it again depending on today's action.



Here is what the situation looks like from a #s perspective

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  #64 (permalink)
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  #65 (permalink)
 Bermudan Option 
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Still in the trade. Forgot all about Friday being a holiday and held over the weekend. Because it is a front month option (in laymen's terms: the option expires during the next monthly expiration date) I am going to lose 3 days worth of time premium on the options. However, I think the effects will be minimized because my option is kinda deep in the money.

Speaking of in-the-money options options, although they hinder my reward, they really minimize the risk in options trading too I am finding. Since the in-the-money options have a high delta (aka are mostly intrinsic value) they react in lockstep with the underlying stock but the movement is nowhere near as volatile. If I had bought some out-of-the-money calls on KBH, I would likely have a larger profit because of the 7-8% sell off in KBH, but if the move had:

a) taken longer
b) not been as large of a move
c) come at a time when volatility fell in the market

then I could have been much more likely to be have a loss. Liquid in-the-money options allow me to set stops that mimic the underlying and there is less slippage or less likelihood of underlying price changes not translating into option price changes


I have been brainstorming a theory for the last few hours that still needs to be ironed out. My theory is that regarding short term option trading, the closer the strike price with a 0.8 delta is to the underlying as a percentage, the greater the return on my investment is potentially. For example, with KBH, I might need to buy an option that is 8% in the money to achieve a 0.8 delta. However, with Apple, I would only need to purchase an option that is 5% in the money to achieve a 0.8 delta.

What I am still working out is exactly when/how this is beneficial. I think it is because I can wield an option that mimics the underlying using less capital (as a percentage of the underlying anyways). I can get the same returns as someone who owns 100 shares KBH, but by putting up 8% of the cost, whereas with AAPL, I can get the same returns by using only 5% of the cost of 100 shares.

I might be incorrect, but the conclusion I have reached is that high delta limits the time premium (risk) in the option, and the small % of investment to reach a high delta means that the leverage is increased (or perhaps more optimally in the Option Traders favor is a better way to put it). So all things being equal, finding the underlying with the lowest % difference between the underlying price and what you believe constitutes a high delta (0.8 in my personal analysis) would optimize rewards and minimize risk.

Originally I thought the reason for the discrepancy of % was because the strike price as a percentage is smaller with more expensive underlyings but then LVS allows for greater leverage than AAPL so that argument is dead in the water. Perhaps it has something to do with the remaining intrinsic value in the option?

Comment if you have any ideas or you see anything I am overlooking in my reasoning.

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  #66 (permalink)
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Here is how my position is sizing up:



(Just saw that I put 'cut my losses' when I meant to put 'lock in profits'. Force of habit perhaps lol)


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heading higher on light volume. Still holding onto all the puts. perhaps next time I will sell a few puts to lock in profits

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 Bermudan Option 
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or a break above 8.1

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 Bermudan Option 
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 Bermudan Option 
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Stopped out of my position. good to get one right. well I had a few calls right that I f***** up, so I guess it is good to make a profit


Notes:
BTO =Buy to Open (how I opened my options position)
STC = Sell to Close (how I closed out my options position).
So in laymen's terms, the analysis above reads: I bought 4 options for $2.17 and sold them all for $3 each
$301 on an $868 investment = 34% profit in 8 days


Now my new goals are to:

a) Use more of my portfolio but do not become reckless or give less attention to intraday movement. I will start at two options to trade for now and work my way to 4-5 which is what my account is divided into @ $800-1000 lots
b) Become more consistent doing DD in afterhours. Key point here. I haven't been making enough time to trade. I think the bearish plays might juuuuust be showing up now so I need to pay attention.
c) Contemplate a few homerun trades. If my portfolio is split into 5 lots of $800, I might use 20% of my portfolio on high risk/high reward trades by using highly speculative out-of-the-money options. I want to read up on some more option strategies though so that I can potentially roll down or forward if things go against me instead of just letting my speculative options dwindle to zero-worth

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