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Using Options for Swing Trading


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Using Options for Swing Trading

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  #31 (permalink)
Market Wizard
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dynoweb View Post
Just read your thread with interest. I've been doing credit spreads for about a year now. I'm still not convinced it's a good long term strategy because of the large potential loss for the small gain. I'm playing the 90% probable trades so only picking up between 4-6% on the bear and the same on the bull side. I play the monthly expiration's and have gotten into trouble with a few of the positions a couple of times.

Keep going on this thread.

Thanks dynoweb. Nice to hear someone else trading options on the board. Sounds like you know that credit spreads as you currently do them are not ideal because you already understand that the longer you trade those 90% probability spreads, the greater probability you will eventually encounter that 10% price reaction that you don't want.


I guess it depends on how you view the market and what you look for. Personally, I look for breakout opportunities and big moves so a lot of the option strategies I want to implement are geared towards taking advantage of this. Psychologically, I am not sure how well I would cope with opening a credit spread, sitting on my hands, and willing the market to not do anything crazy so that I can to hold onto profit.

My personal trading beliefs are to cut my losses as soon as things aren't doing what I want them to, so most credit spreads seem stressful, especially given the limited profits that most pay out... but one credit spread I am interested in is reverse ratio hedges. It is kinda like a long strangle: a big move in any direction will result in profit and a small movement = a loss. The difference is that one direction has unlimited profit. and the other direction has limited profit potential.

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  #32 (permalink)
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Bermudan Option View Post
Thanks dynoweb. Nice to hear someone else trading options on the board. Sounds like you know that credit spreads as you currently do them are not ideal because you already understand that the longer you trade those 90% probability spreads, the greater probability you will eventually encounter that 10% price reaction that you don't want.


I guess it depends on how you view the market and what you look for. Personally, I look for breakout opportunities and big moves so a lot of the option strategies I want to implement are geared towards taking advantage of this. Psychologically, I am not sure how well I would cope with opening a credit spread, sitting on my hands, and willing the market to not do anything crazy so that I can to hold onto profit.

My personal trading beliefs are to cut my losses as soon as things aren't doing what I want them to, so most credit spreads seem stressful, especially given the limited profits that most pay out... but one credit spread I am interested in is reverse ratio hedges. It is kinda like a long strangle: a big move in any direction will result in profit and a small movement = a loss. The difference is that one direction has unlimited profit. and the other direction has limited profit potential.

Last Friday was a good example of trades getting under pressure. Since the market has had such a strong upward movement last month, my bear call spreads all got right up to the money so I closed them out early. With the income I collected on selling both the original bear spreads and the multiply bull spreads I ended up down about 5% of my margin used. But you are absolutely right about the stress that puts you under. Prices move very fast at that point.

I'll have to check out that reverse ratio hedge since I haven't seen that one before.

One interesting trade I heard about from CNBC's option express show is called a Call Spread Risk Reversal. What that looks like is a long Call spread with the spread in a range you hope the price will move to and a naked put 10% less than the current price. There are two things attractive about this trade. First the net credit/debit was $0 except for commissions. The potential upside is the difference in the long call spread and the risk is having to buy the stock for the price the naked put was sold. Since I wanted to pick up more shares of this company, it seemed like a really low risk way of getting into this position. I'll give you the prices with the option, hopefully that's alright to do.

BTO Apr 13 29 Call
STO Apr 13 32 Call
STO Apr 13 25 Put

The equity price when I entered into this trade was around $27. Since I've started this position, the price has moved lower so the same deal would give credit. Buy ideally, I want the price to go up.

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  #33 (permalink)
Market Wizard
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Hmmm. Haven't watched CNBC in a while. The position is still naked a short option though. I know you said that you wouldn't mind owning the stock... you have to remember that you are selling insurance to own the stock whether it is @ 24.99 or 13.12... What happens if it pulls an ORCL and gaps down 10%?

Also, you are financing a speculative long option bullish bet that the price will go higher with a speculative short option bullish bet that the price will go higher. Essentially you have added leverage to a directional move and increased your risk exposure to a downside move to varying degrees (selling puts atm puts = moderately bullish... buying an OTM bull spread = more aggressively bullish) Also, you said you want to pick up more shares in your post. Does that mean you already own shares? Because that would make a portion of your portfolio that is a bet that the stock is moving higher lol.


Oh and:
Difference between strike prices in bull spread ($300) - initial debit + Credit for Short Put = Max profit

Max loss = ???


The risk still outweighs the reward too much for me to trade it. If you already own a position there might be some better ways to use options to protect against a move lower but still gain regular profits? I skipped that portion of Options As A Strategic Investment so I don't know what to recommend lol. Good luck!

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  #34 (permalink)
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I appreciate your thoughts on that. The way I was looking at this is that I wanted to add shares of that stock into my portfolio, so I'm starting out with the conceptual basis of my options play as having just bought the shares. Owning the shares always carries the potential loss of the entire investment. The naked put I sold forces me to make my purchase of this stock at 10% below the current market price. So this option you could say, saved me the 10% loss on the stock if I just bought it. On the credit spread, I do cap my gains at only 300/contract but my biggest risk is that it expires worthless. Since my options trade didn't cost me any debit, my loss would be not being able to leverage that margin amount for a better trade.

Yes you're right, I do already own a few shares of this stock but I wasn't thinking of the insurance play with puts. Just trying to capture the upside if it does make the move I hope it does, or if it goes the other way, get in at a cheaper price.

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  #35 (permalink)
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QCOM: 6 contracts 67.5 April/May Calendar spread. (Sell April $67.5 Calls at the same time that I buy May $67.5 Calls)
Options Reasoning: Implied Volatility almost has to increase as the Earnings report is built into the back month option. Currently @ 33rd percentile. As long as volatility doesn't collapse, my risk has been quantified so that I will have $200 loss only when the key $63.5 resistance level breaks. I plan on being naked going into the earnings report and I will likely sell going into the earnings report, perhaps holding 1-2 options through the report.
Technical Analysis Reasoning: Bounce off the trendline on the Daily, might break out on the longer term timeframe as well tbh
'Fundamental' Reason: (Note that there is no extensive research in this portion, this in my trying to rationalize the trade) The most popular Android tablets and phones have the Snapdragon processor created by Qualcomm. Nexus 4 was released late last quarter and might have a positive impact as they have been in and out of stock for the past few months consistently. Also, the Galaxy S4 is scheduled to have a Snapdragon processor as well. If Samsung and Google's flagship phones have the processor, that can be construed as a positive sign about QCOM's product and its future.


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  #36 (permalink)
Market Wizard
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Entered the position and I have 6 calendar spreads open for a debit of $92 each

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  #37 (permalink)
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I have been selling option verticals since I can't sell naked options to generate premium.... they really aren't that difficult to learn and your risk is limited.... I have been doing 20 or 30 contracts like on APPL or AMZN, or BBRY and risk 10k to get approx 3k but probability of sucess of around 75%...
So far... its been working...

Also what I really like to do is sell cash covered puts on stocks I wouldn't mind buying at certain price... for instance... a few weeks ago, sold JCP $14 puts.... as I thought 14 was a good buy.... my puts expired and I pocketed the money...

or I like selling $12 BBRY puts as I feel that the $12 is strong support and wouldn't mind owning it at that level... so far I got to go to the well several times..

for those of you that want to learn these strategies, I would suggest playing around on the paper money account with a broker like TOS and mess around with it till you get comfortable... TOS has many archived swim lessons that help teach the ropes as well and its free

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  #38 (permalink)
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Bbry puts sounds kinda good because the stock is so volatile you will pocket some nice change if they expire worthless. Still not a fan of risk outweighing reward but I might grow to like it down the road perhaps. If your losses are $10,000 and your wins are $3,000, you have to be right like 75% of the time just to break even, right? I prefer grinding it out with singles and doubles and getting a home run every now and then instead. To each is own though, sounds like it works for you. AAPL looks like it might be moving sideways for the foreseeable future so credit spreads aren't a bad idea there potentially. I might grab some long term LEAPs for a cheap bull call spread down the road.

Anyways haven't made any short term trades recently. With the profits from my HNZ trade earlier in the thread I opened a Roth IRA account. Everyone should look into those if they get a chance. The best way to describe it is a savings account where you can't take out any of the interest (read: profits) that you earn. I have Dec calls on JASO w/ a $6 strike and a Diagonal bull call spread on the iShares Italy ETF Dec expiration on the longer termed options as well. I think that the euro crisis will rebound this year hopefully.

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  #39 (permalink)
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@Bermudan Option
You seem to like Calendars, curious if you have ever looked at diagonal spreads. One of my favorites is a diag with a back-month ITM long option and a front month OTM short option.
Example would be an IWM May/June 95/94 Call spread. May is OTM and short, June is ITM and long.

Take a look at a PnL graph. One of the nicer characteristics is that you make money even if it moves immediately in your favor, but like a calendar it will benefit from some sideways market action before expiration.

Cheers,

Nice to see other option traders here.

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  #40 (permalink)
Market Wizard
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Funny you should mention that... Diagonals are my absolute favorite type of options trade lol. I have the trade you mentioned in play currently for my EWI (Italy ETF) trade. (long Dec13 $12 calls, short May13 $13 calls)

Diagonal bear call spreads are my preference tho where I can often have a long position for free at the end of the day if I skip a strike price or two. I prefer to have a directional bias and the strategy allows for me to hit a few singles until I get a home run.

I haven't utilized it recently because it is cheap to put on but it ties up a chunk of capital since you have to have the difference between strike prices in cash because it is a credit spread. Too capital intensive for my IRA but I will use it once I start the shorter term time frame again. My strategy is to buy a long term OTM option like 3 month out and then sell ATM weekly against it if the underlying hits a resistance level. I can reevaluate whether to reestablish the position weekly and it has the quickest time decay. The only issue is the high gamma means that if the weekly ends up ITM I will lose money on the weekly faster than I gain in on the monthly option.

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