acestocksplayer
We had a board devoted to options trading on the original Talking Stocks Forum. Here is the first page of that board which began on February 10, 2013....


OPTIONS TRADING [icon_pulldown] : Options Trades Strategy with Stocks

 
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AceStockPlayer said: 
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Joined: Aug 16, 2010
Posts: 12325
February 10, 2013 6:13 PM (edited on: January 13, 2015 )
This board is for those traders who want to discuss strategies or ask questions about how options trading work with real-life trades. As always, keep in mind that Options Trading can be extremely risky and cause one to lose most or all of their principal. Options trading is a very aggressive form of trading, though some strategies can make it less risky if one knows what they are doing. Nonetheless, options trading is not for the faint of heart!

Be sure you understand the Terms and Conditions of this site and this Forum before using or viewing it. Look in the Disclaimers section of the Announcement Board to the right for more information

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Are you new to options trading? Why not make paper trades without risking money?

You can do just that! You can set up your own virtual options trading account and trade in near real time without risking any money on the Chicago Board Options Exchange (CBOE)! 

Learn to Trade Options and do Spreads without risking your money! (click here)

This site and its message board reflects opinions of individuals only, and should not be understood to offer advice on investing or trading. Investing in stocks, bonds, options, futures or other uninsured investments can lead to substantial financial losses. Always consult a Registered Investment Advisor/Broker. Visit my blog at http://www.Blog.AceStockTrader.com .

 
AceStockPlayer said: 
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Joined: Aug 16, 2010
Posts: 12325
February 10, 2013 6:45 PM (edited on: February 10, 2013 )
On Friday, I mentioned one of my Options Trades....CLMT

As I mentioned on Friday, I had bought some options out of the money for a cheap price....out of the money options are usually much cheaper, but a novice trader in options needs to be extremely careful when buying Out of the Money (OTM) options.

The reason is that OTM options can lose a lot of their value very quickly if the under-lying stock pulls further away from your strike price. 

The reason I bought these OTM options is that I trust my charting skills a lot, and second, CLMT has been an aggressive stock (it's an IBD 50 stock) which means it has a good following of traders. Third, I was ahead on many of my trades and showing quite a bit of profits...if there is ever a time to get a little more speculative with options, its when one is well ahead.....and fourth, the market is clearly in a Bull Market which makes a few well placed bets on CALLS (which are bullish bets on individual stocks) a less risky venture.

I bought the first few contracts with a Feb 35 strike back in December for 15 cents each (since contracts are sold in 100 share lots, that's 15 cents x 100, or $15.00 per contract). Those contracts languished for a long while....I had pretty much given up on CLMT as it had not done much for weeks...then a few days ago, I was looking at CLMT again trying to decide if I wanted to dump the contracts and get a few bucks back for them (for perhaps another spec trade?), or let them go and see if I would get lucky...knowing full well if I kept them, they could end up worthless. 

AS I looked again at the chart, it occurred to me that CLMT was carving out the handle of a cup and handle pattern....so, last week, i bought a few more on spec at $10 a contract....I basically have invested $75 to control 600 shares of the stock...

On Thursday, CLMT broke out of the cup-n-handle pattern...on Friday, as expected, CLMT accelerated higher from there....my calls which were still worth only $10 each on Thursday (despite the breakout) shot up to $60 each on Friday...a 500% increase.

Since these options expire in one week I decided it might be a good thing to get my original investment out of the trade, so I tried to sell 3 of them at 60 cents, then 55 cents....then 50 cents, but the profit-takers kept pulling back by the end of the day, so i still own all 6 contracts. Now, I realize that these options could fall fast back to ZERO in the coming week and I will lose everything, because they are so close to expiration...unless they can push a little higher and get into the money...the stock price closed only 10 cents short of the strike price.

So, in the next few days, CLMT is either going to score some nice gains for me, or they could end up falling quickly back to ZERO....well, you can't say it isn't exciting, if a little nerve-wracking! This is an extreme form of Options Trading....I don't recommend this kind of trade most of the time!!!

Here's the chart in MoCelerator Form... 

CLMT in MoCelerator Chart

 

CMAC38 said: 
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Joined: Aug 18, 2010
Posts: 11550
February 10, 2013 6:58 PM
Ace, thanks for site and posts here. Hopefully, many will stop by with thoughts and ideas. Green Trades Always
 
AceStockPlayer said: 
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Joined: Aug 16, 2010
Posts: 12325
February 10, 2013 7:04 PM
Sure, CMAC38!

I was wondering when someone would ask about Options Trading? What I like most aobut Options (besides the fast action) is that it allows me to play many more of the big name stocks without risking a lot of capital. For about what I would spend on a penny stock, I can control 100, 200 or more shares of a big name stock, like CLMT or ARMH or FB....you name it, but Options allows me to regularly play the big names without risking large sums of capital.

Thanks to LilShark for asking that we start up this board....the board was always sitting here, but there was no active discussion until now!

 

popeye47 said: 
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Joined: Oct 12, 2011
Posts: 166
February 10, 2013 7:26 PM
ACE:
I had some TA questions about some stocks on the penny board and also told them it was regarding some options I had bought. That may be the reason CMAC and LS mentioned it.
I am completely satsified with my retirement portfolio but like to use my extra or play money with options.
I am not as technical as you, or CMAC or LS. I look for the golden cross, death cross and etc. I use a lot of gut instinct which I'm sure you wouldn't approve. Anyway in a nutshell I mostly go with blue chip stocks with lots of volume and liquidity.
Thanks.
 
popeye47 said: 
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Joined: Oct 12, 2011
Posts: 166
February 10, 2013 7:28 PM
P.S. since you mentioned FB. That was one I got wrong by buying puts in November 2012.
 
AceStockPlayer said: 
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Joined: Aug 16, 2010
Posts: 12325
February 11, 2013 11:31 AM
No problem, popeye! Actually, you should expect a fair number of losing trades with options....the trick is controlng your costs and minimizing risk.

I just sold my 6 Feb 35 calls on CLMT this morning for about a $600 gain! The original investment excluding trading commissions was only $75. Now, i should point out that i have another spec trade that expires in February on SLV.....that trade is looking like a loser.....but i invested a small amount of money on 15 contracts but my actual cash outlay on SLV has been about $100.....the CLMT gains more than offset my not so good bet on SLV. That's what i mean by managing the risks and keeping your costs down, at least relative to the strategy you might use.

 

green-team said: 
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Joined: Jul 22, 2011
Posts: 649
February 19, 2013 8:34 PM
'Since these options expire in one week I decided it might be a good thing to get my original investment out of the trade, so I tried to sell 3 of them at 60 cents, then 55 cents....then 50 cents, but the profit-takers kept pulling back by the end of the day, so i still own all 6 contracts. Now, I realize that these options could fall fast back to ZERO in the coming week and I will lose everything, because they are so close to expiration...unless they can push a little higher and get into the money...the stock price closed only 10 cents short of the strike price.'

ACE,
thanks so much for posting this example. I am pretty new to options myself and will be experimenting with them soon, in small money orders.

my question is about your paragraph above. it sounds like they are hard to sell since you mention they kept pulling the rug under the bid that day even though it was already in the money that day? is that typical once an option goes into the money that it is difficult to sell off?

thanks for the continued learning here on this board!
-gt
 
popeye47 said: 
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Joined: Oct 12, 2011
Posts: 166
April 9, 2013 3:58 PM
Forgot all about your option board. 
Of course that is nothing unusual at my age. lol.
I have been playing PM calls every time there is a pullback in the price because of the market or folks just taking profits.
It has been a good play since the first of the year.
 
littleshark said: 
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Joined: Aug 22, 2010
Posts: 30787
June 6, 2013 1:27 PM (edited on: January 15, 2014 )
by Ace pg8 6-6-13 on the nasdaq board 1:07pm :

ACE said: "for those of you trying to learn options i suggest you follow the premium changes and bids on Yahoo Finance site....an excellent FREE source for watching daily options activity."
 
littleshark said: 
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Joined: Aug 22, 2010
Posts: 30787
June 6, 2013 1:38 PM
copy & paste of a post by Ace on Nasdaq board that I feel should be placed here to save it for future study and refection by future viistors to this board :

June 2, 2013 12:12 PM Quote This Flag Private Message 
WallStreet Kid asked what went wrong with his stock pick, CIEN?

Here's the question he raised on May 30th which I was not able to respond to until now: 

"
May 30, 2013 9:06 PM Delete Quote This Flag Private Message
Ace, LittleShark

"Of all my picks yesterday I mentioned, I chose CIEN calls and I am under water already. Now I am questioning my judgement call why I chose CIEN? I chose CIEN because I saw it as going higher based on weekly charts and daily chart, plus volume was much higher on yesterday's runup, which is good. So where did I go wrong? Unless I learn from my mistakes, I will just lose money. So where did I go wrong or did I? wsKid 
----------------------------------------------------------------------------------

I'm not sure that you went wrong with your stock pick, kid. One look at the chart of May 29th shows that unless you bought at the high price of the day, you likely would not be under water or very little under water. The stock did give back some after that huge up day on May 29th, but that was due to some lateral resistance plus the price was hitting the upper B Band. (However, the B-Band wall is rising, so it's possible the B Band resistance is only temporary.)

As I see it, you're still very much in the game on the chart if you are playing a swing trade of several days? If you were only intending a day trade or a very short term trade, I might agree that something went wrong, but otherwise, you are still good, imho!

Now, if you are playing CIEN with options (which you said you were playing calls), that adds another dimension to the trade. Since options are a form of leverage, and also because options tend to move up or down in premium price on MOMENTUM, the price you pay for a call option can change very quickly. In other words, if your OPTIONS TRADE is under water, it's likely you over paid on the PREMIUM (price) for the option. 

What drives premium prices to rapidly deflate, even if the underlying stock price remains relatively stable? Two things that I can think of:

1) Time Factor. If you bought very short-expiry options, they can lose price quickly even if the underlying stock price has moved only a little.

2) Momentum Factor. If the stock has a high beta (meaning that historically the price tends to swing in wide margins from highs to lows and back), then the premiums will change quickly and more aggressively on any change in direction. I call this the momentum factor, and high beta stocks tend to have the biggest momentum factors. 

If you want to avoid overpaying on premiums, there are a number of tricks you can do but I don't have enough time for all of them here. One simple one is NOT TO BUY call options ON THE DAY THAT THE STOCK PRICE IS SOARING HIGHER...rather, wait a day or two, and it's quite likely the price will pull back some and the PREMIUMS of the call options you want to buy will often plummet! In fact, one trick I often do is set a limit order price that might be 20% or more less than the current premium with an expiration about 2 or 3 days out, and I often will get the call options I want by just letting the limit order fill a day or two later. This is one trick of many.

Another thing to consider is how far to expiration? If you are playing with WEEKLY options, then these animals can move very aggressively on price....I don't fool with them for that reason....I prefer options that are about 2 to 4 months from expiry....if I guessed wrong on the initial move, then my call options (or puts) won't lose all of their value at once. 

Also, it usually doesn't pay to buy call options (or puts) that are too far from the current price....unless you have som
 
littleshark said: 
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June 6, 2013 1:40 PM
cont'd from last post ... the rest of ace's post copy & pasted above :



Also, it usually doesn't pay to buy call options (or puts) that are too far from the current price....unless you have some extra money around and want to speculate on a big move, but otherwise, it's wise to stick to strikes that are close to the money (or even in the money).



 
littleshark said: 
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Posts: 30787
June 6, 2013 1:44 PM
another of Ace's posts from pg1 again of the nasdaq June discussion board :

June 2, 2013 12:54 PM Quote This Flag Private Message 
One More Comment on Weekly Options.....

Those of you who are trading with Weekly Options should understand that these are highly volatile financial instruments....to me, it's simply a form of pure gambling!

Weekly options are very short in time existence, by nature. Anything that has a short life has a greater chance of going wrong or not living up to expectations. When I was young horse player, I recall that there were races at different distances....

There were the typical 3 furlongs races (about 3/4 of a mile) and the 1+ mile races....and there were the occasional quarter horse races. The quarter horse races were very short races that lasted for only 1/4 of a mile. Typically, anything could happen in the quarter horse races. You might have placed a bet on the very best of breed quarter horse in the race, but if that horse stumbled on the first step out of the gate, you would likely lose the bet.

With 1+ mile race, if I put my money on the best of breed horse, he could suffer a bad break or two like a stumble at the start, and still have ENOUGH TIME to get back up to the top and win the race.

So, in my humble opinion, if anyone is playing with WEEKLY OPTIONS, keep in mind that even when you are betting on best of breed stocks, that a weekly option is still like a lottery ticket. Sure, it can win....but it's just as likely to be a loser too. And with Weekly Options, it's often ALL or NONE. If the option fails to get in the money very quickly, your ENTIRE INVESTMENT (or should I say "BET"?) is gone!

With Weekly Options, the trader is violating one of the key rules to wealth accumulation, and that is to be sure you can get most of your money back if the trade goes in the wrong direction. Having the chance to get your money back allows you to place another trade the next time without having to come up with more capital from your next paycheck or your savings! 


Bets on Weekly Options are Like Lottery Tickets. The Quality of the Underlying Stock Will Rarely Have Time to Produce Winning Profits for the Gambling Trader...It then becomes a game of chance rather than skill! The main difference between gambling and investing is that gambling is usually an ALL or NONE proposition which often results in a complete loss of your investment! 

This site and its message board reflects opinions of individuals only, and should not be understood to offer advice on investing or trading. Investing in stocks, bonds, options, futures or other uninsured investments can lead to substantial financial losses. Always consult a Registered Investment Advisor/Broker. Visit my blog at http://www.Blog.AceStockTrader.com .



wsKid 
littleshark said: 


Joined: Aug 22, 2010
Posts: 7712 June 2, 2013 4:22 PM Edit Quote This Flag Private Message 
ACE ... thanks for taking the time to weigh in on WSK options play, helps me and others learn about options too ... WSK did say this 5-30 about that CIEN trade :

"I purchased the (CIEN) July 17 calls for 1.10, and now they are 1.06. I know not by much but still underwater. I chose the July expiration because I figured it would provide enough time should something go wrong in this volatile market. "

That fits with your advice Ace I believe ... so looks like he is on the right path, except it seems he bought a day late, at the top of the momentum as far as I can see ...
 
littleshark said: 
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Joined: Aug 22, 2010
Posts: 30787
June 6, 2013 1:49 PM
note: check daily chart on CIEN and see the gap up on CIEN 6-6-13 ... WSK call options big winners ...
 
littleshark said: 
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Joined: Aug 22, 2010
Posts: 30787
August 5, 2013 10:38 PM
copy & paste from nasdaq board 8-5-13:
[axlmayhem87:] "ive got a quick question. if you decide to sell a stock short cause u think it will drop can u protect from being wrong by writing a call option for the same price as your short sell."
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Ace's reply:
I don't think you would want to write a call option (because that means you are shorting the option--you probably mean to BUY the call option as insurance against your short)...

This being said, please understand that simply buying a call option is often not enough insurance by itself. If you are looking for simple protection against a major reversal, it's okay to buy a call option with a rather short duration--I would suggest about one or two months beyond the current expiring options--you don't want to buy too short a duration because time decay rapidly destroys the value of the option and you have to keep replacing it with more calls which eats into your net gains on the trade. Also, try to buy the option relatively close to the money--if you buy one that is not close to the money, and your short ends up going against you, the call may prove useless anyway because it was too far from the strike price.

Generally, here is what I might do:

Say that I am shorting a tech stock like ADBE...it closed today at $47.63. I would suggest looking out one month beyond the present month for options that expire in September, in order to minimize time decay. Next, I would look at a strike close to the current price....probably slightly out of the money because I don't want to over-pay for my insurance....but also, I want it to be close enough that it acts like insurance should my short suddenly reverse on me and rises, say $2 or so in value. For instance, the Sept $48 call is $1.51 and the Sept $49 call is $1.03. So, if I am shorting 200 shares of ADBE, I would probably want to buy 2 calls (equals control of 200 shares) at $206 (that's the 2 contracts on the Sept 49 calls). So, in this instance, my insurance costs me $206 (plus the broker's commission, so lets just round off to $215.

Now, my goal is for the short I start on ADBE to resolve itself sometime before mid-September and let's say my goal is $42 on the short....should the short get down to $42, I would cover for a gain of over $1,000 less the cost of the insurance (2 calls at $206) for a net gain of over $800.

Should the short fail me, and let's say that ADBE goes to $50 and I cover, then I lose about $490 on the short, but the $49 calls rise in value by roughly $200 profit, so the net loss becomes $290 instead of $490. Notice that I wouldn't break even with this scenario, but I do end up with smaller losses. So, in this hypothetical situation, the calls let me sleep at night, but they also serve only to lessen the damage, not break even. I would have to buy another call (3 calls) to try to break closer to even, but that also cuts into my profits if I make the right call on the short. 

Here's another thought....let's say I buy the ADBE $50 call option for September to save money and my outlay is only $160 including commissions....and assume that ADBE does make it to $50, but not much over that strike point....the call options might gain, say $100 in profits, but my loss on the short is close to $500--in this case, I saved some premium outlay on the calls, but then the insurance itself failed to make up enough of my losses because I bought out too far from the money....

So, both time decay and the cost of the options are important to consider. Good luck!


littleshark said: 
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Joined: Aug 22, 2010
Posts: 30787
August 5, 2013 10:47 PM
copy and paste from the nasdaq board:
August 5, 2013 10:42 PM Quote This Flag Private Message 
[axlmayhem87:] "ace- o ok I c. thanks for the information it is a big help"
----------------------------------------------------------------------------
Ace's reply:
Sure, and another way to work a short is not to buy any option protection whatsoever, as after all, it can cut into your profits. However, if you work without option protection, you should work a plan of price levels where you will end the short. Have a mental buy stop (the point where you will not lose any more than X amount, and stick to that plan and cover should that occur). The only 3 ways that a mental stop will fail you are:

1) It gaps up in price....gaps can really hurt....so don't bare-naked short a stock with a history of gaps or great volatility. (If dealing with a very volatile stock, then it's smart to get some call options against it.)

2) You don't have the time to constantly monitor the position and the short squeeze occurs against you and you missed it because you were on the golf course or at the ball game or at work. Bare-naked shorting requires you to constantly monitor the position (which is a lot easier these days with a smartphone app from your broker).

3) Your buy stop mental limit is reached....but you fail to act on your stop...human emotions being what it is, you decide that maybe you can give it a little more time and it might come back...this is usually a big mistake, and probably the most common mistake by traders. You have to stick to your plan, no matter what. 

Notice I said to use a mental stop....you should almost never use actual stops with the broker, because once you post a stop order, it is visible for all traders with Level II to see, which means that they will pick off your stop at the worse possible moment--it's like saying "here I am!" and here is where I will let you have my stock for cheap. That's why I insist only on mental stops, not posted stop orders. No one can read your mind if it's a mental stop! 
Good luck!


 
littleshark said: 
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Joined: Aug 22, 2010
Posts: 30787
August 6, 2013 12:10 AM
found this Ace options advice on pg 25 Dec. nasdaq board ... might as well archive it here for posterity( is that a word ? us simpletons like to use big words ... it boosts our ego ... heehee ) :

December 18, 2012 10:26 AM 
[WallStreetKid:] "Ace

Thanks, I will definitely need some good luck, lately I have been creamed several times even when I was right, due to time decay.

Anyways, IGT is poised to mover higher on a weekly chart, but on a daily chart it looks like it is getting tired?

If you have time, what do you think of IBM? wsKid"

Ace reply:

Sorry to hear about the "creaming" of late....likely you were playing options, and those buggers can cream a trader pretty quick if you get on the wrong side of the trade. I certainly took my lumps in my first year of so of options trading....it was a lot trickier than I imagined....one thing I have learned with those buggers is to try not to pay steep premiums, and that usually means don't chase a call or put if it has just had a big run-up....the other great lesson is don't play around too much with options that are more than 10% out of the money unless you buy very long dated ones. The third lesson is to try to both buy and sell options on the same trade to try to cash in more on the volatility than the direction, and thereby lower your out of pocket costs.....the last lesson is one I don't do much because my broker makes it kind of onerous---I think I need to talk with them or switch accounts, because they put that on as a precaution when I was new at options trading, but I shouldn't have to call them each time I want to write a put.

One thing I have noticed with your options trades is that you are playing the WEEKLY options....that to me is pure GAMBLING. Stocks and options can change direction quickly....with options, just a few pennies move in the wrong direction can send the value of your options plummeting. When stock and options trading evolves into GAMBLING, we must be very careful. The one thing I have tried to remind myself over the years is that the winners in this game aren't the gamblers, but the investors. It's okay to take a calculated risk once in awhile, but always keep the full picture in perspective....have some other trades that are going in a different direction....hedge a little....and with options, try to avoid short duration options as those are the most volatile ones. 

That being said, here's a look at the IGT chart....it's working on a Bull Flag right now....I filled the big gap recently.....overhead resistance downtrend line is the next challenge....would like to see it clear $16.00 to establish a new higher high on the long view daily chart....It's at a decision point....it could break either way, but the Bull Flag favors a break higher...

IGT Daily Chart with comments
This site and its message board reflects opinions of individuals only, and should not be understood to offer advice on investing or trading. Investing in stocks, bonds, options, futures or other uninsured investments can lead to substantial financial losses. Always consult a Registered Investment Advisor/Broker. Visit my blog at http://www.Blog.AceStockTrader.com .
 
axlmayhem87 said: 
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Joined: Aug 2, 2013
Posts: 210
September 12, 2013 7:41 AM
looking at some trx options for oct 19. a $3.00 call at .65 a contract. dont know how it will play out but it looks to me like a pretty decent buy.
 
CMAC38 said: 
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Joined: Aug 18, 2010
Posts: 11550
September 12, 2013 8:35 AM
Axl, the main thing I would watch is that gold has broken its 1352 support to the downside....How fast we find bottom is a little up in the air..TRX will rise with rising gold prices and is a relatively new royalty company.

1326 now puts us under the 50 day...going to be interesting.
 
CMAC38 said: 
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September 12, 2013 9:41 AM
Axl....I am looking at NAVB Jan14 $3 calls for.30-35....Huge open interest.
ALL OPINIONS, IDEAS AND DISCUSSIONS ARE BY ANONYMOUS PEOPLE. NEVER ACCEPT ANY COMMENTARY ON THIS FORUM OR WEBSITE AS INVESTMENT ADVICE. ALWAYS CONSULT A LICENSED BROKER OR REGISTERED INVESTMENT ADVISOR. WE ARE NOT RESPONSIBLE FOR YOUR ACTIONS.   

Enjoy the forum! Thanks, Mike
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Littleshark
Yeah PNG ,,, whenever ACE did a post about options ,,, I used to paste it over onto the seldom used options board back then ,,, so it would be easier to find in the future ...

i didn't know that was still available after the shift to this forum web site ...
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Ace's Thoughts on Option Trading - Part 1

Here are some risk management rules I developed from those experiences to prevent bad days like that ever happening again....

Generally, I will not invest more than $1,000 on any one options trade....this is why you will not see me playing with options on high priced stocks like AMZN, GOOG, NVDA, etc.....If I want to play those stocks, then I will just buy the stock shares in odd lots....this $1,000 limit is my personal rule and is determined as no more than 1% of my trading portfolio assets. (I have other assets too, but they are in long term investments like my 401k.)

I am comfortable with the 1% rule, so if I lose the entire $1,000 investment, I may not be happy, but it only represents 1% of my trade-able assets, which is not the end of the world and that amount can be made up with better trades tomorrow and the next day...!

So for example, back a few months ago when NVDA was a hot stock, I skipped the options because even one options contract just near the money was well over $1,000....
So, I bought something like 25 shares of the stock instead....because the stock is rarely as  volatile as the options are....and I still racked up some nice profits without a lot of volatility...I think I made over $500 on that simple, smallish NVDA trade. I saw Doc doing this a lot and so I tried it, and it works....I have done several successful trades using Doc's odd lot shares strategy....why just yesterday, I cashed out a $400 profit on only 20 shares of SHOP....

So, by setting a $ limit for any one options trade, I know I can't lose more than I invest....there is no margin call to worry about with a simple options purchase.....if my limit is $1,000 and I invest $1,000 and I lose that full amount, I know that is all I can lose....but if I bet $3,000 on an options trade, I have to be prepared that I might lose it all.

Other risk management techniques I use with options is to buy out further in time which means that the time value will help support the premium value of the optionswhen the price gets slapped down.
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Ace's Thoughts on Option Trading - Part 2

A third trick I sometimes use is to buy a cheap out of the money put for some downside protection....I would only do this if I was betting out nesr my $1,000 limit....so, let's say I buy a call contract on NVDA for $950 with a September expiry date....well, to protect my downside, I might invest $75 on a July 27th put priced at least $10 out of the money.....then, if NVDA gaps down tomorrow or the next day, the put will help offset some of my losses.

Don't forget, you can also use pre-set limit orders....if I am going to be away most of the day, then I will set a pre-set limit SELL order on my largest positions including large options trades....now, I don't normally like to use pre-set limit orders because the order is visible to other traders on Level 2 and some wisecrackers will sometimes jack the price down to trigger those limit orders and grab my options bet from me, and then they will profit from it....but if I am away all day, then I am comfortable with a pre-set order, as the alternative can be a lot worse....!

If the price drops hard, then the limit order should go off and the options contract will sell at a price that I am comfortable with selling at....now, the one other problem with a sell limit order is that sometimes, bad news will break in the off hours and your stock might gap down the next morning at the open and your limit order wil trigger, but much below the limit price that you set. One way to overcome this, such as when earnings are reported after the bell, is to buy a cheap short expiration put to protect your downside....

I may lose money on that trade, but I won't lose everything...my limit order or cheap put pritection should get me back enough money for a better trade tomorrow.😉


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Ace's part 3 on options

"As I say, I rarely ever play with options with Deltas under 45....if I do, then its purely on speculation, but as I learned only too painfully in the early years of my optionstrading, when a person trades too many sub-50 delta positions, they are setting themselves up for losses in the long run. There's a reason that delta is down around 20, and that is that mathematically, the odds are pretty good that your strike price will never be reached during the life of the contract (it looks like this was weekly option expiring on August 3rd, or about two weeks from now).... 

Yes, you might get some great wins on occasion, but playing with a 20-something delta trade means the price action is subject to much fluctuation...and the liquidity of most 20 delta's isn't real good, because most of the options trading action takes place at the money or near it, but a 20 delta is not that close to the trading action...

Looking at the MSFT chart, I see that the price of MSFT was only briefly within about $2.50 of your strike price ($110) and that was for not more than about 20 minutes on Friday morning....and keep in mind that the price of your option won't really take off until the price gets within about $1 of the strike price...and MSFT never did get that close!....

So, though it can cost me more premium, this is why I buy options with higher deltas....most of my options buys occur at around deltas of 50 to 60....and as low as 45, but rarely ever below 45....

Because a trade that starts at around a 50 delta will be "in play" immediately and is more sensitive to immediate price action in the under-lying stock...and should my stock falter, my call option might slip from, say a delta 50 to a 40...and a 40 still has value, and so I might be able to cash out money, even if it's a losing trade...but that money that I cash out can be re-deployed on a better trade....

But if I buy a delta 20, and the under-lying price of the stock falls back, even just a little in price, then my call will be nearly worthless...and I can tell you it's no fun to stare day after day at a worthless call option in your portfolio, and it's so worthless that no one will even buy it from you for any price...

So, when trading a delta 20 or 30 or even a low 40, and the price doesn't reach the strike level, then you should not expect to get a lot for the sale of that option....that's just the plain truth as I know it.

Here's an idea to improve your chances...sell options instead of buying them...and sell puts if you like, but make sure you are getting more than a few nickels for selling those puts...you should want the reward of the premium sale to be worth the risk that you could end up owning the under-lying stock, should it get exercised against you. But by selling puts (or covered calls), you are now on the winning side of the trade as most puts and calls never get exercised (one study says that only 17% get exercised) and you will be pocketing the cash on each "successful" sale, rather than being with the many poor souls who spend down their assets while trading 20- and 30- delta options so that Da Boyz get rich off of them!  Most options contracts are "written" or "sold" by the big brokers like Goldman and Morgan...most options buyers are retail traders like you and me...and some hedge funds that might be buying a little protection in the opposite direction of their stock holdings...

So, have you ever wondered why Goldman Sachs rarely ever has a losing day of trading? One reason is that they sell a lot of options...but they don't buy that many options....because they know that most options expire worthless and then they pocket the proceeds on those sales!   "
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CMAC38
Thanks PNG for making the effort to post Ace's posts on options here.  😁
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My comments are:

Options tend to be much more sensitive to price movements than stocks are...also, options tend to move ahead of stock prices....an options contract may move higher or lower before the under-lying stock price does, though sometimes, those options price movements will prove to be head-fakes....

Options are most price sensitive when they are OUT OF THE MONEY (OTM)...this is because an OTM options contract has NO INTRINSIC VALUE...it is strictly trading on TIME VALUE and time value is compared against the distance from the STRIKE PRICE...

So, for instance, if someone owns a November 16th (monthly) call on SPY with a $275 strike price (which is $4 out of the money), that option is going to be more sensitive than an option that is in the money, such as the November 16th $270 call.

Also, NOT all options expire worthless...if they are in the money, they are not worthless....although, most of us here don't really want to own an options contract on expiry day, because we might have to exercise the option...so almost always best to sell the option before the expiration, unless you truly want to own the stock (or sell the stock in the case of a put)....statistically, I read that about 17% of options do not expire worthless, although there is also some other statistics that say that closer to 25% of options do not expire worthless....but to PNG's point, yes, most options do expire worthless...but not all! ÃƒÆ’ƒÆ’ƒÃ†Ãƒ¢â‚¬â„¢ÃƒÆ’‚°ÃƒÃ¢â‚¬Â¦Ãƒâ€šÃ‚¸ÃƒÃ¢â‚¬Â¹Ãƒâ€¦Ã¢â‚¬Å“

One of the key lessons for me with trading options is that if you want to cut down on price volatility, then try to play options that are IN THE MONEY or at least AT THE MONEY, meaning they are very close in price to your selected STRIKE PRICE...

The second lesson is the EXPIRATION DATE...I tend to buy my options about 40 to 75 days out to expiration... if I buy less than 40 days out, then I tend to be sure that I am trading with IN THE MONEY OPTIONS so that the time value does not become a big issue with my contracts.....if I do anything less than this, then I am truly gambling...and yes, once in a while, I do this type of strategy, and generally, I have paid the price when I attempt to get too adventuresome...! ÃƒÆ’ƒÆ’°Å¸ËœÂ³

I know some options traders may wonder why I am buying options that are two to three months out if I only intend to hold the trade for a few days or a week at best, and the reasons above explain why I do this...also, if I guessed wrong on the immediate direction of the underlying stock movement, a longer dated option that is bought in the money tends to hold its value much better and will allow time for my trade to re-cover...a stock trader knows that they can hold their stock indefinitely, sometimes for years, but eventually, they may make their money back if they hold long enough...but the luxury of time is not on the options buyer's side! If your call option drops from in the money to 25% out from the strike price and the options contract expires in 30 days or less, you can almost certainly kiss that money good-bye! ÃƒÆ’ƒÂ°Ã…¸Ëœâ€“  

However, the cost of the contract also comes into play...generally, I don't like to bet more than about $800 on any one options trade....this is my comfort level and represents about a 1.5% value of my trading portfolio-- in other words, even if I lose my entire bet one options trade, I can't dent my overall trading portfolio by more than 1.5% on any one trade...and many of my options trades take place at less than $400 a trade.... ÃƒÆ’ƒÆ’ƒÃ†Ãƒ¢â‚¬â„¢ÃƒÆ’‚°ÃƒÃ¢â‚¬Â¦Ãƒâ€šÃ‚¸ÃƒÃ¢â‚¬Â¹Ãƒâ€¦Ã¢â‚¬Å“‰

But sometimes, options contracts are very expensive...especially if in the money and on either a very volatile stock or on a very high priced stock...for example, you will never see me trading options on AMZN or GOOGL only because one in-the-money options contract on those stocks exceeds my 1.5% limit... and I tend to avoid options on very volatile stocks because those options premiums tend to be expensive....the person selling options on volatile stocks is more likely to make profits at the expense of those who buy options....I am thinking back to some of the CRYPTO stocks late last year that had ridiculously high premiums...and some of the CANNABIS stocks recently had very expensive premiums, and I avoided them (except for MJ which is an ETF for them)....but I generally believe that sellers (writers) of options tend to profit in situations like these since more options tend to expire worthless, although it can be uncomfortable when you are the seller (writer) and you realize you are on the hook for possibly owning, say TLRY at $150 if you sold an expensive put on TLRY at that strike price when it was at $200 a share...at the time it was at $200, that looked like a pretty good sale!...but only days later, TLRY was well under $150 and recently traded under $100, so imagine you were that put seller and you are now forced to buy TLRY from another person for $150 a share with the actual price under $100...certainly, for a retail trader, that might be a big hit for someone! (But if it was Goldman who sold the put, this would be a tiny dent for them!)...😎          

My suggestion to LittleShark is to: keep trading costs down...don't buy 10 contracts or any number of contracts if that one trade will eat up all of your dry powder...look at the recent example of WSK where he said he bought 10 contracts and got wiped out for a quick $600 loss....you will rarely see me trading more than 2 or 3 contracts on any one stock symbol trade...if I do go over 3 contracts, it's usually on a lower cost ETF trade where the contracts are relatively low cost.....again, keeping that 1.5% rule in mind....

Now,  the 1.5% rule does not work for everybody...that's my personal comfort level...if someone has a small pot of money, they obviously are going to have to have a larger pain threshold if they are going to make any meaningful trades...so, for someone like LittleShark who wants to trade options, perhaps his threshold is 10% or 20% of his dry powder on any one trade? The point is, each trader should set a limit for how much of their dry powder to risk on any one trade, imho!  If you guessed wrong on one trade, the trick is to make sure you have some dry powder left so you can come back in the next day and trade again for a brighter future....and of course, NO ONE should ever trade with money they need to pay a bill to keep the lights on or to put food on the table....only trade with money that you can afford to lose!    😃

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Ace post on Options in response to Slammer

slamminsam wrote:
I was a broker for a couple of years in the late 80's....absolutely no one made money in options by buying them.  The only ones who did OK were the writer of covered calls.  This was a long time ago.  In the long run all the options "players" went broke; the covered call writers made a small percentage and that was OK because the broker made money too with the commissions.  Now.....things are a lot different.  It's best not to get too greedy.  I think ETF's are safer - they don't expire in a month or two.  There were no such things as weekly options in the 80's.  I think there were monthly options, six mo. options and yearly options, believe it or not.  I was trying to tell Lil Shark that he should paper-trade his options trades for awhile and see how he does.....but I guess he ain't interested.  I know this - everyone on this board should be doing very well - if for no other reason the markets have been hitting ALL TIME HIGHS......until the last month or so - then all of a sudden things have change.......but for the last NINE YEARS.....the market has been RUNNING STRONG!  How can one not make big money?  Agreed.

I'm gittin' ready to go to Church.  Talk to you guys later.  At least the sun is out in upstate NY and the fall foliage is starting to come in bloom.   The Slammer


Sam, no doubt that making money with options is tricky, but a lot things have changed since the 1980's....

For one thing, trading costs are way down from the 80's. When I first opened a trading account back in 1990, I was paying some broker about $100 a trade for his commission....my guess is that options trading had similar high commissions, right?....heck, now a person can do an options or stock trade for just a few bucks....

Another thing, back then, I had to place a phone call to my broker to buy or sell anything...now, those trades can be done in a fraction of a second on a mobile app or from a trading platform on your computer-- I don't have to wait in a queue to speak with my broker....so, I think there is a better chance to lock in profits now than there was back then and with the trading platforms we have now, price is very transparent (with Level 2 and so on) compared to back then...I am still suspicious to this day that my broker back then wasn't giving me the best price or even a fair price or quote....

However, I do agree that OPTIONS WRITERS are more likely to make money only because most options that are traded are either at the money or out of the money...most buyers of options buy them at a low cost premium and bet on the come   ...or they are using options as a hedge against their stock shares to protect against down-side (or upside if they are shorting a stock)....so, for this reason, most options do expire worthless and the seller of those options pockets the money....

So, in my own experience, when I am actively trading (meaning the day job isn't consuming a lot of my time), I have proven to myself that I can run a profit with options trading...but the strategy here is to think like the WRITERS of options....either I sell options (those covered calls you spoke of) or if I buy them, I buy my options in-the-money and/or with longer expiry dates, which are the options that WRITERS tend to make fewer profits on....so, again, this has been the lesson I learned over several years of options trading....think like the SELLERS (Writers) do....and I think you can make money with options even if you are buying them, but of course, you still have to time your entry and exit properly too ...(and this is where I have to limit my trading during busy periods at the day job, otherwise, I can't properly time my entries and exits nearly as well)...

Or, become a writer of options, but for most retail traders, this requires selling a covered call which means you have to buy 100 shares of stock for every options contract you sell...or a person can also sell puts but keep in mind that your broker will freeze your account for an amount equal to the strike price...so, for example, a few months ago, i sold a put on an oil stock (BPT) with a $30 strike price and my broker froze $3,000 of my sweep account to cover the cost of selling that put.  

But options are also useful tools for protecting your investments in stock shares....As an example,  I used them successfully earlier in the year when I rode SQ up from about $28 to $65 with 100 shares of stock...I kept buying an occasional cheap put to protect my downside....and as I recall, my put finally allowed me to exit the SQ trade successfully just shy of the $65 mark...I think around $62 or so (although I missed the next move up which took SQ up toward $100, but that was only because I wasn't focused on that stock after $65)...currently, I own two puts on NIO that I bought at a $7 strike after I paid over $8 for NIO...now, NIO started to rally late last week and it might come back to $8 or more, and that would make me happy...but if that doesn't happen by November 16th, I can exercise those puts and exit my 200 shares of NIO at $7 rather than some beaten down price like $5.50 or worse.. 

Sam, overall, I agree with your comments about options trading...they are tricky devils and if a person is not thinking like the SELLERS of those options, then they will surely lose money over time.  So, that's my point with options...think about what the goals of the SELLERs (WRITERS) are and then buy those options that the writers would prefer you not buy...they still have to sell them to you in order to create a liquid market, and I would venture to say that most in-the-money and long-dated options are sold by the big brokers like Goldman Sachs (click here to learn more!), the House of Morgan, or by Berkshire Hathaway (Warren Buffett) [click here to learn more] as most retail sellers of options (and those numbers are very small, incidentally) do not want to sell you ITM or long-dated options, as those are the ones they are more likely to lose money on.   

Incidentally, I do think that these days, most SELLERs of options make a good income off of them....this is a major reason that Goldman rarely ever has a losing day of trading, because they are selling a lot of options against the stock shares they own...and look at Warren Buffett...he has admitted that a large source of Berkshire Hathaway's income comes from the sale of options contracts....

THINK OF THAT OLD BOARD-GAME, MONOPOLY...The winning strategy of that game was to buy a lot of properties and put hotels and houses on those properties and then charge HIGH RENT everytime an opponent landed on one of your properties.....WELL, the big institutions do the same thing with Options....they buy up most of the stock shares out there in the market...and then they collect RENT while they hold those shares by either LENDING the shares out to the shorts (and collecting interest on the margin loans) or by collecting dividends on those shares and selling options contracts to the sheeples...it's RENT to them...just like in MONOPOLY!  They don't care if the stock shares go up or down...they have it figured that they are  making money regardless of the direction of the stock shares. 
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slamminsam
Ace:  I agree with you that options are tricky.  You are one of the VERY FEW traders I know of that make very good money trading them.  I congratulate you!  Maybe you should write a book about trading options.  I'm sure it would attract attention, especially with the volatile moves the market is making lately.  I would buy your book.  Good luck with your trades and many happy returns!  The Slammer
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