Would this be a dumb idea?

Posted by umfan92 on January 25, 2012 (02:08PM)

I have been in stocks for a few months now, and I would like make an option trade or two. I was thinking of buying a long term OTM call option. Worst case scenario, I lose what I paid for the premium, which won't be too much, but if the company happens to do well, I can make a good amount of money. 

Do any of you do this? 

I noticed Xerox missed earnings and had a really bad day today, down 9%, so all the options went down as well. I haven't done any research yet, but I'm just throwing it out there as an example. Are those types of trades dumb? 

Posted by spshapiro on January 25, 2012 (02:16PM)

Only if Xerox doesn't appreciate to the strike within the time period. Btw, I would be on the other side of the trade myself, but only if I own the shares.

Posted by umfan92 on January 25, 2012 (02:30PM)

Thanks spshapiro. I also had BAC in mind because I feel like they'll start improving over time. I'm not exactly sure how to determine if a company has the potential to grow or not. I've been doing too much research on technical analysis. 

Posted by Rob M on January 25, 2012 (02:49PM)


I do something similar but all the LEAPS I buy are ITM.

Posted by umfan92 on January 25, 2012 (03:12PM)

I read about a similar strategy, Rob. It's a larger premium right? I guess it's a trade-off, no pun intended. I bought a couple BAC Aug 19 2012 at 9.00 calls. I know it's a risk but it barely costs anything and it's a long enough time that it can get there. 

I have to make the dumb mistakes all beginners make right? We'll see how it goes. 

Thanks.

Posted by OldFart on January 25, 2012 (03:51PM)

umfan92 said: I have been in stocks for a few months now, and I would like make an option trade or two. I was thinking of buying a long term OTM call option. Worst case scenario, I lose what I paid for the premium, which won't be too much, but if the company happens to do well, I can make a good amount of money. 

Do any of you do this? 

I noticed Xerox missed earnings and had a really bad day today, down 9%, so all the options went down as well. I haven't done any research yet, but I'm just throwing it out there as an example. Are those types of trades dumb? 

 otm calla are basically lottery tickets. once in a blue moon you win, usually the other way around

Posted by umfan92 on January 25, 2012 (04:18PM)

Thanks OF. I'll be doing more research about options and I'll keep learning. And who knows, it might work out for me. So do you mean that long term ITM calls are the way to go?

Posted by TampaJake on January 25, 2012 (04:26PM)

I don't do that. When spshapiro says he would be on the other side of the trade I believe he means he would be happy to sell you that OTM call option. The reason is this - if the price advances he makes money by selling the option & participating in some of the capital gains on the stock he owns. If the price remains flat he gains the premium but little or no capital gains on the stock. He can win 2 ways AND he will always benefit from time decay on the option. You as the option buyer can only win if the option goes in the proper direction in a specified period of time.

In my opinion, if you own stock, a better choice would be to sell an OTM call option. This does limit your gains if the stock should suddenly take off, but it also gives you some premium which you can not lose.

Posted by Rob M on January 25, 2012 (04:33PM)

umfan92 said: I read about a similar strategy, Rob. It's a larger premium right? I guess it's a trade-off, no pun intended. I bought a couple BAC Aug 19 2012 at 9.00 calls. I know it's a risk but it barely costs anything and it's a long enough time that it can get there. 

I have to make the dumb mistakes all beginners make right? We'll see how it goes. 

Thanks.

 

The premiums for ITM options are definitely higher but have more intrinsic value and therefore you aren't paying as much of a time premium. You can still acheive much higher returns than actually owning the stock and it is less risky than buying OTM options.

Posted by guitarmanken on January 25, 2012 (06:20PM)

      Umfan those out of the money calls are cheap because they are crap. They lose value each day even if the price of the stock stays the same. In fact even if the stock is up a little at expiration date you still lose money. If the stock price is the same at expiration you lose all your money. How stupid is that? Deep in the money calls are way better but still risky. You must learn to use the P&R calculator here on trade king before you buy calls. It will totally help you understand how they work. Remember preservation of capital is #1.

Posted by NYSEguy on January 25, 2012 (07:59PM)


umfan92 said: I have been in stocks for a few months now, and I would like make an option trade or two. I was thinking of buying a long term OTM call option. Worst case scenario, I lose what I paid for the premium, which won't be too much, but if the company happens to do well, I can make a good amount of money. 

Do any of you do this? 

 
See mistake #1 here:

https://www.tradeking.com/education/options/top-10-option-trading-mistakes


Posted by papermaker67 on February 01, 2012 (09:41AM)

They are lottery tickets-Don't spend your capital that way.
BAC is a train wreck as well.  I suspect all of us have done what you are speaking of in the past.  If you figure the rate of return in an annual sense the near term OTM calls are much higher.  Buying deep ITM calls can replicate a stock purchase and should maintain value while you participate in whatever increase the stock  has over the time frame.  If you are very bullish on the stock you can sell OTM puts to help purchase the ITM calls as well.  BUT if you are wrong you will be REALLY wrong:)

Posted by papermaker67 on February 01, 2012 (10:00AM)

OK BAC April 8.00 OTM call @ .34 X 5 contracts.
Sell 6/4 Put spread for a net of .17 per contract X 5
For 85.00 you get to gamble for a few months.  You just need to be ready to take it off if it goes the wrong way.

Now watch that will work and I dont do it...story of my trading career.  

Posted by papermaker67 on February 01, 2012 (10:03AM)

Just for the record I dont like BAC.

Posted by TK All-Star on February 01, 2012 (05:09PM)



Umfan,

 

Yes. This would be a dumb idea.

 

Your plan is nothing less than gambling. And that’s okay if you know what you are trading and whether the price being paid is reasonable or exorbitant.

 

However, as an options educator, I cringe when I see traders such as yourself beginning their option-trading career by taking pot shots and hoping to be lucky.

 

Covered Calls were designed as risk-reducing investment tools. If you use them that way, you are far more likely to earn money, rather than tossing our cash into the trash. The loss may not ‘be too much’ – but why lose money?

 

Here’s one basic point that traders who buy cheap out of the money options don’t recognize: ‘If the company happens to do well’ it is still very possible (even likely) that the stock will not rise as far as you need it to rise and that you will still end the trade by seeing your option expire worthless.

 

Call prices do not always rise when the stock price rises. Sometimes too much time passes, and that hurts the option price more than the stock price rise helps. Sometimes options decline in value when the stock is not expected to be very volatile in the future.  These characteristics of options are not something to be ignored. I urge you to begin learning to use options by getting your hands on a good book for beginners.  (I recommend my book: The Rookie’s Guide to Options.)

 

If you must dive into options, I suggest you start with covered calls. This will give you an opportunity to see how options work with a real, live position. This trade has considerably less risk than your suggested choice.


Regards,
Mark Wolfinger

Feb 1, 2012

 



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Posted by umfan92 on March 19, 2012 (11:46AM)

Ok well I got really lucky and BAC took off in the last few days. My 2 call options have more than tripled in value. So I got the best of both worlds. I learned from you guys that it was a dumb idea, and I didn't lose my money. 

So now that I've made profit, I'm not sure whether I should sell or keep it for a little longer.

BAC has been rallying the last few days with high volume, I assume because of the good news about the stress tests. I'm thinking of keeping it for a few more days to see if it continues but if it drops I'll let it go and if I see volume diminishing I'll also let it go.

What do you guys think? I'm still new at this but I hope this doesn't sound too bad.  

Posted by Buster01 on March 19, 2012 (11:52AM)

Greed is never a good thing.  Sell one option and lock in profits.  If you want, keep the other one as it's house money anyways so technically you won't be out anything if it drops, well besides lost profits.

Posted by spshapiro on March 19, 2012 (01:02PM)

Um, you made out investing in OTM calls at a time of a raging bull. That is not the norm, so counting on it in the future is chancy. If you had said ORIGINALLY, that you were buying this option because you had (what you thought was) good reason to believe the stock would move towards this strike in a timely way, then there is some rational for doing this type of trade. But you said, “I have been in stocks for a few months now” which some might take to mean “I am a lamb looking to be fleeced…” Remember I said that I would be on the other side of this trade, except I don’t like BAC, and I don’t sell options on stocks I wouldn’t own.

This is not a game with grandpa, were he will let you win or give you back your chips when you lose. Take your time to develop your skills, your style. You will still lose sometimes, but hopefully not that often. Since you made money on this trade, you probably will learn less from it than if you had been burnt. Not that I wish it for anyone, but it is just a reality that you should acknowledge.    

Posted by papermaker67 on March 19, 2012 (03:03PM)

Posted by papermaker67 on February 01, 2012 (10:00AM)

OK BAC April 8.00 OTM call @ .34 X 5 contracts.
Sell 6/4 Put spread for a net of .17 per contract X 5
For 85.00 you get to gamble for a few months.  You just need to be ready to take it off if it goes the wrong way.

Now watch that will work and I dont do it...story of my trading career.  

I can only make money for other people....

Above worth 925.00 today.

Posted by umfan92 on March 19, 2012 (06:45PM)

Ok I sold my contracts today close to the peak price (I got lucky again). 

I want to thank everyone who has helped me on this thread. I do pay attention even though it might seem like I ignore it. I realize I got lucky this time and it is not likely to happen again. For now, I will stay away from options or maybe just sell covered calls like Mark Wolfinger and others have said.  

I dont want to seem like just another new kid that doesn't listen to good advice and will blow his account in a matter of weeks. I have learned a lot on this forum and I do appreciate all the help. 

papermaker67, 
    I wiuld have considered your suggestion but I am not yet aporoved for trading spreads, but that is stilo imoressive turning 85 into 925.

Thanks everyone.

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