I have another newbie question about options. I was thinking about try out a simple "Long Call" strategy. But I noticed some of the options' premiums are pretty high and that stock would need to sky-rocket to break even. Here an example of what I found:
DMND - Premium for $35 strike price, Dec 17 is $4.80 - Break even if stock goes up 11%+
BRLI - Premium for $12.5 strike price, Dec 17 is $1.80 - Break even at 16%+
INCY - Premium for $12.5 strike price, Dec 17 is $2.05. Break even at 16%+
Looks like this might be good strategy if I except the stock price go up like 20% or 30%. But if stock doesn't make it I can lose the huge premium. Like for INCY, 1000 stocks would cost me $2,050 (I usually by ~$10K worth of stocks). Options seems like an easy way to lose a lot of money.
Honestly, I have yet to loose $2k in any of my stock bets. It seems like if I am so bullish about a stock, I might as well buy it outright. I would end up gaining more money that way.
I may just need find something with cheaper premium which I think is a good bet to get anywhere with options? Any suggestions or ideas from you guys?
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Each of these options carries an implied volatility of over 100. (The higher the IV, the higher the premium.) From TK's probability calculator, one standard deviation of DMND's price for December expiration is 25.35 to 46.22, based on Friday's closing price of 35.80. That's a price swing of 30% in each direction.
If you're interested in speculating on price movement, you might want to trade vertical spreads instead of long calls. Your maximum profit will be reduced, but so will your risk.
Or, as you say, you can just buy the stock-- but keep in mind that long stock positions can also carry significant risk, especially when those stocks are so volatile.
Yes, because it's very easy to take on too much risk.
TK's IV chart is a useful tool; just be sure you don't confuse historical volatility (the stock's actual price volatility, calculated from historical price data) with implied volatility. The IV line on the chart represents the average implied volatility of the underlying's front-month ATM call and ATM put.
It's also a good idea to become familiar with the concept of volatility skew, which can be represented graphically as IV versus strike price for a given option type and expiration date. Such a graph provides a quick way to determine which options are overpriced or underpriced relative to others in the same expiration cycle.
You can do this yourself with just a spreadsheet. Download your option chain using the "Export to Excel" link on the TK option chain page. Then plot a graph of implied volatility versus strike price (you can plot calls and puts on the same graph). Here's an example:
Let's say you want to buy a December call spread on EFA, and you're considering several different strike prices in the mid-40s. Do you see how the IV of the $47 call sits above the trend line of its neighboring calls? This suggests that the premium of the $47 call is comparatively high, so it would make sense to sell this one and buy the $46 call (for a spread width of $1).
Of course, this skew curve changes over time, so you'll need to act quickly once you identify a trade that you like. Also, please don't take this trade as a recommendation; I merely chose it at random to illustrate the method.
Are option premiun usually so expensive?
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I have a saying... Until you can get two issues right, why add a third.
Issue one... Choosing the Right Stock
Issue two... Choosing the Right Direction
and the Final Issue that usually takes your money is
Issue three.. When is it going to happen (time or expiry of option)
The problem with issue three is it does not represent 1/3 of the equation. It really represents over 50% of the bet. Ole Otter has lost more money in the stock market by playing options than any other hair brain ideas that I've tried.
Tread lightly and carefully...
Issue one... Choosing the Right Stock
Issue two... Choosing the Right Direction
and the Final Issue that usually takes your money is
Issue three.. When is it going to happen (time or expiry of option)
The problem with issue three is it does not represent 1/3 of the equation. It really represents over 50% of the bet. Ole Otter has lost more money in the stock market by playing options than any other hair brain ideas that I've tried.
Tread lightly and carefully...
unseengundam said: I have another newbie question about options. I was thinking about try out a simple "Long Call" strategy. But I noticed some of the options' premiums are pretty high and that stock would need to sky-rocket to break even. Here an example of what I found:
DMND - Premium for $35 strike price, Dec 17 is $4.80 - Break even if stock goes up 11%+
BRLI - Premium for $12.5 strike price, Dec 17 is $1.80 - Break even at 16%+
INCY - Premium for $12.5 strike price, Dec 17 is $2.05. Break even at 16%+
Each of these options carries an implied volatility of over 100. (The higher the IV, the higher the premium.) From TK's probability calculator, one standard deviation of DMND's price for December expiration is 25.35 to 46.22, based on Friday's closing price of 35.80. That's a price swing of 30% in each direction.
If you're interested in speculating on price movement, you might want to trade vertical spreads instead of long calls. Your maximum profit will be reduced, but so will your risk.
Or, as you say, you can just buy the stock-- but keep in mind that long stock positions can also carry significant risk, especially when those stocks are so volatile.
unseengundam said: Options seems like an easy way to lose a lot of money.
Yes, because it's very easy to take on too much risk.
Uns, you have been offered two good pieces of advice here, at a very low cost. Most people don’t value things given away for free, but if you don’t in this case, I would take the bet that you will after losing some sum that will be meaningful in your mind.
I am not saying this to stop you from using options. I am saying this so that you take the time to consider the risks as well as the rewards.
Over time, options become more and less expensive. As mentioned above, the implied volatility is the driver.
There are option strategies that work better in high and low volatility environments. To put it in general terms, sell them when they're expensive (covered call, credit spreads, or sell puts), and buy them when they're cheap.
You can do a vertical spread for a somewhat neutral volatility trade.
There are option strategies that work better in high and low volatility environments. To put it in general terms, sell them when they're expensive (covered call, credit spreads, or sell puts), and buy them when they're cheap.
You can do a vertical spread for a somewhat neutral volatility trade.
Uns - it's all Greek to me. You got enough good advice above, no reason to repeat it. It is difficult to trade options without some understanding of pricing models
Use historical data to determine if the options are over priced or not. For example, last Friday Google's 605 calls were under valued ($0.30 @ $599) while just two days before Priceline's 520 calls were WAYYY over priced (~$20 @ $515). My rule of thumb is, if it takes more than a 3% move by expiration time to just break even (not even make money), I don't generally buy it. I've lost almost $10k in the past month on options and experience tells me that once it hit the profit region, get ready to sell it and don't hold it as time decay will kill you.
treeHamster, it seems like what you're talking about is Implied Volatility. The IV is the major driver of options premiums. If everyone expects a stock to move up, the calls will get more expensive. If down, then puts. If there is uncertainty, then both cost more. It's worth noting, the market doesn't always get it right.
It's not good to use a rule like 3% as you mentioned above. Every stock has it's own implied volatility and it changes over time. The best thing to do is look at your stock's IV and decide if it's high or low.
There are option plays that work better in higher and lower IV environments.
It's not good to use a rule like 3% as you mentioned above. Every stock has it's own implied volatility and it changes over time. The best thing to do is look at your stock's IV and decide if it's high or low.
There are option plays that work better in higher and lower IV environments.
treeHamster said: Use historical data to determine if the options are over priced or not.
doougle said: It's not good to use a rule like 3% as you mentioned above. Every stock has it's own implied volatility and it changes over time. The best thing to do is look at your stock's IV and decide if it's high or low.
TK's IV chart is a useful tool; just be sure you don't confuse historical volatility (the stock's actual price volatility, calculated from historical price data) with implied volatility. The IV line on the chart represents the average implied volatility of the underlying's front-month ATM call and ATM put.
It's also a good idea to become familiar with the concept of volatility skew, which can be represented graphically as IV versus strike price for a given option type and expiration date. Such a graph provides a quick way to determine which options are overpriced or underpriced relative to others in the same expiration cycle.
That is actually the kind of options I would like to find, under valued options that can I snap up. Is there any option screener/scanner that can be easily to used to find these undervalued options?treeHamster said: Use historical data to determine if the options are over priced or not. For example, last Friday Google's 605 calls were under valued ($0.30 @ $599) while just two days before Priceline's 520 calls were WAYYY over priced (~$20 @ $515). My rule of thumb is, if it takes more than a 3% move by expiration time to just break even (not even make money), I don't generally buy it. I've lost almost $10k in the past month on options and experience tells me that once it hit the profit region, get ready to sell it and don't hold it as time decay will kill you.
unseengundam said:
Is there any option screener/scanner that can be easily to used to find these undervalued options?
You can do this yourself with just a spreadsheet. Download your option chain using the "Export to Excel" link on the TK option chain page. Then plot a graph of implied volatility versus strike price (you can plot calls and puts on the same graph). Here's an example:
Let's say you want to buy a December call spread on EFA, and you're considering several different strike prices in the mid-40s. Do you see how the IV of the $47 call sits above the trend line of its neighboring calls? This suggests that the premium of the $47 call is comparatively high, so it would make sense to sell this one and buy the $46 call (for a spread width of $1).
Of course, this skew curve changes over time, so you'll need to act quickly once you identify a trade that you like. Also, please don't take this trade as a recommendation; I merely chose it at random to illustrate the method.
Actually I have a specific algorithm that I added into ThinkOrSwim's scanner which searches for certain stocks. They are actually a LOT easier to find as I work on a theory that I am developing. The theory is based on times when Black-Scholes breaks down. Also I wasn't talking about IV's. I was talking about market efficiency. I do use the Greeks some but no where near as much as a lot of people seem to. I generally look for a specific handful of stocks then use them as the ones to work with for a while as they fit the model I'm developing which works in times when the Black-Schole's model doesn't work (there are times it doesn't work by the way).
There are also ways to make money without having to buy OTM. For example you could buy some ITM calls that have a delta that's very close to 1 and it's exercisable price very close to the theoretical price (within a 5%) then use that. For example when Apple's $396 you could buy a deep ITM call for 375 which will have a theoretical price near $21 and then if Apple moves up 2% your options would move up 30%. It's not a dazzling 100% or 1000% like I hit with Google last week but it's still decent and has a much lower risk level.
P.S. I was speaking of calls that expire within 8 days (where the BS model starts to fall apart).
P.S. I was speaking of calls that expire within 8 days (where the BS model starts to fall apart).
I just wanted to add that you should sign up for an account with TD Ameritrade and download their ThinkOrSwim platform. It will do options charting just as if it were a stock but it will also include the theoretical price on the chart which is a good way for knowing if it's under valued or overvalued (look about an hour or two into the past on the chart and if the theo is under the selling price, it means they're overpriced, or vise versa).
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