Options Trading Expiration Date Selection
Posted by Maclin Vestor | Filed under Business
There are strategies on whether to buy or sell in the money, at the money or out of the money options. There are questions of whether to be a buyer or seller, and to get puts or calls, and to be hedged or un-hedged. In addition, there’s also the question of WHEN to select the option. Do you select short term, or long term?
There are two views
One point of view is that you believe what Warren Buffet believes, and that’s that the pricing model is based too much on recent volatility, and that if you sell an option as far out in the future as possible when the volatility of the market/individual stock is at it’s peak, that with all things being equal, you will probably find that the volatility won’t return, and thus the buyer of the option is paying Too much. In addition, if you are Warren Buffet, you can depreciate your losses on paper, and use the sale of your options as capital to invest. If you are Warren Buffet, there’s a lot more value in having cash as you can achieve greater gains with that cash.
The other view is that long term options may cost more for volatility, but paying for 1 10 month option is cheaper then 10 1 month options at the same strike price. As a result, you should own long term options, and sell short term options, perhaps even with the same stock. If you buy a long term option, and sell short term, if at any given time, the price shoots up (and you sold short term calls), you can sell your long term option to pay for your short term option, then if you wish, repurchase the long term option and continue to write short term calls. You will continue to collect the theta.
I believe what Buffet believes to a certain extent. I believe that you should be a little concerned about the implied volatility and historical volatility. If a stock has had a lot of recent volatility, you should eventually expect that volatility to decline. If that does in fact happen, it may be more difficult to sell the value in calls to get your money back, but you still should. If you do not have the ability to borrow funds at the fed funds rate, or raise capital and so on, you will be better suited buying LEAPS and selling short term. That doesn’t necessarily mean both views can’t be correct. You could sell puts in times of high volatility in the S&P with European style options (must be held until expiration), and make money, or you could buy leap calls in that same period of time and make money. It’s even possible that you could also buy a put with the same expiration year (non European), and still sell enough short term puts to pay for it by then. I believe that buying short term options is the riskiest.
Well what if someone owns a stock and they write covered calls and the buyer actually does win. He will win more than he loses, the owner of the stock will forfeit his stock and lose a small amount, but where the heck does the money come from? The option buyer pays essentially a fee for the option, the option seller receives that fee, the option calls in the shares, and the share price is sold to someone who either paid too much for it, or someone who will eventually sell it to someone who paid too much for it. Someone will lose. However, it is possible for the option owners and option sellers to all win.
I would not want to be the one buying short term options, that requires expert knowledge about what is going to happen short term, or billions of dollars at your disposal to force the price of the stock up, and hope demand follows so you can win and still get out before people figure it out, or you could own a huge hedge fund or mutual fund and use that to try to chase a stock up higher while you sell out of that same stock. These are the kinds of games that can be played, which is why it wouldn’t make sense for someone who is smart enough and can figure stuff out to turn his money over to a mutual fund manager.
So it’s possible to make money as an option buyer and as a seller. The question is, does it fit with what you do, and do you know what you are doing?
Maclin Vestor teaches how to make money with trading system and how to buy stock.
Tags: Business, buy stock, how to buy options, how to buy stock, option trading systems, options, stock, when to buy options, when to buy stock
Money Management in Trading Systems
Posted by Adela Thomas | Filed under Finance
How to manage money when buying stocks, futures, or options — what you must know before you buy.
Many people have a very crucial problem, they take on more risk than they can. It really doesn’t matter if you’re very young, if you take risk to the extreme and continue down that path, you will by mathematical law in all probability lose money.
Lets say you had an almost sure investment that was 85% likely to succeed. When it succeeded you double your money. You put all your money on it. The problem is, when the investment fails, you lose everything. Now it is just a fact that you will eventually lose everything if you continue to invest everything. You only need one trade and you are wiped out completely. Now, even if you invested 90% of your money on an investment that would win 80% of the time, you still are taking on too much risk to win in the long run. If you lose once, you will need a 1000% return just to get back to even. That simply will not happen forever, and even if it did, the large loss would limit your potential for gain so much, that you’d be better off not taking on the maximum risk.
Now, your risk of losing everything can never be completely 100% eliminated, even with conservative strategies. If you flip enough coins, eventually you’ll get a very rare event such as 100 heads in a row. However, you’ll also get 100 tails in a row. The idea is that you have a strategy that yields you more when you win, and/or wins more than it loses. in this case there will be several losses in a row, but there will also be several wins in a row. If you manage your money properly, you will still have enough money if you get several losses in a row, to be able to more than make up for it when you get several wins in a row. If you are forced to limit the amount of capital after so many losses, that you cannot invest with the same amount after the losses, you may be unable to win enough to make up for those losses. The idea is to keep your investments small enough to limit the chances of that happening. Although almost nothing is a sure thing, by using proper money management, you tip the odds in your favor.
Even if you have a profitable method, if you do not manage your risk, your profitable method becomes unprofitable. It’s not usually the investment vehicle, it’s the investor that ultimately determines how quickly you fail, and ultimately whether you are able to succeed. Under the same context, it’s not usually the type of car, but the driver that determines whether you cause an accident. In order to protect yourself, you must keep your positions at a manageable level, and make sure to keep yourself limited by these rules that will limit your risk of ruin and keep the odds in your favor so you can stay in the game.
So how exactly does one manage money in a trading system? You need to determine probability of a move taking place. If you buy OTM option, the stock will have to move larger for success to occur. Of course if it does, the reward will be greater. There are probability curves based on a random walk theory that will assist you in determining the probability of a move taking place, until you know any better, use these. However, you also should use your own records of your system Determine both your risk/reward (your average % win divided by your average percentage losses, and in addition figure out your likelihood of success. When you do this, you can use what’s known as the Kelly Criterion By using the formula as follows Kelly % = W - [(1 - W) / R] Kelly % = The maximum percentage of your capital you should invest per position. W = Winning probability R = Win/loss ratio
A trading system that contains good money management rules will not only outperform one without, but it will also help protect your capital, and keep you in the game.
Maclin Vestor teaches about varioustrading systems and teaches you to find a trading system that works for you.
Tags: Finance, forex, futures, how to buy stock, investment, investments, options, stock, Stock market, stock trading systems, stocks, system, systems, trading, trading strategy
