Option Experience

Malcolm Myles on

Hi Clubbers,

Thought I share an experience that I've gone through the last few days.

I get a LOT of email about option investing because I asked for it. I feel that learning is a beneficial experience unto itself. I sat in on a "webinar" touting itself as showing off the "big trade". It was, of course, a sales pitch for a $1,000 three day event.

I've been interested in buying options - specifically puts to provide downside insurance on positions I wish to keep. But I've done my homework and realize that 90% of option traders go broke and a really successful option trader - the 10 out of 100 - only make money on 60% of their trade IF they are LUCKY. Still the siren song of big short term gains was ringing in my ears so I listened.

In the webinar, they guy showed his large equity trading account - $1.25M - with his current positions. Impressive. Then he showed a what happened in one morning (Tuesday after the holiday) when the stock market opened. His account jumped by $250,000 in about ten minutes. His goal in trading is to capture 5% per month with aggressive option trading on his eight screen trading platform.

Here's the crunch though... $1.2M, captured $250,000 in ten minutes in late May... How much was his account worth in January when you back out the $250,000 at 5% per month? Did he have just $1M and make it to his goal with the single day trade in May? Or did he, as I suspect but didn't get an answer to, roll his account up and down in $250,000 "mood swings" in the five months of 2013 and just showed the best results to impress.

Here's what scared me the most - he answered a question from a 65 yo retired person who admitted he has memory problems and wanted to have documents to refer too if he bought into the program. He recommended that the listener start with a $10,000 account and not use his whole nest egg to trade options and yes, he would get a PDF book to print out... I nearly punched the screen!

Then he showed us a live trade. This was the limit. He bought puts to cover his downside risk and then put in an order to buy just above the puts. The market was closed and earnings were released. The stock started to drop on the news and approach his buy. And I quote: "common baby, common, common, common... this is just like having a baby!".

The only thing missing was the State Motto of Nevada "Baby needs a new pair of shoes".

If you want to gamble. Take a vacation to Lake Tahoe. At least you'll get some beautiful views, some time in the sun, water and beach. Hike in some of the cleanest air in the country and if you must, there's a club or two that will take your money for "entertainment purposes".

Strong Fundamental investing with a layer of Covered Calls and Cash Secured Puts on the top is the way for me.

Malcolm

richard J bitter on

I've been through a fair amount of options related training
and in a nutshell, options are an incredibly flexible way of
approaching the stock market. options are a lot more nuanced
than stocks and you really need to understand two aspects:
how the greeks contribute to the value of an option
contract, and the concept of synthetics.

the level of "gambling" you do is directly dependent on what
type of trading you're doing. most people blow it on options
because they're bent on buying out of the money contracts
and this is not always the best approach.

you wont get a lot of this type of information in a free
webinar, but if you wanted to buy XLF to get exposure to
financials, you could go out and buy 100 shares @ about
$2000. a very conservative options approach is go out a few
calendar months, say august, and buy an in the money call
where the option's delta value is about 0.8 to 0.85. this
will be around the $18 strike and should cost around $250.

the 80ish delta suggests that I have about 80% of the upside
move- so if XLF runs from $20 to $21- i'll gain about $80
instead of $100. i'm doing this on about 15% of the total
cost of 100 shares and if the market completely tanks, my
loss is absolutely capped.

for synthetics- most people don't realize that stock is
equivalent to a long call and a short put. when you sell a
covered call, the resulting position is a synthetic short
put. the call you sold has effectively "cancelled out" the
call that's inherent in the owning of the stock.

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