Basic question

[dod]

I occasionally swing trade US stocks and hold them for several days. I enter on a stop rather than at market.

Could a put or call option be bought by me on the same basis as the underlying stock? In other words, when the underlying reaches a specified price, an option is bought, and if the underlying reaches a specified lower or higher level, that option is then sold?

Or are 'stop' option purchases dependant on option prices?

 

[2468steve]

I occasionally swing trade US stocks and hold them for several days. I enter on a stop rather than at market.

Could a put or call option be bought by me on the same basis as the underlying stock? In other words, when the underlying reaches a specified price, an option is bought, and if the underlying reaches a specified lower or higher level, that option is then sold?

Or are 'stop' option purchases dependant on option prices?

The above appears to be a decent strategy,but it may not neccessarily follow that it would prove successfull. I believe you can trade options with stops/limits etc....but i wouldn't base my entry/exit solely on the chart of the underlying...many things to consider,not least intrinsic value...time value etc...

"Options are like fish...the longer you hold them the more they stink..."

 

[2468steve]

Or are 'stop' option purchases dependant on option prices?

yes....

 

[ian]

"Options are like fish...the longer you hold them the more they stink..."

LOL...Now that's a quote.!

 

[dod]

Well, I wanted to avoid the concern I have that one day a stock I'm long plummets overnight and my modest 'risk' turns into a monster loss. I thought maybe if I bought an option instead of a position, I would benefit from any subsequent gain but be protected against the outside possibility of a massive loss.

The idea's a non starter, though, if I can't buy or sell options based on the behaviour of the underlying.

 

[TheBramble]

I looked at this a long way back and while it would make sense in certain circumstances depending on your position size, current and anticipated market volatility and overall investment expectations, for the smaller player (probably most of us on these boards) it is a non-starter. And if you could get all of that lot right, then you don’t need to hedge anyway.

If you're buying options to hedge with a profitable trading strategy - you're over-insured and wasting money (and profits). If you don’t have a profitable trading strategy, no amount of option engineering will help.

If all other factors are right and you have it covered, selling premium is a useful way to augment your position and achieve greater leverage using the underlying as your hedge. But that’s a whole different ball game.

 

[2468steve]

I looked at this a long way back and while it would make sense in certain circumstances depending on your position size, current and anticipated market volatility and overall investment expectations, for the smaller player (probably most of us on these boards) it is a non-starter. And if you could get all of that lot right, then you don’t need to hedge anyway.

If you're buying options to hedge with a profitable trading strategy - you're over-insured and wasting money (and profits). If you don’t have a profitable trading strategy, no amount of option engineering will help.

If all other factors are right and you have it covered, selling premium is a useful way to augment your position and achieve greater leverage using the underlying as your hedge. But that’s a whole different ball game.

Bramble,
exactly what I wanted to say but didn't know how....thnx....

 

[dod]

Basically, this is a strategy I've followed for years, off and on. It simply involves watching out for a chart pattern, and when it appears, placing a buy or sell order at a higher or lower point than the current price. If I'm filled, a stop and a target are automatically placed. The target is always twice the risk.

My worry - so far unrealised - has always been that even at a modest level my initial risk (entry price minus stop price) could turn into something much larger. For example, with an entry price at $70, and a stop at $69, and a target at $72, I could wake up one morning and find the price at zero.

If I had bought 1000 shares at $70 I would have had a total 'risk' of $1000 with my stop at $69 for a possible gain of $2000 if my target was reached at $72. However, if the price fell to zero I would be down $70000.

With a call option I could never lose more than the cost of the option.

This is all theoretical. In actuality, over many years of buying and selling at this 1.2 R/R ratio, any time I've lost more than my initial risk, I've been compensated another time by gaining more than my target - all due to overnight gaps.

 

[2468steve]

Basically, this is a strategy I've followed for years, off and on. It simply involves watching out for a chart pattern, and when it appears, placing a buy or sell order at a higher or lower point than the current price. If I'm filled, a stop and a target are automatically placed. The target is always twice the risk.

My worry - so far unrealised - has always been that even at a modest level my initial risk (entry price minus stop price) could turn into something much larger. For example, with an entry price at $70, and a stop at $69, and a target at $72, I could wake up one morning and find the price at zero.

If I had bought 1000 shares at $70 I would have had a total 'risk' of $1000 with my stop at $69 for a possible gain of $2000 if my target was reached at $72. However, if the price fell to zero I would be down $70000


With a call option I could never lose more than the cost of the option.

This is all theoretical. In actuality, over many years of buying and selling at this 1.2 R/R ratio, any time I've lost more than my initial risk, I've been compensated another time by gaining more than my target - all due to overnight gaps.

One strategy I have used is to wait till maybe 1 week before expiry,or even days,and look for set ups that you've outlined...thus most time value has disappeared and then you become more leveraged as a result of smaller moves being so close to expiry....I've never held into expiry and normally close out a couple of days after entry....it has a decent success rate....the trick is finding the right stock with a decent beta,and then the option to suit with the most powerful delta...

http://blog.poweropt.com/2006/03/10/option-trading-the-greeks/

 

[grantx]

I'm looking to utilise buy/write strategies (long stock, short call) on UK equities. Could one of you gentleman suggest a decent broker (and comm's). I'm in the UK.

Thank you.

Grant.

 

[Profitaker]

The idea's a non starter, though, if I can't buy or sell options based on the behaviour of the underlying.

Some brokers accept options orders on a "market if touched" based on the underlying. Try Interactive Brokers (IB).

 

[dod]

That sounds like what I wanted. Thanks, I'll look into it. Evidently, there's a lot more to IB than meets the eye - my eye, anyway.

 

[beckhamm_7]

I've also got a basic question. I'm new to option trading and I was looking at a few on the yahoo finance site. For the options of the QQQQ shares, for each strike there are two different options on market. Is one an American and the other an European?

 

[kensfishbar1]

I'm looking to utilise buy/write strategies (long stock, short call) on UK equities. Could one of you gentleman suggest a decent broker (and comm's). I'm in the UK.

Thank you.

Grant.

Hi Grant

Did you find the right broker for the U.K. buy/write?

Thanks.

 

[grantx]

Hello Ken,

The buy/write strategy has been put on hold and brokers weren't pursued.

I presume you're looking for the same. One possibility (an educated guess) would be Kyte stockbrokers (Kyte are more well-known for clearing and derivatives).

Hope this helps.

Grant.

 

[gooseman]

grant-are you talking about institutional stuff or retail stuff?

 

[grantx]

Goose,

I'm assuming Ken is retail. Can I assume from your question Kyte doesn't offer a retail service?

Grant.

 

[gooseman]

I don't kjnow mate. i'm know the institutional market pretty well so could help on that front. retails stuff not really my bag...