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John,
Thanks for the note. I'm going back to bed, so I'm printing it out to read
it upstairs.
Guy
Paranoia...you only have to be right once to make it all worthwhile!
-----Original Message-----
From: owner-metastock@xxxxxxxxxxxxx [mailto:owner-metastock@xxxxxxxxxxxxx]On
Behalf Of John Manasco
Sent: Tuesday, June 20, 2000 4:50 AM
To: metastock@xxxxxxxxxxxxx
Subject: Re: Selecting options or writing uncovered options
Hi Guy,
Well here goes.
I buy options that are no more than a month and a half from expiration.
Anything longer and you are buying too much time premium, at least for me. I
buy on technicals with the expectation that the underlying will move in a
certain direction. I buy only in the money contracts on stocks I expect to
make a good move and I use tight stops. Liquidity is important so I look for
stocks that have decent open interest.
I don't write uncovered options on indexes but I do write them on stocks.
Personally I like to write options that are far out of the money on an
underlying with less that four week until expiration. An option loses its
time premium more quickly as expiration approaches and you want it to finish
out of the money. I look for options whose implied volatility is greater the
its historical volatility with the assumption that volatility will revert to
the mean, i.e. decrease, which means the option premium should also
decrease.
Another big reason I write options on stocks with less than four weeks until
expiration is the margin requirements. Writing uncovered options ties up a
bundle of your equity in margin, equity that might be better allocated
elsewhere and I think Schwab has pretty high margin requirements.
Implied and historical volatility can be found on the web but I use a
program called Option Simulator. It is one of the best I have found but
unfortunately is no longer available.
You said you're idea was to write in the money options. If you write a call
are you prepared to deliver the underlying and if you write a put are you
expecting to take the stock? If so you are limiting you're return to the
difference between the strike price and the underlying price and the money
you received for the sale. I'm not sure if this is what you want to do.
As an aside I have a friend who made a bundle on writing in the money
options. On April 4th when the market crashed ( my term) he sold in the
money puts on everything he could right at the bottom of the drop when we
were down 500 points. I on the other had bought calls at the same time. I
made money but not as much as he did. When the market recovered the huge
volatility premiums in the put option collapsed and he kept it. The premiums
in my call options also collapsed which hurt my positions but they went up
enough anyway to be profitable, just not as profitable as his.
One of the real beauties of options is spread trading which can be a
conservative approach with high returns. That's where I want to get to
eventually. Options can also be used very effectively to determine the price
of a future that is locked limit up or down and can be used to extricate
yourself from a futures position even when the futures are locked.
Sorry if I'm rambling but as you can see I like options and feel my toolkit
would be totally inadequate without them. I also feel they have a lot longer
learning curve to be used fully than outright buying of stocks or futures.
Best of luck,
John Manasco
----- Original Message -----
From: Guy Tann <grt@xxxxxxxxxxxx>
To: Metastock User Group <metastock-list@xxxxxxxxxxxxx>
Sent: Monday, June 19, 2000 2:49 PM
Subject: Selecting options or writing uncovered options
> List,
>
> Well, here I come again from our normal position of ignorance.
>
> We're planning on getting more involved with options. For our next sell
> signal that could arrive any day now, we plan on writing SPX Calls and OEX
> Calls in addition to buying SPX and OEX Puts. We have very little
> experience buying options and have had beginners luck with our first 5
> trades. Now we're going to get a little serious here and try to make a
few
> bucks.
>
> We've each budgeted $10,000 for buying options and another $10,000 as our
> exposure writing options.
>
> Now, I'm busy reading my option book, like a good little student. Since
we
> lucked out with our previous trades we're feeling overconfident. :) I do
> have a question regarding buying options (since I haven't gotten to that
> chapter yet):
>
> How should I select what option to buy? Currently I select 'in the money'
> options and look for option months that have a pretty large open interest.
> Is there a formula or a decision process we can apply to pick the right
> option month?
>
> In terms of writing uncovered options, my question is basically the same.
> How do we determine which options to write? I guess, even more important
> is, do we write options that expire out 3 months or would we write the
near
> month options? Again, since we're short term traders and will probably be
> buying these back before they expire, my guess is that we should write the
> near month.
>
> Additionally. my idea is that we should write 'in the money' options with
> pretty good open interest. Again, I'm sure there is a methodology
somewhere
> that would help us make a semi-intelligent decision.
>
> Any recommendations or thoughts would be appreciated.
>
> Thanks,
>
> Guy
>
> Paranoia...you only have to be right once to make it all worthwhile!
>
>
>
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