Re: OPTN: How can they do that? (here's how)

["Dick Crotinger" <dangle@xxxxxxx>]

>>  Not to be flip but with the liquidity, the size. and number of players
coming on board, the ECN's, after hours trading  and yada, yada,
yada.......it appears that the equity market is the place to be.  ...who
needs options 'cept maybe the big guys?<<

Well, the flip answer is "leverage."  I'm not being trite, you obviously
know the drill on this.

I do in fact trade some stocks, mostly longer term.  I prefer options for
the speculative opportunity that they represent.  Since I still don't do
very well in deciding [invariably] what direction a market is headed, I like
using long options to "hedge my bet."  And no, I don't feel for the most
part like this is gambling.

My favorite place to open a long option is just out of the money, with the
stock starting to turn (as I see it).  Since I'm not always right about the
direction of the stock <g>, I believe that the option represents an easy
play on being right or wrong.  If I'm right, the gamma (ROC of delta) will
grow the most rapidly on an option at this point of the stock price, and the
delta is nearly 50%.  If I go long 20 contracts, I can match dollar for
dollar the performance of 1000 shares of stock at that price, for something
around 10% of the dollar investment (according to how much time til expiry,
volitility, etc.).  Since most of my trading is shorter term, i.e., a week
or less, I see no reason to devote a rather large portion of my assets to a
trade which is just as likely to go against me as for me (despite my
analysis).  And if it goes against me, the delta of the option depletes
progressively slower as the stock moves away (or grows progressively faster
as it moves in my direction), meaning that the profit potential is greater
if I'm right, and the penalty is less if I'm wrong.

    I acknowledge that options are a much more difficult instrument to
control than stocks... e.g., stops don't work at all with options like they
do with stock, so I do not use them (except mental contingents).  But I
follow the markets pretty much full time when they are open, so have other
criteria for when to pull a trade.

    On the other hand, when a situation materializes as it did this last
week, where I find that the prices posted on my DTN/Ensign screens don't
really represent what I can buy or sell for, that makes me wary of using
options, stock, or any other vehicle.

Dick Crotinger