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Hi Alex,
A lot of people ask that question, and a few
people take their money trying to answering it.
The truth is there is no ONE option strategy
that I, or anyone else, could recommend. People look at options as a
tool, unfortunately this is incorrect. Suppose you had only one tool, a
hammer. You could drive nails, etc. but it would be real difficult to do a
tune-up on your car. Options are more like the deluxe 1001 piece Craftsman
tool set. There are dozens (hundreds?) of strategies depending on your
view of the underlying equity.
You can do everything from speculating for huge
gains with potential, sudden 100% losses (by purchasing out of the
money calls or puts on a stock or index) to protecting yourself
from losses on a stock you hold (by buying in the money puts). You can
create a position that makes money up or down, as long as the move is big enough
and soon enough (buy both an out of the money call and an out of the money
put). You can create positions with a high return and a low risk, but a
very low probability of being correct or a position with a high probability of
being correct at a high risk but with a very low rate of return. You can
be bullish by buying calls for a debit or bullish by selling puts for
a credit. You can be bearish by buying puts for a debit or bearish by
selling calls for a credit. You can do this and much more over time frames
varying from a few days to several years depending on the expiration you chose,
though the price of the options will go up for extending the
time.
There are two important points in these examples to
remember. First no one strategy is "best", all are valid just learn when
to apply them. Second, and more importantly, with option, for every
advantage you gain there is always a trade off; the lower the risk, the
lower the return and/or the higher the initial cost will be and vice
versa.
Most new traders begin by speculating on long calls
and puts. These are appropriate at times and pay off well when you are
correct, but most new traders quickly run thru their account due to
over trading, both size and frequency, under capitalization, and lack of exit
strategy or discipline. If you are very bullish or bearish on a stock
(or index) use this strategy. But remember this, trade the same number of
contracts as the number of shares your account can support divided by 100.
In other words if you trade 500 shares of a stock at $30.00, trade 5 contracts
(controlling 100 shares each) or less, not the $15,000 the stock would have
cost. If the option cost $5.00, you will have $2500 at risk. Keep
the rest in a secure place.
If you are moderately bullish or bearish a debit
spread is appropriate, buy a low strike call and sell a higher strike call with
same expiration if bullish or buy a high strike put and sell a lower strike
with same expiration if bearish. The short part of the position reduces
your cost and risk to the net debit but also limits the upside
potential to the difference in the strikes minus the debit. For example if
you buy a $50 call and sell a $55 call foe a net debit of $3 that is your
max.risk and your max gain is 55-50-3 =$2. There's that tradeoff, but
spreads can be traded on margin where long calls and puts can not. Again,
trade the appropriate number of contracts not dollars.
A debit spread is the reverse and is used when you
are neutral to slightly bullish or bearish. If you are bullish sell a high
strike put and buy a lower strike put with the same expiration for a credit
(sell a $55 and buy a $50 for a credit of $3). If you are bearish sell a
low strike call and buy a higher strike call with same expiration for a credit
(sell a $45 and buy a $50). The max. gain is the credit and the max. loss
is the difference in the strike prices minus the credit received.
These are the types of trades I prefer but do not
limit myself. I also use covered calls, collars, and short straddles when
appropriate. Generally I prefer to be a seller rather than a buyer but I
don't limit myself.
There is some excellent free information at <A
href="https://www.optionsxpress.com";>https://www.optionsxpress.com they are
a broker but have tons of free info. Also try <A
href="http://www.21stcenturyinvestor.com";>http://www.21stcenturyinvestor.com
they sell advice but also have a free option course and excellent risk profile
charts you should print out.
Good luck and good trading,
Ray Raffurty
<BLOCKQUOTE
style="PADDING-RIGHT: 0px; PADDING-LEFT: 5px; MARGIN-LEFT: 5px; BORDER-LEFT: #000000 2px solid; MARGIN-RIGHT: 0px">
----- Original Message -----
<DIV
style="BACKGROUND: #e4e4e4; FONT: 10pt arial; font-color: black">From:
Alex Bell
To: <A title=realtraders@xxxxxxxxxxxxxxx
href="mailto:realtraders@xxxxxxxxxxxxxxx";>Ray Raffurty
Sent: Monday, October 21, 2002 8:13
PM
Subject: Re[2]: [RT] Selling Uncovered
Puts
Hello Ray,What particular option
strategies would you recommend to new
tooptions trader (having relatively good experience in
stocks tradingand market timing).Best
regards,Alex
<A
href="mailto:alex_bell@xxxxxxx";>mailto:alex_bell@xxxxxxxTuesday,
October 22, 2002, 1:22:28 AM, you wrote:RR> Hi John,RR>
I do not trade naked puts but have nothing against the strategy, as long as
you have the funds to cover the position if necessary and like the stock
anyway, as you have said you do. I justRR> prefer other option
strategies.RR> There is a web site that I have found very
useful. They have some very powerful scanning tools. The table
below is a scan for naked puts (Dec. expiration). Since it is not free
($39.95 /RR> month, 1 month free trial) I prefer to send the name
privately.To
unsubscribe from this group, send an email
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