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Hello Ray,
Thank you very much for your excellent post.
I am a risk adverting person (as probably many on this list :-) ) so
spreads that you explained are likely suitable vehicle for me. Also I
appreciate links you provided - will study them attentively.
Good luck and good trading,
Alex mailto:alex_bell@xxxxxxx
Tuesday, October 22, 2002, 10:07:25 PM, you wrote:
RR> Hi Alex,
RR> A lot of people ask that question, and a few people take their money trying to answering it.
RR> 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.
RR> 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
RR> strategies depending on your view of the underlying equity.
RR> 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
RR> 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
RR> 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
RR> 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
RR> 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
RR> up for extending the time.
RR> 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
RR> 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.
RR> 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
RR> 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
RR> 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
RR> (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.
RR> 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
RR> 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
RR> 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
RR> traded on margin where long calls and puts can not. Again, trade the appropriate number of contracts not dollars.
RR> 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
RR> 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
RR> max. gain is the credit and the max. loss is the difference in the strike prices minus the credit received.
RR> 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
RR> but I don't limit myself.
RR> There is some excellent free information at https://www.optionsxpress.com they are a broker but have tons of free info. Also try http://www.21stcenturyinvestor.com they sell advice but also have
RR> a free option course and excellent risk profile charts you should print out.
RR> Good luck and good trading,
RR> Ray Raffurty
RR> ----- Original Message -----
RR> From: Alex Bell
RR> To: Ray Raffurty
RR> Sent: Monday, October 21, 2002 8:13 PM
RR> Subject: Re[2]: [RT] Selling Uncovered Puts
RR> Hello Ray,
RR> What particular option strategies would you recommend to new to
RR> options trader (having relatively good experience in stocks trading
RR> and market timing).
RR> Best regards,
RR> Alex mailto:alex_bell@xxxxxxx
RR> Tuesday, October 22, 2002, 1:22:28 AM, you wrote:
RR> RR> Hi John,
RR> 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 just
RR> RR> prefer other option strategies.
RR> 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> RR> month, 1 month free trial) I prefer to send the name privately.
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