Open Question Time!
Hey Option Traders! So I’ve been thinking…
I hate to just post stuff arbitrarily and hope it’s something you want to read about. I’d rather be writing about the things you want to learn. With that in mind, I’m going to have an open question time. Here’s how it works…
Simply scroll down to the bottom of this post. You will see a box with the words "Leave a Comment" directly above it.
Click your mouse inside that box. Then type out your question.
The question you ask must be about option trading or covered call writing. Also, your question must be straightforward. One sentence that ends in a question mark would be ideal. In other words, I want your question to be succinct, and without all the reasons why you’re asking the question.
Please realize I cannot give personal advice regarding a specific situation or trade you may be facing. I can only provide education. I will provide that education based on the specific questions you ask.
Does all this make sense to you? If so, please scroll down right now and enter your question in the comment box. Click the "Submit Comment" button to send your question to me. I currently have "Comment Moderation" turned on, which means you won’t see your comment appear immediately. I’ll have to approve it before it shows up on this blog.
I guess that about does it. I look forward to hearing what questions you have!
Best regards always,
A.J. Brown
P.S. Depending on the number of questions I receive, I may post my answers all at once, or I may turn the questions and answers into individual posts. Since this is the first time I’ve done this, I’ll just have to wait and see. Thanks again for participating.
P.P.S. Have you checked out my other most recent posts on this blog? If not, you should now. Click here to check out what I’ve been talking about.
Theo @ 5:02 am:
Hi TJ. With highly volatile stocks (e.g. Goog, Bidu, Fslr,etc…) are you ever a SELLER of calls & puts so you can take advantage of the overpriced premiums and have theta decay work in your favor. Or do u still BUY calls & puts - even if they are expensive given it’s high volatility?
Dan @ 5:14 am:
TJ. Thanx for your response regarding spread trading…but for expensive stocks like CME, Goog, Bidu,etc…don’t you think it’s wiser (& more cost-effective) to use Debit or Credit Spreads so u can trade them at a much cheaper price?
I’ve just started trading ‘debit’ spreads & the few i’ve traded (e.g.Rimm, Aapl,Ma)it’s easier to ‘double’ your money with a smaller movement in the stock than with reg calls & puts. But the downside with spreads is - if the stock goes ‘ballistic’ (e.g..ISRG,MA,VMW after earnings), your profits are capped & u miss out - big time.
Shawn @ 7:18 am:
Hi A.J.:
When we buy an option and we want it to react as closely as possible like the underlying stock do we purchase at the money, 1 or 2 strikes in the money; and does the underlying stock need to be above a specific price?
A.J. Brown @ 2:14 pm:
Alright Theo… The first time I thought it was funny. Now I think you are doing it on purpose. Why do you keep calling me TJ? My name is A.J.
With regard to your question, the strategy I like the best is to find underlying stocks that are setting up for predictable movements and then leveraging that movement with an option that moves just about in lock step with the stock. To do that, I buy farther out in time and deeper in the money.
The Black Scholes approximation of option premium price is based on a best-fit polynomial equation. This, by the way, is where your theta is derived from. The only problem is that the market is based completely on human motion and sadly not mathematical model comes close to being accurate. Not even Black Scholes. (You can see this over and over if you use a Black Scholes pricer and compare the theoretical option price to the real option price.)
I prefer to not base my trading practice on an approximation of movement. I keep it simple. I find a good stock. I leverage its movement with an option that will move in lock step motion.
Thanks. Now… how can we work on getting my name right in the future?
A.J. Brown @ 2:18 pm:
Dan… Have you been hanging with Theo? My name is A.J. Where did this TJ come from?
With regard to your questions…
What trading style and respective strategies you choose are completely up to you. I can only tell you what has worked best for me.
The methods I use to pick underlying stocks finds the ballistic movers. I leverage their movements with options. I make a lot of money.
If spread trading works for you and you are happy with the results, then I celebrate and appreciate you. So long as you are out there doing it, you’re good as gold.
A.J. Brown @ 2:29 pm:
Hey Shawn,
Great question!
What I’m trying to do to leverage a stock’s movement with an option, is emphasize the intrinsic value component of the options premium price and deemphasize the time value component. The easiest way to do that of course is to buy deep in-the-money. However, that is not always the most cost effective way. You often don’t get the best bang for the dollar invested.
Another tactic is to try to stabilize the time value component as well as de-emphasize it. So, what are the variables that go into the time value? The big one’s are time before expiration and volatility.
The time before expiration really has a massive effect when an option becomes near term. To stabilize this variable, I don’t trade options that are near term.
Also, when evaluating an underlying stock, one of the criterion I look at closely is volatility. The less volatile the underlying stock, the more stable the time value component of the option premium price, the less I have to go deeper in-the-money to emphasize the intrinsic value over the time value.
This is a subject I’ve talked about for hours, so I hope my brief summary in this blog post comment does the topic justice.
As far as underlying stock price, I like more expensive, because stocks tend to move with their sectors and options tend to have a simillar starting price. In other words, you get a better bang for you buck with an option, the more expensive it is.
And, more expensive stocks swing bigger, meaning we can use our roll up strategy very effectively to really supercharge profits.
Thanks for asking these questions, Shawn. Good luck.
kathleen morgen @ 11:31 pm:
If I call you AJ will you answer my question? Just kidding. I’ll ask it again. When we write a covered call we want the stock to be uptrending but consolidating or in rest mode, right?
How long do we look for the stock to be in this rest mode before we consider it a candidate to write a covered call on?
Ken Long @ 11:33 pm:
Thanks for your opinion on spread trading.
What are your feelings on different time frames and trading styles? ie., shorter term capturing moves, longer term capturing trends.
Ken
Ken Long @ 11:34 pm:
In choosing the “easiest way to make massive returns”, have you examined the other markets?
If you have, is there a reason you chose stock options?
Do you have an opinion on the difference between options, futures, and forex?
kathleen morgen @ 11:50 pm:
what do you mean when you say “look for stocks that are setting up for predictable movement”?