Moving forward, you’ll hear me throw out this term quite a but, and its important that we’re all on the same page so that I’m not doing all the winning while you are messing shit up and getting angry at me over my trading style.
The introduction of weekly options was a game changer for me. In my career as an option trader, the one issue I’ve always had buying options is paying up for all sorts of time that I have no intention of using. If you aren’t familiar, option pricing is stupid. There is a portion of premium assigned to the amount of time the option has until expiation that you pay to have rights to. In short, the mathletes have found a way to charge you for time, and anticipated price movement to a degree, all at the point of purchase. Think about it this way, if you are buying a one month dated option to use for a few days or weeks, you are paying an extra sum of money for the luxury of time that you do not require. The end result is that it cuts into profit margins. I prefer to keep things margins lean.
Weekly options are the same exact vehicle as traditional options, sans the amount of time until expiration. Weekly options are significantly cheaper than traditional options because you are paying for less time.
Now if you’ve ever bought an option you might not be a big fan. Those that are not big fans are usually not the best at picking stocks or their timing is whack. If you are an option buyer, it is required of you to be an excellent stock picker and be able to time BIG price swings. That goes beyond calling stocks trading up in an up tape. It means you need to have tomorrows newspaper, today, and know which stocks will move the most tomorrow. Take the AAPL lotto trade I posted this week. Within 24 hours, the option had returned over 300%. During that time, AAPL also had better than a 20 point price swing.
As an option buyer, you have to buy with purpose. You cannot buy calls on any old stock you think will go up. It goes beyond that. You have to trade the stock that will move the most, and move almost immediately after you purchase. This is especially the case with short dated options.
Stock won’t move? YOU LOSE.
The great thing about short dated OTM options is that they are gamma sensitive. That’s a nerdy term for “this thing will generate a big return if I am right about price.” Each week in my trading room, we start looking for these trades by about mid-week. I anticipate being right 40% of the time, which is unheard of with this style, and I position to lose the entire premium. I might take 2-3 of these per week and one win pays for multiple losses.
Now if I were to buy more time on these trades, it would up my win % significantly. In fact, in more than half of my losing trades, buying more time would have insured victory. However, it would have also negated the chance for me to make a 1000% return in a couple days. I could care less about being right. I am here to make money.
Moving forward, I will post trades like this on occasion, and I will refer back to this as an instruction manual. Trade at your own risk. Trade small. When I hand you a win, may you let your gratitude fall upon me here for the world to read, or at least be willing to come back for more.
Have a good weekend,
OA
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Old sport!
If the trader does not understand the inherent principles in option pricing, they have no shot. It’s a rather easy concept. Love the tutorial method you are taking on your blog, though.
How do you choose which strike to go after? Do you often choose a strike under, at, or over your projected equity price?
And just like that, I make a fool of myself. I suppose you do not choose strikes over your projected equity price in a time sensitive option contract.
Great question. For lower priced stocks, usually one strike out. On higher priced stocks 3-5% otm.
much respect ,,as i have the luxury of only yapping about my winners,transparency is the true test
Unfortunately, everything I do is time stamped. I have to admit to losing on occasion.
OA-
Really appreciating the knowledge you’re dropping in these posts. I’m going to give this a go, but have a lot to learn, first….
Great post, OA.
One of the best posts this week. Most likely going to read/think about your crazy ideas more now.
Thank you OA.
.
Nice post, although I prefer trading monthly’s over weekly’s. I find it beneficial to pay for the added time premium. The odds are in the favour of Mr. Market Maker when weeklies are traded. You find IV is often jacked up with premium being washed away rather quickly. Albeit opportunities are still available.
The thing I don’t like about weeklies is that the theta decay goes up exponentially as exp. looms. So if your timing is a little off I find buying further out helps, in case you are wrong. Weeklies can also be very rewarding though if you are right.
Guys, guys…
Not trying to talk you out of trading what you trade. Just wanted to post this as an explanation to my cocaine-style quadruple digit percent winnings you will witness here.
Carry on.
risk a 1/4 percent to 1 percent of your grub stake on a trade…profit anywhere from 2-10:1 reward on your bet…win 40% of the time…you are profitable
take your setups every time, take your stop losses every time.
I appreciate your knowledge& experience. You trade faster than I do though, so it is a struggle to understand what you are doing. Sometimes if one doesn’t buy quickly after you have posted something, then the next post shows that you have already sold it. I guess you changed your mind that certan trash stocks would see epic demand, because the next thing I knew you posted about “taking out some trash.”
Some here will be able to follow U, I expect. But it looks like your trading style is faster than what I can do.
Frog,
I would disagree. Your post makes it sound like I am a day trader.
I hold option trades for a week on average. One trade out of thirty gets closed quickly if I determined I was wrong.
For example, in “taking out trash” I was closing positions I had held in EGLE (over a week hold)and FNMA (over two weeks) that I was in for quite some time.
If that is considered moving fast, go soak your dentures and get back to watching Gunsmoke re-runs.
OA
Your are good at what you do, for people who can trade that fast. I will note for future reference that, like many good traders, you have an obnoxious personality– and feel compelled to personally insult anyone who trades differently than you do. This is the last last comment I will make on your page.
My point is that I am not trading fast, and I do not appreciate you giving that impression.
My obnoxious personality stems from obnoxious comments…
“Sometimes if one doesn’t buy quickly after you have posted something, then the next post shows that you have already sold it.”
If you were to go through 5 years of time stamped trade alerts from me, you would find your comment to be true less than 1% of the time.
I hope you will make an exception to your comment about your last comment being the last comment, and place one more comment to apologize for the comment that caused such a comment scene.
Comments?
OA
Awesome post, OA. I’m looking forward to more of your articles.
I was wondering why some of your picks were OTM, as the other materials I’m reading recommends ITM with higher delta (over 60%).
I may not be great at picking stocks, but I (and anyone else here) have picked an _excellent_ time to learn about options (now that I’m following your posts).
Ultramarine,
Great question.
Most teach this philosophy in order to improve your probability of success. This means things do not need to move immediately in your favor, and do not require an explosion in price to make money.
In option buying, success is determined by being right on the stock, and right on time. With a two or three month option, they assume you’ll be profitable at some point with an ITM option, and unless prices move significantly against you, they won’t decay as fast either.
Those teaching to buy long dated and high delta are trying to give you better tools to be profitable in the trade. As you become better at picking stocks and timing price swings, get more aggressive in the month/strike selection. It will pay better.
Again, great question.
OA
There’s also a much finer line between success and failure with OTM options. The LEAPs and such in the money are going to reduce your portfolio volatility and so you can risk more capital. They are going to be a leveraged play on the stock without paying hardly any premium as a PERCENTAGE of the cost. If you are wrong you still can preserve a ton of capital similar to a stock, where as OTM weeklys are pretty close to all or nothing trades.
And I am Not knocking it at all, just explaining why other materials may have vested interest in giving people a “safer” alternative that is less dangerous to someone new to it who may treat it like a stock and out way too much capital at risk.
IMO, for people new to options its a smoother transition to use an option with far more time on it than you will ever use, and then scale back as you gain comfort in using it.
Great post! Thanks so much for teaching this! I am following you now with RBCN and tried for FB, but the ask was too high, so I’ll try again Monday Got RBCN for .19 after waiting another day so, maybe I’ll get FB too. I’ll have to disagree with Frog, I don’t see this as fast at all. A week is certainly not day trading. Also, in case, it’s of interest to anyone, I learn best by doing, but because I am still learning I’m am following with very small amounts of capital. For example, I only allocated $190.00 to the RBCN trade. If there are others who want to follow, I would advise doing the same in the beginning.
I would like to know though, what would be considered a normal portion of the port to trade with an option? Thanks!
just need to say that if you ever followed Jeff , his style has never been obnoxious,,and over the years made me a boatload of wins..watch and win