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S/T view - which call/put option?

Discussion in 'Derivatives' started by manageacc, Mar 1, 2019.

  1. manageacc

    manageacc

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    Hi All,
    Just looking to start trading options.
    Wanting to get advise on the following scenario:
    What Call Maturity/Strike/Delta do I buy if I expect a move up in price in the next three weeks?
    Would I buy a call with strike price below/above my target price?
    Would I buy a call with longer maturity of three weeks?
    Good advice would be much appreciated. Thank you !
     
  2. cynic

    cynic

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    There are a number of other things, that ideally need to be considered before answering such questions.

    Before venturing into the options market, I recommend that one learns a lot more about it, particularly with respect to implied volatility and its impact upon extrinsic value.

    There is an excellent book by Sheldon Natenburg that I wholeheartedly recommend to anyone contemplating the trading of options:

    https://www.booktopia.com.au/option...MIg7mNo_3g4AIVVROPCh3aSArnEAQYASABEgJpPvD_BwE
     
    cutz likes this.
  3. manageacc

    manageacc

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    Hi Cynic,
    Appreciate your reply.
    I’ve been trading for 5 yrs now, just equity shares and have an ok track record for directional trade.

    Looking into options for leverage, do you think it’s worth while, or better with futures and cfds? ThNk you
     
  4. cynic

    cynic

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    Options definitely have a lot to offer, for those whom understand them well.

    In my opinion, one of the biggest pitfalls, for newcomers to this market, is the tendency to severely underestimate the impact volatility can have on extrinsic (a.k.a. time value).
    Hence my reason for recommending Sheldon's book.
    Everything that I have ever wanted to know about the workings of the options and futures markets, was contained within that single volume. One of my biggest trading regrets, is that I did not find out about its existence twenty years sooner.

    Delta (i.e. directional exposure to the underlying) is only one of many considerations when trading options.
    (It is possible for traders to lose money despite having correctly forecast direction, conversely, it is possible for traders to make money, despite having misjudged market direction. Any trader who doesn't yet understand how this can happen, ideally needs to learn more about options before venturing into the options market.)

    If one is confident with one's ability to forecast direction, then products such as futures and/or cfds might, serve as a useful preliminary step for broadening one's understanding of market derivatives.

    When embarking on any new venture, one typically won't know just how little one knows, about how much more there is to know.
    The things that one doesn't know, that they do not know, have the potential for financial devastation.

    Hence the importance, for those engaging leveraged derivatives for the first time, of keeping net exposure as small as practicable, until such time as experience confers a more adequate understanding of such things as carry costs, market spreads, the impact of being margin called (or closed out) based upon "marked to market" policies/practices, broker platform quirks, exchanges prematurely closing due to triggering of circuit breakers etc.
     
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  5. cutz

    cutz

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    Personally from what you're describing a buy to open with a long term maturity, a high delta in the money may fit, watch out for time decay and vol drop offs with long calls, hence deep in the money, you will be highly exposed if you're wrong and the underlying drops off but the most you'll lose is premium.
    I've dome similar trades using long calls and short puts at the same strike but I don't think this will fit your risk profile. The book and info cynic mentioned is great advice.
     
    cynic likes this.
  6. cynic

    cynic

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    When done in equal measure, these equate to a synthetic long underlying.

    Conversely for bought puts, sold calls, a synthetic short underlying.

    One however does need to take care to manage the potential for early exercise of the written leg when American (rather than European)style options, are used.
     
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  7. cutz

    cutz

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    Right on, that's why I prefer euro spreads, being assigned on short calls is a real spoiler.
     
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