Do you do options?

[Ombud]

Went to an OptionsXpress seminar yesterday and I kept wondering if people really do this. He kept highlighting having a 51% probability of making money / losing less than 2k / breaking even point. I'm not in this to lose less than 2k or break even. I can stick the $$ under the mattress and do that. I'm "in it to win it" mentality. Actually I'm doing okay with stock investing focusing a lot on reinvesting dividends. So although I'm approved for Level 2 option trading, I don't do it. Did I miss something? If you trade options, do you trade weeklies? What % of your portfolio do you assign to option trading?

[frankq]

I've dabbled in it, but the strategies being employed by traders today require advanced math degrees.....A 51% probability of making money isn't turning me on.

[Deleted]

Ombud - Your question is a complicated one, as there are many takes on Options & even more ways to use them.

The first thing you have to understand is what your Options Authorization Level allows you to do with Options. Level 2 Priveleges are inclusive of Level 1 Priveleges.
Level 1 allows you to Do Covered Calls (Sell Call Contracts against Stock you own - This Caps the upside potential of the Trade in the event you are "Called" - However, it allows you to keep any Premium you received for Selling the Call if the Call Expires Worthless on the Expiry Date {Underlying Stock is more than $0.01 BELOW the Strike Price}).
Level 2 Gives you this AND allows you to Buy & Sell Call and PUT Contracts.

So let's say you Sell a Covered Call against Kelloggs -
* You "Freeze" the shares you own (100 Shares for every 1 Contact)
* You Receive a Cash payment equal to the Price of the Strike you Sold the Call against (Price x 100 = Premium for 1 Contract)
* Upside is limited to the Price of the Strike + The Premium Received - Any Fees {In the Event you are Called}( Example: $65 Strike {1 Contract} + $1.00 Premium - $9.99 + $0.75 Trade Fee {1 Contract} - $19.99 Exercise/Assignment Fee. So,

($65.00 x 100) + ($1.00 x 100) - $10.74 ($9.99 + $0.75) - $19.99 = $6,569.27
Now let's say you bought the Stock at $55.00 -- This Play Limits (Or "Caps") your total Profit upside to $1,069.27 or $10.6927 Per Share.

It is the Equivalent of a -- GOOD UNTIL CANCELLED LIMIT SELL ORDER.

One Might do this IF they felt the Stock (or the Market) was going to drop, but yet still felt that the Stock Was a Good Value to hold Longer Term. If the Stock Declines and is Below the Strike on the Expiry Date; You keep the premium -- Conversely, if the Stock is above the Strike on the Expiry Date; You get "Called", the Underlying Stock is Automatically Sold and you are "Out".

Level 2 is a tad more tricky, and requires that you be very careful in your Research. Not every play will "Win".

One Might BUY a Call if they felt the Stock was going to go up substaintially, but didn't want to put a lot of money down to benefit. You might be able to BUY a Call for say $300.00 {which would represent 100 Shares of the Underlying} whereas Outrightly Buying 100 Shares of the Stock Might Cost $3,000.00.
If you Bought the CALL for $300 and the Stock went up $10.00 you might see the Value of the CALL showing $600.00, at which time you could SELL the CALL and Pocket $300 Profit {Minus any Trade Fees} (NOTE: Just an Example)

One Might BUY a PUT if they Felt the Stock was going to Fall and wished to Profit from that event without "Selling Short". The Idea is the Same as with BUYING a CALL, only in reverse - As you are looking for the Stock to Fall in Value.

There is also the Built in Drawback, however either way of TIME DEGRADATION -- The Longer the Options Contract is Open (Date/Days until Expiry), the less it is worth. This is Known as TIME VALUE.

Now the "Break Even" Point is the Point at which you make Money on any Options Trade; it is fairly simple to figure out. You just subtract the Premium Received and any Fees from the Cost of the Strike (If you Sold a Call), If you Bought a Call You add the Premium plus any Fees to the Strike Price, If You Bought a PUT You just subtract the Premium Received and any Fees from the Cost of the Strike.
The Dollar Figure you get is the "Break Even" - The point at which you start to make Money.

The 51% Probability of making money, is roughly accurate &  is about equivalent to Buying a Stock or ETF.
The Ability to limit Losses is a benefit however. Although this can also be done using specific types of Stock Sales Orders, if you are doing stocks.

Level 3 Privleges (which you don't have) give you even more choices and opportunities, whilst still fairly conforming to the information you heard during the presentation.

True Risk (and potentially unlimited losses) arise when you get Level 4 Privileges.

Weekly Options Generally have very tiny BID/ASK amounts, as such you need to have a lot of Stock or a lot of Cash to run the Number of Contracts you would have to to make them mildly profitable.

I as a Semi-Professional Investor/Trader Have Level 4 Options Privileges (All I do for a Living is Investing/Trading) & I don't do Weekly Options. I Do SELL PUTS (pretty much all I do with Options), I have a very good Positive Run Rate; but have had my losses.

The only way to really get a Feel for Options is to Actually Do 1 and see how it plays. Then you can get a True Feeling for what they are about & why there is more and more talk about them.

One thing I can tell you is this - Volatility, that nasty Demon that is constantly kabbitzed about in the Stock Market works more pronounced and faster typically in the Options Market.


FrankQ - I don't have an advanced math degree and I do fairly well. Just a thought.

[2kids10horses]

In the past, I have sold Puts, and sold Covered Calls.

Covered calls, as DI described above is actually a very safe way to potentially magnify your returns on a Dividend portfolio.  This is an income generation technique.  And it may cause you to miss out on some substantial principal gains if the underlying stock rises.  (That's the "risk".)  The benefit is you get to keep the dividends and the option premium.  When you sell the call, you choose the "strike" price.  The lower strike price you choose, the higher the option premium you will receive, but then, it's more likely you'll get called out.  Note, however, you don't have to hold the short position to expiration, you can buy it back.  So, you can keep your stock.  You may have to pay more for the call than you sold it for (a loss on the option trade) but your stock value will rise.

An ideal covered call stock is one that tends to trade in a "trading zone".  That is, it goes up a little, and down a little like a sine wave.  The idea is to expect this pattern to continue, the price ossilating in the channel, sell the call option when it is at the top, and buy it back (or let it expire worthless) when it's at a low in the channel.  The idea is to pick up a couple percent profit every 3 or 4 months.  Let's say you make a 2% profit every 4 months... that's equivalent to a 6% annual return (you can do it 3 times a year).  And if the underlying stock pays  3% dividend, now you get 9% a year.  (3% dividend plus 2% +2% +2% for selling call options.)  That's the theory, anyway.


I found selling calls stressful.  I'm greedy enough to want the income, but I'm also greedy and want the appreciation!  And, when the underlying went down, it usually went down more than what I made in selling the option.  What I should have done (but didn't... I don't know why I didn't, I was just stupid I guess...) but after selling the call, I could have put in a stop loss order to buy it back if the stock started to rise.

Anyway, I tried it for couple of years, and I was successful at it, but I don't want to put myself under that kind of stress any more.