Alan – We open here a forum for discussing options. It might be helpful to open the discussion with a copy of the paragraphs that I wrote 4/24 about options. I don’t know how to cut-and-paste that material.
Before I opened this discussion forum, I noticed a question about choosing a stock that might perform well as an option. I’ve already briefly addressed the subject…and would appreciate knowing about the thinking of others.
I have years of experience, but could not pass myself off as an ”expert.” I prefer that this discussion forum be a gathering of investors with an interest in options…with all of those with greater experience contributing things that they have learned. Our goal is to benefit one another.
This is a discussion topic or guest posting submitted by a Stock Gumshoe reader. The content has not been edited or reviewed by Stock Gumshoe, and any opinions expressed are those of the author alone.
…………………………………………….OUR FANTASY PORTFOLIO
REPORT ON OUR OPTIONS FOR MONDAY, MAY 5
1-day gain/loss
………………………………………….4/30…..5/1…..5/2……5/5…….(5/5)
ARNA (May s$6.00)………….0.58….0.84….0.80….0.89 (+11.76%)
CBST (May s$70.00)…………3.30….3.70….3.50….2.80 (-20.00%)
DRTX (June s$12.50)………..2.08….2.35….2.00….2.85 (+32.45%)
GILD (May 17 s$75.00)……3.19….4.70….3.65….5.15 (+36.32%)
GILD (May 17 s$77.50)………………2.90….2.13….3.20 (+43.50%)
GILD (May 30 s$79.00)……………………………………2.87 (+40.95%)
GGB (June s$6.00)…………………………………0.40….0.35 (-12.50%)
MXWL (June s$15.00)…………………………..2.00….1.75 (-8.26%)
Our portfolio is looking pretty good!
Linda – I somehow think that our portfolio won’t end up looking so good today, though.
If anyone fancies a FREE video lesson from the worlds greatest option trader (well they would say that, wouldnt they) http://www.tradewins.com/Promo%20Emails/WIN_AFF/Chris_Verhaegh_lp/index.html?AFID=304962&click_id=05_34470082_362685d7-dc79-45e0-8e94-cf7bf39640dc/
I didnt have time coz Im leveraging a faucet out today.
Alan – Leveraging is fun, isn’t it? And profitable. But faucet leveraging was expensive for me last week.
I have a quirky house. The man I bought it from started this house (1948) by constructing a garage with crown molding. In this garage, the man lived with his wife while the two of them created the house and 3 children. They did quite creative things with plumbing, too. So replacement of my kitchen faucet led to walls being opened, a ceiling in the basement being opened, and replacement of all plumbing into the kitchen. Being the caretaker of my quirky house has been costly….so I have to keep multiplying my money by using options.
Thank-you, Alan for the free video lesson. We are honored to get this lesson from THE greatest option trader in the world!!’
Alan ; this sounds like the Sam Giancono investment vehicle developed by the Chicago Brotherhood & used in Las Vegas. Characterized by slogan ” I’ll make you a deal you can’t refuse”. Hope you like horseheads.
Wow, lots going on here! I don’t think anyone would consider me an option expert, but I have learned some expensive lessons over the years. One of the worst things that could have happened for me with options was the day msft made their bid to buy yahoo. I bought 20 way out of the money yahoo calls, $100 worth. Went to a staff meeting and came back $8000 richer. I thought this was a really easy way to make money. Didn’t take long to lose it on way out of the money options. I now use covered calls to raise some cash, use options/spreads when there is a clear catalyst coming (earnings, FDA rulings, etc), and to hedge. Most of my portfolio is research, buy, hold, DRIP. I get my adrenaline rush taken care of by doing a little trading in options. Be careful out there. Frank
Welcome, frank mccarthy!
I like the adrenaline rush of options, too, and enjoyed your story about options calls on YAHOO. Our current tippy market is not a good one for option plays…but our paper trades did okay until Tuesday.
This thread has been fun! We benefit from one another.
…………..OUR FANTASY PORTFOLIO
REPORT ON OUR OPTIONS FOR TUESDAY, MAY 6
Sale of CBST (4 contracts @ 2.35 per option share) = $925.00
Purchase of DRTX June s$15.00 @ 1.85 = 5 contracts for 925.00
ARNA……………0.58….0.84….0.80….0.89….0.95
May s6.00……………………………………………(+6.74%)
DRTX……………2.08….2.35….2.00….2.85….2.70
June 12.50……………………………………………(-5.26%)
DRTX………………………………………………………1.75
June 15.00……………………………………………(-5.40%)
Gild………………3.19….4.70….3.65….5.15….3.85
May 75.00……………………………………………(-25.24%)
Gild…………………………2.90….2.13….3.20….2.11
May 77.50……………………………………………(-30.94%)
Gild………………………………………………2.87….2.11
May 79.00……………………………………………(-20.61%)
GGB…………………………………..0.40….0.35….0.40
June 6.00……………………………………………….(2.27%)
MXWL……………………………….2.00….1.75….1.25
June 15.00……………………………………………..(-32.50%)
P (Put)………….2.41….2.51….1.92….x.xx….2.71
June 24.00…………………………………………….(59.65%)
MXWL option contracts, purchased for $1,200, are now worth $750.00…a drop of
37.50%. If the stock price of MXWL turns sharply higher, we will keep these
option contracts. More likely, they will be sold.
With funds from the sale of MXWL option contracts, we can buy something else for our portfolio. What would you like to try?
One possibility is to choose Tuesday’s top performer [ P (Put options)], choosing a different strike price.
Frank, did anyone ever answer your question about shorting a stock?
In order to do a short sell, it’s really easy. I use Scottrade. Pick your stock. Instead of choosing buy, choose short sell. Everything else is exactly the same – choose the number of shares, choose market order, limit order or whatever. Wait a few hours for your company to go out of business. Then choose ‘buy to cover’. Then take out your millions of dollars. The $7 fee is the same whether you do a regular (long) transaction or a short transaction. So instead of buy-sell, the analogous pairing for short selling is ‘short sell’-‘buy to cover’. The way I see it, choose short sell, turn your computer screen upside-down, and nothing will be any different. Oh, and if you have Scottrade, you can’t short stocks under $5. That’s probably because most of these companies fail, and you would be making way too much money.
Clomu; What I actually asked is how do you short a stock that is not optionable? That includes the majority of penny stocks,,,those priced under $5.00,,, But also some that are higher priced because of volume of trading too low. I know of no way to do that for the avg.
trader.
fa
clomu – Thank-you! I am another who never shorted a stock. I want to make sure that I correctly understand what it costs to successfully short a stock. (1) Do I pay anything when I click “short-sell”? (2) When I click “buy-to-cover,” do I need to have enough cash in my account to buy the number of shares in my original short-sell order?
What is the outcome when the stock-price goes up, rather than down?
I can’t speak for clomu and every broker will treat short selling a bit differently, but here are my thoughts:
You do not necessarily have to pay anything to short a stock, other than the commission, but you do sometimes have to pay to borrow — effectively, you’re paying rent on the stock that you’ve borrowed, and the rate will depend in part on the demand for shares to short.
Heavily shorted stocks can sometimes cost you 50% or more a year as a borrow fee, though that’s rare and is more of an issue for large investors who are trying to build institutional positions than it usually is for individuals trying to sell short a small position in a not-heavily-shorted stock (often if a stock is already heavily shorted, retail brokers will just tell you there aren’t any shares to short — or in their terms, they can’t “get a borrow”, so you might not be offered the high-cost-to-borrow shares, particularly if you’re just shorting small lots through their online system). Short sellers are also responsible for making the shareholder whole on any cash payments from the company — so if there’s a dividend, you will have to pay it.
And yes, when the stock price goes up, you start to accumulate paper losses against the cash you gained by selling the borrowed shares at a lower price. In theory, short selling presents you with the possibility for infinite losses, since a stock could go up forever (it can only go down to zero), but in practice your broker would eventually force you to cover the short and take collateral from your account to cover it if the losses rise on a short position. Shorting is mechanically not difficult, but it’s really hard to make a living at it — I would urge folks to think about shorting as a strategic way to hedge a portfolio rather than as a way to bet big on specific companies going down, and to keep short positions pretty small because they can really, really bite you. So for example, if you own a 5% position in facebook then you might sell short a 1 or 2% position in a similar stock that you think is much worse (twitter?) to protect yourself from all social media or momentum stocks getting clobbered; or if you own a lot of biotech stocks you could short a terrible biotech to help protect you from the possibility of all biotech stocks going down en masse, with the assumption that in bad times the stinkiest stocks fall the hardest, etc.
I have dabbled in shorting, but have no confidence in my ability in that area and probably just don’t have the stomach for it, so I may go back to it again someday but I’m not short anything now or long puts on anything at the moment.
Buying long is a fairly simple game. Selling short is a dangerous game. As Travis says, your potential losses are unlimited. Options are a different game….. you’re buying the option/choice to buy at some future date at some pre-agreed price….but NOT the obligation. Niave people often confuse the two. Its important you understand the difference in the terminology. Investopedia explains at length, in v simple language. I suggest you invest in a free click there before you invest a potentially unlimited amount of $ elsewhere.
Thank-you, Stock Gumshoe for the clarification…and for the caution, too (that Alan doubled).
I’m wondering whether part of the reluctance to short…as well as to use a Put Option…is psychological. It feels better to me, anyway, to cheer on the team at bat than to boo them.
But there is also a financial penalty, that could be high it seems, if a short goes the wrong way. With a Put Option, it is simply another option play that I need to sell as soon as it moves against me, just as I do with a Call Option.
Alan – The Put Option that you chose for us is making money, still! A good choice.
My picks always make money…..until I give them the kiss of death by actually buying them.
But I think this one will continue to fall to 15. Just about to death cross 50/200 MA
Alan – Would you be able to explain “death cross 50/20”?
Given your expectation, plus the very fine gains so far, I am going to open more Put Option Contracts for P.
If anyone here is itching to try some option contracts, I recommend:
______________________________________________________________________________________
(1) ARNA Call options for expiration month of June or later, strike a bit below the current stock-price (or you could choose the 6.00 contract that we have in our portfolio). When the stock-price reaches $7.00, be prepared to sell after any dip.
(2) DRTX Call options for expiration month June, strike price less than the current stock-price. Given that FDA approval is expected, you can hold through the FDA decision date (May 26?) with little concern. Following approval, there will likely be a distinct rise in the price of the underlying stock that will bump the gains of your option contracts.
(3) P Put options for expiration month June, July, or August and strike price nearest the stock-price (or you could choose the 24.00 contract that we have in our portfolio). For the greatest profit, hold the contracts until P drops to $15.00.
____________________________________________________________________________________
A tactic that increases profits with options: When an option play is making fine gains, open more option contracts on the same underlying stock, choosing different strike prices and/or expiration dates. You might have 3 or 4 option plays going at the same time on the same underlying stock.
[Notice: We have two option plays on DRTX, both making us a profit…We have 3 option plays on GILD, one with profit and two losing money…And we will now have another for P.]
Death cross (as I understand it) means a point in time when a lower MA line (say 50) moves down to cross a longer MA line (say 200). It is believed to signify a SP nasty drop off the cliff is coming. A golden cross is the reverse and signals a rise in SP. Not sure if you guys know, but on request, I started a new classroom thread for technical analysis……perhaps some of you brianiacs could comment there http://www.stockgumshoe.com/2014/05/microblog-technical-analysis-classroom/
I shouldnt take 15 too seriously….just my gut feeling…..no crystal ball here.
OUR FANTASY PORTFOLIO
REPORT ON OUR OPTIONS FOR WEDNESDAY, MAY 7
……………………………………4/30….5/1…..5.2…….5.5……5.6……5.7
ARNA (M 6.00, 0.58)….0.58….0.84….0.80….0.89….0.95….0.97 (0%)
DRTX (J 12.50, 2.08)…..2.08….2.35….2.00….2.85….2.70….3.70 (37%)
DRTX (J 15.00, 1.85)……………………………………………..1.75….2.10 (20%)
GILD (M 75.00, 3.19)….3.19….4.70….3.65….5.15….3.85….4.40 (14.28%)
GILD (M 77.50, 2.90)…………….2.90….2.13….3.20….2.11….2.45 (16.11%)
GILD (M 79.00, 2.57)………………………………….2.87….2.11….2.40 (13.74%)
GGB (J 6.00, 0.40)…………………………….0.40….0.35….0.40….0.60 (50%)
MXWL (J 15.00, 2.00)………………………2.00….1.75….1.25….1.45 (16%)
P (J 24.00, 2.41)…………..2.41….2.51….1.92…………….2.71….2.95 (8.85%)
Here’s another way of looking at short-selling: If you are a random biotech company, what is the probability that you create a meaningful product, a drug that works, a drug that solves some health problem that no one has been able to solve yet? To me, the odds are pretty clearly against you. It’s hard to create, easy to fail, especially when it has to do with helping the human body. If I had the money, I would short every single biotech stock, weighting each company equally. I’d likely lose big on many like GILD, but for every 1 that succeeds, 10 or more fail. Is this faulty logic?
clomu; I think you are right on target…The problem is that most start-ups are not option-able for precisely the reasons you state.. I know of no other way for the avg. investor to short other than selling what you own. Big players can “borrow” stock to short tho at often great risk & considerable cost. fa
SEE #107, MY RESPONSE TO ALAN.
FIND RECOMMENDATIONS TO BUY OPTION CONTRACTS FOR
ARNA…..DRTX….P
New option play on P – Put P expiration Sept, s$23.00 @ 3.60 – 3 contracts for $1,080.
I wanted to choose contracts with expiration July. On Scottrade, all contracts for July were for strike $100.00 or higher. Odd! We’ll add July Put-contracts for P when I learn what the possibilities are.
By now, all who follow along with us on this thread are aware that I like using options, and always have 4 or more in play. Yet I stay with simple Call and Put options. I do sometimes use both Calls and Puts on the same underlying stock…and learned from The Blind DayTrader that I am then using a “straddle.” I use this tactic when a VERY-WELL-FOLLOWED drug is in phase III trials so that I gain after any AdCom decision and after any FDA decree.
I have a notably high success rate with my option plays. The reasons are: (1) When an option is doing well, I usually buy more option contracts on the same underlying stock, choosing different expiration dates and strike prices. This tactic multiplies gains. (2) My usual method of choosing an option play is to first find sectors in a strong up-trend. From that sector, I strive to identify the strongest moving stock for the option play. (3) Basic technical analysis skills greatly help me identify strong stocks. When choosing what stock or option to buy, I rely almost entirely on the trend-line pattern (and I prefer a 6-month chart).
My thought is that you will do well with option plays if you do well choosing stocks. Alan has started another thread, that dovetails with this one on options. Check it out:
http://www.stockgumshoe.com/2014/05/microblog-technical-analysis-classroom/
Hey Margaret,
What a fantastic thread this has turned out to be, thanks to you!!!
Let’s try an experiment as I want to test my thinking about delta once and for all. I am also buying September put options on P but I am buying the $29 strike price as they have a delta of .70 and the $23 ones have a delta of .46. However, mine cost $8.05 as opposed to the $23 ones which cost $3.20 I think you said?
Anyway, hoping we can track both; I want to see if my extra expense is going to waste.
Again, thanks for making this a truly awesome thread.
Don
Don – Welcome back!
Yes, this has been a lively thread, with people exploring many aspects of options. A lot of fun!
I like your idea for an experiment. So, to test your thinking about delta, I’ll add your put options on P to our Fantasy Portfolio. All other holdings except one were limited to a purchase price of $1,300. With the option share price of $8.05, each contract costs $805. So for the Fantasy Portfolio, I will get 2 contracts for $1,610. I will also add contracts to make the one at $23 cost close to the same amount.
So put-options on P for September strike $23 (delta .46) will be compared with put-options on P for September strike $29 (delta .70).
When I return later today, I will look for your explanation of “delta.” Also tell us your thoughts about how the different delta might affect outcomes for those option plays.
Thanks Margaret. Well, at least in theory, the $29 puts should go up in value in a greater proportion than the $23 puts since the delta is greater, for the $29 ones. I never really tested it like this so this should be fun.
It gets funky because depending on the speed and amount the underlying rises, the delta also changes so this can impact things as well. The delta’s rate of change is the gamma, and it can get pretty complex tracking it all.
Don
When listing reasons for my high rate of success with options, I forgot to include THE most IMPORTANT reason: I sell out of option contracts that fall 20% to 30% from their high since I opened the contracts.
[Alternatively, sell option contracts when the underlying stock drops 5% to 10%. I still have not tested outcomes to learn whether I would do better by closing contracts based on a drop of the option share-price or based on a drop of the underlying stock price.]
I claim that I do not allow me to argue with me about whether or not to close option plays. The truth is, I do argue with myself sometimes. I argued compellingly just yesterday regarding MXWL.
I pointed out that MXWL has a trend-line pattern that is strongly predictive of a continuing up-trend. Just before buying option contracts on MXWL, it had gained 10.07%. Given that it has the strength to make such a gain in one day, I need to allow it to fall more than I’d allow others to fall. [I nodded my head in agreement.] Also, the stock-price is still under $20 even after rising 89.06% YTD, so investors will be attracted to this stock. [Yes, that seems likely.] And its business of energy storage and power delivery systems for alternative energy is a growing one. [A business appealing to me and to others, too.]
But if MXWL fell even the least little bit, I was going to close those option contracts. So what happened? MXWL turned green. So I still hold MXWL in my portfolio, and we still hold MXWL in our Fantasy Portfolio.
However, only rarely do I allow me to overturn my “rule” to QUICKLY sell out of options that are moving the wrong way. Cutting losses is vital with options. Cutting losses preserves investment capital, allowing it to go directly to work on another option play.
The probability is that an underlying stock that has gone down two days in a row will be going down down down. The probability is that some new option play will go up, speedily making up the loss you just incurred. So dump losing option contracts, and go with new contracts on a different underlying stock. Make this pattern your modus operendi…and you will have much higher gains on option investments.
Good decision, both of you!
Wow, great thread!!
Bradley – Welcome!
We have a great bunch of people here, teaching one another. For a time, it bothered me that we were in a market too wobbly for using options. We put together our Fantasy Portfolio, anyway. And I now think that three of our holdings can be recommended for playing with real money.
Don – Higher Delta = stock price goes up or down more? How is delta different from beta?
I choose high beta stocks, that I think give me better gains. They can give me greater losses, too! Basically, my understanding is that high beta stocks make larger moves. They also are higher risk. Always, it seems, risk is tied to the potential for greater gain.
So it is with options. High risk. The potential for enormous gain. My thinking is that the key to being successful with options is to cut the risk of loss.
Loss is less likely when I use an underlying stock with a trend-line pattern that is highly predictive. Then the high probability (that is inherent in that trend-line pattern) is in my favor. Loss is also less likely when I exit an option contract that has lost value, and roll over the remaining value into a new option contract.
One fine option play gives me a gain of 50%, or 100%, or 150% or even much greater. That high return cancels losers IF (and only if) I am dumping option plays quickly after they move against me. I repeat telling the importance of this tactic. And I will continue to repeat it, because it is the key to a good experience with using options.
Sorry it has taken me so long to respond; things are crazy at work.
In your message, you say,
“Don – Higher Delta = stock price goes up or down more? How is delta different from beta?”
Actually, delta is the speed at which the call or put goes up or down, not the stock. So, if delta is .50 and the stock goes up one dollar, the call goes up fifty cents. If the delta is .90, and the stock goes up one dollar, the call goes up ninety cents. That’s why I generally like calls with higher delta; the lower the delta, the less you make as the underlying moves in your favor. HTH.
Don
Update on the option recommendations:
ARNA moved up 2% soon after the opening bell, crossing to the above-$7 territory. ARNA has, for years, been moving up-and-down within a range. It rises to near $7.50 or to $8, then abruptly reverses direction and falls to $5.50, $5, $4.50 or $4. Up. Down. If you buy ARNA call options today for June with a strike price below $7, you can have a nice little gain. Our sell signal will be a drop in the stock-price.
DRTX is event driven. So it is a runner from now to the end of May.
P is our put option, that Alan thinks might drop to $15. It has a LONG way to fall from here. But you know, of course, that we get no absolute guarantees. And today P leaped at the opening bell, soon up more than 5%. This could be a gift, providing a great entry point for opening put options. Or….
My thought: It is not easy to open put contracts on a stock that just gained 5%. To avoid a stomach ache, you could wait for a little dip before ordering puts on P. Or you could reach for the greater gain, and buy those puts when P is at a higher price. I MIGHT buy those puts at this price, saying to myself, “No guts, no glory!” However you choose, stay within your comfort zone.
I bought some new options today.
ACRX (Acelrx Pharma)
5 calls @ 0.50 with a strike price of $10. Expires May 17.
My theory is that the stock took a dive today (and these options in particular along with it) and I believe it will recover past $10.50 in the next 10 days. Stock has bounced around today between $10.51 to $9.80
Let’s see how that plays out….
Well, not good so far. They immediately dropped to $0.40. But now back up to $0.41! So I’m confident it’s poised to shoot way up there…. 🙂
I closed out CVX yesterday at $3.00 as it looked to me that was a top. Made $22.00 before fees of $ 20.00 for a gain of $2.00. Still a gain is better than a loss. What I expected did not happen ,,,, so I guess the main lesson is that options may give you more flexibility in a changing mkt. than the stocks with less at risk. fa
Frank – I enjoy your openness to experimenting. And this experiment gave you a little financial reward, too.
jer_vic – Thank-you for giving us the example of ACRX as an option play. We can use it for lessons on choosing an underlying stock, and on turning loss into potential gain.
__________________________________________________________________________________
LESSON #1: When choosing an underlying stock for options, put each stock that you are considering through a check-list. One item on the check-list is VOLUME.
– Volume changes are indicators. A rise in volume indicates probability of stock-price gains. ACRX dropped in volume this week…a negative indicator, showing probability of stock-price loss.
____________________________________________________________________________________
LESSON #2: When considering whether to buy a stock or an option, identify reasons that the investment might make money.
…..With DTRX, the reason is an event…the expectation of FDA approval.
…..With GILD, there are many streams of income, and the stock-price recovered well following biotech’s down-turn.
…..With puts on P, its trend-line indicates probability of sharp decline.
…..With both MXWL and GGB, their trend-lines indicate probability of stock-price gains.
With ACRX, you expected that its drop in price would be followed by a rise. And it might rise. But if we go by probabilities, a drop in stock-price indicates likelihood of more drop in price. So learning about probabilities is helpful to an investor.
_________________________________________________________________________________
LESSON #3: Most helpful to me is the trend-line pattern( that is formed by changes in stock-price). Across the last 6 months, ACRX formed 3 separate patterns.
Pattern #1 is an up-trend. This line on the chart was formed between November and the end of January as ACRX’s stock-price rose. Put a ruler on the chart, and you will easily see the up-trend line between $7.50 and $12.75.
Pattern #2 is a non-trending one. It was formed between February 1 and the end of March as ACRX’s stock-price went up-and-down, heading no where within a narrow range. This is a “consolidation pattern” that will break either to the up-side or to the down-side. ACRX broke to the down-side.
Pattern #3 is a down-trend. It started April 1 when ACRX’s stock-price was $13. The probability is continuation of this down-trend. Recognition of a down-trend pattern is your get-out-of-here indicator.
_________________________________________________________________________________
LESSON #4: Option contracts need sufficient time for the underlying stock to move past the strike price, providing you with a gain. You chose an expiration date that is 9 days from now….a VERY short window of time for the underlying stock to make enough gain for you to profit. On the day you opened the option contracts, their share-price fell 20% – so you need additional time for the recovery of loss. And there is a way to buy time.
______________________________________________________________________________
LESSON #5: When you hold option contracts that have lost 20% to 30% of their value, consider possible outcomes.
(1) The underlying stock may recover, with enough increase in price to make up the loss AND reach or pass the strike price (resulting in no loss, or some gain). Figure the probability of this much stock-price gain. Ask whether the underlying stock’s trend-line gives you strong reason to expect this much gain. Ask whether there is sufficient time between now and expiration day for this much gain to be likely.
(2) The option contracts will expire worthless under these conditions: if the stock-price holds even, neither rising nor falling…if the stock price continues its decline that started April 1…if the stock-price rises, but not enough to reach the strike price. In any of these cases, you will lose all investment funds put in these option contracts.
(3) If you close the option contracts, you will recover part of your investment funds. Those funds that you rescue can then be invested in another option play with an underlying stock that is in a strong up-trend pattern. This action gives you a much greater probability of recovering funds lost.
___________________________________________________________________________________
LESSON #6: Across decades, investors have learned that they have better outcomes when they quickly close option contracts that have a loss of 20% to 30% (or when the underlying stock is down 5% to 10%). Closing contracts prevents further loss, so prevents options expiring worthless. After this action returns to you your remaining funds, you can then act to recover what was lost.
Taking no action is the surest method of turning a partial loss into a total loss. So I recommend developing the habit of acting quickly to close option contracts. Then put the funds into another option play. This tactic is the surest method of recovering what was lost, and turning loss into gain.
Margaret; Excellent expose’.. I might add, options only do what the underlying does except with leverage which must be managed with flexibility and attention. fa
Yes, so the options are basically that underlying stock on steroids. Special handling required.
Margaret; Well said ,though original purpose was forward contracting to lock in a future price,,,,,a form of insurance. Someone always sees other money making possibilities in the market. fa
Im saying what the majority here surely must be thinking: Margaret: That was a fabulous post. Blinking well done!!….its great to have it all here in one succinct summary.
I agree wholeheartedly, I am a complete beginner and really appreciate the time and expertise which Margaret , Frank and others are so willing to contribute. At the moment I’m stumbling around trying to get a grip on options, stock patterns and so on and a thread like this is just what I need to keep me going, so thanks very much!
Hi Margaret. Thanks for the detailed analysis. As you probably surmised, my decision to buy the ACRX options was nothing more than a WAG – so, a pure bet that it will rise again (at least past $10.50) on or before next Friday. I have very little skin in this particular game (~$250) so I’m going to ignore your (very good advice) about selling, in this instance, and see how things play out, at least into the beginning of next week.
Jer_vic – Let us know how it goes. You and Frank bring experimentation and humor to your investing….adding spice to your own lives!
OUR FANTASY PORTFOLIO
REPORT ON OUR OPTIONS FOR THURSDAY MAY 8
ARNA (M 6.00, 0.58)…..0.58….0.84….0.80….0.89….0.95….0.97….1.10
DRTX (M 12.50, 2.08)…2.08….2.35….2.00….2.85….2.75….3.70….3.30
DRTX (J 15.00, 1.85)………………………………………………1.75….2.10….2.10
GILD (M 75.00, 3.19)….3.19….4.70….3.65….5.15….3.85….4.40….4.20
GILD (M 77.50, 2.90)…………….2.90….2.13….3.20….2.11….2.45….2.25
GILD (M 79.00, 2.57)………………………………….2.87….2.11….2.40….2.24
GGB (J 6.00, 0.40)…………………………….0.40….0.35….0.40….0.60….0.60
MXWL (J 15.00, 2.00)………………………2.00….1.75….1.25….1.45….1.35
P (PUT J 24.00, 2.41)….2.41….2.51….1.92……………..2.71….2.95….2.10
P (PUT S 23.00, 3.60)………………………………………………………………….3.70
P (PUT S 29.00, 8.05)………………………………………………………………….8.05
Margaret, could you or others explain the DRTX May 12.50 call noted above. You bought at 2.08 on what date? I’m looking at the chains right now and I see last price of 1.70 …b/a 1.60/2.00 with op. interest at 483 contracts.
What am I missing? Realizing I’m running out of time, I’ m trying to determine if there’s still a play to be made. Also looking at June.
Thanks, JB
JB: I think Margaret means June, not May. I believe she is basing that listing in our fantasy portfolio on my actual transaction – see my reply to Margaret in post #53.
Thanks for the reply j_v. You are the one I’m looking for here. If you were thinking about a play on DRTX today, do you see anything appealing? The volume of option trades are low for this stock, but that’s to be expected because it’s not widely traded? Thanks. JB
PS. Those trades are doing well for you I see.
First off, asking me for options advice is akin to asking sheep for Spanish lessons. 🙂 The DRTX play is working out well, so far, but note my 2nd one on ACRX is not doing so well at the moment.
My reasoning for the DRTX trade was that at a strike price of of $12.50, for options expiring June 21 worth ~$2.10, then if the stock went over $14.60 before the expiry, I could make money. Since there was a PDUFA date in the middle of that (May 26), I thought it was reasonable that the stock would go to, or past, my target price of $14.60 before my options expired.
So, now those same options are ~$3.10, which, to my logic means the target price if you bought them now would be $15.60. But, the June 21 calls for $10 strike price are $4.70 right now, which gives a target price of $14.70. That sounds better to me. But there is the question of volume and open interest. The $12.50 strike price has an open interest of 208, while the $10 strike price has an open interest of 17. I don’t know enough about options to know how to value the open interest information. Maybe someone else with more knowledge can speak up? To me, the June $10 strike price options seem a better deal.
There’s also the May options – they are much cheaper, and have more open interest, but they all expire before the PDUFA date. However, I believe the PDUFA date can be read as an “outer limit”, not a milestone – ie. the announcement will take place on or before, not on – does anyone know for sure?
So, maybe the May 17 $12.50 or $15.00 options are interesting? Will we see building interest (and thus increasing share price) leading up to next Friday in anticipation of the PDUFA announcement? That is the gamble, I guess…..
(as I was typing this, the $12.50 options went from $3.10 to $3.40).
jer_vic – Right you are. DRTX should show June expiration for both strikes. I would have missed this fine play heading up toward the FDA decision, and am grateful that you laid out the compelling reason you chose it as an option play.
I then bought it (no money needed for this purchase) for our Fantasy Portfolio, and bought it also for myself (making money off your good thinking, jer-vic!).
JB – I expect good gains for DRTX in the run-up to the FDA decision, and a bump after it. A month of mostly gains for an option play…that sounds good to me. Even in this teetering market, I feel confident about DRTX.
Here are the contracts we are holding: June s$12.50 @ 2.08 (jer_vic’s transaction)….and June s$15.00 @ 1.85 (purchased 5/6).
How do you feel about calls for May 17 with a strike price of $10? They’re trading at about $1.85 right now. Too risky, since the expiry is before the PDUFA?