Options, understandings and tactics

By megfk, April 25, 2014

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.

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analog68
Irregular
384

I am really looking forward to learning about option trading…..thanks Margaret and all.

Alan Harris
Guest
0
Hi Y’all. Margaret Kittelson Asked me to cut n paste some comments from the Regado thread. No so simple but heres my best effort Margaret Kittleston says: April 24, 2014 at 9:31 am Some of you were commenting about options for GILD (that I mentioned yesterday), and wondering how a person can buy a call-option “with conviction.” For those who are interested, I’ll address this subject. A basic understanding of options is helpful, I think. With each option, the investor controls 100 shares. So when I bought 3 options for GILD, I then controlled 300 shares. 300 shares of GILD… Read more »
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lskulow
Irregular
68

Margaret,
Thank you for answering my questions. I didn’t see this until just now. Also, I look forward to the development of this thread on options. I’ve already learned quite a bit. I appreciate your detailed explanations and examples and I’ll continue to be watching and learning!
Linda

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newbie
Irregular
78

oops

newbie
Irregular
78

Testing 123

KennyG
Irregular
3530

Welcome back Kotter. The class is in session.

cmessinger
Member
2

Very interested in options….Thank you!

The Blind DayTrader
Guest
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For anyone new to options, or even interested in them at all, check out http://www.theoptionsinsider.com/ Top shelf educational podcasts and such there, with former floor traders and capital management types. What are the favorite strategies people are using in IRAs? Mine is the near month ratio call spread, with stock to cover the short leg (or sometimes LEAPs). I’m not saying it’s a never lose strategy, but I’ve never lost on it in about a year of using it. To describe it with an example for anyone unfamiliar: Buy XYZ at $20 (or an XYZ LEAP call in the money).… Read more »
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The Blind DayTrader
Guest
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Oh, I guess I should clarify, that when I say buy one and sell two, I mean in ratio. So, if I bought 400 shares of ABC, I would buy four calls, and sell eight. Whatever quantity of stock and/or LEAPs I had, I would buy and sell to keep it balanced. It is just a call ratio spread, with the short leg covered. Some people call it the “portfolio repair strategy”, only I’m using it to make money, not recover it. Pretty standard stuff, but I had a lightbulb go on over my head, when I first heard Jon… Read more »
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biotechlong (btl)
Irregular
2790

Thanks for sharing your option trading strategy, bdt. While I understand the basic dynamics of the trade strategy, what is your exit plan in the event that the underlying stock (and derivatives) move in the wrong direction? I assume that you must use trailing stops. If so, what % ?? If not, what alternative protection ??

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The Blind DayTrader
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@lawrence mckenna: I generally only do this with stocks I am happy to own, and that are stable(ish) or in an uptrend of some sort. I am one of those people who doesn’t like entering stops in the market if I am able to monitor daily or at least a few times a week. However, if it does go against me, as happened with TOL a month or so ago, I do use a pretty tight mental stop of 5% to 10% (depending on whether it is a new position or a profitable one that I can afford to let… Read more »
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arch1
Irregular
7782

bdt; I do not understand selling more calls than you buy,,,If you do not hold the underlying stock would you not be selling un-covered calls? My broker would not allow me to do that because of the risk involved.

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biotechlong (btl)
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Hi Frank. Although I am a relative newcomer to option trading, I do understand the basic trade dynamics and management of risk factors associated with options. The strategy outlined by BDT appears to be relatively conservative – primarily because you can functionally “cover” the 2 options that you sold with the combination of your initially purchased 100 shares and the 1 call purchased at a strike price less than the strike price of the 2 call options sold. I am not sure whether any broker would consider this set up fully covered if you have limited options permissions – but… Read more »
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The Blind DayTrader
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@frank archambeau: I would not suggest entering into something like this without being experienced at single leg options trades (selling covered calls, etc.), and double legged positions (such as normal credit or debit spreads). Lawrence explained why this method has no naked legs. I trade these in a non-margin IRA, with level 2 options permissions. I don’t know if brokers other than OptionsHouse would allow this, but in theory it is the same as having one covered call, and one debit spread, so it should be considered limited risk all around from a broker prospective. Since somebody asked, here are… Read more »
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arch1
Irregular
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bdt; thanks for answer , I must have misunderstood what you were saying. I thought you meant buying one call & selling two without holding the underlying stock. I only sell covered calls if I do not mind the stock being called away,,, or selling puts if I plan to hold a position . For instance sell one put btm & one at the money or above if I foresee stock rising. I often adjust single leg to multi as conditions change.

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biotechlong (btl)
Irregular
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BDT, I withdraw my earlier question posted at 9:00 am. I figured it out. Essentially, if the underlying SP turns south and stays tracking in that same (wrong) direction, the options prices should likewise decline. That gives you a choice: (a) If you want to keep the originally purchased underlying shares (or LEAP), you simply let the call options that you sold expire worthless. (b) If you want the ability to sell off the underlying shares (or LEAP) prior to the near-term option expiration date, you can buy back the sold calls (presumably at less than the price that you… Read more »
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The Blind DayTrader
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Yes, but I still use that 5%(ish) trailing stop on the underlying, to help decide when to act. If it only falls a little, then the options expire and I have the initial credit to subtract from my cost basis. If the sold calls fall to zero (or near zero), I’ll buy them back, and sell the near term call to recover what I can, if there is any value in doing that. If the underlying has fallen below my mental stop of 5% or a little more of the price where I entered the near term part of the… Read more »
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gabgigor
Member
69

Let the lessons begin.

biotechlong (btl)
Irregular
2790
Thanks to Margaret and Alan for your joint efforts in launching this new discussion strand. I don’t think that it is reasonable to use this strand as a “complete” training platform – but I do think that it would be very helpful to point out training resources that are available. One such resource is jimfinksoptions.com. Although I have not yet subscribed to his service (highly rated by Gumshoe readers), I was somehow able to download his excellent “Options for Income Strategy Manual” that clearly spells out the key concepts that we all need to know to get started in options… Read more »
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hipockets
Irregular
1229

My thanks, too, to Margaret and Alan, and to Lawrence for the info about the Strategy Manual. His link did not work for me; this one did:
http://ki.nlh1.com/downloadablePremiums/OFI_OptionsManual.pdf%E2%80%8E

And thanks to all of the contributors to this thread, too. I feel very lucky to be a part of the Irregulars.

Meg in Minneapolis
Guest
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When I research a stock, I draw its chart. In my desk’s top drawer are my research pages. Each page shows 12 charts (3 charts across, and 4 charts down). In the right upper corner of each page is a title. I have a small stack of pages with the title GOLD/SILVER… another stack with pages labelled SOLAR… REFINERS… STEEL… CHINA/ASIA… ALTERNATIVE ENERGY… RARE EARTH… OIL/GAS… TECHNOLOGIES… BIOTECH/HEALTH… MARIJUANA… E-CIG… SHIPPERS… MISC. Using this method, I can quickly find any stock that I’ve researched in the past few years. I can also, with a brief scan of any page, readily… Read more »
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Meg in Minneapolis
Guest
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WHOOPS!! Your row of stocks came out in a garble here. So you will need to separate out lines 2 and 3, align each chart’s vertical line, and properly stretch out the volume and % YTD. Hey! I’m sure that you’ll sort it out.

Margaret Kittelson
Guest
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Compulsion disorder…I just HAVE to fix the garbled assignment.
________________________________________________________________________________________
CBST 1/6-$63.61……………………..ARNA 1/17-$7.26……………………….DRTX 3/25-$5.54
l Cubist…………………………………..l Arena Pharmaceutical……………l Durata Therapeutics
l antibiotics……………………..l safe weight loss…………………l super-antibiotic
l……………………………………………….l…………………………………………………… l
l________________________…….l____________________________…..l________________________
12M……………………..% YTD…………8.2M………………………..% YTD………468K…………………….% YTD
________________________________________________________________________________________

When you make your own giant L for each chart and draw the trend-lines, just leave out those lines of place-holder dots.

Margaret Kittelson
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Okay, you guys….No laughing at me allowed. And now I am going to try again. Yet again.

Meg in Minneapolis
Guest
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I just noticed that I’m now “Meg in Minneapolis.” I’m still Margaret…and happy to respond to either name.

arch1
Irregular
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I have a question; how can you short a stock you do not own & Is not available on the option market,,IE. non-optionable?

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Don Barrett
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I haven’t shorted stocks, but as I understand it, if you truly believe a stock will go down in price, you literally borrow the shares from your broker and sell them; that is the essence of shorting. Then, if the stock goes down as you hope, you buy them back at a lower price which returns them to the broker, and you keep the difference between what you sold them for initially and what you paid to buy them back at a lower price. If the stock goes up, you have to buy them back at a higher price and… Read more »
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James
Guest
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Shorting is not hard, and basically all that has to happen is Your broker has to have shares to borrow. Instead of buy you sell, then to close the transaction you buy to close. I am very happy with Interactive Brokers, even though they do not have some of the HTB (Hard To Borrow) stocks like pennies that I would like to short.

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blinddaytrader
Irregular
4

Welcome to the thread, James! You clearly know your stuff, and I’m glad to have another dark sider (premium seller) in the mix–it was getting a little lonely hanging out with all the call buyers. Just kidding, I love call buyers. (After all, where would premium sellers be without them?:-))

hipockets
Irregular
1229
James, this is obviously a stupid question, because I think the answer is obvious – but – To short a stock, one borrows the stock from the broker and sells it. Then, to close the position, at some point in time one buys the same amount of stock, hopefully at a lower price than the purchase price, and “gives” it to the broker. My question: Providing the borrower stays within the rules and financial guidelines of the broker, is this point in time is strictly up to the borrower ? Glad you joined the party!
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Margaret Kittelson
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Frank – You already know that I have never shorted a stock. So you and I will both be glad when someone comes along who is capable of responding to your question. Before I exit, I wanted to respond to something you said. You wondered what level I might want this thread to be. If you would enjoy the process of bouncing ideas with me, let me know.. mkittels@msn.com For now, I set out a bit of my thinking. If this forum is approached as a class, with experienced teaching novices, then a mix of skill-levels is needed. And The… Read more »
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Eddy9
Member
16

In your opening post No 6, you don’t want to forget the “option’ dummies. Thank you. Plain language is what I need. Looking forward eating your lectures. Eddy

arch1
Irregular
7782

Meg; I make no promises but I will at times chime in if I think it helpful & in my depth. For now on the stop loss mentioned I think that tight stop loss is just noting a small movement in the stock as an indication of how you treat the option,,,,,whether to get out,,,add to,,, or otherwise modify. I seldom sleep more than 3 or 4 hours at a time so all depends on my degree of fogginess as I read the thread,,,,@ 3am or 3pm .

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Margaret Kittelson
Guest
0
Shall we ding you one, Frank, if you’re foggy? So far, I’ve never noticed the least dimming. If it is your preference to sleep longer, let me know if you are open to trying several supplements that I find helpful. But here I am, having intended to go to bed in the early AM…still chugging along at 4 PM my time. Unless I exert a big effort to be disciplined, I then have no schedule at all. And do, please, chime in to help us with options. Interesting about the tight stop-loss on the underlying stock. I have 4 or… Read more »
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hipockets
Irregular
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Margeret — post 13

When one publishes their email address on the web, one opens oneself to several types of different nefarious deeds. It is not a good idea.

One safe way to do it is to substitute something for the “@” symbol – something like “HippyPockets= = gmail.com [ replace the “= =” sign with @ ]”. Be sure to add the part in brackets.

I apologize if there is a HippyPockets uslng gmail. :>)

I agree wholeheartedly with your statement, ” . . . a mix of skill-levels is needed.”

Margaret Kittelson
Guest
0

Thank-you for the note of caution, Hi Pockets! And I did it twice on this thread.

So where the @ would be, type the bracket symbols enclosing something other than @? Example : myname[&]yahoo.com

Or myname%yahoo.com

Or myname@Jyahoo.com

Hey! What sort of nefarious deeds might I be alert to now?

hipockets
Irregular
1229
Margaret — post 13 In your example “myname%yahoo.com”, replace “%” with “@” to arrive at “myname@yahoo.com” There are ‘bots that cruise the web looking for email addresses — The most obvious damage is someone harvesting your email address and spamming you unremittingly A more serious result could be that the email address, combined with other tidbits of information [ phone number and address from phone books ( you did mention Minneapolis, I think ), the mention of other personal things on websites, etc., hackers] about you will lead to the possibility of financial harm **. Unlikely, but there are a… Read more »
Margaret Kittelson
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Hi Pockets…Yes, you do remember correctly that I live I not so far from a place where all the children are above average, so I’ve often heard. But at my grocery store, I can’t find those Powdermilk Biscuits that they eat all the time out there on the prairie where the wind blows and they got ten inches of snow last week. Right after Easter it was, ten inches of snow. And I can tell you, people had had enough, and they know how to turn their heads away and pretend they don’t see. They practice at church every Sunday… Read more »
Margaret Kittelson
Guest
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Edouard – I need plain language, too. So here is repetition of #6, adding your clever revision:

We who are option-dummies depend on those with knowledge and experience to give us explanations that are clear enough [dummied down enough] for us to understand.

Margaret Kittelson
Guest
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Here is try #3 with the assignment. ________________________________________________________________________________ CBST 1/6-$63.61……………………ARNA 1/17-$7.26………………..DRTX 3/25-$5.54 l Cubist………………………………..l Arena Pharm …………………l Durata Therapeutics l antibiotics……………………l safe weight loss l super-antibiotic l……………………………………………..l l l______________________………L_____________________………l_______________________ 1.2M % YTD……………8.2M………………% YTD…………..468K………………..% YTD _________________________________________________________________________________
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hipockets
Irregular
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Margaret – Re post 15 –

Assuming the website’s font size in your post is 12 points and the spacing is proportional, there are 80 characters per line in post 15.

You could try holding your line to 65 characters to see if that helps.

This line is 65 characters.
123456789012345678901234567890123456789012345678901234567890123456789012345

But it shows up in the compose window as 61. Let’s see what it is when I post this comment.

hipockets
Irregular
1229

Just realized that the number of replies to the original comment affects the available characters per inch. Oh, well!

Alan Harris
Guest
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Margaret et al: why not dummy run an option deal (phantom portfolio so no real dosh.) All settle on MSFT say. See how that pans out. Various people can suggest various ways to play it….lets see who’s the guru.

Margaret Kittelson
Guest
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Alan – Great idea. Right now, I don’t know what The Blind DayTrader plans to do with MSFT. And I want to begin with a focus on how to analyze a stock, then how to identify a stock that might be a good underlying stock of an option play. We’re starting with the assignment of analyzing 4 stocks. Maybe you could add some more for us to consider (and include some that would be lousy choices). I can so easily identify lousy choices. Good ones…I do not so easily find those for myself. I certainly like your idea of everyone… Read more »
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Alan Harris
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Id suggest that we settle on one stock and get those in the know to come at it from different directions. Winner takes all the applause….but all take the lesson) Im gonna suggest APPL as of tomorrow. Your call (‘scuse the pun 🙂

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Margaret Kittelson
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So many years ago, I held APPL. And across all the years of enjoying investments, I’ve only held stock with a price less than $50.00, preferring less than $15.00. APPL was a small-fry back then. I do hold high-cost stocks as option plays, though. So for that reason, too, I think that APPL is a good choice. Alan, I am going to assume (unless I hear otherwise…mkittels@msn.com) that you would introduce APPL, who I no longer know, then guide discussion toward things appropriate to this stock as an option play. We might not get to it tomorrow, depends on how… Read more »
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Margaret Kittelson
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3 strikes, and I’m out. I’m sensing that there