Options, understandings and tacticsAlan – 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.
REPORT ON OUR OPTIONS FOR THURSDAY MAY 1
………………..4/30……5/1
ARNA………0.58…..0.84 (+44.82%)
CBST……….3.30…..3.70 (+12.12%)
DRTX………2.08…..2.35 (+12.98%)
GILD 75….3.19…..4.70 (+47.33%)
GILD 77.50………..2.90
P (put)……2.41…..2.51 (+4.15%)
An approach to managing option contracts that is favored by many investors: Sell any option contract that has gained 20% or more.
Therefore, these investors would now sell ARNA and GILD 75. They might immediately buy ARNA options at a new strike price, and buy GILD options at a new strike price. They might also add options for both ARNA and GILD at new expirations dates.
Whenever you hold a stock that is doing well, you might seek to increase your gain by adding more shares. Whenever you hold an option that is doing well, you might seek to increase your gain buy buying more option contracts on the same underlying stock.
Margaret,
As for posting. I could not believe how simple it was when I first seen it. So let’s try it.
First – prep your place to post. meaning have a space ready to paste comments/pictures ect. it has to have atleast 1 empty space so not to run into each other.
2nd – highlight in blue, left click and drag down for interior page tags, or if you want to show a web site – right click on the page URL (www.shoes) and it will turn blue. An option box drops down— click on copy
3rd – go to page you want info to go to, right click in the area you want the copied (blue) info, box drops down.. click paste. Walhla! Done!
So highlite in blue (left click n drag) or right click url (www.stufftocopy) chose copy, go to where you need info, right click, chose paste.
Left click to copy is for picking out areas within bigger areas. I’ll pick something from post above “buying more option contracts”
Walhla! ? try Voila’ If as sometimes happens you can’t get an option box try control C for copy & Control V for paste in Windows.
Greenfield – This is so funny to me!! You tell me, You can’t believe how simple it was. Then you go through 3 steps with right-click, left-click, click copy, click paste. It doesn’t sound simple at all to me.
Maybe this process is like so many, when directions seem complicated, but actually doing it turns out to be fairly easy. Yes – I WILL try it. Try it, I’ll like it?
My mouse has no right and left click, that might be a problem. And I’ll need to check some menu on my computer to learn about “paste.” I wrote out everything you said, and I’ll keep your directions on my desktop. Many thanks, greenfire67!
Margaret: I hear what you say about taking profit at certain levels. But remembering these are fantasy buys, for this test can we let it run to strike date irrespective, then review what we should have done when and why. No point to cashing in fantasy money.
Alan – Absolutely. We don’t want to mess with fantasies!
We could also add some other option plays to track in our fantasy portfolio. The sticking point for me was option-volume being low for the biotechs. I hold in my own portfolio options on MNTA (Momenta Pharm, with treatment for MS). The chart is ideal, volume at about 1.5M, option volume high, too…everything a go. But MNTA option performance, it is a slow go.
Alan – I thought that I’d add that I’m not in the group of investors who sell options when they gain 20%.
Their method is profitable, though And I think that it is a very good approach (with both stocks and with options) for investors who are risk averse.
Margaret, maybe this video will help you understand how to copy and paste.
It’s less than 2 mins long
https://www.youtube.com/watch?v=vCYP0mPeDoU
Thank-you, Linda. A visual demonstration might do the trick.
I do have computer barriers…tending to just want to stick within a level of comfort. Sometimes that seems odd to me, because I had a computer before anyone I knew did. And I coaxed and wheedled professors in my department to use computers for word processing. That was in the early 80’s, when over-filling your floppy disk resulted in losing everything on that disk…a really swift whack at the side of the head for losing focus. Groups of computer-users met together to problem solve at Joe’s house working on his Kaypro. Maybe all the crashes, and losing months of work, gave me computer PTS.
But in revealing that dark past, I am now free from its shackles. Right? So I shall now, thanks to help from you, Linda, and from Alan, and from greenfire67, finally start moving photos and text with ease.
Shockingly easy. I felt like a dope when shown the 1st time to coppy/paste. I programmed cad/cam for a decade before too! Silly
Open interest is how many contracts are currently open. Volume is today’s activity only. It is important to realize how open interest behaves due to volume. Each closing of a position decreases open interest, each open increases open interest. So if today the volume is 700 (500 closes, 200 opens). Tomorrow open interest decreases by 300 (contracts).
Opposeablethumb – So now I know! I appreciate the information.
So it seems to me significant that the put for P had open interest of 3,403, but volume of 136.
A similar ratio was evident with put options for DDD, that I did not go with due to rising price for 2 days. With DDD, May expiration, open interest was 1,398 while volume was 122. Then June expiration had open interest of only 149 for the same strike. My take is that these put options may be about at the end of the string.
I also had never considered that volume included contracts that closed, as well as those that opened.
For your amusement, I had made a guess that “open interest” was a tally of all who had bought option contracts at the target prices to either side of this one. I had to come up with some explanation or other, right?
I do not think the ratio has much significance in most cases. If you knew the newly opened contracts that may be significant. In your example imagine the extremes 1398 open interest and 1398 volume. So you decide this is a good ratio. Tomorrow you go check it out and at the end of the day you see volume zero, open interest 1. What happened? The day before everyone else closed their contracts. You opened 1. Day 2 you are the only open contract. However, if the volume is 5 times the open interest you are assured that contracts are being opened (new positions taken).
Also, different explinations help, so here is some more material to study;
http://seekingalpha.com/article/629681-options-trading-a-little-knowledge-is-a-very-dangerous-thing#comment-8925431
This is a site (free) which gives some long & short ideas of the day. Shorting is also an “option”
http://www.shareplanner.com/featured-blogs/ryan-mallory/watch-lists/19713-swing-trading-watch-list-key-cma-car-dnr-hznp.html
http://seekingalpha.com/author/options-weekly?s=options-weekly
Sorry most of these are SA authors, but it gives some/different perspectives.
Linda – So far you have got your A!
Your Gild $75.00 call-option led the pack 5/1. Looking forward to seeing how it fares when racing next to Gild $77.50 on 5/2 and thereafter.
ARNA OPTIONS
For those who wanted a heads-up when I decided that ARNA was a go for buying option contracts….I had announced two days ago that the time was now, but then did not start the option play. Why? Because volume had not increased.
Wednesday 4/30), ARNA’s volume was 4.5M on Wednesday, and its stock price increased 3.62%. Thursday (5/1) , volume rose to 6.4M and the stock price again increased.
Our option gained 44.82% on 5/1. We captured that gain for our paper trade. I am now opening my own option trade for ARNA. I will choose a June expiration, with a strike price at or below ARNA’s stock-price.
If others also buy option contracts for ARNA, let’s compare the performance of different strike prices and expiration dates.
The repeating pattern for ARNA is a rise to about $7.50, then a reversal with a drop back to about $5.00. Thanks to Frank’s guidance, I will (for the first time) buy put options on ARNA at the time I am selling the call options.
Of course, ARNA will at some point break out of its up-and-down trend-line pattern. So I expect some time to use options in order to to increase gain as ARNA rides to $20.00.
OpposableThumb – Thank-you for you reflections on volume/open interest for options. Your comments strengthen my thought that volume is an important factor when deciding which option contract to choose.
A Seeking Alpha comment: ARNA sales see nice rise. However the stock price stumbled. So our options did, too.
Here are some biotech stocks recommended by ZACKS:
NVS (one that Dr. KSS said that he holds) – cancer immunotherapy
SNY – that recently increased its stake in REGN
MDVN targets “orphan” diseases, recent earnings report of +36.36%
IDIX – hepatitis C (HCV)
UTHR – Drug Remodulin, strong performance..and other drugs doing well also
I have not pulled up the charts for any of these. One or more may be good as the underlying stock for option contracts.
Here is a comment by investor Paul Mampilly about investing in biotech: When you invest in biotech, you deal with stocks that can rapidly fall in value. If you hang on for the fall, you will lose a lot of money. [Here, I note that BNIKF dropped in value 51.28%, falling from $1.95 to $0.95 in just over one month.] Biotech stocks can quickly rise, also. If you are invested in a biotech stock as it rises, you will make a lot of money. So when investing in biotech, play it right.
For reasons that I will never comprehend, some investors seem proud of hanging on to an equity as it drops in value. It sounds as if, for them, a buy-and-hold style is viewed as a virtue. Throwing away your money is a virtue?
Buying and holding option contracts, not selling them when they drop in value, will result in lots of financial loss. Such a passive style is a sure-fire way to throw away your investment capital.
If you learn how to manage option contracts, those investments will increase your yearly % gains. Next, transfer tactics that are effective with option contracts over to the way you manage your stocks. AAAHHH Then you will MUCH increase your yearly % gains.
CVX gamble update ,,,May 2 Friday sold $123 call expiring for $166 % and at same time bought May 9 $123 call for $205 essentially a rollover but with $41 loss to date. Done at 3;30 EST.
This was after a before mkt announcement of unexpected 19.8% earnings drop & later CVX announcement of dividend increase 7%. Now we are back to where we started only with a loss to make up & expiration next Friday. Same odds,,,still a coin flip,,,little longer time before 2nd swing at the ball. We are going to shoehorn a quarters worth of trading into 30 days,,,,probably. This is real world,real time nothing fancy,,,,,are we having fun yet?
Hi Frank, Are you sure those numbers are correct? I thought you paid $239.00 for the call expiring today 239.00 – 166.00 = 73.00 loss.
True but the $205 cost of changed position must be accounted for. Equals $41 to put me back where I was. Don’t make too much of ups & downs at this point.
Hey Frank: this has been an active thread, so please forgive me if I forgot or missed your previous explanation for this.
Why are you using weeklys?
The exponential decay of time value, and fast collapse of volitility, usually make weekly options a bad bet for longs. In fact, I have heard many in the industry say that they are really only important to premium sellers (I.E. people who do short term covered calls, naked/cash secured puts, and short outlook spreads).
Wouldn’t the May 16th ITM call, or even possibly the June, hold its value better (hold its volitility longer, and have a slower time decay), than any of the weeklys?
Unless you know each week is going to see a large enough rise in the underlying, for the intrinsic value to offset the large losses to time and IV, I’m not sure I understand how this is intended to profit more than just holding the monthly through the whole rise would.
What have I missed about how this works?
BDT; you are correct on all counts. I expect something to happen that may not occur. It is a coin flip that shows things you can do as time passes. I would normally never touch this.
Frank – So your one-day call expired on you, huh. Expired worthless? Nope! Your “coin-toss” trade had a gain of 166%.
Now you are in a 2nd CVX gamble, for May 9. Frank is having fun!!
Margaret ; It did not expire worthless on me,, I sold it for $166. The % sign was lack of proofreading. If I stopped there I would have a $73 loss. This lesson is not yet over.Same gambit is in play ,,I only made a small move. Continue watching ,,there are lessons to be learned when it’s over. I chose this precisely for unusual situation,,not to make or lose money,,,,perhaps because in a senior moment I felt generous.
If anyone else is following there are no invalid questions & I will not ridicule anyone. I will answer to the best of my ability but I too am learning & I gain most by doing. I do not know how this will play out but I will keep you posted.
Here is my thinking process that led to my purchase of options on two different stocks today.
I started by looking at charts of those stocks listed in #89. I learned:
NVS, $87.36 (5/2) is a lumbering sort. It is +5.6% in 6 months (+0.03% per day, +0.93% per month). Volume is down. YTD +8.24%. Option contracts for June s$85.00 @ 3.10, volume 4, open interest 6. Volume too low for me to consider.
MDVN might be a good stock purchase. The stock-price is down 32.42%, and may now be at the start of an up-trend. So it could move fairly quickly from $59.59 back to $88.19. I nix it as an underlying stock for option contracts due to low volume.
SNY is one I would not consider. It is not trending (moved in 6 months from $52.60 to $54.00). And it is not optionable.
IDIX No options on this, either. Specializes in viral diseases. The chart has appeal to me…a sort that rose from $4.70 to $8.00 (where it stayed for a month), then a fall to $4.90. It is now at $5.27 (+4.87% on 5/2) , so appears to have broken out. It might give an investor a quick gain of 34%.
UTHR is a big company, stock price $104.22 (+1.98% on 5/2). It is down 11.92% from its recent high of $116.65. So the probability is that an investor could gain 10 % in few months time. As for using options, I would not choose them due to small volume.
So long as I was in the research section for options, I checked out options for two stocks that interest me. I liked the option contracts’ volume, so I bought them.
_____________________________________________________________________________________
MXWL – $16.17 (+10.07%) on 5/2. Maxwell is a tech company with energy storage and power delivery systems. YTD +89.06%. Was $9.00 in September. Volume up from 1.4M to 3.3M.
Option contracts: C June s$15.00 @ 2.00, volume 90/open interest 985
[translation: Call contracts, expiration June, strike $15.00, each share at $2.00]
I’ll add this to our fantasy portfolio, so we can watch another option contract as it plays out across time. I stayed with the investment of $1,300 and divided by 200 (2.00 X 100, because there are 100 option shares in each option contract). So we can buy 6 contracts, with $100.00 left over.
———————————————————————————————–
GGB – $6.31 (+4.82%) on 5/2. Gerdau makes steel products. Its share-price fell 25% from $8.41, and is now into an uptrend that appears to be secure. Volume is up from 3.9M to 6M, also a positive indicator.
Option contracts chosen: C June s$6.00 @ 0.40, vol. 34/open interest 1,561
[ Translation: Calls, June expiration, strike of $6.00, each option-share costs 0.40.]
I’ll add GGB to our fantasy portfolio, too. For $1,300, we can buy 32 contracts [1,300 divided by 40 (100 option-shares) = 32.5] with $20 left over.
——————————–OUR FANTASY PORTFOLIO……………………
REPORT ON OUR OPTIONS FOR FRIDAY MAY 2
ARNA……0.58…0.84…0.80
CBST…….3.30…3.70…3.50
DRTX……2.08…2.35…2.00
$75
GILD……3.19….4.70…3.65
$77.50
GILD……………..2.90…2.13
GGB………………………..0.40
MXWL…………………….2.00
P………….2.41…2.51…1.92
[newly added:]
GGB – ($6.31 5/2,) C June s$6.00 @ 0.40, 32 shares = $1,2280 + fees
MXWL – ($16.17 5/2), C June s$15.00 @ 2.00, 6 shares = $1,200 + fees
So Margaret did you actually purchase these last two stocks GGB and MXWL yourself? Just want to make sure I’m understanding you fully -that you are interested in them enough to make a real purchase. Thanks! Learning a lot from this thread and I appreciate your encouraging teaching style 🙂
Linda: I dont think thats a fair question to ask. Margaret is working hard to demonstrate a fantasy play for our collective education. What she does with her real money is her business only.
Oh ok sorry but it looks like she offered the information a few posts (post 93) back so I was just clarifying. I wouldn’t have asked had she not said “led to my purchase”. Maybe she meant her fantasy purchase. ha
(with a big smile on my face) I think it comes under the general heading of ‘being nosey’ but adds naught to OUR investing education. Onwards and upwards.
I have found this options thread useful as I am learning from other traders and have been inspired to do further research myself.
I decided to research weekly options as I have never looked into them before. I found this YouTube that details the way this trader allocates funds to different areas including having 20% in Cash to have available to take advantage of opportunities that may occur 3 or 4 times per year. I found this information very informative and would recommend those interested in options to watch this YouTube.
Options weekly
http://m.youtube.com/watch?v=9v7eRtmzk94
Ken – Thank-you, Ken for the video! But I more appreciate what you said.
You spoke of taking advantage of opportunities that “may occur 3 or 4 times per year”…an understanding of the market that I rarely encounter. What you said is, I think, very important.
Most of an investor’s gains will be made during those 3 or 4 times per year when the market surges. SPY call options, during a surge, usually rise more than 100% per day. Sectors will rise then, too, giving investors the opportunity to profit from call options on leading stocks in their sectors.
When there are no waves, options are likely to be sliding down to a loss. Stocks don’t rise much then, either. During any period of calm, I benefit from carefully scrutinizing my holdings. I sell any options that are not moving up. I sell any stocks that seem stuck, too. I don’t know whether I get 20% into cash, but that seems to be a good recommendation.
During those times when there is no wind to propel options (or stocks, either), I go through my lists of stocks that I have not yet researched, looking for my next holdings. After the initial screening, I usually consider about 12 stocks. On one page, I draw out their trend-lines so that I can easily compare them. I watch how they perform each day. I’m waiting . I’m waiting for a break-out. When sectors start to move, I am ready to buy into them.
I think that the lull time in the market is just now ending. So Thursday, I sold slow-poke holdings to provide more funds for buying stocks and options. I’m ready to ride some waves.
I’ve been in a long-running contest of investors. For 6 years, the top 10 (based on yearly percentage gain) remain the same. I attribute my high gains to quickly selling any holding that has dropped 8% from its high point since I bought it. I also cut back on the number of stocks I hold when the market is trending down or is tippy. Whenever I cut back on my holdings, I end up with cash that I can spend as soon a the market improves. Being able to buy into a newly rising market will much increase an investor’s over-all yearly gains.
After responding to Ken, I was curious about the percentage of my investment funds that I have now converted to cash. So I checked.
Duel to the tippy market condition, I have been selling stock that is not moving up along with equities with any loss. I have been selling option contracts that have made no gain, along with options with any loss. My goal is to have funds ready to buy into good opportunities after the market starts trending up.
I’m now 57.14% cash.
Frank: While you stated the near term catalyst of Memorial day price increases I wonder if this has other headwinds. The price looks to be driven up already looking at a chart and in fact may be rolling over. It is impressive that the price held in the face of bad earnings.
A look at a chart of crude price is declining. Part of a stocks price is looking at future earnings and in the case of oil companies pressure from electric, natural gas, and hydrogen (soon) vehicles all make the future of oil demand questionable. This is one of the reasons for the low PE. I realize your gamble is only for a week. Looking at a 2 year chart this bet would have worked well last year. Looking at the decline afterwards and due to the pressures I have mentioned I may well buy puts shortly before Memorial day.
Good SA (seeking alpha aka silly alfalfa) article on DRTX this morning. Here’s the link:
http://seekingalpha.com/article/2191083-durata-therapeutics-approval-probability-and-investment-strategy-for-dalbavancin?isDirectRoadblock=false&uprof=
lawrence – Thank-you for posting the SA article about DRTX.
It appears that jer_vic made a great choice when he bought option contracts on DRTX. His first option trade!
[Background: DRTX’s drug Dalbovascin was approved 12-0 by the Advisory Committee, and comes up for FDA action on May 26.]
“Statistical data suggest overwhelming chance of approval.”
“High chance of approval complement the use of call options as a strategy.”
It does look promising, but I’m not going to count my chickens yet. The reasons cited by the SA article were pretty much my reasons for deciding on the DRTX options – great ADCOMM results, pending FDA action on May 26, etc. Fingers crossed….
Linda…MXWL and GGB both have trend-line patterns that I like a lot. My intention was to buy them, but only when the market was no longer wobbly.
Then on that day of looking at option possibilities for our fantasy portfolio, I also looked at the MXWL and GGB option details. Volume is important to me, and each of them had enough. So I bought them.
Yes, I bought them for my own portfolio, as well as for our fantasy portfolio.
When I bought option contracts on MXWL and GGB, I did so on a whim. I abandoned self-discipline [that would insist that I wait for better market conditions]. Now both MXWL and GGB are in the red…so maybe I’m paying a price for my bit of serendipity.
I do clearly like these two. So you might consider them for an option play. But wait. Wait (as I think that I should have) until the market moves up for several days.
By contrast with MXWL and GGB, jer_vic’s option play on DRTX is event-driven. With high probability, his option contracts will go up in price between now and May 26.
Ok, thanks Margaret. I thought that’s what you meant when you said you purchased them. I was curious because that would, of course, mean that you thought they were good plays based on your experience rather than just for our fantasy portfolio. I made my first real purchase today GILD – C May 30 s$79.00 @ 2.57 just one lot, just an experiment to see how it feels with real money. If it goes to $81.65 by May 30, I should break even.
Linda – Congratulations on having gumption! I think that you made a good choice for your first option trade.
I commend you, too, on using restraint, buying only one contract. You chose an option that expires this month, leaving little time for the stock price to rise enough to break even or to make money by May expiration day. Is it May 30?? Here is a recommendation for managing it if it is not moving up quickly enough: You could “roll over” the contract to June or later.
We are here to teach one another. So, Linda….you be our teacher by explaining how you determined that you need the underlying stock (GILD) to reach $81.65 for you to break even.
I request that others teach us methods they use to manage an option contract that has little time in which to move up to the break-even point. I mentioned rolling over to another expiration date…and that move needs explaining, too.
Good morning, Margaret. To answer your question: I am figuring my break even point on my GILD option by adding the option premium (what I paid incl fees) and the Strike Price.
So 2.57 (premium) + .077 (my fee 7.70/100) + 79.00 (strike Price) = 81.65
(I got this method from OIC online options course )
So now I know why options that are precisely at the strike price have a value a bit less than the amount I paid for those option contracts.
Thank-you, Linda, for giving us a formula for figuring what our break-even point will be. And hey!! Your GILD option contract did well Monday. I bought GILD June expiration, strike $77.50. And I’m a happy camper, too.
Yay! It’s so nice having this thread to build encouragement. I hope we all profit!
Everybody — Here’s a link to one OIC tutorial:
http://education.optionseducation.org/course/
I haven’t finished it yet, but it seems to be comprehensive and easy to understand.
I’m taking these courses too, Hi Pockets. I recommend them too, they’re very easy to follow and I like the quizzes at the end of each course. Lot’s of good information at OIC website.