OK, here's the scenario. I have $30K in my account. Let's say for this argument that I have privledges to do anything I want, buy or write options, futures, spreads, etc.
And I am 90% sure a stock will go up tommorrow, and I want to risk my entire $30K on the stock. I want make the trade today and close it out tommorrow after the stock goes up.
Would buying calls be the best decision, because I wouldn't have to put any money on the side for margin?
You mentioned before you would sell puts. Lets say I had $5K to allocate. Would selling puts theoretically give the same return as buying calls if I were to just sell $5K of puts or buy $5K worth of calls and close the position the next day? Would the downside be equal? Given the stock doesn't get hurt too bad.
Thanks in advance.
[quote="Valuetrader"]OK, here's the scenario. I have $30K in my account. Let's say for this argument that I have privledges to do anything I want, buy or write options, futures, spreads, etc.
And I am 90% sure a stock will go up tommorrow, and I want to risk my entire $30K on the stock. I want make the trade today and close it out tommorrow after the stock goes up.
Would buying calls be the best decision, because I wouldn't have to put any money on the side for margin?
You mentioned before you would sell puts. Lets say I had $5K to allocate. Would selling puts theoretically give the same return as buying calls if I were to just sell $5K of puts or buy $5K worth of calls and close the position the next day? Would the downside be equal? Given the stock doesn't get hurt too bad.
Thanks in advance.[/quote]
A few things pop in my head about the stock odds of moving higher. Lets start with your number of 90% and work from there as it's as good of a place to start as any.
using 90% that leaves a 10% it will not rise, so that means it could stay the same or drop. What becomes obvious is that there is not enough information to know if a trade can and should be made. The stock price might be highly binary, for example an important FDA ruling that was recommended by an inferior panel. The odd of the stock risking after the FDA ruling is about 90%, and since everyone knows this, if the ruling is in the favor of the medication the stock will move higher BUT will not move as much higher as it will fall if not approved. So the magnitude of movement needs to be known. The payoff for success needs to be about 10 for 1 or better to make it worth it.
if your neighbor works at Ford ($F) and says they are coming out with a Mustang that does 200MPH and gets 50 MPG and doesn't cost anymore to make compared to the older model, and they are going to announce tomorrow or as soon as they finalize a few details, the stock is likely to pop up very much. With a strong move higher (relative to the 11 for 1 needed just to make the trade) you will likely want to buy call options that are one strike out of the money in the front month as long as that provides plenty of time (buying options that expire in a few days may be ok if you have at least a day or two buffer). this i believe will give you the biggest bang for your buck
If you think the stock is going to move up (again above the 10 for 1 amount) but only a little bit. For example a $50 stock moving up 50 cents. Basically moving up 1%. If the stock trades with little or no real spread than long the stock may be your best choice. If the stock does 62 million shares a day in volume, and the options trades many strikes with 1 cent spreads like $QQQ buying call options might be great too.
If you are dealing with a stock during options expiration week and every day has real time decay, selling an out of the money put (assuming that the options are traded in some real volume) at or near the offer will likely give you the best bang for your buck. This also gives you a slightly less amount of risk than buying the stock
If the expected move is large relative to the price of the stock, than selling an out of the money put under the same conditions as above is likely to be the best choice. The risk is lower than buying the stock, and the amount collected should have a very high delta to the price of the stock, with time decay and or implied volatility loss the overnight true delta could even be higher than 1 realized.
I hope this is helpful and feel free to ask if anything is not clear
Best
Robert
OK, thanks for the feedback Robert, yes it was helpful. I think what I need to do is practice buying calls and shorting puts in different scenarios, and see which one gives a better profit in different situations.
[quote="Valuetrader"]OK, thanks for the feedback Robert, yes it was helpful. I think what I need to do is practice buying calls and shorting puts in different scenarios, and see which one gives a better profit in different situations.[/quote]
Hello VT
You could do that, or you could also watch the tape and or look at the tapes of the stock and the options and that should give you an idea of what to expect in the future. If you have examples of previous stocks you can post the date and the symbol and we can go over each method to see what would have been the best way in the past.
Best
Robert