Hello Tuck,
Nice to hear from you again. Happy holidays to you, your's, and all the other regulars to this forum. Thanks for that article from Bernie Schaeffer.
Bernie is a well known "options expert" with a solid understanding of options. Although, we are all bias when we are selling something like a book, service or product. Most of the public think that only the experts on TV have this exclusive knowledge. Not the case in this age of the internet and computers. We have folks on this forum that have as much if not more experience and knowledge.
Bernie did a nice job on the subject of deltas. He only mentioned one approach of several which does fit into the realm of covered calls writing and writing leaps spreads. I got a chuckle reading the CNBC article. Bernie talks about his recent INTC bearish recommendation on November 21, 2000 for a December expiration. They were very profitable and carried a much higher risk factor than my plays. My LEAPs Spreads WINs® Bear Report made 3 bearish recommendations on November 1, 2000 on INTC. Yes, there were very profitable and much more conservative than Bernie's.
USING DELTAS TO TRADE OPTIONS
Here is Bernie's article:
cnbc.com
"So how should you trade out-of-the-money options? First, I suggest looking for leverage ratios between five and 10. Then I would choose an option with the highest delta for a given leverage level, making sure that enough time is left in the option for the stock's expected move to play out. I would avoid far out-of-the-money options, because their return compared to the return on the expected move in the stock generally isn't large enough to justify the added risk that these low-delta options will expire worthless. The name of the game is to rely onreasonable moves in the underlying stock, rather than the very rare "off the charts" moves, to drive your out-of-the-money option profits.
For an example of a successful out-of-the-money trade, I turn to one of my aggressive recommendation services that focuses on out-of-the-money and near-the-money option buys. On Nov. 21, my Expectational Analysis methodology was giving me a bearish read on Intel Corp. {INTC, News, Boards}. Fundamentals -- concerns over slowing earnings growth for the semiconductor sector -- and technicals -- overhead resistance from its 20-day moving average; two consecutive closes below its 20-month moving average -- were weak, while sentiment on the stock was pointing in an optimistic direction -- overhead call additions; decrease in short interest.
With optimism amid a poor technical and fundamental environment setting up an ideal bearish play, I recommended an out-of-the-money December 40 put with the stock at 42.5625. The statistics for the trade entry, as seen in Table A below, were:
On Nov. 30, Intel gapped lower on several brokerage downgrades. My put had doubled at that point, which prompted me to exit half the trade at a 100% profit. I call this strategy the "free-trade" rule, as it lets a trader play the rest of the position with the "house's" money. Traders can reduce the volatility of their aggressive trades and guarantee themselves at least a breakeven trade when a position doubles by selling half their contracts. The rest of the position is then held to allow profits to run to the expected target level. The statistics for my first exit recommendation, as seen in Table B below, were:
The following day, Intel was hit hard again, dropping another 10%, as rumors circulated that the company would soon come out with a profit warning. This stock move caused the option to reach my target profit level, so I recommended a closeout at that point... "
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My WINs® generated three plays as follows without the spreads. The spreads would have generated additional income.
The INTC stock was at $44.875 when the recommendations were made.
Today, INCT is at $32. You can see how the deltas varied and reacted to the INTC downward moves on the PUTs and still the JAN02 $50s had more leverage and had a lower intrinsic value than the 60s PUTs when the INTC stock was at $44.875.
NOVEMBER 1, 2000 INTC LEAPS PUTS RECOMMENDATIONS
INTC $44.8750 Jan02 $50.000 WNLMJ @ $11.8750
today worth $18.625 (+56.85%) before any spreads written.
INTC $44.8750 Jan02 $55.000 WNLMK @ $14.7500
today worth $23 (+55.93%) before any spreads written.
INTC $44.8750 Jan02 $60.000 WNLML @ $18.6250
today worth $27.5 (+47.65%) before any spreads written.
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SUMMARY
1. You can better gauge the impact on the price value of the option before you invest if you run it through a simulator or a free calculator such as the CBOE's Options Toolbox. You can do "what-ifs" and see the results before you get into a jam. Folks can visit my web site for that address in the November issue: leapspreadswins.com.
2. The last few months the big money has been on the bear side of the market. Some big, big bucks has been made on the short side. Bear PUTs and bear spreads has been gravy time. Caution - Now, may not be the time for new bearish plays since we are about to pivot soon. |
