Hi Paul; At one time I traded a lot of options, to tell the truth
I was over focused om them. In options you compeat within a market
of supply and demand, floor traders who have an edge, also
the commissions are more than with stocks. The original writer
is also not to be considered a fool. In a lot of cases the writer
has inside information. There are so many unseen factors, that
no matter what or whoes rules you go by they can be very risky.
That facts are 80% expire worthless. To beat thoes odds you have
to be dammm good, when you take the expences off etc. The floor
traders get first pop..they are in and out and most make money,
but people like myself on the buying side are like in a third
market.
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Look at options from the writers view, and get that view understood
to were you think you could write options and make money.
Books that deal with just buying options deal with them much like
the tipshyster at a race track who sell systems to beat the dogs.
On the surface they can show you how it works, and it all looks
just fine..put in in pratice and you find out it seldom works.
The track the kennels and only a hand full of pros make money at
a track and the pros know that if they make 15% they are doing
good. Of course they roll a lot of bets, and I never got that
good but I rolled bets you wouldn't belive. I lost tons of money
before I could get to were I found a way to "beat the crowd" ,
that required working the odds more than handicapping.
Same to some extent with options, analyzing is like handicapping,
but were is the "tote" board.
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The "tote" board is in the open interest..the bets already placed,
to find good odds and to win you got to beat the crowd,
sometimes a lot. Another factor is just how much of the stock is
shorted..odd they don't stress always check the short
interest always not all preform the same way, but a look
at the short interest on a chart compared to price tells more
than most other factors. Not being able to get up to date
short interest is a drag, but the brokers have it, at least
they have their in house info, and they often take short
positions too..based on the orders coming in. The data
we get is not up to date but with some extrapolating it
can be usefull. In most cases you will see a dramatic drop
in short interest just before the stock goes down.
( most shorters lose money ).
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All the rules you mention apply, but any of them can be
defeated and have you making bets you shouldn't make.
Then after you buy an option, if it's not to limit risk
on a long position..( better done with writing ) then you
most often want to sell the option..so what is the market
you sell to, if there is small open intrest you may be
surprised to find how the price skews agains you as you
place the sell order. The best market is in a large open
interest close to but just out of the money, were when
you chart the option you find the vast majority paid a
lot more for it, you get in way under their price and
the floor traders will have a hard time cutting you out.
It's a slice of time sold as a commodity..you want to
own it cheaper than the vast majority so you can dump it
at a discount or say undercut the price on the way out,
and still make a profit. This gives you an edge..and with
options you need an edge. Most of the writers will not
buy options back, unless they get them a lot cheaper than
when they wrote them.
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I lost a lot in options, backed off and looked again,
then in the last six to nine months I've only played a few..
they are not as profitable as a lot of people would have
you think. I'll have to go back and look, but since I got
more cautious..in the last 6 to 9 months I have not lost
on any bets in options, not one. Most of my bets were
on calls, with only one put bet in the bunch.
It will take me a long time to make up for the early losses,
fortunatly I backed off while I still had some money to play
with..a lot don't.
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Leaps ( calls ) on companies with a faily strong balance sheet
that has got beat down but will likley survive and were the
leaps have gotten dirt cheap..are the safest bet.
If I had the time I could show you over and over were
these made much more money than any other kind.
From T to pepsi, to ADBE..to TWD..CYRX ..the premuims
were drit cheap when thoes cos were at their lows.
I make exception to WDCDW only if it falls to 3/8..and
the stock shows support at 16 when and if she drops that
low..that exception may not last..it's based mostly on what
I know the vast majority paid for that call..and the large
OI and that with any bounce in the stock price some of those
suckers will try to average down, ( I got my market ), and
can under cut the floor traders if I get in that cheap.
Normally I like more time..but chances are if she goes off
that cheap..even a 1/2 pt bounce in the stock price will
double that premium or more, and she can do that on any day.
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Looks like I might be over over talking what I want to say,
I'l give it a break..just study the options from the writers
angle and get a handel on that before you get tied up in
the third world market of buying and hoping to sell them.
Don't write un covered calls, and if you going to work the
exotics as I call them (straddels and such )..remember it's a
full time job, commissions are high, spreads get skewed,
and most of the paper profits never work out in real time.
The pros on the floor got most of that covered real good.
-------------------
Jim
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