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Strategies & Market Trends : The Options Box -- Ignore unavailable to you. Want to Upgrade?

To: ig who wrote (9397)	2/3/2001 10:35:30 AM
From: dli	Read Replies (3) \| Respond to of 10876

If your timeframe is a few days at maximum you should stick to front month options except when there's only a few days left until expiration. The front month also tends to have the highest liquidity so you won't be giving up as much getting in and out. However, keep in mind that if your timing is off somewhat time decay can hurt you badly on front month options even if your directional assessment is proven right eventually. As for the strike price to choose, assuming that you have a fixed dollar amount to commit to the position if you want a precise answer you should run all strikes through a pricing model with your forecast values (the CBOE has an options calculator on their web site). Unless you are expecting an extended move in the underlying often the OTM strike that will be ATM at your target price will offer the highest percentage return but also the highest risk. However, with highfliers there's often a very pronounced U-shaped vertical volatility skew where far OTM strikes are most affected (i.e. far OTM calls and puts are highly overpriced). So if you expect an extended it move a strike that's a little closer to the money may prove to be the better choice. That's why it pays to run things through a model. Dave

To: ig who wrote (9397)	2/3/2001 11:28:46 AM
From: Poet	Read Replies (1) \| Respond to of 10876

Hi IG, First, I can't give you any direct advice, but can frame my answer in terms of what I would do if I were looking at buying puts on CIEN. First, the VIX has been pretty low (until Friday) so the volatility factor in options is on the smaller side, which makes buying them right now preferable to selling to open. Second, we're about midway into the February option cycle, so IMO, buying Feb puts is still OK if I feel the move in CIEN will occur within the next week. Why pay for more time by buying the March series? Third, if CIEN is currently 100 and I think it will hit 87, I'd personally buy ATM or slightly OTM puts, like the Feb 100's or 95's because the delta is higher (the value of the option will rise at a faster rate per one-point move down in the underlying) than significantly OTM puts. I see there's a large OI on Feb CIEN puts at most strikes, and lots of activity on Friday, so you're not alone in your thinking. I hope this response was a wee bit helpful.

To: ig who wrote (9397)	2/4/2001 12:21:22 AM
From: KFE	Respond to of 10876

IG, Please keep in mind that I am looking to capitalize on very short-term swingtrades in the price of a stock, often buying and selling the options within a day, and generally not wanting to hold more than a few days, maximum. It is much more difficult to daytrade options than it is stocks. Bid/asked spreads and timely executions cannot compare to equity markets. If all you want is to increase your leverage it is possible to do that in a 1-few day time frame. Deciding which option will give the maximum advantage can be determined as Dave said by using an options pricing calculator for the different strikes (for your purposes just use front month options). A quick estimate of how far an option will move can be obtained by looking at the strike that is the same distance from the one purchased as you expect the underlying to move. If you mainly trade a limited basket of stocks with experience you will be able to look at an option chain and pick out the most efficient one for the strategy desired. It will be mandatory to be able to route your order to any one of the five exchanges for the type of trading that you will be doing. Understanding implied volatility and its effect on option prices will not be critical in such a short time frame but you should know the effect it has on option prices in regard to such events as earnings announcements. I believe that equity traders can enhance their skills and returns by understanding options. One example is being able to short a stock that may be problematic because of unavailability to borrow or uptick/upbid rules. You can get the same risk/reward profile with greater leverage by doing a synthetic short (short call + long put). Best options to buy when I KNOW* what is going to happen to the price of the underlying stock?* If you can do this just let me know and I will be more than happy to tell you which option is the best. Regards, Ken