View Full Version : Who "gambles" in the options market?

11-29-2004, 08:17 PM
Anyone here want to share their experience (success or failure) in trading options?

I might take a few grand and buy a few inexpensive option contracts (~$300 each). I would buy some puts and some calls. I will also space this out over time so that my entire bankroll is not invested at once

Does anyone have experience evaluating this like a gambling event? Is it possible to out smart the market and become a +EV trader?

Bad idea?


11-29-2004, 10:14 PM
Not sure if this is what you're looking for, but I'll tell you what (little) I've done with options.

I am almost exclusively on the sell-side when it comes to options. I will write covered calls on positions that I want to hold longer-term, but I feel the stock is overheated and may pull-back. I will also sell cash-secured puts on stocks that I want to buy at a discounted price.

For example, say that I want to buy QCOM at 39.50 or better. The basic approach is to put in a limit order to buy the stock at 39.50. Another approach is to simply sell the December 40 puts for 0.50.

Pros of using limit approach:
If stock dips to 39.50 then rallies, you're in and you win. But, had you used the put method, you'd only collect the premiums, which is likely to be less profitable than had you owned the stock.

Cons of limit approach:
In a sense, your cash is tied up. If you have a margin account, then this might be less of an issue.

Pros of using put method:
If the stock doesn't close below the strike price, then you've pocketed the premiums, which is a decent yield for a month. If the stock closes between 39.51 and 39.95 (or so), then you'd have gotten stock at the price you wanted, that using the basic approach would not have gotten you.

Cons of using put method:
You are tied into the stock. So, if bad news comes out overnight, you're basically gonna get stuck with the stock, whereas if you had done it via limit order, you could cancel it (or get the stock at a big discount to your target price). Options method is more expensive also, in terms of transaction costs.

I know there are some posters that work directly in the options field, and I'm sure what I've said above is probably high-risk (and maybe even unwise), but you asked, and that's what I do when it comes to options.

It's really rare that I trade spreads, for me being a smaller player, I'd get killed by transaction costs.

This said, I don't recklessly sell cash-secured puts. I will only use this method after I've done my research on a given company, and I really do want to buy the stock, but only at a certain price that isn't quite available for me in the market. Overall, this particular method has worked okay for me. Not great, but pretty well.


11-30-2004, 01:38 AM

This is interesting for me - though I know basically nothing at this point. If you don't mind, I have a question. If you're going to write some puts, as in your example, how do you decide how many to write? I understand that you use this strategy as a "cheaper" way to get into a stock, but the upside seems pretty limited (the price of the put times how many you sell), and it seems fairly risky. How do you decide how many you can afford to write?


11-30-2004, 03:59 AM
Hi Tourne,

Note that I am not randomly writing puts to make extra money. Here are some basic criteria that must be met for me to employ this strategy:

1) I have already done my research, and I want to buy this stock at price X or better.

2) X is beneath the current market price, but not significantly so... i.e. I'm not going to be writing a put that is say 20% out of the money.

3) I want to establish the stock at price X, because I feel that would be a great entry point, and this isn't a stock that I *absolutely* must own. -- Writing a put does not guarantee that I will own the stock.

4) The premiums gained from writing puts less the transaction costs make the overall employment of the strategy worthwhile.

5) I am looking to enter into this position for the longer-term... I stress this criterion, because it does happen from time to time that you get stock put to you at the price you wanted, because it falls dramatically. Your goal was satisfied in that you did establish your position at your target price, but the market has taken the stock down quite a bit more. So, if you didn't plan on holding for the longer-term, this strategy might not be the most prudent.

Now, to answer your question, I will write exactly the same number of puts as I was intially wanting to invest. The QCOM example was a contrived example to help explain what I do. But, say I wanted to buy 500 shares of QCOM @ 39.50, and I really really wanted this price or better. I would probably not set up an limit order to buy it at 39.50. I would much rather be paid 1.25% (for the 1 month, which is a pretty large) plus the money markey interest (much less for 1 month) to wait to buy the stock at my price point. So, to do this, I will sell 5 open Dec 40 put contracts, and I will definitely have $20K sitting in my account's money market ready to buy the stock should it get put to me due to my written put options. I'd much rather have my $20K earn me 1.25% for the month. Basically, I'm getting paid for my time to wait to buy a stock I want to buy at my set price.

It's not always that you'll find put options that meet your target price requirements, but I always look to see if they exist if my above criteria are met.

Hope this answers your questions. Again, I'm not a professional, so do your own due diligence. Also, if you are playing with much smaller sizes, say 100 shares at a time, then the transaction costs will likely kill this strategy.


11-30-2004, 04:05 PM
Thanks for the responses so far.

RMJs, thanks for writing about your experience.

I have a lot to learn.

11-30-2004, 04:54 PM
I have no experience with options but I do have a moderate amount of investment experience. Naked options seem quite risky. Options where you are hedging on stock you own or wish to own is less risky but I wouldn't feel superconfident in it as a +EV opportunity.

In my opinion, the options market is like a big poker table with a high rake and some of the players are world class. 90% of players lose money. Be honest with yourself; are you really world class and do you have superior information to the market enough to beat transaction costs and make a profit? Usually the answer is no. Happy investing.

12-03-2004, 05:30 PM

In my opinion, the options market is like a big poker table with a high rake and some of the players are world class. 90% of players lose money. Be honest with yourself; are you really world class and do you have superior information to the market enough to beat transaction costs and make a profit? Usually the answer is no. Happy investing.

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This is probably the best advice one can get on the subject.

"Options, Futures, and Other Derivatives" by John Hull is worth reading if one's serious about derivatives. Great book.

12-03-2004, 06:21 PM

I have a lot to learn.

[/ QUOTE ]

Check out the Wilmott message board. http://www.wilmott.com Its dedicated to those who work with or have an interest in quantitive finance and there is a lot of knowledge about options there. Some of the most knowledgable people on the subject even. Its intellectually a fascinating board - even if you're not in the financial world.

Ask your question there. There will be likely be some brilliant people replying. You should take their advice.