Is anyone involved in trading options around here?
I just started last week not knowing much about options but having invested in stocks before, and I'm interested in going more into it. The risk/reward ratio is extremely high, but for someone living on a low income, one can make a week's income rather quickly with the right bets. My calls on BAC, for example, went up 75% in a day. Of course, the flip side of this is that big losses can wipe out the entire investment pretty quickly.
Options?
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ICouldBeTheWalrus
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Yes. I find long call positions to be a nice way to get some leverage with a clearly defined risk. Mostly I've had some good trades when I've been really confident a stock is going to go up. I've never been willing to put more than about 20% of my taxable account in them, and I've always kept a close eye on things.
One annoyance I'd like to point out is that there's never been any public ruling from the IRS as to whether different strike prices and maturities on the same underlying stock are "substantially similar" for purposes of the wash sale rule, so the only safe thing to assume is that all options on the same underlying stock can trigger the wash sale rule.
One annoyance I'd like to point out is that there's never been any public ruling from the IRS as to whether different strike prices and maturities on the same underlying stock are "substantially similar" for purposes of the wash sale rule, so the only safe thing to assume is that all options on the same underlying stock can trigger the wash sale rule.
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jacob
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One strategy that I've never used is a fairly conservative "hold everything in treasuries but a few percent (per year) that are used to speculate on winners". There's zero possibility of losing more than a few percent compared to a 100% equity portfolio.
Personally, I've used options to hedge. The one time I bought a call for speculation, I lost money. In general though, I find options to be so much of hassle come tax time that I prefer not to use them. Nowadays I only use them to exit a position (short call on underlying) but I often find a trailing stop loss is better.
I have considered using some of my high yield to buy puts on the S&P500 for downside protection [instead of reinvesting it back when the market is overvalued like now]. Since my portfolio beta is lower, I don't need as many. OTOH, as with all insurance, if one can afford to self-insure, it's generally worth it (because the pros who price the insurance know what they're doing), and I can afford it.
Personally, I've used options to hedge. The one time I bought a call for speculation, I lost money. In general though, I find options to be so much of hassle come tax time that I prefer not to use them. Nowadays I only use them to exit a position (short call on underlying) but I often find a trailing stop loss is better.
I have considered using some of my high yield to buy puts on the S&P500 for downside protection [instead of reinvesting it back when the market is overvalued like now]. Since my portfolio beta is lower, I don't need as many. OTOH, as with all insurance, if one can afford to self-insure, it's generally worth it (because the pros who price the insurance know what they're doing), and I can afford it.
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secretwealth
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Jacob, that's an interesting idea. Treasuries and some options would give me too low of a yield for the aggressive growth that I'm hunting now, but it might be something to consider when I have a bigger portfolio and am looking more to maintain value.
What I like the most about options is that the higher growth means that I can overcome the commissions on a low investment more easily than just buying the stock outright. Putting a small amount on BAC, I recouped the commission when the underlying stock went up just 0.5%, whereas it would've taken a much higher jump to recoup commission for an equal investment in the stock itself.
I'm also beginning to wonder if options can be integrated into a permanent portfolio.
What I like the most about options is that the higher growth means that I can overcome the commissions on a low investment more easily than just buying the stock outright. Putting a small amount on BAC, I recouped the commission when the underlying stock went up just 0.5%, whereas it would've taken a much higher jump to recoup commission for an equal investment in the stock itself.
I'm also beginning to wonder if options can be integrated into a permanent portfolio.
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jacob
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Options (optionality) is really a tool intended to modify the pay-off in some sense. I prefer to think of it as a tool for insurance rather than speculation.
Of course for every such transaction one side is looking to insure (hedge) and the other is looking to speculate (finance). ALWAYS!
It's important to know which role you're playing whenever you engage in an options trade.
[This is similar to knowing why someone has chosen to sell the stock you're buying or vice versa when you're dealing with "cash products".)
Look at what John Hussman is doing ... if market conditions are bad (presuming you have a way of knowing when that is ... I'm a big fan of multpl.com) you can essentially use put-call parity to turn your stock exposure into a bond at the risk-free rate without having to incur taxes.
E.g. C-P=S-K*(1+r)^(T-t) is CP-parity, so your bond position equivalent is essentially S-C+P, that is, you sell a call and buy a put with a strike that's close to the price of the stock or index---scaled appropriately.
Another thing you need to look into if you're actively using options as a portfolio strategy is the VIX index. Options are priced based on the volatility and the volatility is range-bound and predictable. (Sounds like the perfect opportunity for trading, eh?). Hence this "insurance" costs more when volatility is high and vice versa.
Overall, I've decided that for these purposes the extremely high options commissions are just not worth it unless I can predict market direction extremely well. As I mentioned above, I can emotionally and financially afford draw downs(*), so I don't insure.
(*) Mainly because I rely on dividends rather than total-return or capital gains.
Of course for every such transaction one side is looking to insure (hedge) and the other is looking to speculate (finance). ALWAYS!
It's important to know which role you're playing whenever you engage in an options trade.
[This is similar to knowing why someone has chosen to sell the stock you're buying or vice versa when you're dealing with "cash products".)
Look at what John Hussman is doing ... if market conditions are bad (presuming you have a way of knowing when that is ... I'm a big fan of multpl.com) you can essentially use put-call parity to turn your stock exposure into a bond at the risk-free rate without having to incur taxes.
E.g. C-P=S-K*(1+r)^(T-t) is CP-parity, so your bond position equivalent is essentially S-C+P, that is, you sell a call and buy a put with a strike that's close to the price of the stock or index---scaled appropriately.
Another thing you need to look into if you're actively using options as a portfolio strategy is the VIX index. Options are priced based on the volatility and the volatility is range-bound and predictable. (Sounds like the perfect opportunity for trading, eh?). Hence this "insurance" costs more when volatility is high and vice versa.
Overall, I've decided that for these purposes the extremely high options commissions are just not worth it unless I can predict market direction extremely well. As I mentioned above, I can emotionally and financially afford draw downs(*), so I don't insure.
(*) Mainly because I rely on dividends rather than total-return or capital gains.
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George the original one
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I dabbled in selling covered calls against the company stock I get through ESPP. I was hoping it would effectively increase the dividend yield; instead, the stock price always went up past the strike (Perhaps I need to wait until I have a lot of the stock built up, and then only sell calls on a portion of it, thereby making the price rise on the others 
. Since my previous approach was to sell right away in order to diversify (I was only putting money into ESPP to get the 10% discount), I still came out on top because the strike price was higher than I would have sold at.
. Since my previous approach was to sell right away in order to diversify (I was only putting money into ESPP to get the 10% discount), I still came out on top because the strike price was higher than I would have sold at.