Common vs Options - not.

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    Posted: 16 June 2011 02:56 AM

    there seems to be a lot of sentiment on AFB lately that options are evil and common stock is “safe.”  while i understand the reasoning behind this opinion, and the desire to forewarn investors who are new to options and might not understand the risks associated with the leverage options provide, IMO it’s just not true.

    options are not inherently risky - there are several different options strategies that can be employed conservatively and with limited risk.  of course you can also employ very risky / high reward options strategies too.  there are strategies to limit exposure to time decay, and there are strategies to be used in combination with common stock to collect premium from time decay. 

    the point is: options are investment tools which, used in the right hands, can be very effective strategies and in some ways can be less risky than owning common stock.  i posit that loading up on common stock using margin (and receiving margin calls every other week) is more risky than most of the options strategies employed by AFBers i respect over in the Options Strategy thread.  [note i have nothing against loading up, i leverage up myself (using options as opposed to margin) when it seems appropriate.] 

    not all investors on AFB have been holding AAPL since $90 or even $7.  so not everyone has hundreds of thousands of $ to hold common.  esp. for a $300+ stock, options provide a great way to participate in the upside (or downside if that is your view) without the huge cash requirement.

    i would encourage investors new to options or those possibly scared off of options, to learn about them and see if they are appropriate to incorporate into your portfolio.  they’re not right for everyone.  and they do require a higher level of attention, which the typical AFBer already has.  but i suggest that you really read up on them first, and then do some paper trading to get the hang of it.  (there are mechanics to options and terminology to learn that is foreign at first. [puts, calls, expiration, strike, buy to open, sell to close, etc.])

    some online education options sites:
    OptionsExpress Education Center
    Options Monster - Options 101
    The Options Guide

         
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    Posted: 16 June 2011 04:37 AM #1

    Great post.

    I myself recently switched from common on margin, to 2013 LEAPS.

    I’m much, much, much more comfortable owning long term leaps than common on margin (where an after-hours event can blow right past your stop loss orders on opening, causing unknown losses). Plus the upside potential is much higher on leaps, with less risk.

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    Full Disclosure:

    - Long Apple
    - Pro: Apple HDTV, iPhone Air, Stock split, Consumer robotics

         
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    Posted: 16 June 2011 11:06 AM #2

    I don’t see where you get the “less risk” part.  Your downside with LEAPS, the same as weekly options is 100%.
    With any kind of bear market even those 2013 LEAPS have big potential losses.  I understand the upside and I hold some, but with any market wide correction they could be toast. 

    Hell I’m starting to worry about 2012s . . . it’s not that far away.

         
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    Posted: 16 June 2011 11:25 AM #3

    FYI: Most studies I’ve read indicate that the VAST % of people lose (big) when ‘buying’ options. It’s the writers that are making the money on a consistent basis!

    FWIW, I am holding a fair # of IN THE money 13 leaps in addition to shares bought fairly cheap by todays #‘s.

      cheers to the longs
        JohnG

         
  • Posted: 16 June 2011 12:38 PM #4

    johnG - 16 June 2011 02:25 PM

    FYI: Most studies I’ve read indicate that the VAST % of people lose (big) when ‘buying’ options. It’s the writers that are making the money on a consistent basis!

    FWIW, I am holding a fair # of IN THE money 13 leaps in addition to shares bought fairly cheap by todays #‘s.

      cheers to the longs
        JohnG

    I’ve been teaching options trading for about three years, and I can tell you that most will never ‘get it’. The reason is quite simple: they have no idea (rightly or wrongly) where the underlying equity is headed. I’d venture the same is true of your average retail account. They buy common because it’s got ‘buzz’, not because they have an educated insight as to the direction of the firm.

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  • Posted: 16 June 2011 05:06 PM #5

    Never i say never use weeklies .... It is like getting robbed !

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    “The market can remain irrational long than you and I can remain solvent ... ” Keynes

         
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    Posted: 16 June 2011 05:13 PM #6

    Stop putting your money in options

    1.  All the money in options is volume and liquidity lost from equities.

    2.  Less liquidity in the equity gives manipulators more power.

    3.  Selling AAPL to buy any AAPL call is selling pressure plain and simple.

    Help me continue the list of reasons.

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    The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled.

         
  • Posted: 16 June 2011 05:16 PM #7

    Weeklies are huge thieves

    The Sec is useless

    Hedge Funds are thieves

    Who has more ?

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    “The market can remain irrational long than you and I can remain solvent ... ” Keynes

         
  • Posted: 16 June 2011 05:59 PM #8

    Unique - 16 June 2011 08:57 PM
    Luigitartaglino - 16 June 2011 08:16 PM

    Weeklies are huge thieves

    The Sec is useless

    Hedge Funds are thieves

    Who has more ?

    Not if you know how to play the weeklie game. I’ve made 17.5k today off weeklies.


    I lost 300 euros as my stops on Apple collapsed ....

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    “The market can remain irrational long than you and I can remain solvent ... ” Keynes

         
  • Posted: 16 June 2011 06:09 PM #9

    Unique - 16 June 2011 08:57 PM
    Luigitartaglino - 16 June 2011 08:16 PM

    Weeklies are huge thieves

    The Sec is useless

    Hedge Funds are thieves

    Who has more ?

    Not if you know how to play the weeklie game. I’ve made 17.5k today off weeklies.

    How do you play weeklies ?

    Signature

    “The market can remain irrational long than you and I can remain solvent ... ” Keynes

         
  • Posted: 16 June 2011 06:34 PM #10

    Luigitartaglino - 16 June 2011 08:59 PM
    Unique - 16 June 2011 08:57 PM
    Luigitartaglino - 16 June 2011 08:16 PM

    Weeklies are huge thieves

    The Sec is useless

    Hedge Funds are thieves

    Who has more ?

    Not if you know how to play the weeklie game. I’ve made 17.5k today off weeklies.


    I lost 300 euros as my stops on Apple collapsed ....

    I never set Stops.  Today’s dip was caused when buying interest slacked causing an imbalance between buyers and sellers (there being more sellers) at about 1:00PM EST.  Its a simple supply and demand equation.  Same supply with less demand means lower prices.  When AAPL dipped below $325 50,000 shares were sold (sell interest block trade).  That sudden increase in supply caused AAPL to dip quickly to about $324.75 and tripped a whole lot of Stop Loss triggers.  Sell side volume exploded further depressing AAPL until it hit $320.  Selling volume dropped and remained low for the rest of the day.  At the same time buying interest expanded creating an imbalance reversal that favored buyers.  This led to AAPL regaining nearly all that it had lost prior to the trigger.

    If it wasn’t for the Stop Loss triggers AAPL may have dipped a bit, then recovered without the violent drop to $318.

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    You can’t do more, make more, be more, than the next guy, if you think like the next guy. Think different.

         
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    Posted: 16 June 2011 06:37 PM #11

    With absolutely no data to back up my hypothesis, I nonetheless posit: most retail option investors lack the necessary knowledge to profit.

    If you don’t know what you’re doing: stay the hell away from options!

    Anyone willing and able to learn: you have infinite resources available, including a wealth of expertise on the AFB.

     

    EDIT: fixed typo. smile

    [ Edited: 16 June 2011 06:40 PM by lovemyipad ]      
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    Posted: 16 June 2011 06:38 PM #12

    jimlongo - 16 June 2011 02:06 PM

    I don’t see where you get the “less risk” part.  Your downside with LEAPS, the same as weekly options is 100%.
    With any kind of bear market even those 2013 LEAPS have big potential losses.  I understand the upside and I hold some, but with any market wide correction they could be toast. 

    Hell I’m starting to worry about 2012s . . . it’s not that far away.

    leaps are not the only options plays you can make.  there are weeklies, monthlies of various dates, and then there are call spreads, bull put spreads, covered calls, etc.  options can be more nuanced.

    here are some examples, at today’s closing prices:

    Jan 12 340-350 call spread
    cost: $4.15
    max risk: $415
    breakeven: 344.15
    max profit: $585
    ROI: 141%
    ———————————-

    Jan 12 320 call
    cost: $34.20
    max risk: $3420
    max profit: unlimited
    ROI: unlimited

    ———————————-

    common
    risk all the way down to 0
    max profit: unlimited
    ROI: unlimited

    ———————————-

    even with a “LEAP”, you are in effect stopped out at whatever you spent on the option.  that’s why there can be less risk, depending on your strategy.

    one call gives you similar leverage to owning 100 shares, depending on your strike of course (and how much ‘delta’ your call has).  so in the example above - it’s $3420 at risk vs $32,500 at risk for common shares.

    [ Edited: 16 June 2011 07:21 PM by kloot ]      
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    Posted: 16 June 2011 06:42 PM #13

    macglenn - 16 June 2011 08:13 PM

    Stop putting your money in options

    1.  All the money in options is volume and liquidity lost from equities.

    2.  Less liquidity in the equity gives manipulators more power.

    3.  Selling AAPL to buy any AAPL call is selling pressure plain and simple.

    Help me continue the list of reasons.


    disagree - AAPL is one of the most liquid stocks in the market.
    call buying is buying pressure, not selling pressure.  call buyers have a vested interest in the underlying going higher.  call buyers are not making AAPL go lower.

         
  • Posted: 16 June 2011 06:45 PM #14

    Unique - 16 June 2011 09:16 PM
    Luigitartaglino - 16 June 2011 09:09 PM
    Unique - 16 June 2011 08:57 PM
    Luigitartaglino - 16 June 2011 08:16 PM

    Weeklies are huge thieves

    The Sec is useless

    Hedge Funds are thieves

    Who has more ?

    Not if you know how to play the weeklie game. I’ve made 17.5k today off weeklies.

    How do you play weeklies ?

    Please check out my Day Trading AAPL thread for a glimpse of what I do.

    http://www.macobserver.com/tmo/forums/viewthread/80494/


    Thanks !! , for other replies , it is the first time , I got kicked with my stop loss due to hedgies game ....

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    “The market can remain irrational long than you and I can remain solvent ... ” Keynes

         
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    Posted: 16 June 2011 07:44 PM #15

    kloot - 16 June 2011 09:42 PM
    macglenn - 16 June 2011 08:13 PM

    Stop putting your money in options

    1.  All the money in options is volume and liquidity lost from equities.

    2.  Less liquidity in the equity gives manipulators more power.

    3.  Selling AAPL to buy any AAPL call is selling pressure plain and simple.

    Help me continue the list of reasons.


    disagree - AAPL is one of the most liquid stocks in the market.
    call buying is buying pressure, not selling pressure.  call buyers have a vested interest in the underlying going higher.  call buyers are not making AAPL go lower.

    Your argument does not specifically address any of my three statements.  I maintain they are all true.

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    The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled.