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Option Q&A

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Option Trading and Risk Management - What Approach Do You Use?

Posted by Pete Stolcers on June 19

Option Trading Question

"I noticed you haven't written much about Money Management as a critical element to trading effectiveness. Do you personally apply a specific Money Management philosophy and if so, can you provide your perspectives on which is most effective. Additionally, I've read some about Fixed Ratio Money Management, made known by Ryan Jones' book, 'The Trading Game'. Do you have a perspective on this? Ryan seems convinced that Fixed Ratio is the most effective method out there to maximize gains while managing risk."

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“I’m Reading A Course By Bernie Schaeffer. Is it a Waste of Time?”

Posted by Pete Stolcers on May 22

Option Trading Question

I am reading Bernie Schaeffers course on 10 Days to Succesful Options Trading. Am on the right path? Is he reputable, or am I wasting my time?

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How Do I Handle A Losing Out Of The Money Option Trade That Has Lots Of Time?

Posted by Pete Stolcers on May 3

Option Trading Question

Please indulge a beginner. I have limited myself to buying calls and puts until I got more familiar with option strategies. As February expiration approached I found myself hopelessly out-of-the-money (OTM) on 4 SHLD Feb170 puts. I'd bought them four months earlier when they were in-the-money (ITM). I had made money on some SHLD calls and I felt confident that the stock would retrace. Feb arrived and the stock had made its way up over $180. I had been watching it and it was not unusual to see it up $3.00 or $4.00 one day then down $2.00 or $3.00 the next. But, alas, I waited too long and there was no way I was going to see any profit and it was now too late to bail out. How does one get out of a position that has plenty of time but is far out of the money. I'm in trouble again and I wondered if I might SELL March 80 puts on JCP where I paid $5.50 for May 85 puts. The stock was down $4.00 today and I could have sold them for about $3.75. I would recoup some of my money, but they have plenty of time left on them. I doubt they will go far enough for me to sell-to-close at $5.50 or better. I read about your strategy to sell OTM puts for a little each time and do it each month. If one had a few months and could capture around $100 each time I might get closer to recovering my initial investment. Does this make sense?

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What is The Best Approach To Option Trading If You Only Have $5000?

Posted by Pete Stolcers on April 16

Option Trading Question

Money management with low balances. I read a lot about managing accounts by limiting the percentage of your balance you risk on any individual trade. However, if a person wants to get into trading, but has a limited amount of capital they are willing to risk, say $2000 - $4000, it seems that one has to risk a substantial percentage to make any gains when all the fees are added in. If you were to only risk 20% or less on any one trade, you would have to almost double your money a large percentage of your trades and trade short term OTM options. It seems that risking a larger percentage on a longer term deep ITM trades on quality companies would be safer. How would you approach trading if your account balance was less that $5000?

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How Can I Exit This Option Trade Without Getting Whipsawed?

Posted by Pete Stolcers on March 27

Option Trading Question

I'm playing a stock that I believe will increase quickly so I bought simple calls on it. The problem is that I want to protect my profits without being whipsawed when I'm ahead. Should I use a trailing stop, or a contingent order (based on the target price of my stock) to sell my options. I know that with trailing stops, it is difficult to determine the bailout percentage since their are many variables involved and the chance of being whipsawed is high.

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If The Stock Option Liquidity Is Poor, Can I Get Screwed Out Of Profits?

Posted by Pete Stolcers on March 26

Option Trading Question

Let's say I've picked a very liquid stock (1 million shares average daily volume) with little option liquidity. I've bought 10 contracts for $3.00 and there isn't any buying or selling interest in the options. Before expiration my position is 10 points in the money. Will this trade be profitable? Do I need buyers to sell my contracts to, or will the OCC be obligated to buy the options from me no matter what the situation is? Will the liquidity for that particular option change the price of that option if its 10 points in the money?

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Surrogate Market Positions - How and Why?

Posted by Pete Stolcers on March 11

Option Trading Question

Over a year ago, I featured this question in my option trading blog. The market conditions have changed, but the concept has not. Lee T. asks, “Can you recommend a stock that I can use as a proxy for the S&P? I would like to make directional bets on the market for seasonal trends such as a year-end rally, and swing trades spanning a few days or weeks. But options on SPY don't seem to work well since the SPY has a historical volatility of six. I've seen some people use GOOG as a market proxy but I am also not wild about options on a $400/share stock that trades on the NAS. Are there any NYSE stocks that might work better?

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Which Option Strike Price Should I Trade?

Posted by Pete Stolcers on February 13

Option Trading Question

Can you blog about the strategies that you use to pick the option strike price and expiration month once you have identified a possible stock? Also are there any tools out there one can use to identify possible profit and loss and probability of success for option trading?

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Why Are VIX Options At A Discount?

Posted by Pete Stolcers on February 6

Option Trading Question

I have noticed that calls on the VIX trade at a discount. Why is that? Is there an arbitrage opportunity? What am I missing?

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Can You Help Me Exploit The Delta Of An Option?

Posted by Pete Stolcers on December 9

Option Trading Question

Where can I find real time delta calculations for various options? CBOE has "freeware" that computes Greeks, but even with this utility one has you input multiple variables. This makes it impossible for someone to exploit aberrations in delta numbers given all the input variables. What do you think?

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How Do I Get A Good “Deal” On A Stock Option?

Posted by Pete Stolcers on December 4

Option Trading Question

I have heard people say they got a 'good deal' on an option price or that an option is overpriced.... what constitutes what is a 'good deal' or what is overpriced?

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Which Option Trading Arbitrage Strategy Is The Best?

Posted by Pete Stolcers on November 24

Option Trading Question

Among the strategies discussed on your site I was looking for arbitrage strategies (no chance of loss), such as this: you buy a $50 put for $1.00 and you sell three $47 puts for $.38. The total net credit on the transaction is $.14. Even if the index slips quickly the $47 you will have enough money to buy back the sold puts with the money you make on the $50 puts. If the index closes $47-$50 you will make money. If the index closes above $50 you will make enough to cover your commissions. If there is a rapid decline to $47.50 I could sell a $47 put and buy a $46 put for overnight protection.

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I’m Faced With An Ill Liquid Market? How Can I Keep The Market Maker Honest?

Posted by Pete Stolcers on November 6

Option Trading Question

I am trying to establish a position in a very ill liquid option. It's so ill liquid that I am the only one and it. Every time I place an order it is partially filled, then the price is bumped up. My orders alone have caused the price to double from $.40 to $.80. The options started off no-bid, offered at $.40. Now the option market is my bid, offered at $.80. Am I better off placing one large order or several smaller orders to enter the trade efficiently? How can I avoid having my own orders drive the price up?

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I Need to Know When I’m Assigned. Why Is Option Assignment Notification So Screwed Up?

Posted by Pete Stolcers on October 22

Option Trading Question

I don't know if I am even directing this question properly, but I am trying to overcome the bs replies from various brokers and the option trade groups. How is it possible or justified that a call writer who is assigned on a Thursday or Friday is not be informed of it until it is too late to do anything other than buy shares in the open market to deliver, incurring a heavy loss? It seems to me this should be fought vigorously. Especially with spread positions the writer needs notice of the short leg assignment in time to exercise his long leg in order to acquire the shares at the strike price. Notice to exercise and notice of assignment should be required to be delivered by Friday morning and no later. Am I missing something here, except the advisability to always close out spread positions before expiration?

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What Do You Think Of A Covered Call Stock Option Trading Strategy That Uses LEAPS?

Posted by Pete Stolcers on August 19

Option Trading Question

What do you think of an option trading strategy that buys stocks with good fundamentals and then sells LEAPS against them? What would be the downside risk on the trade?

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