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« Double-Dip Watch: Uptick in Industrial Production | Main | More Bad News Blows in for Wind Power »

Thursday, August 19, 2010

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Hockthefarm

Great post Y:

Just got back from a short road trip and enjoyed your take immensely.

Normally when I buy options I'm either just in or just out of the money. A few weeks back I bought some Dent induced qqqq puts way out of the money. They were NOV 40's for $0.37. A very small purchase compared to the folks here I'm sure. My question is he following: At times like these is it better to buy time or buy a close to the money strike price?

Thanks
Hock

the broken clock will be right one of these decades

Hock, buy TIME TIME TIME TIME TIME TIME TIME.

You will need at least thirty years of time if you are to profit from Idiot Wave.

I'm serious.

yelnick

Hock, I played options in 2002, made some fast money, also got burned at the bottom - learned it is not in general wise to buy way out of the money options. They do not work as well as expected even if you call it correctly, and they can sap any partial return. Same argument for buying close-to-expiration options. Right now buying out 9 months or more probably catches the dip (if you are bearish).  


Neely and I would expect the majority of traders who read this site (comment please!!) would recommend the e-mini futures instead of options. Lots of volume. If you watch them you can sometimes catch a spike or dip that is outside the cash range by enough you can skim some arb profits. 


One risk is to be wary near options expiration. Since these instruments are cash settlement - not buying a basket of the underlying stock - they open up huge opportunities for manipulation. The policy issue is whether a futures contract is "between consenting adults" and so anything goes, or as a matter of policy should be limited to the underlying commodity being futured. The manipulation is to go one way in futures and the other in the basket. Given they are cash settlement, you can buy many multiples in futures what is being impacted in stocks. Then a small manipulation in the real stocks can whipsaw the futures. If instead the futures had to be settled in the underlying basket, they could not grow to multiples beyond the stocks themselves without an impact being felt in the market. The same principle holds for naked short positions. 

the broken clock will be right one of these decades

The vast majority of options written have expired worthless.

If history is just the roughest of guides, your options will probably bring you tears.

And if they don't, you might think you were smart and not lucky.

And then the next round or the one after that will bring you tears.

But if you shell out thirty bucks a month to Gainsville you can pretend you weren't responsible for your poor decisions!

Daniel  - Taz

A break lower here in the Euro Swiss cross is bad news for the bears. I still have OZ dropping 15% inside one to two months although I am watching for the alternative scenario of a very modest drop in the next two weeks.

Bird: with your price harmonics do you use log or linear charts?

Cheers

Taz

JohnEBGoode

Great post Yelnick! The reason I come to this blog is because you make us think. Below 1070 I think bifurcation occurs.

Bird

On options, I trade straight puts and calls a lot and use near-ish term more or less at the money options on short-ish term signals (60 min or less). If you are good at it, you are in and out before loss of time premium eats you alive. But, like anything, it depends on how good your analysis is. One good thing about EWT is that it applies, in theory, just as well to a 10 min chart as a 10 year chart.

Hockthefarm

Thanks folks, lots to consider. Dent made an interesting comment two days ago: If we are heading into a potential crash scenario, the market should shed another 500 dow points in the next move and that move should start this week.

Have to say that Dent really nailed the weak GDP number and he was calling it over a month ago.

It seems a lot of folks I read have an alternate scenario for a 10 to 15 percent correction now and then a run up into December. That would be uber hard on my Nov 40's.

Thanks again,
Hock

rc

Excellent post. The Fractal of Chaos diagram is very interesting and the simplicity appealing. I've long paid attention to simple patterns -- two's and three's and trends and ranges -- along with some technical indicators. One of my favorite indicators is an MACD on a signal to noise ratio: close - close[previous] / sum of the (high - low) ranges.

Re: options. I consider them "hot potatoes" -- get in and get out. Of course time decay and excess premium due to volatility are the costs to be avoided. They have their place as long as there's enough volume, though I rarely trade them now.

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