[quote=stockstradr]
First, I don’t even think about options unless there is out-of-normal (variation) market fluctuation that I am VERY CERTAIN is coming, AND others haven’t priced that in yet. For example, the S&P500 is peaking at 1500, yet the housing market is collapsing, so I expect the stock market will fall dramatically.
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That’s the goal, but I’ve been SURE and WRONG too many times to rely on this principle.
[quote=stockstradr]
I usually end up buying the options that break even after a very small fraction (as little as 3% to 5%) of my anticipated market move…and also are close to the MAXIMA of my lower %ROI curve, plotted for the conservative value of the correction (in this case 10%) that I expect.
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I would like to try your spreadsheet, as this is what I try to do mentally, and it’s too much to keep track of.
Picking options that break even on a small favorable move in the underlying security is dead easy; the further in the money, and the closer to expiration the option is, the smaller the required move to break even. Of course, your return on the move also reduces the further you go that direction, and you lose your shirt (much larger cost per position) if the trade goes against you.
What I end up doing is sitting tight for months on end until the VIX hits the low end of its range, then looking for at-the-money long term puts that are cheap compared to those on similar underlying securities.
Sadly, my GS puts got hammered by the short-covering rally the last 2 days. Good thing they are in the money and have a year left, maybe good things will still happen. These are the kind of days where I’m so glad that I never sell short. Talk about SURE and WRONG, here I am again.
