Two Option Plays - Help?

[jws43yale]

I considered buying the $140 September calls at about $1.55 but have been really busy with football so I was unable to execute by the end of the day a couple days ago. The news of the announcement that was previously only on the tech blogs I read hit mainstream media and the $140 calls are now at $4.60. I am kicking myself for not pulling the trigger when I had the chance.

[Moneyman314]

I usually avoid buying any front month contracts...its really gambling at this point (and for myself it is -EV).

You have to have a plan formulated as to when you will sell the option. Will you hold till expiration? Do you take a triple (selling right now)? Or are we trading on gut instinct? From my experience, option trading on instinct will lose you money.

Jon

[APXG]

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I usually avoid buying any front month contracts...its really gambling at this point (and for myself it is -EV).

You have to have a plan formulated as to when you will sell the option. Will you hold till expiration? Do you take a triple (selling right now)? Or are we trading on gut instinct? From my experience, option trading on instinct will lose you money.

Jon

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Playing poker on instinct will also be -EV for 95%+ of the participants, and yet the egdes of the very best players come almost solely from instinct / subconscious mind. I would be very suprised if the same didn't hold true in basically all financial markets where there are adequate sample sizes.

[Phone Booth]

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Playing poker on instinct will also be -EV for 95%+ of the participants, and yet the egdes of the very best players come almost solely from instinct / subconscious mind. I would be very suprised if the same didn't hold true in basically all financial markets where there are adequate sample sizes.

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That's like saying smarter people are smarter. Everyone makes decision on instinct. Better traders have better intuition to guide their instinct. Hence, they make better decisions.

[RarocASP]

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I usually avoid buying any front month contracts...its really gambling at this point (and for myself it is -EV).

You have to have a plan formulated as to when you will sell the option. Will you hold till expiration? Do you take a triple (selling right now)? Or are we trading on gut instinct? From my experience, option trading on instinct will lose you money .

Jon

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[APXG]

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Playing poker on instinct will also be -EV for 95%+ of the participants, and yet the egdes of the very best players come almost solely from instinct / subconscious mind. I would be very suprised if the same didn't hold true in basically all financial markets where there are adequate sample sizes.

[/ QUOTE ]

That's like saying smarter people are smarter. Everyone makes decision on instinct. Better traders have better intuition to guide their instinct. Hence, they make better decisions.

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No, most people are encouraged to make decisions based on specific research / facts / mathematical models rather than on instinct. Quants attempt to exclude all intuition from the decision making process, and ridicule those who do not follow formulas.

I believe there is a certain high level where IQ becomes inversely correlated with intuitional ability b.c. as one reaches ability to process increasingly complex formulas, the more falsely confident he becomes. After a certain threshold (and perhaps excluding options), intuition is the key to trading, not intelligence.

[Phone Booth]

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Playing poker on instinct will also be -EV for 95%+ of the participants, and yet the egdes of the very best players come almost solely from instinct / subconscious mind. I would be very suprised if the same didn't hold true in basically all financial markets where there are adequate sample sizes.

[/ QUOTE ]

That's like saying smarter people are smarter. Everyone makes decision on instinct. Better traders have better intuition to guide their instinct. Hence, they make better decisions.

[/ QUOTE ]

No, most people are encouraged to make decisions based on specific research / facts / mathematical models rather than on instinct. Quants attempt to exclude all intuition from the decision making process, and ridicule those who do not follow formulas.


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You can't build mathematical models with mathematical models. There's intuition somewhere. No one trades strictly based on a single fixed model - people who trade based on models tweak their models all the time - and what other than intuition is guiding them? Ultimately, people make decisions, and that decision making process is not based on a formula.

Conversely, intuition is based on facts, observations and logic. The world has certain patterns and our mind is good at seeing those patterns that require more reasoning or more data than we can handle on a conscious level. There isn't something magical inside us that knows more than we do. Intuition is about sorting through the information, figuring out which pieces are relevant and drawing, hopefully, the correct conclusion. The same thing we try to do consciously, but at a much slower pace.

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I believe there is a certain high level where IQ becomes inversely correlated with intuitional ability b.c. as one reaches ability to process increasingly complex formulas, the more falsely confident he becomes. After a certain threshold (and perhaps excluding options), intuition is the key to trading, not intelligence.

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You ought to look up the definition of intelligence, or for that matter, what's important in mathematics. Any old idiot can process complex formulas. Misapplication of mathematical formulas is a sure sign of an overeducated idiot, not a genius. Strong intuition in things like poker and trading, on the other hand, is highly correlated with general intelligence.

[mmctrab]

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I usually avoid buying any front month contracts...its really gambling at this point (and for myself it is -EV).

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The OP was interested in trading around a particular event which he said would occur on a certain date. In that particular situation, trading the front month options is fine and buying more time premium than necessary would make no sense.

[Moneyman314]

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I usually avoid buying any front month contracts...its really gambling at this point (and for myself it is -EV).

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The OP was interested in trading around a particular event which he said would occur on a certain date. In that particular situation, trading the front month options is fine and buying more time premium than necessary would make no sense.

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I do agree with this to some extent. The problem that I see is that the IV is going to drop like a rock right after this "event". The IV could halve in minutes. In my mind its a matter of risk/reward...if you are wrong on the stock's direction after this event, a short term option is going to lose nearly everything basically instantly (assuming the drop in IV), whereas a longer term option will retain more premium and will usually allow you to get out without such a massive percentage loss. Obviously you will be relinquishing some profit potential by buying the longer term option, but a lot of the time, the 2 month option isn't that much more than the 1 month.

[mrbaseball]

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whereas a longer term option will retain more premium and will usually allow you to get out without such a massive percentage loss

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The longer the term of the option the more sensitive it is to volatility. Shorter term options are much more sensitive to price movements (gamma) and long term options are more sensitive to volatility movements (vega). If you are gonna be wrong it's best to be wrong with the cheaper (shorter term) option. Closer ins generally have more liquidity as well meaning less execution risk.

But you have to be very careful trading options around an event because implied volatilites will generally drop regardless of what happens because the threat of the event is gone.