Option Trading Tips - Collar

Wahaa said...
If you want to just buy straight options (calls/puts), always buy deep-in-money ones. The common mistake that people tend to make is to buy the cheap out-money options, they end up to expire worthless.
Like Palm. It is a cheap stock. You could either buy stock or sell covered call. Use the premium to buy put to reduce the downside risk. It is called “Collar”. For more information, see : http://www.optiontradingtips.com/strategies/collar.html
But if you are really bullish about PALM, you could just buy 2010 $7.5 call. (I would not buy strike at $10 or $15 myself) Set some stop. If you feel like that the price of Palm is going to just be flat at this level, you could do Calendar spread, otherwise don’t do it.
Goog’s options are too expensive. I don’t like the spread of bid and ask. It’s better selling its options than buying them. You could do put bull spread june $330->$340. That is the bullish bet that GOOG will not go below $340 by June expiration date.

QJ said...
I have a question, what if GOOG goes 450 and PALM goes 12 before June 1?

Wahaa said...
In that case, buying deep-in-the-money calls will make more than bull put spread which reward/risk is capped.
Then your deep-in-money calls makes more money than your out-money calls. I believe that deep-in-the-money call options get the same move with the stocks with less money. The downside is that what happens if they don't move to your target? Your wonderful stop-loss action will minimize your loss (That is where I need to improve)

lite1067 said...
wahaa, QJ
buying deep ITM option is not good choice because:
1) less leverage but more capital at risk (why to buy option? the reason is right the opposite - to gain leverage and reduce the potential maximum capital loss)
2) the volatility skew is against you

Wahaa said...
right, usually I prefer to sell option spread to make a little money.
Well, on the other hand, it depends how long you hold the options. ITM options are still good choice if you speculate something. But it looks like that future trading is more fun!
I want PALM jan 2010 15C to 20C leaps, GOOG June Calls anywhere from 400C to 450C. If I see 82x/81x spx or where ever mkt shows end of this correction