ok first what i do is look at yahoo market stats and see which stocks went up the most… i look at their charts and analyze them to see what they did in the past… most went up way to much so i buy PUT options for them… sure enough a few days later i have a 100% profit ive done this 10/12 times! too.. anyone else notice this??
ofcourse i dont put 100% of my capital into any trade lets you 2000$ for an example i may buy 1 contract at 2 another at 3 for a different stock and do this until i have 2000 invested..
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2 Comments on “This options trading strategy works well almost too well?”
zman492 5th January 2010
It is not a big secret that buying puts is usually a profitable strategy in a bearish market. You did not say what kind of analysis you did with charts, nor how you picked the expiry and strike price for the options you bought. You also left out any discussion of how you would/do handle the situation when the stock does not go down again in a few days.
Consequently, I will not try to evaluate your strategy per se, but, based on what I have seen from other people who believe they have found winning options strategies, I can give you some advice.
(1) Do not count on this strategy working forever.
(2) As long as it is working, keep using it.
(3) Do not risk all your profits using the same strategy. Keep at least half your profits in safer investments.
Example:
Assume you started by putting $2,000 at risk, i.e., you bought $2,000 worth or puts split between multiple stocks. Assume you closed the first trade for a $600 profit on a $600 investment. Take $400 of that profit and put it into a money market and reinvest the other $800 the same way. If another option made $900 on a $900 investment, put $600 of that into the money market and reinvest $1,200. I would keep putting two thirds of all profits into a safe place until I had at least my original investment amount ($2,000) and probably until I had at least twice my original investment amount ($4,000) there. Then I would consider decreasing the amount of any profit I put there from two thirds of all profits to one half of all profits.
The amount you have to invest would have grown from $2,000 to $2,200 when the first trade was closed, from $2,200 to $2,500 when the second trade was closed, and would keep growing at a good rate that will make you rich quickly if the strategy keeps working. However, if the strategy fails after some time has passed, you still will have a nice net profit.
Learning to manage risk is critical if you want to trade options. What I gave you is a very simple technique for option buyers.
Of course, no one can tell with any certainty what will happen in the future, but my candid prediction is that your straegy will fail before too long. For your sake I hope I am wrong.
Common Sense 5th January 2010
Options are great to trade… if you know what you’re doing. You can lose your intire investment very quickly….. just as quickly as doulbleing it or better. I never put more than 5% of my investable assets into Options & Option Stradegies (within that amount… I diversify also). Having a good handle on the "Greeks" is imperitive. I do mostly trades that take avantage of a decreasing Theta. But I do buy individual Puts & Calls. It’s no miricle… in this market for a Put to grow quickly. Be careful of VOL….. The value of your Put can be cut by 50%…. even if the stock doesn’t move.
I use ThinkOrSwim. Their Option tools are 2nd to no one. Their free webinars are incredible. They have back testing for Option stradegies.