Soccer5, great post.
I found it very interesting as it has parallels to my approach to options trading and I think your approach should generally work. Nevertheless, I thought I might offer a few insights from my own experience that you might wish to think about to tighten up your methodology.
Firstly, I don’t have any options trades open at the moment but I have been running a paper portfolio to test a particular portfolio design. I actually bought Flight Centre FLT Call Options in that portfolio on my normal trade parameters and its gone great.
The trade details were:
Date of trade 10th April 2017. Still open.
Series: FLTEW7/Expiry 28th September17/ Strike $28.00/Call Options. (So 5.7mths (24.5wks) to expiry at entry)
Share Price at entry= $30.27, Share price now = $35.51 = +17.3%
Option Price at Entry= $3.355 Option Price now =$7.735 = +130% to date.
Duration:
So, I normally target 5mth duration, but sometimes need to drop to 4mth or minimum three month to get my preferred risk/reward parameters. Generally with options, all else being met then you’re trying to buy longest duration possible, as much time to expiry as fits your risk/reward parameters.
Once you get over 6mths duration though like you have, there are a few issues. Unless the stock is in a really strong long trend, the move may fail or go through sideways and pullbacks over that period. Particularly if you’re out of the money, you burn a lot of time value waiting those periods out. I’ve had successful trades up to two years, but I’m very selective with those and my form of TA makes those predictable for me. I think your VSA is more short term and not really a long-projecting, trend following method.
The other thing beyond 6mths is that market maker coverage thins out. Have a look at the ASX website brochure on market making contract rules. Simple long options are not all that price sensitive, nevertheless you still start paying too wide a spread and having to cross the spread further out. My two year options I once got were really hard to fill and I didn’t get my full position, even though I eventually made good money from them.
ITM/OTM:
I started trading in options way out of the money, then moved back to 10%OTM, then 5%OTM, then At The Money, then well into the money as I gained more experience. I now set up a standard position at target 66% of the premium being in the money. What it means is that if I close out with say two week’s time value left, I will effectively have about 70% in the money. That becomes more like a binary option outcome, where if the stock goes sideways it still finishes with 70% of my value there. It’s a very relaxed risk reward, set and forget approach and you still make plenty of money if you get it right, as per my sample FLT trade above.
Your being out of the money in FLT is problematic, as the stock has come strongly you’re way, however if it pulls back before going on with it, it will burn time that costs you and you’re under pressure to make decisions how to manage it. You could be correct on your call but lose money on an OTM Option. I got sick of doing that.
Risk/Reward:
I want a multiple of 2.2 to 3times the premium. i.e. 120% minimum on a win versus 100% on a loss. That way a 50/50 win rate still has a mathematical edge. I don’t use stops, so with this I can just let the option run and do what it will do and if I lose 100% on expiry it doesn’t matter. I rely on averaging out in front with my win rate and profit ratio.
It’s great to have more, but to get your 5X multiple to target you have to compromise elsewhere like going OTM, hence more risk. I’m happy with 3times multiple to my target and then I’ll move the duration out further if possible rather than look for a higher multiple. Better risk.
Charts:
I analyse Monthly and weekly charts only. Not Daily and never day trade with options.
Flight Centre outlook:
It bounced off the strong 50% All Time High level of $27.87. Also broke up through a weekly down trend line. It’s a volatile stock and the move isn’t out of the normal range for it, but I sense there’s a bit of short covering in this price and therefore that it will pull back soon to that 50%ATH level, before building up again.
Careful not to give your profit back. It’s still a bounce trade within a longer downtrend for the moment until it goes on with it a bit more. If I was in your position, I’d be looking to take my profit on this leg soon (with 1 or 2wks say), where-ever you think the short term peak is, then let it pullback, and if it turns up after correcting with a higher low, you could re-enter for a quite long and strong trend next go. (I might do that myself, but have choice with my time and ITM settings to hold it through any pull-back for a bigger profit down the track. Think I'll trade out though. Writing this post has actually helped me focus - thanks.).
(Note your FLTW19 Strike $35 purchased January for 43cents. Now $1.435. Expiry 29 June 2017. Profit +233%).
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