This is a newbie question for sure. Is it just me or should buying long calls be quick and easy money? I'm just trying to understand this so bear with me.
For example, the QQQ current price is 457.93. Why not buy a June 4th call option with a 458 strike, wait a day or two (let's just assume the price will go up short term for this example), be profitable and sell the contract? Did I miss something?
Also, I see people buying call options with a higher strike. But why? Isn't the whole point to hit the strike and go beyond it to make profit? So why not just pick the next, soonest call strike in the options chain rather than something higher. In the QQQ example, why are people getting June 4th calls at a 460 strike rather than 458? Seems more profitable is to pick 458 rather than 460 and more achievable in the timeframe, no?
I get it that price can go down, take longer to play out, or go sideways, among other possibilities. Please let's just assume a constant move up in this example to keep things simple.
Are Long Calls not Easy Money?
byu/Substantial_Prune_64 inoptions
Posted by Substantial_Prune_64
35 Comments
Assume you’re correct. You’re right!
Yes they are easy money sometimes and other times no so much. “let’s assume the price will go up short term” There’s the rub. But yes, long term it will go up but no guarantee you will make money on any single trade. “Please let’s just assume a constant move up in this example to keep things simple.” If only it was this fucking easy.
It can be easy money.
But then you have to have good position sizing and risk management cause shit always happens. People don’t have self control and will put their entire port into calls and get fucked by a black swan.
It literally works everytime it works. Except for the times it doesn’t work.
Parody?
Yes, it’s real easy until it isn’t. Take some time to learn Greeks and option pricing.
Go look at last 5 days on a QQQ chart. The odds are always stacked against you. Remember that!
Do you assume shares of QQQ are easy money? What if somebody asked the following question:
>For example, the QQQ current price is 457.93. Why not buy a share for 457.93, wait a day or two (let’s just assume the price will go up short term for this example), be profitable and sell the share? Did I miss something?
Does that make sense to you?
Yes assuming your assumptions are right , you are right!
The gains aren’t quick nor easy, and if you’re not using a big size, they aren’t crazy either. You see, if you happen to buy a local daily top, you might wait a few days just to break even (assuming the underlying goes up, if it goes down or sideways, you are fucked). Once you try this, you will see that is not as easy as it seems.
But yeah, if you happen to buy the actual dip and buy some extra time on your calls, and buy atm, and the underlying goes up without any meaningful pullbacks, you get the gains you are looking for. Otherwise, you’re just breaking even or losing money. Timing your entry and exit is everything.
Paging the Greeks. Theta or time decay will decrease the option’s value and implied violentity. The shorter the time to expiration, the bigger impact that theta will have. Theta is an exponential curve as you get closer to expiration. Like all things, when you are right, it’s easy money.
On the flip side, the shorter the duration, the cheaper the option price is. If you are right, it is easier to make bigger gains, but also bigger losses. For example, if the price is $1, and it moves up to $2, that’s a double or 100% gain. If your option is $2 to buy, you need it to go to $4 to get that 100% gain.
Options prices will reflect to a degree how much movement is expected. For example, FOMC, CPI, PPI, days will have increased option costs.
Nobody tell OP.
I backtested that trade prior 2 years and it sucks. Drawdown of 35% and it made like 14% risking 10% of your portfolio.
Theta and IV will fuck your ass the moment you buy a call and it goes sideways
Oh boy.
You stated a ticker (QQQ), you stated a Strike (458) and you stated an Expiration (6/4). What do you think is missing?
Why chose a strike that is ATM? Why not pick an ITM strike like 400? Then when it expires you will make even more money.
The piece you are missing is the Price.
The Breakeven is the Strike plus what you paid. This means a stock has to move in your direction.
I genuinely enjoy these questions. They all start out the same usually like “So this is super easy, I just buy and make money right? What am I missing?” and the thing they’re missing is literally the entire foundation of how this entire complex system works and operates.
It’s hilarious.
I remember the first time I bought a long call, was correct that the stock price went up, but still lost money because the volatility CRASHED hard. Nothing about options is straightforward, intuitive, nor easy.
Commit to running your strategy on weeklies for 6 months. Only way to know for sure if it works or not is to gather some hard, empirical data. You may be on to something.
You should not do options!
It is easy, that is why most people on Reddit buy calls and lose until they run out of money. Does you Option software do this on each and every trade… I think not.
https://app.screencast.com/T0hJAO4yU4MyM
Your Prob of Profit is like 1/3 , that means 1 in three times you make a penny , that means 1 x 100 =$1 . Sounds like a great trade , now some moron will do 10 of them and blow 3.5k .
You have to learn the Greeks. Options are like melting ice. You have to understand how face the ice will melt with the greeks. If you anticipate a fast directional move, you can getaway with OTM calls. Day trade it. If you want it to behave like stock buy a deep ITM call. If you’re fuzzy about your entry or timing buy a complex option. It’s complicated because the price is multi dimensional. Again affected by the greeks.
Is the bear still with you? Blink twice.
As others have said, time decay is a thing, because options expire. Unlike a stock trade, if you’re buying options time is always working against you, and always cutting into your profits, even if you’re right about the direction of the underlying stock/index and the timing of the move. If that last sentence doesn’t make sense to you, don’t worry, it didn’t to me either when I started. Keep educating yourself, it’ll click eventually.
Also, this is true of all investing, but especially with options: there’s always a counterparty. So every time you think you’ve found an edge (or a sure thing) you need to stop and think about it from the counterparty’s perspective. If you have a theoretical 100% or near 100% success rate, why would anyone take the other side of that deal? They wouldn’t, right? The real nuts and bolts of options trading is finding those places where you do in fact have an edge of some kind, and its important to remember that it’s not just us chickens here on Reddit looking for edges. The investment banks, prop firms, hedge funds, market makers, etc. are all working with capital that is orders of magnitude larger than we’ll ever see in our lives, and they have resources to match.
I’m not saying it can’t be done and money can’t be made on a consistent basis, but if it were easy I’d have quit my day job by now and I’d be too busy getting a tan in the Maldives to comment on your Reddit post.
You will lose if you do that comparing to buy QQQ directly. Options expiring in two weeks at the current price level are very expensive. you can back test the risk/return of buying QQQ directly. You will find you get better result if you set your max loss to the options size in the long run
Stocks never go down, of course!
Look up LEAPS. It is a less risky version of what you seem to want to do. The only issue is, it can be very expensive… because LEAPS are deep in the money and have far out expiration dates. But, if you bought a QQQ LEAPS contract, it is hard to imagine it not being profitable at some point before its expiration… in fact, you’d probably be able to sell for a profit in a week or two if you really wanted to. Cool thing about leaps is, if you are dead wrong and QQQ goes down, you just need to wait longer.
I would be surprised for the premium you have to pay. the expected value ( in 2 days) of this stock has already been priced by the market. like someone says, if you assume you are correct then you are right, but long calls are not easy money. the odds of the trade being very profitable are typically fairly low. we are talking about probability right …
get a higher strike within a short duration is wild. if they go after the 460 instead of 458 it means they are pretty confident in their bets. And even if the price moves up, it doesn’t mean you will sell at that price. you can be locked up in loss even the price moves up.
Sorry my french 🙂
I don’t understand why Jun 4th, everything else makes sense. I would run this strategy everyday, since QQQ has daily expiry. This would generate 6x the return.
Easy money is generally determined after the fact. Whenever profit seems too easy, I slow my roll and look for the risk I’m missing. That doesn’t mean I won’t open the contract, it just means I’m better informed and willing to accept the risk.
lol that’s the idea! Unless the stock doesn’t go up…
I’m down 100 bucks on Amazon right now with this strategy, but I made 250 on AMD last week doing the same thing. I only put in what I can lose and take 20 to 40% as soon as the gains show up. I’m pretty new to it as well, but I agree with you that it’s a pretty safe play for options (options are not safe).
No, you’re right. Any trading technique is ‘easy money’ ***when the traded item goes the way that makes the trade work***.
I choose strikes based on the delta I want, and what makes sense as far as risk on my account, I buy no more than 10% of my account in premium regardless if it’s OTM, ITM or ATM .. I shoot for .60 delta as long as the premium price is right for my risk limitations and those are usually ITM or ATM. Not holding anything into expiration, I day trade the contracts, so I’m zeroed out when I’m done trading, I don’t swing the contracts. Easy? No, trading isn’t always easy, I’ve had easy trades but overall trading and surviving and thriving for extended periods isn’t necessarily an easy endeavor, sometimes will have a red day, or eveb red week, hopefully not month but it happens depending on how bad you do. But yeah you buy a call or put, it goes in your direction, you close out, yeah you profit. Not sure what you’re asking here. Many different reasons on why you pick a strike. I also look at volume and open interest, and I want contracts with decent spread at the time if entry. If you want to pick your strikes based on reasons you describe, have at it.
1. Price doesn’t go up forever. 2. Higher strikes are more out of the money, therefore cheaper. It doesn’t need to hit the strike to be profitable assuming there’s still some time to expiration. For example, someone was buying 150 vix calls a couple months ago, they weren’t betting that vix would hit 150, they were betting vol would go up and the “probability” of 150 vix would be greater than before.
oh my, why did i never think of this before!