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New Trade – BUY OCT14 CALLS on AAPL – my first directional trade

This trade against Apple (AAPL) will be my first directional trade buying long calls. In the past I traded this kind of option strategy the wrong way and no wonder that it didn’t work for me so I stopped buying options and instead started selling options.

First, let’s take a look on the chart below, why I consider this trade a good candidate for a directional trade and then later I will try to explain the mechanics of the trade. You may want to enlarge the chart to see it better or open it in a new window.

AAPL long Call trade

First, take a look at the chart. I consider the trend unbroken and in a slight consolidation. Most likely the stock will continue to the new highs.

Second, look at the squeeze chart below. It turned from a negative (below zero) territory to a positive. That action itself is bullish to me. Now we may see another swing up. But I cannot see how big.

Third, look at the wave (the bottom indicator) which is in a very strong magnitude, pointing up with no sign of weakness (which of course may change any day, but it doesn’t show up yet).

These are three quick reasons, why I consider this trade a good candidate to pick a few points within a few days.

Let’s take a look at the details:

Trade Details

BTO 1 OCT14 89.29 call @ $8.55

Delta: 73
Expiration: 96 days
Exit: upon a sell signal
Stop loss: upon a sell signal

Let’s take a look at those metrics and explain what I was doing wrong in the past:

Delta 73

Delta has two functions in options. The first one is that it tells you the probability of an option ending ITM or OTM. In this trade with Delta 73 (or 0.73) it tells you that the option has 73% chance ending up ITM at expiration and 27% chance that it ends OTM.

The second function is that it tells you the magnitude of the move of the option price compared to a stock movement. In this example, the option price will move by 73 cents for every dollar of the stock move.

This is the mistake investors do when they buy options. When you buy options you want its price to move as much as the stock. If you buy cheap OTN option, the move will be slow and in many occasions time decay will eat up your option faster than the price moves.

So for me, no more cheap OTM buys. You buy ITM options, sell OTM options. Do not be a cheap guy or you will lose money.

Expiration: 96 days

Another mistake I made in the past was I tried to buy as little time as possible. Once again I was approaching the long side of the trade from the seller perspective and constructing the trade the wrong way.

Take a look at a typical option behavior vs. time:


When the option loses its value the most? Obviously when it approaches its expiration time. As close it gets to expiration as faster the time decay works against you as a buyer or for you as a seller. The cut off is roughly at 50 days of the time value when the things start getting nasty. And faster. The biggest time value loss is around 15 days when things start speeding up rapidly. So you want to be a seller in this time frame.

As a buyer, I want time decay as slow as possible, so I decided to buy as long expiration as possible. I think, 96 days is OK.

Exit & Stop loss – upon a sell signal

This can get tricky. As I do not know Think or Swim platform that much yet (for many years I was using Strategy Desk and Trade Architect), I do not want to program (and experiment with) an automatic stop loss order in a live trade yet. So I will watch the trade like a hawk and as soon as I see a sell signal, I will liquidate this trade. When that happens, I will post about it.

I entered this trade tonight for tomorrow open. Let’s see if the trade executes at the open or not. I may update this post or you can check My Trades & Income tab on this blog to see if the new trade appears in the list. You may also check My Holdings.

I do not expect holding this trade until expiration. If the stock moves a few points I should ride it as long as it moves and makes me money. Then I sell it for a profit (or a loss if it turns against me).

Happy Trading!

2 responses to “New Trade – BUY OCT14 CALLS on AAPL – my first directional trade”

  1. Options can definitely be a ride!

    I have been sticking to buy/writes and selling calls for stock I want to sell anyway. I sold a 200 call on IVV for 7/19/2014. Will be a nice gain, or OK if I keep the stock.

    You can make a decent return doing it, assuming the market doesn’t crash.

    • Martin says:

      Agree. I try keeping my positions as small as possible to have room for a potential repairs in case of crashes. I agree that options can help a lot.
      Thanks for stopping by.

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