Buying options is extremely risky for a number of reasons. Firstly, you need to make sure that the vehicle/instrument you are trading is liquid. This gives us the best chance of getting in and out at the price-point which you want. Then you need to make sure that you are being as precise as possible with your entry. Remember when buying options (especially out of the money options), you need a big move in the price of the underlying in order fo the option to gain value.
To give you an idea of the risk you are taking with an OTM option for example, the seller of this option can make money off you if the price remains the same, goes up a bit or goes down. You are betting against the house, so to speak, which is why you need to be ultra careful.
The only way we would consider buying a call or put option is if we can finance the purchase with something like a sold put. In this video, we explain how we set this up.
Posted in SPY
On Friday last, the S&P500 dropped below its 10 day moving average of $2840. This means the odds are now high that the index is moving down into a daily cycle low. The 50 if not 62% retracement levels will probably get hit over the next couple of weeks. Expect the bears to come out in force trying to call sub 2000 numbers on the index. The probability of this happening remains very low. Sentiment has remained very subdued over this past six weeks. We still do not have enough sellers in the market to force a big collapse here.
Marathon Oil (MRO) ralied well over 10% on Friday the 17th of April whereas the price of crude oil continued its collapse. We have good reason to believe the bottom is in here for MRO as all the bad news seems to be priced in. The play here was to sell puts aggressively as implied volatility (even in further out expiration cycles) spiked above 100%. Volume both from insiders and the institutions has spiked also over the past few weeks. Long MRO.