More Bang for Your Options Trading Buck

10/28/2013 8:00 am EST

Focus: OPTIONS

Daniel Gramza

President, Gramza Capital Management, Inc.

Daniel Gramza doesn't want you to make any common mistakes when it comes to your options trading, so he shares some simple parameters for you to follow.

SPEAKER:  My guest today is Dan Gramza.  We're talking about common options trading mistakes and how you can avoid those.  So Dan, there's a lot of mistakes I'm sure traders can make.  Give us the top five, if you could. 

DAN GRAMZA:  Well, you know, I think there's a few basic things from my point of view that I think get abused when it comes to options.  One, people, when it comes to making directional trades, from my point of view a lot of people say, well if you buy options you're not going to make money.  If you don't properly plan your trade, that's probably true, but here are some parameters that I find helpful and I think essential when it comes to looking at a directional plan in options, so here's what we're talking about, Tim. 

We're talking about where we have a directional bias, so that means we view some type of technical indicator to indicate there could be a change in market direction, all right.  Now, once we have that buy signal, my feeling is that we should look at an option beyond the current expiration, so we buy time.  The other thing is that we're going to buy options that have a total delta over 100 because a lot of people have a tendency to say well if I buy a delta of 10, it's cheap, but it's going to move 10 cents for every dollar as the underlying move, as you know, Tim. 

My feeling is I want bang for buck because what we're going to wrap around this is we're going to wrap a time requirement.  My feeling is if we are looking at a daily chart with this technical indicator saying yes, it's a positive market condition, and you and I buy calls with this delta near 100, in two to five days if that is not productive I would stand aside, and those are all the issues I think that people have a tendency to make a mistake with.  They buy options that are too close to expiration.  Theta starts chewing away at their premium.  They buy an option with a low delta because it's cheap and they're not getting the bang for the buck, and they have theta chewing away at that premium, so the probability of that strategy making money is actually fairly low, and it's critical that we begin though the process with that very specific technical buy or sell condition. 

SPEAKER:  Now, are you a proponent of somebody eventually starting to get into spreads and callers if you will and that sort of thing, a little more sophisticated rather than just buying and selling outright, or can you make a good living in options just doing the simple options trades? 

DAN GRAMZA:  Yeah, I think you can actually, actually.  Spreads have their place.  I mean, options are such a beautiful instrument.  They give us so much flexibility, they're wonderful.  Spreads have their place too.  I mean, we can also create a spread that gives us that directional bias that we can offset some of the cost of that spread, so there are ways to construct to use a spread to our advantage, accomplishing the same things that we're talking about.  I think simple ideas, I'm a simple guy, can be very powerful if they're done properly. 

SPEAKER:  There are so many options products now and so many different markets.  Where do you recommend somebody start?  Is it just pure stock options or should they do index options, options on ETFs, what do you like? 

DAN GRAMZA:  Well, first I would say they should pick a market that they like.  I like that question.  They should pick a market that they find interesting to themselves.  The second thing is from my point of view, I want options that are liquid.  I want options that have the volume in place.  If they don't, then I'm not really interested.  There's so many things out there that have liquidity that you and I can get in and out of, whether it's an index option, stock option, or futures.  Futures options, the only difference between those and the other ones is that they operate 24 hours a day, so depending on the time frame that you're holding a position, if you're interested in trading index options, futures options may give us a little bit of an advantage because of that time parameter.  I can manage it a little differently. 

SPEAKER:  Dan, thanks for your time. 

DAN GRAMZA:  My pleasure. 

SPEAKER:  You're watching the MoneyShow.com video network.

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