April 27, 2007
Stock Du Jour (AMZN + Long-term Perspective) & Random Observations
Along with all the usual Short and UltraShort ETFs, there’s Ballard Power Systems (BLDP) on the new lows list. (Check out the PowerShares WilderHill Clean Energy ETF (PBW) if you’re interested in exposure to that sector).
Homebuilders jumped nicely… meanwhile some jerk’s lowball limit order is sitting in there.
AMZN was the stock du jour (again) doing over 175,000 trades and moving up smartly.
Here’s a monthly chart of Amazon.com since it came public back in August 1997 to give you a better long-term perspective.
Cat: | Time: 8:44 am (utc+8)
April 27th, 2007 at 10:06 am
AMZN up 40% in 2 days. Those puts are looking tasty :>)
April 27th, 2007 at 10:35 am
Amir: How do you know what to pay for a put?
April 27th, 2007 at 10:49 am
Always a hard thing to assess. If you want to gamble and pay for ‘cheaper’ options then ATM-OTM is a strategy though I think that’s a suckers game. I’ll limit my risk exposure and pay for premium only and go with deep puts. If you’re a contrarian then this might be a good strategy rather then shorting - limit risk.
But I think your question was more towards the point of a dollar amount in which case I factor in the price, time, risk, stock volatility, and other factors to come up with a fair value. It’s not scientific but short of understanding/gaming Black-Scholes, it’s what I employ.
Do you invest/speculate/gamble with options?
April 27th, 2007 at 10:51 am
May I ask on what grounds you would trade long on this stock? Having watched it with incredulity for two days, I ask this question. Thank you.
April 27th, 2007 at 10:57 am
BBC-
Are you asking me or CM?
I’m merely observing that put options look attractive = going short.
April 27th, 2007 at 12:20 pm
Amir - that is my point, I kept waiting (along with many others) for some top to form, so that I could short…and waiting…and waiting. Actually I was asking CM based on his dummy lessons.
April 27th, 2007 at 12:30 pm
Amir: No, I never touch options because a) they’re usually illiquid, b) I don’t know how to price them, and c) the richest guy I know who trades options sells (writes) them exclusively.
bbc: It’s trending up, it’s unusually active, and it gave great low-risk Dummy spots to get long… all the normal reasons one trades stocks. Credulity isn’t something a day trader factors in.
April 27th, 2007 at 1:23 pm
CM,
Curious, but if your friend is writing calls/puts then he should have a better idea of what price to sell the contracts. Why don’t you figure out from him a good pricing strategy?
April 27th, 2007 at 2:49 pm
Amir: Yes I should, but I don’t think he’s going to tell me. ;-) The point is he might not know what a fair price to pay is, but he definitely knows what is a dumb price to pay and is happy to sell those.
April 27th, 2007 at 8:45 pm
thx for the PBW headsup. sustainable, clean energy production will be the only way for the future. funny how the left was right all along : ).
April 28th, 2007 at 6:14 am
you do not need to know the optimal option price just like you do not need to know what the stock’s optimal price is. When amzn printed the dummy entry you could’ve bought the stock or you could’ve bought the May 55
calls. You would use the same risk and money management techniques as you would if you bought the equity.
Whether the option was priced right or not at the time is not that important. Much like it did not matter which of amzn price points was the “correct” price. it traded in about 15% range in a 2 day period. can anybody point to any price within that period and say whether it was an optimal price or not?
if you are looking for a day trade and you have a dummy entry you can use the exact setup to enter ATM (or ITM) front month calls.
April 28th, 2007 at 7:12 am
Born2: Can you post a chart of those AMZN calls? How are you going to comfortably control your risk in some illiquid option? Just taking a hit on the bid ask spread is going to murder you, isn’t it?
April 28th, 2007 at 7:12 am
Born2Code,
You may be correct but buying calls, especially May 55 calls, on a stock that’s up 40% in 2 days doesn’t leave much room for potential upside, IMO.
April 28th, 2007 at 7:16 am
CM,
>How are you going to comfortably control your risk in
>some illiquid option?
You can always exercise the option too :>)
April 28th, 2007 at 8:08 am
Chairman: Options are very liquid. The spread may be big(ger) if it’s thinly traded, though, and can change at the whim of the options market maker. (e.g., although the basic price is determined mathematically, they can jack up the ask if they expect a large influx of buy orders due to something being featured on TV).
April 28th, 2007 at 9:11 am
The other side of your option trade is always the CBOE. Liquidity is not an issue. you are always guaranteed to sell-to-close your position. The spread may not be favorable on illiquid options but you can always close them.
the AMZN ATM options are very liquid, the spread is about $.20 but you can always enter a limit price and hit the middle.
On the 26th, the day of your chart, the $55 call traded around 1500 calls during the 30 minute candle that had your entry. The low was around $3.40
The high of the day was $8.50, half an hour before close it traded as high as $7.90 and closed the day at $6.90.
As for risk. Instead of buying 100 shares of AMZN at $57 and putting up $5700, you could’ve put 1 call at $3.40 or let us say $3.60 if you got a really bad fill. that would be $360.
Let us say you held to close, the equity would’ve made you around $5.70 a share, or $570 on your $5700 investment.
The option would’ve made you $4.30 a share (if you sold in the last 30 minutes at $7.90). That’s $430 on your $360 investment.
If your stop was around $56 for example. Your risk would be $100 on the equity. At $56, the option would’ve been worth around $3, or maybe $2.80 with a bad fill. So your risk on the option would be less than the equity. This varies with the strike you choose.
That’s why i buy ATM or the closest strike ITM .
You could exit your option based on the stock price instead of the option price. This would allow you to use the identical setup for trading the call as you would for the stock.
Amir: as for the 40% move. I am not making a judgment on whether you should’ve entered or not. But if you took the dummy trade then you cannot argue against taking the option trade. If the 40% keeps you away from the stock then you would not buy the stock either .
April 28th, 2007 at 10:09 am
Born2: I wish I had the options data because then I could overlay the charts and see how the exact fills would look. Most of the stocks I trade are “unusual suspects” that don’t have anywhere near the options activity of AMZN. Anyway, I’ll try to get the data for those AMZN 55 calls and do an overlay chart.
Yahoo is showing that the May 55 Call had a volume of 2,979 so I can’t believe it did 1,500 just in one 30-minute period. Once I dig up the data we can all have a look.
April 28th, 2007 at 10:20 am
Pete: The last thing I want to trade is where the “whim of the market maker” changes everything. I want to execute against a wide, deep, anonymous, electronic order book where spreads are extremely tight. If something isn’t trading once a second I don’t want to be there.
April 28th, 2007 at 10:25 am
i looked up the chart in TradeStation. I tried to search for websites that offer historical option charts but i could not find any… sorry.
April 28th, 2007 at 1:45 pm
Born2: If you can export the data from TradeStation into something readable in Excel, that would be nice.
April 28th, 2007 at 10:30 pm
i am sure there is a way to do it but i am not that well versed in TS’s advanced functionality. i am just going to list the data manually off the 30-minute intra-day chart for the 26th. the first candle starts at 8:30 central and ends at 9:00 central.
i just realized that in my example i was looking at an extra candle from the 27th. the day actually closed at $8.40 so your gains on the option trade would’ve been higher than what i stated.
open, hi, low, close.
3.10, 3.11, 2.75, 3.00
3.10, 4.30, 3.10, 4.30
4.10, 4.20, 3.75, 3.90
4.00, 4.00, 3.70, 3.80
3.67, 3.70, 3.40, 3.70
3.90, 4.50, 3.90, 4.30
4.24, 4.60, 4.24, 4.60
4.60, 4.80, 4.46, 4.80
4.80, 5.30, 4.80, 5.30
5.10, 5.50, 5.10, 5.50
4.40, 5.80, 4.39, 5.50
5.60, 7.00, 5.60, 7.00
7.00, 8.50, 6.80, 8.40
p.s. your checker thingy keeps prompting me if i post several comments to a single post, it already banned one of my email addresses from commenting on your site. so i do not know if you will get this or not.
April 29th, 2007 at 10:07 am
Born2: You mean someone with the handle Born2Code can’t export something from TS? ;-) Anyway, thanks for putting in the numbers by hand, I’m going to see if I can kick something out of my machine and make a chart. Spam Karma is a feisty one and has knocked out many a legitimate comment, but that’s the price we pay to keep the spam at bay. (I’m a poet.)
April 29th, 2007 at 11:55 am
:) truth is am too busy coding and trying to meet deadlines on several projects… the little time i have left i spend reading charts and few insightful blogs… last thing i had time for was reading TS manuals :)
OT, my wife is from Beijing and we have two gorgeous mixed kids (2 and almost 5). Baby T is adorable.
April 29th, 2007 at 3:54 pm
[…] Reader “Born2Code” left this comment in a recent post that intrigued me: “If you are looking for a day trade and you have a dummy entry you can use the exact setup to enter ATM (or ITM) front month calls.” […]