Click on the chart to enlarge it.
As we have seen in other examples, one of the unique qualities of Ocean is its pinpoint accuracy in identifying when a trade is ripe for the picking.
Since this is a crucial aspect in considering options as a trading vehicle, let's see how well Ocean can do as an options trading toolbox and methodology. I think you'll find that the story reads like a good detective mystery, and as a bonus has considerably more valuable lessons in it than a who-done-it would!
We like to have the deck stacked as far in our favor as possible when considering an option play. As you know when trading options, everything has to be right for you to make any money:
We have to be right on the directional call, we have to expect an almost immediate move to avoid the inevitable premium decay and there needs to be an acceleration in the price action for the volatility component of the option price to work in our favor.
These obstacles, combined with the extreme leverage of options, demand that unless everything lines up correctly options should generally be ignored in asset-allocation.
Let's analyze, then, the factors present in the market in general and in Amazon in particular that allowed us to consider an option play at this time.
By the way, when considering a put option based first on an overall weak market, the best risk-reward opportunities usually exist in individual stock options rather than an index-based option. This is so since most unsophisticated option players usually focus on index options rather than individual stocks, many times using the put option as a way to hedge their other long positions.
This herd mentality then quite often inflates the premium in the index option to a level where only an instantaneous and unusually large market collapse can yield any profits for the put purchaser, and even then, the rewards are often sub-standard given the risk that must be assumed.
(This is the end of Part 1. Go to Part 2.)
|
