Larry,

Can you recommend how to set up an automatic sell order on a put where the sell is based on the stock price dropping 5%?

I guess the real question is: Can your recommend how to estimate a put's future sell price?

I have been developing a trading strategy. It is a Bear Strategy that shorts the market by buying puts. The stock is expected to decrease 5%.

The puts are bought on market open.

They are sold between the following day and ten days out. (The trigger to sell is when the stock drops 5%.)

I need to estimate what the put price will sell for, when the stock drops 5%. I would like to automatically sell at that time, but can’t because I don’t know what price to ask for when setting up a limit order.

Please recommend how to calculate this, or recommend an appropriate calculator.

Thanks.

Jeff

You are asking an unanswerable question. The most important factor of an option price is volatility and what you are basically asking for is "forecast volatility" which if we knew what it was we could also tell the future. On another note, if you aren't trading 10 or more options a broker would never consider holding the order in his hand and waiting to execute it for you based on stock conditions.

jeff,

at Ivolatility.com there's a section called "education" that you might find helpful but be prepared to do some heavy-duty math!

are you asking about the relative price move between the put & the underlying stock? if the stock moves 1 dollar and the put moves 50 cents then a 5% move in the stock would earn you 2.5% move in the put - you're looking for this ratio, right?

i don't know a lot about "the greeks" - but i think what you want is called the beta (or the delta or something like that). you'd just need to find out what the beta (or whatever) is on the puts then just figure what a 5% move in the stock would equal.

of course there are many other factors such as time decay, implied volatility, etc. that will impact the puts price so it'll never be an exact, consistant ratio between the two. (but you knew that).

i'm sure larry or optionout could tell you better than me, but i think i understand your question. if you surf the Ivolatility site you may find your answer.

good luck.

-ja

Jeff,

Optionyout and Joe make good points. It's a tough question to answer because of all the factors that they cited. The best thing to do is to give us a specific example and we'll try to give you some things to consider. Are you buying in-the-money, at-the-money, or out-of-the-money?

The best you can do is to use the current delta of the put in question. But Optionyout is right -- at best it will only give you a rought estimate. Also, if you're just looking for a 5% move in the stock you better stay with liquid options because the spread and commissions could eat up a lot of your profit.

Larry

Thanks Larry.

How would you define liquid options.

I understand that you mean an option that is easily traded, but what is/are the criteria for that?

Should it have a specific amount of open interest?
If it's not already "In the Money", but is near the money, how much open interst?

When to avoid it entirely beacuse lack of open interest?

What are some guidelines?

Thanks.

JeffO

p.s. I tried my new system with 11 trades. The first three were great. The last three,...I lost my shorts ....so overall "I LOST MY SHORTS!"

Jeff,

Okay, if the first three trades were “great” and the last three trades you lost your shorts. And you lost your shorts overall, then you obviously have a money management issue that you need to address immediately. If three trades were winners and three were losers you should have made money.

Liquid is a relative term. If an option on an individual stock has a bid/asked spread of 20 cents, that’s pretty liquid. If it’s 50 cents, that’s pretty illiquid. I don’t pay much attention to open interest. If I understand your system, it’s pretty short term. So you need to stay in the most liquid of options.

And I also advise you to stay away from options until you can prove that you can make money trading stocks. Long options are the toughest game in town. And if you can’t make money trading stocks you have no chance with options. So try your system with stocks first.

Larry