Mar

5

Safer or Riskier? DIA Options Trading

March 5, 2008 |

Between yesterday and today I tried a new strategy I had never tried before. Instead of buying stocks or stock options, I decided to watch the DIA Exchange Traded Fund (ETF). This fund tracks the DOW 30 performance. Both yesterday and to a lesser extent where very volatile days. The DOW climbed down yesterday more than 200 points before paring down those losses this morning. Today the DOW climbed down around 60 points before ending up around 40. Days in which the DOW swings back and forth a lot could be good days to do day trading: if only you knew that they will actually swing back into positive (or negative if you are a short).

Since I can’t run too many more risks, I tried options this time. The result was better than I expected. Lets analyze the trade:

Option Purchase Price Sale Price Gain/Loss Dow Price Difference Exposure %
Mar Call 118 $4.40 $6.00 36% 160 pts, ~ 1.3% 3.67% of ETF price
Mar Call 120 $3.85 $4.15 7.8% 60 pts, ~ 0.5% 3.18% of ETF price

My gain was satisfactory. My exposure very low to having bought the ETF. It was actually very low compared to the exposure you take on options contracts for stocks of similar price. And the option was very sensitive to price fluctuations so getting a few bucks was easier than I thought. It worked because it was a very wild day. It wouldn’t have worked on a very slow day or on one where it just climbs or drops and stays there.

There is risk with options. At the end of March, for example, these options would have expired — poof, gone forever. A sure way to loose 100% of the capital. Maybe they are suitable for day trading, but certainly not for the long term. Longer horizon options are more expensive and reduce the gain.

Should I try this again?  I am not sure.  Very risky.  Very wild.  Risk of loosing 100% capital.  But I must say it is less risky than other crazy things I have done.  At least I have won money on this one.   Less money risked than in other ventures.

Will have to try it some other day and see if I can repeat the feat.

 


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