It seems that a lot of options that I have looked at lately have had very low OI. I know that you say that you try to buy options with a Delta of around 75 and OI of 100 or more. An example is the Mar 65 PUT on NEWP. The Delta is -59 and the OI is only 90. Would you steer away from that as a general rule? (February 14, 2001)

  Delta's on puts the past several months have been lagging those on calls. That tends to track the trend of the market: when it is up, at the money calls have a lower delta than at the money puts. Now that the market has been trending lower we see the opposite. As we want the biggest movement we can get in the shortest time on our option plays, that means we will have to go deeper in the money to get the delta we want. If you are looking for a $6 move down to support and the delta is -50 to -60, that gives you a $3 to $3.60 move in the option. When you take into consideration the spread which could easily be $1 to $1.38, you are looking somewhere in the range of $2 net profit before commissions. That gets hard to justify and requires that the play unfold exactly as expected and that you are perfect in your execution of the play.

We prefer to take 50% to 70% of the move for safety because you never know for sure if a stock is going to turn right where support appears to be. Thus, we prefer to get a higher delta on that move by buying deeper in the money or looking at a larger range to play. The former costs more money, but we are buying more movement and that limits our exposure because we can get the move we want faster and get out.

As for open interests, we like to see 100 or more. That has to do with liquidity, the actual number of trades. That allows us to use mechanical stop losses without as much risk of being jumped over when the stock is falling but there are no trades in the option at your stop price to activate the stop. At that point, if you have a stop limit you are taken out at the next lower trade as your stop is converted into a market order. Not good. Or you put in a stop limit and there are no trades to activate that order; in that case you get passed over, and if the stock does not come back, you won't get sold out at all. Low OI's mean we have to watch it closely or have our broker do it as mechanical stop orders do not protect us.


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