# First Options Trade



## Seneca60BC (16 September 2008)

Here is my first Options Trade 

AWE expiring Dec 08  - since I am not sure what direction AWE will be heading - I have employed a straddle.

Any feedback/criticism appreciated


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## wayneL (16 September 2008)

Hey Seneca, just a couple of terminology things.

The strategy you have employed is a guts strangle not a straddle. A straddle is both legs at the same strike. It is a "guts" strangle because both strikes are ITM. This would have cost you less capital if you had used the 2.50 call and the 3.00 put, for the same payoff diagram

You've written "no time value since in the money". That's not quite right. Even deep ITM options will have time value unless delta is 1 or -1.

Your breakeven points at expiry are not correct. I make it ~$2.30 & ~$3.20.

Otherwise no problems.... but you do have a little bit of positive delta, ergo, a little bit of upside bias, but no biggy if this puts on a big move for you.

Good luck with it.


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## brty (16 September 2008)

Hi Senica,

Firstly, I don't see that you have factored in brokerage.

I haven't traded options for a few years, but gave up this type of trading because of costs.

If the price mucks around between $2.50-$3.00 when you want to exit, then you are up for another 2 lots of brokerage. In that range your loss is 19 cents (50-27-42 and maybe more with slippage) + 4 lots of brokerage. At $30, that is another 12 cents.

Max loss/risk ~$310.

With breakeven in the area Wayne suggested, or slightly worse prices, for this to be near a R/R of 1:1 you would be gunning for prices of ~$1.90 low, ~$3.60 high, and you would want a high probability of the price getting there to make the exercise worthwhile.

Like Wayne said, Goodluck.

brty


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## Seneca60BC (17 September 2008)

Hi Guys

Thanks alot for the feedback.  Yes a few errors here.

I thought to calculate the breakeven, I have to use the strike price + option cost for the higher breakeven ($2.77) and likewise for the lower value where I minus the option cost from the strike (3.00 - .42) = $2.58 ?

Yes I have not taken brokerage into account for this trade.

Cheers


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## wayneL (17 September 2008)

Seneca60BC said:


> Hi Guys
> 
> Thanks alot for the feedback.  Yes a few errors here.
> 
> ...



For a guts strangle the breakeven points are calculated as follows.

upper break even = upper strike + call price + put price - the difference between the strikes

= 3.00 + 0.27 + 0.42 - 0.50

= 3.19

lower break even = lower strike - call price - put price + the difference between the strikes

= 2.50 - 0.27 - 0.42 + 0.50

= 2.31


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## Seneca60BC (17 September 2008)

ok - looks like my first trade is a doomed failure. 

cheers.


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## wayneL (17 September 2008)

Seneca60BC said:


> ok - looks like my first trade is a doomed failure.
> 
> cheers.



Not if the underlying takes off. You're in the trade now, give it a chance and/or use it as a tool to learn.

Keep us updated.


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## sails (17 September 2008)

Seneca60BC said:


> ok - looks like my first trade is a doomed failure.
> 
> cheers.




Well done for giving it a go!  My first options trade ever was a five lot long strangle on Telstra  . That was a few years ago and I had no understanding about volatility and did everything wrong on that first trade!  I lost a small amount of money but was a good learning experience.  

I agree with Wayne that it's better to let it leave it there for now.  You've got until December, so it's got a bit of time to move around.  If AWE falls further, IV may increase which should help increase the value of your options.

AWE options are not very liquid - so getting fair prices could be a bit of a challenge. 

Good luck with it!


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## Seneca60BC (17 September 2008)

Hi Guys

Yes thanks for the encouragement.  Yea I cannot beleive the illiquidity - i thought the Market Markers were suppose to at least put in a BID ASK everyday?  Is this not true ?

Cheers.


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## elbee (17 September 2008)

From memory ASX option market makers are only obliged to offer spreads on 3 strikes and for only 50% of the time and then only for the stocks they are assigned.


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## cuttlefish (17 September 2008)

There's a few different types - in some stocks the market makers have obligations to give a price when asked and also have bids in the market for a certain period of time.  Others there is no obligation to give a price or be in the market as I understand it.

But liquidity/slippage and brokerage overhead are big things to consider on options trades.


Seneca I'm pretty new to the whole options thing as well so its interesting to see someone elses trade.  I'm curious as to what your view on volatility was prior to entering - i.e. did you have a long or short view on volatility?   Also did you consider a short strangle/straddle at all instead of the long strangle?  

I'm also curious - what is the particular reason for entering a trade with AWE at this time - is there some technical or fundamental event that has caused you to enter at this time.  (e.g. chart pattern, impending news, volume/volatility related event, other indicator etc.)


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## Seneca60BC (17 September 2008)

Hi Cuttlefish

You posted some good questions and unfortunately your going to get answers from a total newbie.

1. As you can see in the diagram, I calculated Historical Volatility (HV) and Implied Volatility (IV) and since IM is smaller than HV that was one reason to enter this trade.

2.  I took a long strangle time frame not because I expect to sit out till expiry, but it gives me enough time before theta overpowers the trade (last 30 days or so) so i want to be out before at least 30 days.

3.  I took a long (guts - thanks Wayne) strangle because I am some what confident oil will keep heading south, BUT in case I am wrong, I have protection.  This is the first trade so I thought I need extra protection. So that is why I entered this trade with AWE.  Hey I could be totally wrong and lose the entire lot - only time will tell.

Cheers!


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## mazzatelli1000 (17 September 2008)

Seneca60BC said:


> Hi Cuttlefish
> 
> You posted some good questions and unfortunately your going to get answers from a total newbie.
> 
> ...




For point 3, have you considered a put backspread? Not saying this is the correct position to have on or anything, just an alternative.

Good luck with your trade!!!


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## Seneca60BC (17 September 2008)

Hi Maz

I am so nascent in this whole thing that I am yet to come across a Put Back Spread strategy.  I dont even know what this is  

I plan to learn the very basics first and then consider the more esoteric strategies.

Cheers!


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## mazzatelli1000 (18 September 2008)

Seneca60BC said:


> Hi Maz
> 
> I am so nascent in this whole thing that I am yet to come across a Put Back Spread strategy.  I dont even know what this is
> 
> ...




The put backspread is not esoteric at all!! Its one of the first spreads that are usually outlined in decent options text.

Anyways...more food for thought for the journey


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## Seneca60BC (23 September 2008)

Well looks like AWE is going to rocket today after a US$19 leap in oil overnight - I think I will be exiting today if it hits my Take Profit figure.


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## Seneca60BC (23 September 2008)

Seneca60BC said:


> Well looks like AWE is going to rocket today after a US$19 leap in oil overnight - I think I will be exiting today if it hits my Take Profit figure.




Doesn't look like AWE wants to budge today  - oh well still hanging tight at the moment.

cheers


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## mazzatelli1000 (23 September 2008)

Seneca60BC said:


> Doesn't look like AWE wants to budge today  - oh well still hanging tight at the moment.
> 
> cheers




Hey mate, good luck!!!

While sitting there twiddling your thumbs - read up on Gamma Scalping

Could prove useful later on against that rotting time decay


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## Seneca60BC (23 September 2008)

Hi Mazz

yes thanks - I will get to that later - just read up on BackSpread - seems like another interesting trading strategy - as you mentioned earlier.

Cheers man


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## Seneca60BC (24 September 2008)

Oil goes down and AWE goes up?  Madness of the market!


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## jackson8 (3 October 2008)

hi guys
am looking at gettting into options trades and have a few questions if someone could help me out would be  much appreciated
1  if i sell a put to open and i get excercised do i then end up wirh stock that i have had to pay a premium price for

2 if i sell a call to open and same happens do i just pay the difference out

3  to write a covered call do i need to hold the stock first or can i sell call to open first then buy stock after at any given time frame

4 if i sold naked call and stock starts to rise to very near to stike price can i buy stock then to cover it before it goes over strike and putsme in red even more

regards gary


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## wayneL (3 October 2008)

jackson8 said:


> hi guys
> am looking at gettting into options trades and have a few questions if someone could help me out would be  much appreciated
> 1  if i sell a put to open and i get excercised do i then end up wirh stock that i have had to pay a premium price for



Even though "get exercised" is often used and everybody understands what you mean, being "assigned" is the correct terminology. When you are long, you exercise the option; when you are short you are assigned.</pedantic>

You must pay the strike price for the shares.

If you wrote a $20 NAB put contract that you received $1.50 for and are assigned. You must pay $20 per share, but you also keep the $1.50 per share. You end up with 1000 shares in your account with an effective cost base of $18.50 per share



> 2 if i sell a call to open and same happens do i just pay the difference out



No. You will be obligated to sell the shares to the buyer. That means either (a) you have to go into the market to buy the shares at market price in order to deliver the shares to the buyer, or (b) you will be short the shares. This will depend on your broker and trading permissions etc



> 3  to write a covered call do i need to hold the stock first or can i sell call to open first then buy stock after at any given time frame



If your account is authorized, you can write the call first if you want to. 



> 4 if i sold naked call and stock starts to rise to very near to stike price can i buy stock then to cover it before it goes over strike and putsme in red even more



Yes.


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## sails (3 October 2008)

jackson8 said:


> hi guys
> am looking at gettting into options trades and have a few questions if someone could help me out would be  much appreciated
> 1  if i sell a put to open and i get excercised do i then end up wirh stock that i have had to pay a premium price for
> 
> ...




I would also suggest checking with your broker what their terms and conditions are in the event of being assigned.  There are some very different ideas on exercise/assignment out there.  Some charge horrendous fees for the stock transactions.  Some charge "fail fees" because you are assigned the day before you know about it - which means you are not opening and closing the stock position on the same day which messes with the T+3.  

You are technically right in the event of a sold call being assigned in that cash to the value of your short call is deposited into you account and, subsequently, you only need to find the difference to buy the share position to close it.

Aus brokers like OptionsXpress understand the workings of option trades and spreads and so are far more exercise/assignment friendly.

Be very careful with IB if you are planning to write Aus options as I understand they only give the first 10 minutes of the day to close the assigned/exercised position before they apparantly randomly start closing out your positions which may have nothing whatsoever to do with your options trade.  This would be risky in our market as some of our shares like WBC, WOW etc don't even start trading until then.  If you have a covering long position that you need to close simultaenously with the assigned/exercised position to retain the original risk exposure, it is almost impossible to get anywhere close to a fair price within the first 10 mins.

Also Pt 4 - as Wayne has said, but just to point out that you would simply transfer the upside risk to the downside should the share price move down significantly.


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## jackson8 (3 October 2008)

thanks alot for your help guys

i have a couple of weeks off work so shall spend time reading and actually watching options market through my brokers platform which is comsec before i leap in.

need to understand what the risks are with different types of strategies, i dont necessarily want to try for riches just make a small amount on the side to supplement my income.

cheers
gary


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## Seneca60BC (3 October 2008)

Well I was actually sitting on a 22% profit and was so tempted to close the trade!! I think this is the hardest thing to do - to ride the trend!  What do you guys do to negate this temptation ?


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## jackson8 (3 October 2008)

Seneca60BC said:


> Hi Guys
> 
> Yes thanks for the encouragement.  Yea I cannot beleive the illiquidity - i thought the Market Markers were suppose to at least put in a BID ASK everyday?  Is this not true ?
> 
> Cheers.




Role of Market Makers
Market makers play an important role in the
options market. They provide liquidity, and
assist in the price discovery process, so that
traders and investors are more easily able to
price and value options. Market makers are not
required to provide quotes in all series, or at all
times, and as such there can be no guarantee
that all series will have prices displayed.
Under ASX Market Rules, each market maker
is assigned one or more securities in which
they must meet certain obligations for certain
percentages of time*. This involves quoting buy
and sell prices for a certain number of series,
and/or responding to requests from other
market participants for prices.
Market makers can choose to have the
following obligations:
a) make a market on a continuous basis only; or
b) make a market in response to quote
requests only; or
c) make a market both on a continuous basis
and in response to quote requests.
Continuous Markets
Market makers who choose to make a market
on a continuous basis are obligated to provide
orders continuously for certain percentages
of time* in eighteen series per underlying
security, encompassing three calls and three
puts in any three of the next six expiry months.
(3 series of calls and puts in 3 expiry months –
3 x 2 x 3 = 18 series). The criteria are based
on the previous trading day’s closing price of
the underlying security and are selected from:
1. Those series at-the-money
2. The next three in-the-money
3. The next three out-of-the-money.
Each order must be for at least the minimum
quantity, and at or within the maximum spread
requirements.
31
Quote requests
Market makers who choose to make a market
in response to quote requests must provide
orders on request for certain percentages
of the time* for all series out to nine months
maturity, for the minimum quantity and within
the maximum spread.
The maximum elapsed time before responding
to a quote request or replacing continuous
orders is 30 seconds.
The minimum duration of an order is 30
seconds. An order can be amended on
condition that the minimum quantity and the
maximum spread are maintained.


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## sails (3 October 2008)

Seneca60BC said:


> Well I was actually sitting on a 22% profit and was so tempted to close the trade!! I think this is the hardest thing to do - to ride the trend!  What do you guys do to negate this temptation ?




If your crystal ball says it will keep going down, then you can hang on for now .

One other suggestion is that you could roll the long puts down to reduce your initial debit and would still keep you in the trade, but think you could lose a lot with slippage with so little liquidity in AWE options - in fact no open interest at all at the $2.50 call strike.  Perhaps this is a paper trade -  if so, it's certainly a good way to get started.

Out of curiosity, I requested a quote on both your put and call options and got no reply.  I imagine there would be a fairly wide bid/ask spread making it pretty difficult to get a fair price. How are you getting your prices for this trade?


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## Seneca60BC (3 October 2008)

Hi Sails

I simply look at the ASX website to get the quotes.  How do you mean you requested to get the prices?


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## sails (3 October 2008)

Seneca60BC said:


> Hi Sails
> 
> I simply look at the ASX website to get the quotes.  How do you mean you requested to get the prices?




If market makers are not quoting, you can always ask for a quote - whether or not you will get one is another thing when the options are so illiquid. Some trading software allows you to request quotes online or you simply phone the broker who will use their software to request the quote.

Using the ASX website for quotes is great when testing ideas, but it doesn't show how wide the spread can be between the bid and ask. When trading for real you will most likely pay higher than the ASX price if you are buying and get less when you sell.


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## cutz (3 October 2008)

Hi Sails,

Funny you should mention that,

some of the spreads on mqg where eye popping last week.


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## cuttlefish (4 October 2008)

Senaca60BC said:
			
		

> Well I was actually sitting on a 22% profit and was so tempted to close the trade!! I think this is the hardest thing to do - to ride the trend! What do you guys do to negate this temptation ?





Seneca - I'm pretty new to options as well but in relation to profits one thing I've started to realise is there are as many choices for profit taking as their are for an initial position.  e.g. you could take the volatility profit while leaving the delta open (by swapping for a low IV high delta - though you'd want to make sure you hedge any existing delta profit etc.)  - I'm not savvy enough to offer specific examples but conceptually its important when taking profits to understand which greeks you're taking profits on.  (and a similar concept applies for implementing stoplosses and trailing stops etc. ).


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## Seneca60BC (4 October 2008)

sails said:


> If market makers are not quoting, you can always ask for a quote - whether or not you will get one is another thing when the options are so illiquid. Some trading software allows you to request quotes online or you simply phone the broker who will use their software to request the quote.
> 
> Using the ASX website for quotes is great when testing ideas, but it doesn't show how wide the spread can be between the bid and ask. When trading for real you will most likely pay higher than the ASX price if you are buying and get less when you sell.




Hi Sails

I calculate my profits/loss based on the BIDs put forward so yes I have taken into account the spread.


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## Seneca60BC (4 October 2008)

cuttlefish said:


> Seneca - I'm pretty new to options as well but in relation to profits one thing I've started to realise is there are as many choices for profit taking as their are for an initial position.  e.g. you could take the volatility profit while leaving the delta open (by swapping for a low IV high delta - though you'd want to make sure you hedge any existing delta profit etc.)  - I'm not savvy enough to offer specific examples but conceptually its important when taking profits to understand which greeks you're taking profits on.  (and a similar concept applies for implementing stoplosses and trailing stops etc. ).




Ok thanks for this - I will have to look into this is much more detail.


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## Seneca60BC (6 October 2008)

UPDATE:

position Exited - Profit 39% after brokerage. 

Cheers!


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## mazzatelli1000 (6 October 2008)

Seneca60BC said:


> UPDATE:
> 
> position Exited - Profit 39% after brokerage.
> 
> Cheers!




Great work

Now just remember to maintain a healthy fear of the market....


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## Seneca60BC (6 October 2008)

Hey Maz

Thanks for the encouragement - yes I have been burnt badly before and I see that as a very good experience - actually im glad that it happened to me - it was a very good learning experience - 

yes with AWE, I suspected oil would go down but was not 100% sure, hence the strangle.

Off course this trade could also be seen as a pure fluke as well, because this is simple just one trade.

The exerise of this was to demonstrate to others on this forum that Options, even though they are risky if not respected, should not be overlooked.  Thats what i learnt anyway.

Cheers


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## mazzatelli1000 (8 October 2008)

Seneca60BC said:


> yes with AWE, I suspected oil would go down but was not 100% sure, hence the strangle.
> 
> Off course this trade could also be seen as a pure fluke as well, because this is simple just one trade.
> 
> ...




Nothing in the markets should be overlooked  Its just some are better at utilising particular products than others.

With regards to the "fluke", don't be too harsh on yourself.

But for trading purposes, the key now for you is to be able to generate money on a consistent basis. I have yet to meet anyone who has made money on a consistent basis from employing strangles/straddles alone.

But theres always a first


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## Seneca60BC (8 October 2008)

Hi Maz

I have paper traded some PUTS as well and have made quite some returns especially in this market - so will also be engaging this - I will also take a look at the more esoteric options at a later time, but dont want to chew more than necessary at this time.


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## Grinder (8 October 2008)

Seneca60BC said:


> UPDATE:
> 
> position Exited - Profit 39% after brokerage.
> 
> Cheers!




Good effort Seneca, straddles have rarley paid off for me so glad to hear it worked out. Start of a curious journey I gather.


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## cuttlefish (8 October 2008)

Well done.  A big part of options trading is in the taking of profit from the little bit of experience I've had - its very easy to let a profitable position go back to a loss - so well done on locking in the profit too.


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## Seneca60BC (8 October 2008)

Hi Guys

Thankyou very much for the congrats - what i do is set a price target, once that price target is hit I am out - no further questions asked - and then move on to the next trade.  Offcourse you guys already know about this but yea, thats how I work - and offcourse, if i later see that I could have made more $$, well then it still was an excellent trade because I have stuck to my plan and not got carried away with the $$.

Cheers!


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