# Controversial Option Discussion Of The Day - Calls and Puts



## wayneL

One of the first thing professional traders are taught is:

A call IS a put. A put IS a call.

Discuss.


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## Timmy

Wayne ... I'm looking forward to this, I think I might learn something.

I have been sitting here trying to understand this, or at least get some sort of handle on it.

The only thing I can come up with is if I buy a call on, say, WBC (random stock pick) I am, in effect, also buying a put on my cash ... the right to 'short' cash in exchange for shares in WBC.

Am I getting warm?


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## matty2.0

wayneL said:


> A call IS a put. A put IS a call.
> 
> Discuss.




A call is a put, only if the call goes kaput.


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## beerwm

wayneL said:


> One of the first thing professional traders are taught is:
> 
> A call IS a put. A put IS a call.
> 
> Discuss.




ok,

So i have a Call at $5, on a $10 stock. - [the right to buy @ 5],
same stock,
I have the [ the right to sell @ 10] - Put
>>>after/if i buy it for $5.

or..

maybe the lesson is dont overthink things - like a lesson in a lesson


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## beerwm

ok new theory-

I dont know options;

but... im guessing the value of a call/put is reflected on the volitily of a stock amongst other things.

so price of call = put - under same circumstances


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## dutchie

A call for one person is a put for the other side. etc.


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## wayneL

OK I've kept everybody in suspense long enough. Not through intentional mind games, just through normal Sunday recreational activities. Anybody in London interested in Bohemianism, get your @ss to Camden. 

We all know the differences between a call and a put... one is right to buy/obligation to sell, the other a right to sell/obligation to buy. 

What prompted this thread was the discussion of synthetics on the other thread, and this is what they are trying to get at with the statement in the opening post. 

They are trying to get traders to understand that there is a direct mathematical relationship between a call, a put, and the underlying stock. They are trying to get people to understand synthetics.

This is reflected in the put/call parity equation, viz (adjusted for dividends and cost of carry):

The call option price - corresponding put option price = stock price - strike price.

Also, the absolute value of delta of the call + the corresponding put, must equal 100, which is the precise absolute value of any stock position.

Further evidence is in the fact that a put can be converted to a call and visa versa, buy simply adding or subtracting stock, thereby changing the delta. All other greeks are identical. A call is a put + stock. A put is a call - stock.

One might argue over the semantics of the statement, but the idea is to get people thinking the right way, to think in terms of synthetic equivalence.

That done, the trader can never again be fooled into believing some of the nonsense spouted by ersatz experts in various places.

That's it.


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## wayneL

Jesus! That killed off the thread.


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## beerwm

wayneL said:


> Jesus! That killed off the thread.




I think we're all waiting for lesson 2.

keep'em coming


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## wayneL

Pick the odd one out and why:


Delta
Gamma
Theta
Rho
Sigma
Vega


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## Frogacle

Rho because it ends with a different vowel.

Its either that or Sigma, which I've never seen used in the context of options.


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## wayneL

Frogacle said:


> Rho because it ends with a different vowel.



Observant, but not what I was looking for.



> Its either that or Sigma, which I've never seen used in the context of options.



Nope.

Sigma is the Greek letter that signifies volatility, viz, 1 standard deviation... and the name of my blog. (There is a clue in that statement)


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## Cartman

wayneL said:


> Pick the odd one out and why:
> 
> 
> Delta
> Gamma
> Theta
> Rho
> Sigma
> Vega




Uncle "Vega" was flown in from Panama .... he's not even Greek !  ..... im sure there is more to it than that though


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## wayneL

Cartman said:


> Uncle "Vega" was flown in from Panama .... he's not even Greek !  ..... im sure there is more to it than that though




Bingo. Your special prize is being mailed to you.


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## mazzatelli1000

Uncle Vega can change his name to Kappa
Then he can fit in with the rest

How about this timeless statement from a questionable character:
"Credit spreads are better than debit spreads because they...you guessed it bring in a credit to your account. Get paid first, ask questions later" 

True or False and why


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## Cartman

wayneL said:


> Bingo. Your special prize is being mailed to you.




sweet !!   --- can i have a red one?

on a point u made in another post Wayne .... 

it actually confuses me why so many "long term" investors go out and buy BHP or CBA or whatever when they could write put options and collect the monthly premium and own the stock at a lower cost base if exercised ----- using this strategy at cycle bottoms seems a common sense/simplistic way to use options/buy stocks 

does that theory still hold water or is my boat leaking :bowser:? --- 

ps bear in mind i am in "option kindy"


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## cutz

mazzatelli1000 said:


> "Credit spreads are better than debit spreads because they...you guessed it bring in a credit to your account. Get paid first, ask questions later"
> 
> True or False and why




Hi mazza,

I'll have a crack at this seeing this is something that's been gnawing at me for a while.

Personally i reckon credit spreads are better as they seem to have a higher probability of success. I say this because i think it's impossible to predict where a particular underlying is going to end up in say 4 weeks time.

To use a wrangle done for credit as an example, what's the probability of the underlying ending up in a loss zone as opposed to a long butterfly ending up in the profit zone?.


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## Ageo

Cartman said:


> it actually confuses me why so many "long term" investors go out and buy BHP or CBA or whatever when they could write put options and collect the monthly premium and own the stock at a lower cost base if exercised ----- using this strategy at cycle bottoms seems a common sense/simplistic way to use options/buy stocks




I might have a go at this, i think the reason being is (im assuming they understand options) is that not all people can afford 1000 shares in 1 hit (unlike the U.S 100 share per contract).

2nd its only in increments of 1000 so to top up you need to write another put which means another 1000 shares if exercised.

But i understand your theory as it only makes sense to collect premium along the way and if you do get exercised at least you have bought the stock at a discount (to what you perceived as good value). Obviously writing out of the money covered calls along the way isnt a bad strategy either in times like this as it helps offset any losses.

Wayne, for some reason i have never gotten to really understand the greeks (perhaps im too lazy) but do you find it essential for medium to long term investing? i know the more knowledge the better but how useful do you find it for your longer term share investing?


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## Toothyfish

Uncle Vega sure goes by many names, I've heard he's been called Omega as well.


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## wayneL

mazzatelli1000 said:


> Uncle Vega can change his name to Kappa
> Then he can fit in with the rest



I've even seen him referred to as omega and tau. Perhaps he likes being master of disguises. I've been tryng to find where vega comes from. The best I can find is that it's Arabic and means descending eagle or something. 



> How about this timeless statement from a questionable character:
> "Credit spreads are better than debit spreads because they...you guessed it bring in a credit to your account. Get paid first, ask questions later"
> 
> True or False and why



 Yes good one Mazza. As a clarification, we're talking about identical strikes in the credit and debit spread, yes?



Cartman said:


> sweet !!   --- can i have a red one?
> 
> on a point u made in another post Wayne ....
> 
> it actually confuses me why so many "long term" investors go out and buy BHP or CBA or whatever when they could write put options and collect the monthly premium and own the stock at a lower cost base if exercised ----- using this strategy at cycle bottoms seems a common sense/simplistic way to use options/buy stocks
> 
> does that theory still hold water or is my boat leaking :bowser:? ---
> 
> ps bear in mind i am in "option kindy"



Ageo makes good points. You have to be prepared to own the stock, then you can simply trade CCs over the stock (synthetic naked put). If that suits your view and goal. I actually did/am doing that with some banking stocks. I actually now own some very crappy bank stocks but the cost base is now so low (and in one case cheaper than free (C)), that I'm still holding and writing calls with some nice premium. 

As far as the sense of it, I've done a blog post which attempt to pick the wings off the long stock, short put (and synthetic) and long call relationship, which I'll copy in a new post. (It's a thinking exercise to understand what you're doing).



Ageo said:


> Wayne, for some reason i have never gotten to really understand the greeks (perhaps im too lazy) but do you find it essential for medium to long term investing? i know the more knowledge the better but how useful do you find it for your longer term share investing?




I think it's critical for any options trader to understand the greeks. Sure you can "get by" as a long term investor without learning them, but it can be costly.


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## wayneL

OK this is from the blog. In the real world traders might have more diverse reasons and goals for trading naked puts/covered calls, but as I say, it's intended as a thinking exercise involving synthetics.



> We know that we can create a synthetic long stock position with options, by buying a call and selling a corresponding put, so we can look at any stock position as having a long call and short put embedded within it.
> 
> We can then analyze the naked put option as a long stock position with the short call stripped out leaving only the short put. A covered call can be looked at precisely the same way, as you have long stock with the long call component stripped out, buy writing (selling) the call leaving only the short put, albeit synthetically.
> 
> Why would an investor/trader do this?
> 
> By implication, the investor is dodging the cost of buying unlimited upside (the call option premium) and electing to collect the premium available in the short put. He is implying that he doesn't believe the stock is going to appreciate in value more than the strike price, plus what the put option premium is going to deliver in the time to expiry. If he does believe the stock is going higher than that point, he is short changing himself.
> 
> He also (by implication) doesn't believe the stock is going to fall by more than the strike price plus premium collected, otherwise just stay out, or use a different strategy. However if the stock does fall past this point, at least the loss is less than long stock.
> 
> It is a bet that the stock price is going to stay in a range, and electing to collect premium rather than shoot for capital gain


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## wayneL

mazzatelli1000 said:


> How about this timeless statement from a questionable character:
> "Credit spreads are better than debit spreads because they...you guessed it bring in a credit to your account. Get paid first, ask questions later"
> 
> True or False and why




BUMP. Because it's a great question.


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## Ageo

wayneL said:


> BUMP. Because it's a great question.




Well for me the answer is true and thats because if your in credit it means you have a head start and something needs to go "against" you to lose. But a debit spread starts you off behind the ball with a debit and you need to have something go "for" you to gain.

In short credit = at the front of the race and if nothing changes you win.

In short debit = at the back of the race and something needs to happen for you to win....

Does this make sense or is it too late for me? 

Its like saying you buy a property thats positive geared from day 1 (credit)
but buy a property thats negative geared from day 1 and your in (debit) the difference from the 2 is 1 is profitable from day 1 without any changes whereis the negative property needs a move in order to become profitable?

(P.S this is just illustrating the differences between credit/debit trades and not strategy's).

Please correct me if im wrong in anyway.


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## wayneL

Ageo said:


> Well for me the answer is true and thats because if your in credit it means you have a head start and something needs to go "against" you to lose. But a debit spread starts you off behind the ball with a debit and you need to have something go "for" you to gain.
> 
> In short credit = at the front of the race and if nothing changes you win.
> 
> In short debit = at the back of the race and something needs to happen for you to win....
> 
> Does this make sense or is it too late for me?
> 
> Its like saying you buy a property thats positive geared from day 1 (credit)
> but buy a property thats negative geared from day 1 and your in (debit) the difference from the 2 is 1 is profitable from day 1 without any changes whereis the negative property needs a move in order to become profitable?
> 
> (P.S this is just illustrating the differences between credit/debit trades and not strategy's).
> 
> Please correct me if im wrong in anyway.




Ageo,

I don't want to jump in too much on Mazza's question, but with a knowledge of the Greeks, you could analyze the put spread and the corresponding call spread with those Greeks (plus dividends and cost of carry/moneyness), to determine if the statement was true or false.


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## Ageo

wayneL said:


> Ageo,
> 
> I don't want to jump in too much on Mazza's question, but with a knowledge of the Greeks, you could analyze the put spread and the corresponding call spread with those Greeks (plus dividends and cost of carry/moneyness), to determine if the statement was true or false.




Ahhhh yes those damn greeks again (back to learning about them).

cheers


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## mazzatelli1000

wayneL said:


> Yes good one Mazza. As a clarification, we're talking about identical strikes in the credit and debit spread, yes?



Ooops
Yes that was what I intended, I'll rephrase below



wayneL said:


> I don't want to jump in too much on Mazza's question



Nah, its fine. I usually pull out too much verbatim to make any sense!! LOL

Sorry guys, the question again:
"Credit spreads are better than their debit spread *equivalent *because they...you guessed it bring in a credit to your account. Get paid first, ask questions later" 

E.g. a bull call spread vs. bull put spread with the same strikes


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## Ageo

mazzatelli1000 said:


> Ooops
> Yes that was what I intended, I'll rephrase below
> 
> 
> Nah, its fine. I usually pull out too much verbatim to make any sense!! LOL
> 
> Sorry guys, the question again:
> "Credit spreads are better than their debit spread *equivalent *because they...you guessed it bring in a credit to your account. Get paid first, ask questions later"
> 
> E.g. a bull call spread vs. bull put spread with the same strikes





So my answer above was way off?


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## wayneL

Clue ==>> premium collection doesn't necessarily involve a credit. :casanova:


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## peter2

Thanks for the question Mazzatelli (and WayneL). I had to hit the books again to try and understand. I'll try to explain.

Most people creating a credit trade think there are collecting premium if they see an immediate credit into their account. It is not this credit that defines the trade as a premium collection strategy. A credit trade may have nothing to do with premium collection. Premium collection is defined by the total theta of the trade. Theta or time decay is largest in the at-the-money options, so to collect premium one must be short (sell) the at-the-money option or the option (in the spread) that is closest to at-the-money. 

Constructing an spread trade just for the initial credit is the wrong way to think about it, but I understand the lazy influence of greed. The vertical spread is a directional strategy but determining how best to construct your spread using calls or puts, that is another question for the experts. The better construction to trade your views of the future price movements could result in either a debit or a credit.


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## mazzatelli1000

Yes, peter2 is very warm that the premium capture in a vertical is affected by time/synthetic time [implied vol]. 



cutz said:


> Personally i reckon credit spreads are better as they seem to have a higher probability of success. I say this because i think it's impossible to predict where a particular underlying is going to end up in say 4 weeks time.






Ageo said:


> Well for me the answer is true and thats because if your in credit it means you have a head start and something needs to go "against" you to lose. But a debit spread starts you off behind the ball with a debit and you need to have something go "for" you to gain.




Since mention of credit spreads, the natural default is to assume the otm configuration where one is short premium - i.e. Time decay works for the spread.

E.g. XYZ = 50
Bear call spread 55/60

If the stock falls, profit results.
If the stock stays still, profit results.
If the stock increases and stays below 55, it still wins.

I imagine these are the reasons for cutz and Ageo responses, that something needs to go against you to lose.

But consider the Bear put spread 55/60 [itm]

If the stock falls, profit will result [deeper itm it goes]
If the stock stays still, profit results [itm]
If the stock increases and stays below 55, it also wins. [the gain on the 60 put > loss on short 55 put]

This also needs something to go against you [i.e. large upward move like the otm credit equivalent], but it is a debit spread. The less time the better, just like the bear call spread.

Is there a reason why the credit received still better?


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## mazzatelli1000

peter2 said:


> Premium collection is defined by the total theta of the trade. Theta or time decay is largest in the at-the-money options, so to collect premium one must be short (sell) the at-the-money option or the option (in the spread) that is closest to at-the-money.




If I am interpreting this correctly, you are describing the capture of short premium in a vertical. 
But you can also be long premium and neutral premium via verticals as well.


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## investedz

mazzatelli1000 said:


> Since mention of credit spreads, the natural default is to assume the otm configuration where one is short premium - i.e. Time decay works for the spread.
> 
> E.g. XYZ = 50
> Bear call spread 55/60
> 
> If the stock falls, profit results.
> If the stock stays still, profit results.
> If the stock increases and stays below 55, it still wins.
> 
> I imagine these are the reasons for cutz and Ageo responses, that something needs to go against you to lose.
> 
> But consider the Bear put spread 55/60 [itm]
> 
> If the stock falls, profit will result [deeper itm it goes]
> If the stock stays still, profit results [itm]
> If the stock increases and stays below 55, it also wins. [the gain on the 60 put > loss on short 55 put]
> 
> This also needs something to go against you [i.e. large upward move like the otm credit equivalent], but it is a debit spread. The less time the better, just like the bear call spread.
> 
> Is there a reason why the credit received still better?




It depends when you use the spreads. If you compare the debit and the credit that was held on until options expiry date, you will profit more from the credit spread. 

If the share price at expiry is 1c less than $55:

Profit from credit trade is total premium received when spread was sold.
Profit from debit trade is 1c...


The other reason is (takes out the text book  that an options premium consists of 2 things, intrinsic and time value. The intrinsic is the real value of the option, the excess premium is time value. The time value loses value exponentially as the option gets closer to expiry.

In debits, the value of the options get melted away.
In credits, the value that melts away is '_locked_' in profit.

So in a situation that the share price goes above $55, and the trader decides to pull out of his losing trade before expiry:
The debit will be sold at a cheaper price
The credit spread will be bought back at a more expensive price _MINUS_ the melted away value.

If you do the math, the loss on the credit ends up being less than the loss of the debit.

The force that goes against you in debit trades is time. The force that becomes your wings in credit trades is time.

Time is the premium collector.


Now back to wayneL's question regarding greeks, 



wayneL said:


> A call IS a put. A put IS a call.




Imagine your own personal characteristics, eg like strength, agility, intelligence, etc. Similar to this option has greeks to represent their characteristics (theta=time, vega=volatility, delta=option value per underlying movement, etc). You know you are strong in certain situations, and weak at other situations. Same applies to options (puts are strong for bear market, but not bull market).

If the greek number is positive, then the trade will be profitable if what the greek represents is positive.

eg, if a delta of the trade is positive, the trade will be profitable it the share price movement is positive.

If the theta of the trade is negative, (eg, naked call, or naked put), the trade will be profitable the less time there is left to expiration.

If the delta is zero (eg, delta neutral), the trade will be profitable if the share price movement is neutral.

Now with any combination of options/shares, simple math would be to sum up the greeks from each option. So you add up all deltas to get the delta of the combined entity, add all thetas to get the theta of the combined option entity, etc. (Wayne please correct me on this if I'm wrong)

Eg, credit Bear call spread, has combined theta that is negative...

So in essence, what the synthetic calls and puts are about, is trying to create a combination of options and shares (or possibly any instrument), to create a combined entity that has the same greeks as a call or put.

A call can become a put and a put can become a call.


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## mazzatelli1000

wayneL said:


> *Clue ==>> premium collection doesn't necessarily involve a credit. *:casanova:




Take heed the words of a master!!



investedz said:


> It depends when you use the spreads. If you compare the debit and the credit that was held on until options expiry date, you will profit more from the credit spread.
> 
> If the share price at expiry is 1c less than $55:
> 
> Profit from credit trade is total premium received when spread was sold.
> Profit from debit trade is 1c...




You may want to check your calculations

Since the bear put and bear call spread at the same strikes are synthetically the same, the risk should be the same, otherwise arbs.

E.g. using arbitrary prices
1) The bear call spread receives $1
Total risk is $5 [width of the spread] less $1 = $4

2) The bear put spread costs $4
Total risk is $4

If spot trades below $55 on expiry by one cent:

1) The credit spread as you say expires worthless and you keep the $1 credit received

2) The debit spread will be ITM
The short 55 put is ITM by 1 cent [$55 - $54.99]- so represents 1 cent loss
The long 60 put is ITM by $5.01 [$60 - $54.99]
Total gain of the trade is $5.01 - $0.01 = $5
Less the debit of the trade = $5 - $4 = $1

Oh no!! This is the same profit as the credit spread



investedz said:


> In debits, the value of the options get melted away.
> In credits, the value that melts away is '_locked_' in profit.
> 
> So in a situation that the share price goes above $55, and the trader decides to pull out of his losing trade before expiry:
> The debit will be sold at a cheaper price
> The credit spread will be bought back at a more expensive price _MINUS_ the melted away value.
> 
> The force that goes against you in debit trades is time. The force that becomes your wings in credit trades is time.
> 
> Time is the premium collector.




In my post, I showed that the debit spread also benefits from time. The less days to expiration so that the spot cannot trade up and threaten the short strike [55 put] the better. You can confirm this by observing theta for the debit spread above.

The myth continues about credit spreads. Like sirens, luring sailors in before dashing them against the rocks 

This is why I have quoted Wayne's post up the top. 
Premium collection does involve time, but so far there have only been descriptions of short premium [involving otm configuration] and a generic assumption that all debit spreads have time working against them.



peter2 said:


> Premium collection is defined by the total theta of the trade. Theta or time decay is largest in the at-the-money options, so to collect premium one must be short (sell) the at-the-money option or the option (in the spread) that is closest to at-the-money.



As stated before this is a short premium [time decay on your side] trade. 
The debate whether to short atm/otm is another debate in itself


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## wayneL

To add to Mazza's post, here's another handy thing to know. The Greeks Theta, Gamma and Vega are strike specific. That means that at a particular strike the above three Greeks will have a value that is irrespective of whether the option is a put or a call. 

eg If the _x_ strike gamma is _y_, the gamma for _x_ strike call and the _x_ strike put is the same, viz, both the call and the put gamma will be _y_.

That means that with vertical spreads, it does not matter whether it is a debit call vertical or the corresponding credit put vertical, theta (and gamma and vega) will be the same in each.

Though the individual values will be different, the sum of deltas will also be identical, because of the mathematical relationship between puts and calls.


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## Ageo

Wayne you ever done video tutorials on options?

Sometimes reading advanced options can be confusing like hell.

All good stuff thow


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## mazzatelli1000

An alternative credit spread:

ABC = $20

Bull put spread 25/30
- Short $30 put
- Long $25 put

ABC *needs* to move above $30 to be profitable!!

The synthetic alternative is the Bull Call spread 25/30
The short call [$30] is away from the money

Is the credit spread still good??


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## cutz

Have to agree with you there mazza,

Bull puts/Bear call credit spreads aren't better then equivalent debit spreads, but I’m still convinced appropriate credit spreads are the preferred option for trading options.

For example say a short butterfly, ABC = $35, IV ~ 20%, 30 calendar days out, 33/35/37. Looks more attractive than its opposite side, what do you reckon?

BTW, I haven’t tried this yet, still backspreading. ( I’m not even sure if technically I’m backspreading I just like holding more longs than shorts as a form of disaster prevention )


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## mazzatelli1000

cutz said:


> For example say a short butterfly, ABC = $35, IV ~ 20%, 30 calendar days out, 33/35/37. Looks more attractive than its opposite side, what do you reckon?




LOL, why won't this question die!! 
It seems there is clouded judgement surrounding the synthetic equivalent when a credit is involved. 

I am referring to the synthetic equivalent that results in a credit.
You are referring to the OPPOSITE offsetting position

An example involving a long butterfly would be where assuming the same strikes 30/40/50:
1) The entire butterfly is composed of puts or calls [debit: +30c, - 40c, +50c - 1:2:1 ] versus;
2) The butterfly which is like an iron condor - short the bull put and bear call, with the short strikes the same [credit: +30p, - 40p, - 40c, +50c - 1:1:1:1]

The question is then is the fly for a credit better than the debit fly that has the exact same payoff?


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## cutz

mazzatelli1000 said:


> LOL, why won't this question die!!
> It seems there is clouded judgement surrounding the synthetic equivalent when a credit is involved.




Sorry mazza,

I gotcha now, yep debit verses credit, same payoff, can't see the advantage of one over the other.

Perhaps the thought of a couple of grand in the hand today is more attractive than waiting around, ( assuming everything goes according to plan).


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## wayneL

Cutz,

There is really no inherently better/best strategy, only strategies that best suit your specific view... even if your view is specifically non-specific.

The short/long butterfly (do you mean the natural or iron?) question depends on your forward view of price movement and volatility... and what you are trying to achieve...oh, and management - if/how you intend to metamorphose the spread as necessary. Is the stock going to boogy in the next month, or sit there like a bank of faded geraniums?

Back to the vertical discussion and synthetics - there is a very good reason for considering synthetic equivalents:

1/ You want to pick the cheapest strategy in terms of contest risk, you want the spread with the tightest bid/ask and the least number of commissions. 

2/ There may be assignment risks that are higher in one spread than the other, e.g. cost of carry issues and upcoming dividends. For instance, if you are DITM with a short call as one leg, and the stock is going ex-dividend, you are almost certain to be assigned early on that leg. Avoid.

So the credit spread may not be better or worse on the face of it, but specific factors in specific circumstances may make one better than the other in practice.



			
				Ageo said:
			
		

> Wayne you ever done video tutorials on options?
> 
> Sometimes reading advanced options can be confusing like hell.




I hear you, but no haven't done videos. Might be something I do in the future though.


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## investedz

mazzatelli1000 said:


> You may want to check your calculations
> 
> Since the bear put and bear call spread at the same strikes are synthetically the same, the risk should be the same, otherwise arbs.
> 
> E.g. using arbitrary prices
> 1) The bear call spread receives $1
> Total risk is $5 [width of the spread] less $1 = $4
> 
> 2) The bear put spread costs $4
> Total risk is $4
> 
> If spot trades below $55 on expiry by one cent:
> 
> 1) The credit spread as you say expires worthless and you keep the $1 credit received
> 
> 2) The debit spread will be ITM
> The short 55 put is ITM by 1 cent [$55 - $54.99]- so represents 1 cent loss
> The long 60 put is ITM by $5.01 [$60 - $54.99]
> Total gain of the trade is $5.01 - $0.01 = $5
> Less the debit of the trade = $5 - $4 = $1
> 
> Oh no!! This is the same profit as the credit spread




Ahhh yes you are correct!  I got mixed up with the bull put spread( buy 55put sell 60 put). That's what you get for staying up too late.

The more I look at comparing the two. The more they look like twins.



mazzatelli1000 said:


> LOL, why won't this question die!!
> 
> The question is then is the fly for a credit better than the debit fly that has the exact same payoff?




I guess the answer is away from the fundamental payoff at expiry and more the market pricing of the underlying options, during entry into the trade. Eg if the ask of the option looks better than the bid of the option then you would credit the trade, and vice versa....


----------



## wayneL

cutz said:


> Sorry mazza,
> 
> I gotcha now, yep debit verses credit, same payoff, can't see the advantage of one over the other.
> 
> Perhaps the thought of a couple of grand in the hand today is more attractive than waiting around, ( assuming everything goes according to plan).




Ahh! Sorry picked up the wrong concept. I thought you were comparing, say:

+1 ITM call
-2 ATM calls
+1 OTM call 

versus

-1 ITM call
+2 ATM calls
-1 OTM call 

i.e. short gamma versus long gamma


----------



## cutz

Hi Wayne,

Yep i was comparing both sides of a natural butterfly but i've just realized that mazza was discussing synthetic equivalents ( credit spread verses its synthetic debit equivalent ).


----------



## mazzatelli1000

cutz said:


> Sorry mazza,
> 
> Perhaps the thought of a couple of grand in the hand today is more attractive than waiting around, ( assuming everything goes according to plan).



LOL I was only joking around
You have to put up margin though, but if it makes you feel better 



wayneL said:


> I hear you, but no haven't done videos. Might be something I do in the future though.




Can you present it like Ron Ianeri? I swear sometimes I think his voice is going to crack LOL


----------



## wayneL

mazzatelli1000 said:


> Can you present it like Ron Ianeri? I swear sometimes I think his voice is going to crack LOL




Haha! 

I like Ron, he seems to be one of the better presenters out there.

Unfortunately, I'm more of a baritone.... and my countertenor voice disappeared way back in the mists of time, a victim of the amber nectar I'm afraid.


----------



## wayneL

Here's one:

There is a seminar clown who terms covered calls as "renting shares".

Why is this a misrepresentation of covered calls?


----------



## Tradesurfer

seminar clowns...funny

an owner of a home who rents to someone still has the opportunity for unlimited upside potential of the underlying asset.

or another way to say it- if homeowner A bought for $200k and rents out at $1000 a month. It would only be like selling a covered call if the renter had the right to buy the house at $300k for example even if the house was now selling for $500k.

something like that.

both the cvd writer and a homeowner does have the downside to zero on the underlying assett so in that regard....

cheers

Derek


----------



## cutz

wayneL said:


> Here's one:
> 
> There is a seminar clown who terms covered calls as "renting shares".
> 
> Why is this a misrepresentation of covered calls?




I've just thought of a theory on that,

May be something to make option trading (for lack of a better term) appeal to the traditional property investor type, baby boomer.

I don't know how these clowns operate but i reckon they may try to draw parallels between receiving rent and receiving premium.


----------



## Tradesurfer

I do seminars but hopefully not a clown 

since Vega was mentioned before though- thought I'd post a quick chart on RIMM Implied Vol.

quick vega lesson and excuse my ignorance if this was already mentioned..but say your Vega is .05

If implied volatility went from 40%- 60%- thats 20% difference. For each 1% in implied vol take the vega amount times that to understand what the change to options premiums would be.

So 20 (IV moving 20%) x .05= $1.00

So if implied vol went down 20% then you'd expect to see a $1.00 drop in the options premium and vice versa if it went higher.

20% can easily happen especially around earnings.

cheers

Derek


----------



## wayneL

Tradesurfer said:


> seminar clowns...funny
> 
> an owner of a home who rents to someone still has the opportunity for unlimited upside potential of the underlying asset.
> 
> or another way to say it- if homeowner A bought for $200k and rents out at $1000 a month. It would only be like selling a covered call if the renter had the right to buy the house at $300k for example even if the house was now selling for $500k.
> 
> something like that.
> 
> both the cvd writer and a homeowner does have the downside to zero on the underlying assett so in that regard....
> 
> cheers
> 
> Derek



Yes partly.

–verb (used with object)
6.	to grant the possession and enjoyment of (property, machinery, etc.) in return for the payment of rent from the tenant or lessee. (often fol. by out).
7.	to take and hold (property, machinery, etc.) in return for the payment of rent to the landlord or owner.

At no time does possession or enjoymnet of the shares be "granted" to the call buyer during the term of the option contract. 

The call seller grants the right to buy the shares to the buyer, but the distinction is in timing. Possession is only transferred on termination of the contract as opposed to during the contract as is with renting.

As pointed out by Derek, the option writer is entering into a contract obligating him to sell share at a set price, if called. The call seller receives a fee (the premium) to compensate for opportunity risk... and real risk of loss if the call is not covered.

Looking at the other side, in no way is the call buyer renting shares from the call seller, simply paying a one off premium fro the right to buy.

A more accurate situation which could be called renting shares, is in the process of short selling. Holders of shares "lend" shares to brokers to be short sold in exchange for a fee, _ipso facto_ renting them out. Nothing to do with options.


----------



## wayneL

cutz said:


> I've just thought of a theory on that,
> 
> May be something to make option trading (for lack of a better term) appeal to the traditional property investor type, baby boomer.
> 
> I don't know how these clowns operate but i reckon they may try to draw parallels between receiving rent and receiving premium.




Yep, that's exactly the reason cutz, but technically incorrect and fosters an incorrect understanding and attitude towards trading CCs.


----------



## wayneL

Tradesurfer said:


> I do seminars but hopefully not a clown




Derek,

You have to boast of 45,700% gains and have pictures of fancy cars, tropical scenes, and middle aged couples looking like they're having the time of their life in front of a computer screen on your website to qualify as a clown.

No cigar mate.


----------



## Tradesurfer

got a bonus vocabulary lesson 

cheers

Derek


----------



## Tradesurfer

> Derek,
> 
> You have to boast of 45,700% gains and have pictures of fancy cars, tropical scenes, and middle aged couples looking like they're having the time of their life in front of a computer screen on your website to qualify as a clown.
> 
> No cigar mate.




I know. Always seems like the students are riding on speedboats out on the ocean that they just bought from the profits.

Unfortunately I get a lot of fowks who have already been through the ringer on those. I just wouldn't be comfortable ever representing myself like that.

but it is kinda funny how you describe it. Funny Stuff!!


----------



## moreld

Great thread.
I know Cartman's question got a couple replies, but I'd like to throw in my 2 cents. "_it actually confuses me why so many "long term" investors go out and buy BHP or CBA or whatever when they could write put options and collect the monthly premium and own the stock at a lower cost base if exercised ----- using this strategy at cycle bottoms seems a common sense/simplistic way to use options/buy stocks_" 

Whenever you sell a Put you are taking on both downside risk and "risking" upside gains. You do that for a small premium, an insurance payment from someone who wants to keep the upside potential and remove the downside risk.

While it seems like a great strategy to sell Puts at market bottoms, or let's say low market valuations to avoid market timing discussions, it is not necessarily a great strategy. If your market prediction is good then you should do better by buying calls. Especially if you pay up, and buy enough time and buy ITM to avoid the lottery ticket style of many options buyers. 

Saying that, in general I sell options. The most important part of options is exactly the same as for all investing, find a strategy that matches your personality.

Like buying calls if you buy the stock you are buying the upside potential, but without the time expiration or extra cost. While you fore sake the inbuilt put in the call and leverage.


----------



## Tradesurfer

A lot of the opportunities aren't around any longer but I did wind up doing some synthetic long positions at so called bottoms.

Basically selling puts and buying calls. But the interesting thing was that the puts had double the implied volatility of the calls so essentially I more than paid for the call and then some because of it.

I hear what your saying though on just selling puts. You do well for that month but yeah not much beyond the premium in upside. Although the premiums may have been inflated.


----------



## wayneL

Tradesurfer said:


> Basically selling puts and buying calls. But the interesting thing was that the puts had double the implied volatility of the calls so essentially I more than paid for the call and then some because of it.




If so, you could have gone for the risk free arb. i.e. the risk reversal

long call + short (corresponding) put + short stock = locked position

Guaranteed profit if puts > calls in the put/call parity equation.


----------



## wayneL

OK here's the next one:

80% of options expire worthless.

True or false?

Therefore it is better to be a seller than a buyer.

True or false?


----------



## investedz

wayneL said:


> OK here's the next one:
> 
> 80% of options expire worthless.
> 
> True or false?
> 
> Therefore it is better to be a seller than a buyer.
> 
> True or false?




I have seen those 2 statements somewhere before, they seem to be catchy phrases when put together, but yes they are ambiguous. 

The 80% probably refers to the total amount of options of all strikes of the month that expire out of the money. 

Though that also wouldn't make sense because all call (put) options with strikes below (above) the share price, would be ITM... which is about half the options...

Hmmm what is the 80% figure?


I see what you and Mazza are getting at though:

XYZ shares @ $50 on expiry date

XYZ $60 bought calls expire worthless (loss)
XYZ $60 sold puts expire ITM (loss)

XYZ $40 bought calls expire ITM (win)
XYZ $40 sold puts expire worthless (win)


----------



## investedz

Ok after a bit of thinking, the 80% would likely be the total open interest of options transacted that were OTM.

So statement 1 could be true.

However it does not "therefore" mean Statement 2 is true.


----------



## cutz

The 80% bit, definitely false, me personally close the majority of positions prior  to expiry, the only positions that expire worthless are the long OTM leftover wings that won't cover brokerage if closed.

Better seller than buyer ?, that's a tricky one, i've always been under the impression that it's better to be taking in credit than the other way round, that question has always been niggling at me, i've never done a debit spread, what do you guys reckon.


----------



## wayneL

Yes the 80% bit is false, despite being repeated almost everywhere you read about options.

According to the Chicago Board Options Exchange:


Typically only about 30% of options expire worthless in each monthly cycle. 
Only about 10% of options are exercised during each monthly cycle, usually in the final week before expiration. 
In fact, about 60% of all options are traded out in the marketplace.

That leaves the buy versus sell argument.


----------



## mazzatelli1000

cutz said:


> Better seller than buyer ?, that's a tricky one, i've always been under the impression that it's better to be taking in credit than the other way round, that question has always been niggling at me, i've never done a debit spread, what do you guys reckon.




I think you are confusing being short gamma with raking in credit.
A long butterfly CAN be a debit spread - don't you like it ??


----------



## cutz

Hi Mazza,

It's OK, i'm always confused,

But i see what you're getting at, a butterfly has a similar payoff to it's credit equivalent, (haven't played around with it much but risk/return may be more attractive in some cases).

The short iron butterfly looks more appealing from the point of view that market swings can be played from the short gamma side, wings acting as natural stops.

What do you guys reckon ?,


----------



## mazzatelli1000

Wayne, I dedicate this to you.
First time I have seen sub leasing analogies!!



> 1.) The Covered Call - Renting Your Stock
> 
> Possibly the most popular options strategy in use by every day investors is the covered call. With this strategy a stock owner may sell someone else the right to their stock. If the stock remains low the original owner maintains ownership. This is an amazingly powerful way to create income on lazy stocks (stocks that just sit around and don’t go anywhere). Depending on exactly which option you sell you can generally create about 10-15% of your stock’s value every month you sell the option. If you manage to do that for 10 months, your original investment would pretty much be recouped and you would be sitting on a stock position with absolutely zero risk and nothing but pure profit (that’s how you get an infinite rate of return!).
> 
> 2.) The Covered Call Improved - Subleasing a Stock
> 
> Okay, so it sounds nice enough that you could rent a stock you own, but what if you’re one of those people who don’t own any stock. Well fortunately we can twist this strategy just a bit to make that possible.
> 
> When you don’t own a house how do you get a place to live? You rent. If you don’t own a stock but you want to use it what can you do? Rent. You could rent a stock from somebody and now you are the rightful possessor for a limited time. During that time period you can do anything you want with that stock. So why not rent it? Or shall I say sub-lease it?
> 
> When you don’t actually own a stock you can still buy the rights to that stock and then turn around and sell someone rights against your rights. Just like renting and sub-leasing. The spread, or difference in price, is your profit. That profit can vary but if you do it right you should be able to generate at least a 20% profit each month - yea that’s right, I said each MONTH.
> 
> 3.) The Calendar Call
> 
> Now I’m going to show you the most powerful way you can combine these strategies. The benefit of owning a stock is you have it right? It’s paid for, you can do whatever you want with it. Well what if you sign a long term rent agreement for that stock? That means you would have the right to own it for a long time. How long? Let’s be simple and say 2 years. Now that you have secured the future price of this stock you can rent it for the next 2 years - every month! As the value of the property (the stock your renting) goes up, your profits will go up in a huge way. In fact it’s so huge I can’t give you a percentage return that you could expect. Depending on how fast you break even, which could occur in a month, everything after that point is pure profit which ultimately becomes infinite.


----------



## mazzatelli1000

cutz said:


> The short iron butterfly looks more appealing from the point of view that market swings can be played from the short gamma side




Sorry, what does this mean??
IMO, it is better to define what bets you want to take in terms of Greek exposures.


----------



## wayneL

mazzatelli1000 said:


> Wayne, I dedicate this to you.
> First time I have seen sub leasing analogies!!




#### me! It's a losing battle. 



> Depending on exactly which option you sell you can generally create about 10-15% of your stock’s value every month you sell the option.




Holy ****! 10-15% with CCs eh? Where do I sign?



> That profit can vary but if you do it right you should be able to generate at least a 20% profit each month - yea that’s right, I said each MONTH.





> In fact it’s so huge I can’t give you a percentage return that you could expect.




I'll see you an infinity and raise you a time warp.


----------



## cutz

mazzatelli1000 said:


> Sorry, what does this mean??
> IMO, it is better to define what bets you want to take in terms of Greek exposures.




Just a thought,

I sort of prefer to trade in and out of the short legs of an IC or wrangle ( assuming things go according to plan, unlike the last few days ), although a long butterfly looks similar, can't grasp  how to do the same.


----------



## mazzatelli1000

cutz said:


> Just a thought,
> 
> I sort of prefer to trade in and out of the short legs of an IC or wrangle ( assuming things go according to plan, unlike the last few days ), although a long butterfly looks similar, can't grasp  how to do the same.




If I am thinking straight, you tend to scalp to the short strikes? E.g. Spot moves away from short call, decent gains, you buy them back. If spot moves up again you short the call again?

Well Wayne's first question in this thread can help you: a call IS a put and a put IS a call - adjust with spot.

Man, I have a tendency to go off topic. 
Just a thought - calendar spreads [short fronth month configuration] are usually debits, and touted as "income generating" strategies - better to buy or sell options if taking in credit is the criteria [since there is no credit version]?


----------



## wayneL

Mazza

I found where you got that article from.

Holy Dooley there enough rant material there for months of blog posts.

The site should be call the mythhub.com

I feel a few rants coming on


----------



## mazzatelli1000

wayneL said:


> The site should be call the mythhub.com




HAHAHA that is awesome, I love it!! 
It has the typical snake oil salesman fingerprints all over it. 
Can't wait to read your blog!!


----------



## cutz

mazzatelli1000 said:


> If I am thinking straight, you tend to scalp to the short strikes? E.g. Spot moves away from short call, decent gains, you buy them back. If spot moves up again you short the call again?
> 
> Well Wayne's first question in this thread can help you: a call IS a put and a put IS a call - adjust with spot.




Hi Mazza,

Yep that's what i do with most positions, can't seem to perfect my timing though but at least I'm playing it safe.

With your suggestion about adjusting with spot i'm starting to look at other markets, ASX is getting a little awkward with it's shorting difficulties and lack of suitable XJO hedging instrument (SPI is too big for minor adjustments), swaying more towards europe.


----------



## mazzatelli1000

Yeah, Europe is much better than Aussie Options market.

Replication is a tedious subject, best to DYOR.
Once upon a time I liked to work with backspreads the way you do, but found myself consistently on the back foot.

Reverted to what I had learnt in QF and found it easier to dynamically hedge and consider static hedges at initiation. 

Each to their own - Good luck


----------



## Grinder

mazzatelli1000 said:


> Reverted to what I had learnt in QF and found it easier to dynamically hedge and consider static hedges at initiation.




Static hedging has proved the difference in my trading, especially in time of high uncertainty (which is just about all the time). Can't seem to get used to dynamic hedging, will need to work on this.


----------



## wayneL

mazzatelli1000 said:


> dynamically hedge



THE secret to consistency in returns IMO. The static hedges merely crash insurance.


----------



## cutz

Grinder said:


> Static hedging has proved the difference in my trading, especially in time of high uncertainty (which is just about all the time). Can't seem to get used to dynamic hedging, will need to work on this.




Yeah same here, although this week i may have a fiddle with SPI contracts, so 1 SPI contact equals  2.5 XJO deltas, i only just figured out that you can adjust the underlying columns in Hoadleys to accept an additional decimal place, ( another derrr moment for me, i assumed it was locked ).

Should be interesting, although i suspect it may not be practical.

I'm eagerly anticipating a book on the subject written by the dude that wrote The black swan so hopefully I don’t do anything silly in the meantime.

BTW Wayne, thanks for the tip on fractional deltas on the other thread.


----------



## mazzatelli1000

cutz said:


> I'm eagerly anticipating a book on the subject written by the dude that wrote The black swan so hopefully I don’t do anything silly in the meantime.




LOL, if you're not highly mathematical, Dynamic Hedging for Vanilla and Exotics will be a headache.

The discussion in that book [concerning vanilla options] is more about adjusting the BSM Greeks to make up for some of its shortcomings
e.g. Modifying delta so it is in discrete format as opposed to the continuous delta and included the effect of elasticity of vol. Adjusting Gamma, for multi period positions etc.

It also touches on some of the higher order Greeks [dgamma, vanna, volga].

Enjoy enjoy!!


----------



## cutz

Yeah,

I suspected it may be the case, probably more than i need to know but from the table of contents it looks interesting.

Should make for some good bedtime reading.

Geez mazza, it seems like you've been through every decent options book under the sun, feel free to throw your top 10 picks my way.


----------



## wayneL

mazzatelli1000 said:


> LOL, if you're not highly mathematical, Dynamic Hedging for Vanilla and Exotics will be a headache.
> 
> The discussion in that book [concerning vanilla options] is more about adjusting the BSM Greeks to make up for some of its shortcomings
> e.g. Modifying delta so it is in discrete format as opposed to the continuous delta and included the effect of elasticity of vol. Adjusting Gamma, for multi period positions etc.
> 
> It also touches on some of the higher order Greeks [dgamma, vanna, volga].
> 
> Enjoy enjoy!!



Doesn't sound like a high priority book for a retail trader.


----------



## mazzatelli1000

LOL cutz

Sometimes I wonder why I chose to be a quant, that book was required reading!! 

To be honest, unless you have a view to trade exotics in the future [binary, barriers] Baird and Cottle is all you need IMO. I know you have read them already.  Other than that, actually trading will be the best teacher.

What exactly are you having trouble with, maybe I can recommend something more specific?



> Doesn't sound like a high priority book for a retail trader.




Yeah I agree


----------



## cutz

Wow mazza a quant, explains why you're always on the ball. 

Actually dynamic hedging ( hence the book ) is what i'm having trouble with.

But as you suggested trading is the best teacher so shortly i'll have a go at some dynamic techniques rather than relying solely on heavy wings, not to say that i haven't been happy with my trading so far, just gotta get comfortable using SPI  futures and other markets, Eurex is what i'm working towards ( decided this yesterday ).


----------



## mazzatelli1000

LOL I can assure you I am one of the sh*ttier ones out there HAHA 

Taleb's book will give you ideas.
I also recommend Cottle's forum, there are some hedges/adjustments that are discussed real time which are useful.

I have successfully derailed this thread as well. 
Sorry Wayne  :hide: 

Controversial topic of the day  
"If HV > IV, options are cheap - buy them
If IV > HV, options are expensive - sell them"
:sleeping:


----------



## wayneL

mazzatelli1000 said:


> LOL I can assure you I am one of the sh*ttier ones out there HAHA
> 
> Taleb's book will give you ideas.
> I also recommend Cottle's forum, there are some hedges/adjustments that are discussed real time which are useful.
> 
> I have successfully derailed this thread as well.
> Sorry Wayne  :hide:
> 
> Controversial topic of the day
> "If HV > IV, options are cheap - buy them
> If IV > HV, options are expensive - sell them"
> :sleeping:




It's all good Mazza. The goal is to help each other. As long as that's happening, let the conversation go where it will. 

Re HV:IV - I like that question, hope we get some good goes at it.


----------



## Grinder

mazzatelli1000 said:


> Controversial topic of the day
> "If HV > IV, options are cheap - buy them
> If IV > HV, options are expensive - sell them"




I don't see it as a hard & fast rule, just another indicator. What really is cheap or expensive? If you look at the VIX it shows options are very low in relation to recent IV levels but could also been considered still relatively high compared with past levels. So would you sell em or buy em?


----------



## wayneL

Grinder said:


> I don't see it as a hard & fast rule, just another indicator. What really is cheap or expensive? If you look at the VIX it shows options are very low in relation to recent IV levels but could also been considered still relatively high compared with past levels. So would you sell em or buy em?




Buy or sell is beside the point. Whether nett long or short theta, do you want to be long or short vega?


----------



## Grinder

wayneL said:


> Buy or sell is beside the point. Whether nett long or short theta, do you want to be long or short vega?




Might be drifting off topic here, but I like short vega plays when my view of IV is high & being close to vega neutral in times like this.


----------



## wayneL

Grinder said:


> Might be drifting off topic here, but I like short vega plays when my view of IV is high & being close to vega neutral in times like this.



Sounds reasonable to me. Punting on vega is certainly a bit more uncertain than usual at the moment.


----------



## Grinder

Wayne, Mazza & Co, maybe someone can throw me a bone with something that was touched on earlier in this thread. 

Iv'e been using static hedging in the form of smaller CTM debit spreads to support my delta neutral ICs as a form of built in insurance. This has worked to somewhat mild success in more volatile times but more often than not has cut a deep wedge out of my profit in calmer times. Alternatively, adjusting positions as I go by rolling, cutting delta & picking up puts/calls at certain strikes has faired well but is not a an exact science to me. 

Whats your take on these 2 methods?


----------



## Tradesurfer

The points earlier about the whole long or short vega/IV reminded me of a couple months ago as I think both of you have pointed out that its not a hard and fast rule. i think put i/v was much higher than call I/V some stocks that let me put on some nice sythetic time long positions. Pretty much financed all of the long call and in many cased collected a credit because of the skew. 

I attached a chart for some discussion of 30 day I/V of puts and calls on the options on the VIX. Now offcourse with a floor of 0, we would naturally see the call I/V higher at lower VIX readings, but in a non scientific study(eyeballing the I/V call/put chart) there is some dicussion to be had about buying calls on the VIX when I/V is a) showing a big gap between, and b) when I/V is spiking. 

Vice versa for when the puts are on top. When Puts reach a highest high in I/V buy puts.

Anyway, check out the chart and wouldn't mind some banter on the subject.

cheers

Derek


----------



## wayneL

Grinder said:


> Wayne, Mazza & Co, maybe someone can throw me a bone with something that was touched on earlier in this thread.
> 
> Iv'e been using static hedging in the form of smaller CTM debit spreads to support my delta neutral ICs as a form of built in insurance. This has worked to somewhat mild success in more volatile times but more often than not has cut a deep wedge out of my profit in calmer times. Alternatively, adjusting positions as I go by rolling, cutting delta & picking up puts/calls at certain strikes has faired well but is not a an exact science to me.
> 
> Whats your take on these 2 methods?




Grinder,

some specific examples would be good, just to make sure we're on the same page.


----------



## wayneL

Tradesurfer said:


> The points earlier about the whole long or short vega/IV reminded me of a couple months ago as I think both of you have pointed out that its not a hard and fast rule. i think put i/v was much higher than call I/V some stocks that let me put on some nice sythetic time long positions. Pretty much financed all of the long call and in many cased collected a credit because of the skew.
> 
> I attached a chart for some discussion of 30 day I/V of puts and calls on the options on the VIX. Now offcourse with a floor of 0, we would naturally see the call I/V higher at lower VIX readings, but in a non scientific study(eyeballing the I/V call/put chart) there is some dicussion to be had about buying calls on the VIX when I/V is a) showing a big gap between, and b) when I/V is spiking.
> 
> Vice versa for when the puts are on top. When Puts reach a highest high in I/V buy puts.
> 
> Anyway, check out the chart and wouldn't mind some banter on the subject.
> 
> cheers
> 
> Derek



Derek

I'm not quite sure what we're looking at there. If it's what it says it is, I see only massive arbitrage opportunity... i.e. never mind buying puts or calls, conversions and reversals with massive guaranteed profits.

Hence, I can't come to grips with what you're showing us. These sorts of things are arbed off well before us retail schmucks even know they're there.


----------



## Tradesurfer

Yeah sorry if it wasn't that clear. So I basically pulled a chart of the options Implied Volatility on the VIX index.

I then set the chart to show me or break apart and show individually what the 30day implied vol is on puts and on calls.

Probably not what you were asking me but figured I'll through in there anyway.

So since the VIX implieds go up when the index gets away from the mean sort of, most options buyers are buying say puts when the VIX is way up and calls when it is very low.

So in this case, rather than the whole IV>HV sell options etc-actually might be a signal to put the options with the highest implied when the implied volatility on that side reaches a new high. Starting to see the VIX settle down and the implied vol on the call side is spiking again and the seperation between put/call IV is or has a large gap again. 

Like I said I have't tested with real data, but food for thought. 

For those worried about IV going down maybe spread the position off. So calld debit right now to be a little more vega neutral.

Just another way to look at VIX rather than buy equities at a new VIX peak or shorting equities at VIX peak lows, buy the VIX options on the Future and using the IV Call/Put graphs to point to which side to take


----------



## Tradesurfer

I was trying to find a chart with the Vix itself also in there with line so we could see what happened to it and how much intrinsic value one might have picked up but if you can look at the chart I posted next to a Vix chart


----------



## Grinder

a couple of hypotheticals will have to do for now. A little tricky to give all possible examples but heres a couple below.

I open up this position below 45 -65 days from expiry for a credit:

SP 400
BTO 10 510 XYZ SEP CALL
STO 10 500 XYZ SEP CALL
STO 10 300 XYZ SEP PUT
BTO 10 290 XYZ SEP PUT

Static hedge might be:(obviously for a debit)
STO 3 480 XYZ AUG CALL
BTO 3 470 XYZ AUG CALL
STO 3 320 XYZ AUG PUT
BTO 3 330 XYZ AUG PUT

or Static hedge might be used to offset short vega:(obviously for a debit)
BTO 2 500 XYZ OCT CALLS
STO 2 490 XYZ SEP CALLS
STO 2 310 XYZ OCT PUTS
BTO 2 300 XYZ SEP PUTS

As opposed to managing the IC position on the go if short strikes are under threat, such as rolling part of the original IC up/down in stages whilst adding single calls/puts to spread the delta around, or maybe even a few debit spreads or calanders to mitigate losses as I go.

Im getting much better as adjusting on the move but still like the added comfort of built in protection.

Suggestions are welcome.


----------



## mazzatelli1000

Tradesurfer said:


> I was trying to find a chart with the Vix itself also in there with line so we could see what happened to it and how much intrinsic value one might have picked up but if you can look at the chart I posted next to a Vix chart




Ah, I see this is implied vol of the VIX options - i.e. vol of vol
I guess if you believe that the VIX is a good indicator of realised vol then you could use this.

But to be honest I am not very familiar with trading the VIX other than looking at the spread between the VIX and S&P500 stat vol.


----------



## mazzatelli1000

Grinder said:


> a couple of hypotheticals will have to do for now. A little tricky to give all possible examples but heres a couple below.
> 
> I open up this position below 45 -65 days from expiry for a credit:
> 
> SP 400
> BTO 10 510 XYZ SEP CALL
> STO 10 500 XYZ SEP CALL
> STO 10 300 XYZ SEP PUT
> BTO 10 290 XYZ SEP PUT
> 
> Static hedge might be:(obviously for a debit)
> STO 3 480 XYZ AUG CALL
> BTO 3 470 XYZ AUG CALL
> STO 3 320 XYZ AUG PUT
> BTO 3 330 XYZ AUG PUT
> 
> or Static hedge might be used to offset short vega:(obviously for a debit)
> BTO 2 500 XYZ OCT CALLS
> STO 2 490 XYZ SEP CALLS
> STO 2 310 XYZ OCT PUTS
> BTO 2 300 XYZ SEP PUTS
> 
> As opposed to managing the IC position on the go if short strikes are under threat, such as rolling part of the original IC up/down in stages whilst adding single calls/puts to spread the delta around, or maybe even a few debit spreads or calanders to mitigate losses as I go.
> 
> Im getting much better as adjusting on the move but still like the added comfort of built in protection.
> 
> Suggestions are welcome.




It looks like you're building a nuclear bomb shelter 
IMO, you seem heavily overhedged.

Dissection is messy - you have long and short calendars and various strikes [290,300,500,510] and a front month condor from 300-500. A large move would still yield some heavy losses.
What is the usual R:R on these trades [if you don't mind me asking]

I'd imagine adjustments are made based on looking at the risk graph?
Personally I would decline to have shorts that far OTM.
BTW if it ain't broke, don't fix it


----------



## Grinder

I adhere to the 'if it ain't broke, don't fix' philospohy', but am always looking at more efficient ways to go about doing things. Take no notice of the actual strikes, they are all ficticious. Thought I'd throw up a replica of an IC with the debit & calander set ups just to explain what I'm thinking.

So back to.. am tossing up between static hedging & just adjusting the IC as I go, difficult to explain as it all depends on my view at the time & what the market throws at me as to how I would adjust. Suppose all I'm after is some feedback on whether other traders go with built in protection or adjusting during play?  



mazzatelli1000 said:


> It looks like you're building a nuclear bomb shelter
> IMO, you seem heavily overhedged.




LOL Mazza, like to play on the safer side, but is tends to be costly.


----------



## cutz

mazzatelli1000 said:


> Controversial topic of the day
> "If HV > IV, options are cheap - buy them
> If IV > HV, options are expensive - sell them"
> :sleeping:




I tend to ignore HV, perhaps at my peril, rely only on IV where it's been and where it's at.


----------



## wayneL

Grinder said:


> I adhere to the 'if it ain't broke, don't fix' philospohy', but am always looking at more efficient ways to go about doing things. Take no notice of the actual strikes, they are all ficticious. Thought I'd throw up a replica of an IC with the debit & calander set ups just to explain what I'm thinking.
> 
> So back to.. am tossing up between static hedging & just adjusting the IC as I go, difficult to explain as it all depends on my view at the time & what the market throws at me as to how I would adjust. Suppose all I'm after is some feedback on whether other traders go with built in protection or adjusting during play?
> 
> 
> 
> LOL Mazza, like to play on the safer side, but is tends to be costly.



Well my approach with ICs etc is this.

Agree with Mazza there. For me, messy and still risk if the market starts to boogie.

If there is some very clear statistical probabilities, not just probs based on volatility, and I can get premium for the strike, I'll write one side of the IC large and add the other side to neutralize delta if I feel I need to.

Otherwise I'll write a low probability IC (perhaps starting with an Iron Butterfly and add more IBs to morph to the IC) and delta hedge OFTEN as I go along. The thing with delta hedging short gamma is that you lock in losses, (the reverse of long gamma scalping), so I'd prefer to pay commissions than pay for delta. 

I might start with, or add some double diagonals or calendars for the vega if necessary.

The end payoff can be substantially different to what I started with.

That's how I prefer to do it.


----------



## Grinder

wayneL said:


> Well my approach with ICs etc is this.
> 
> Agree with Mazza there. For me, messy and still risk if the market starts to boogie.
> 
> If there is some very clear statistical probabilities, not just probs based on volatility, and I can get premium for the strike, I'll write one side of the IC large and add the other side to neutralize delta if I feel I need to.




Thanks heaps Wayne, always nice to know how others go about it. 

I mostly do high prob ICs & always look to adjust way before any pain sets in, this usually takes the form of adding deltas in the form of calanders or debit spreads. 

Your approach of writing one side then hedging if need be with the other is what I tried doing awhile back, however I could never get it right & ended up chasing & defending to no avail. Thought it might have been that I can't pick direction or my timming was off so I turned to putting on ICs as a whole then managing them as 2 seperate trades, this has served me alittle better. If the side you put on went against you relatively quickly, I figure neutralizing delta with the other side would do little to assist. What would you do in this scenario?



wayneL said:


> Otherwise I'll write a low probability IC (perhaps starting with an Iron Butterfly and add more IBs to morph to the IC) and delta hedge OFTEN as I go along. The thing with delta hedging short gamma is that you lock in losses, (the reverse of long gamma scalping), so I'd prefer to pay commissions than pay for delta.
> 
> I might start with, or add some double diagonals or calendars for the vega if necessary.
> 
> The end payoff can be substantially different to what I started with.
> 
> That's how I prefer to do it.




I read up on how Cottle likes to play it with the IBs, this has never really grabbed me, mainly due to the constant adjusting. Will look into again as i can see how it mitigaates loss whilst locking in profits.


----------



## mazzatelli1000

Grinder said:


> I adhere to the 'if it ain't broke, don't fix' philospohy', but am always looking at more efficient ways to go about doing things. Take no notice of the actual strikes, they are all ficticious. Thought I'd throw up a replica of an IC with the debit & calander set ups just to explain what I'm thinking.
> 
> So back to.. am tossing up between static hedging & just adjusting the IC as I go, difficult to explain as it all depends on my view at the time & what the market throws at me as to how I would adjust. Suppose all I'm after is some feedback on whether other traders go with built in protection or adjusting during play?




Maybe some definitions will help
Static replication is to help minimize dynamic hedging costs and risks.
So for the IC, the wings are the static hedge as it offsets partially all of the risk of the short strangle. What remains is dynamically hedged. 
In your example there are even more static hedges which reduces the bet you are taking - hence the cost.

My approach is that I will have a view on vol or direction - always defined at the beginning of the trade
e.g. Short Vega.
So be long the butterfly at neutrality
When vol declines are in my favour I will either 
1) offset as it was a binary vol bet
2) if I believe the spot will be choppy - offset enough so the remaining trade is a punt or will tighten the static replication [wings] to lock in profits.

If the vol bet goes wrong I quickly offset and reallocate to another trade. No adjusting to defend losses and no alteration of my intial view of vol/direction [I guess I have faith in my models]. 

I begin to delta hedge the remaining position with spot 2 weeks before expiry, but not as much in the last week as delta accumulates
While this is happening I usually have a basket of flys, which are hedged with an index straddle [correlation matrix] or index futures.

So my approach is to hedge the entire book as a primary concern, the individual position secondary


----------



## mazzatelli1000

Grinder said:


> I mostly do high prob ICs & always look to adjust way before any pain sets in, this usually takes the form of adding deltas in the form of calanders or debit spreads.




My suggestion would have been to not trade wide IC's because IMO they are difficult to hedge when things move against you [I am not a fan of the R:R], but it seemed to be what your comfortable with hence "if it ain't broke, don't fix it" comment.

I have seen suggestions of adding wings while its moving against the IC, but most place shorts > 1 sigma from neutrality, it is highly unlikely the spot will spike even further. 
And the market gods tend to like moving the underlying against you near expiration, leaving little time for subsequent adjustments to have a chance to come into fruition 

Maybe it was just my personal experience though


----------



## mazzatelli1000

cutz said:


> I tend to ignore HV, perhaps at my peril, rely only on IV .




Don't ignore HIV "where it's been and where it's at"


----------



## wayneL

Grinder said:


> Your approach of writing one side then hedging if need be with the other is what I tried doing awhile back, however I could never get it right & ended up chasing & defending to no avail.




I just want to stress that I only write one side if there is a statistical reason to write one side and not the other. This is reasonably rare with indices and more likely with commods. I am far more likely to enter flies or condors straight off the bat and send in more flies or verticals to shift the goalposts as needed.

This also depends on proximity to expiry.

Mazza's point of using spot to hedge in the last couple weeks is a great idea. At least during market hours. I'll hedge with spot during the day and adjust EOD.

FWIW


----------



## Grinder

mazzatelli1000 said:


> What remains is dynamically hedged.
> In your example there are even more static hedges which reduces the bet you are taking - hence the cost.




Thanks guys, alot of food for thought here. Will need to go back & familiarize myself with disection before venturing into IBs, but like the possibilities presented. I tend to be overhedged most of the time, suppose i'ts just a comfort thing.


----------



## cutz

Hi Guys,

Here's one for today, " Shorting premium is a way that many derivatives traders consistently make money"

I don't really consider it to be controversial but I'll be interested to find out if this is how you option enthusiasts play it.

I kept the quote in it's original form but my interpretation is "the only way".


----------



## mazzatelli1000

cutz said:


> Hi Guys,
> 
> Here's one for today, " Shorting premium is a way that many derivatives traders consistently make money"
> 
> I don't really consider it to be controversial but I'll be interested to find out if this is how you option enthusiasts play it.
> 
> I kept the quote in it's original form but my interpretation is "the only way".




Yeah baby, qualify for portfolio margining and short all that naked premium!!!
Looks like a Charles Cottle quote

I tend to be short gamma more than long.
Not fussed about being long/short delta or vega.

But I think the general interpretation of short premium is to sell options and wait to collect your money i.e. positive theta trading?


----------



## wayneL

cutz said:


> Hi Guys,
> 
> Here's one for today, " Shorting premium is a way that many derivatives traders consistently make money"
> 
> I don't really consider it to be controversial but I'll be interested to find out if this is how you option enthusiasts play it.
> 
> I kept the quote in it's original form but my interpretation is "the only way".




I see two types of options education/newsletter vendors.

1/ The guys that seem genuine

2/ Hypesters

Type one tend to concentrate on market neutral strategies mainly, with appropriate uses for other strategies as well.

Type two on OTM long puts and calls and/or credit spreads.

Though I've seen type one promote credit spread, but a lot more responsibly than say the type of w@nkers I've been writing about on my blog.

Type one are after long term repeat sales. Type two after $3 -5k... take the money and run.

It kind of says something to me.

My view, in general terms, is that long premium is directional and speculative... trying to hit homers. Short premium for making a consistent income.

This is not to say long premium dudes can't make money, but short premium dudes probably are more consistent.

OK that's my sweeping generalizations.


----------



## cutz

Thanks guys for allowing a peek into your style,

That's the zone i prefer to be in, short gamma overall but limited risk, although at the moment I'm biased to the downside and long vega, constantly anticipating a massive correction that ain't happening, gotta stop jumping at shadows.

Mazza must agree with you there, the original statement can easily be misinterpreted and used by spin artists as Wayne has pointed out, in fact one of the first books i ever read on options talked about going naked because hedging cuts into profits/90% of option expire worthless ect. ect. i remember thinking at the time that this must be the way to go. 

Makes me cringe now.


----------



## Grinder

cutz said:


> That's the zone i prefer to be in, short gamma overall but limited risk, although at the moment I'm biased to the downside and long vega, constantly anticipating a massive correction that ain't happening, gotta stop jumping at shadows.




know what ya mean. Banked up on DDs waiting for the vega tsunami now. Sure enough it won't come, or at least won't come when I want it to.  



wayneL said:


> I am far more likely to enter flies or condors straight off the bat and send in more flies or verticals to shift the goalposts as needed.




Now this is something thats worked for me, setting up my condors & placing mini debit spreads like claymores here & their to keep me in the game.



mazzatelli1000 said:


> I have seen suggestions of adding wings while its moving against the IC, but most place shorts > 1 sigma from neutrality, it is highly unlikely the spot will spike even further.
> And the market gods tend to like moving the underlying against you near expiration, leaving little time for subsequent adjustments to have a chance to come into fruition




I like to manage my ICs alittle different to others, don't like playing too close to the fire so I'm usually out with less than a month till detonation. Adding extra wings on the move never offered me much, wacking em on at inception proved more useful. Once it's game on their managed seperately, maybe over managed alot of the time but it's a work in progress. 

Sorry for cutting into the discussion of the day, perhaps I should put in an IC thread. as you were.


----------



## mazzatelli1000

Grinder said:


> Now this is something thats worked for me, setting up my condors & placing mini debit spreads like claymores here & their to keep me in the game.




I am making the assumption that you aren't very confident with your directional abilities, hence the wide IC's, so how do you fare when placing these debit spreads and wings as you are taking a directional punt?




> I like to manage my ICs alittle different to others, don't like playing too close to the fire so I'm usually out with less than a month till detonation. Adding extra wings on the move never offered me much, wacking em on at inception proved more useful. Once it's game on their managed seperately, maybe over managed alot of the time but it's a work in progress.



Yeah, can you imagine doing all those static hedges in the Oz market? You would get killed on -edge alone!!


----------



## Grinder

mazzatelli1000 said:


> I am making the assumption that you aren't very confident with your directional abilities, hence the wide IC's, so how do you fare when placing these debit spreads and wings as you are taking a directional punt?




Correct! Can't pick for you know what. I fare better than doing nothing, mostly place em front month a few strikes in from the short strike of the losing side of my IC. If the index keeps running towards the losing side it reduces the bleeding enough to allow for a quick retreat & take whatever profits I get from the winning side. If the index flips & goes back the other way than I take it off for a small loss & continue to play out the IC. ce la vie. 

any suggestions?




mazzatelli1000 said:


> Yeah, can you imagine doing all those static hedges in the Oz market? You would get killed on -edge alone!!




Yep can imagine, got wounded many times. Glad to be hiding out in the US


----------



## mazzatelli1000

Grinder said:


> Correct! Can't pick for you know what. I fare better than doing nothing, mostly place em front month a few strikes in from the short strike of the losing side of my IC. If the index keeps running towards the losing side it reduces the bleeding enough to allow for a quick retreat & take whatever profits I get from the winning side. If the index flips & goes back the other way than I take it off for a small loss & continue to play out the IC. ce la vie.
> 
> any suggestions?




Wayne has been doing these longer than all of us put together - adding and liquidating flys as he mentioned would probably be the best.

Maybe reduce the debit at risk whenever possible - it is much easier on the mind to hedge and trade when you have reduced your risk IMO - for reference look at Cottles "Miracle in Aug - GOOG" in the book.


----------



## Grinder

mazzatelli1000 said:


> Cottles "Miracle in Aug - GOOG" in the book.




Where can I find this mazza?

btw love the new avatar  would be even better if it could change maybe every month or so, we would'nt want to get bored


----------



## mazzatelli1000

Grinder said:


> Where can I find this mazza?
> 
> btw love the new avatar  would be even better if it could change maybe every month or so, we would'nt want to get bored




Hey G, 
It's in the Butterfly dissection - Chapter 6
I have the archive somewhere of his discussion with his students if you would like it.

Re: the avatar - yeah the plan is to have a new avatar girl for each month.


----------



## cutz

Hi Guys,

I have another topic for today,

Option trading is a zero sum game, if the market makers are making money, who's losing money ?


----------



## Grinder

cutz said:


> Hi Guys,
> 
> I have another topic for today,
> 
> Option trading is a zero sum game, if the market makers are making money, who's losing money ?




everyone & noone who knows whos on the other end of what, someones trash is anothers treasure.



mazzatelli1000 said:


> Hey G,
> It's in the Butterfly dissection - Chapter 6
> I have the archive somewhere of his discussion with his students if you would like it.
> 
> Re: the avatar - yeah the plan is to have a new avatar girl for each month.




no need just found it, thanks.


----------



## wayneL

cutz said:


> Hi Guys,
> 
> I have another topic for today,
> 
> Option trading is a zero sum game, if the market makers are making money, who's losing money ?




I have some views on this,  but will wait to see what others say.


----------



## cutz

No bites on this one Wayne,

Looks like you may have to fill us in.


----------



## skyQuake

ok i'll bite.

The retail guys paying the spread lose money. After punters jump in MMs can usually hedge with existing options/squaring with other mms/physical market.

Seems like theres a bit more to it though?


----------



## jackson8

cutz said:


> Hi Guys,
> 
> I have another topic for today,
> 
> Option trading is a zero sum game, if the market makers are making money, who's losing money ?




hi cutz
an article i have just read gives this definition to zero sum trading

Zero-sum Game
: A situation where one person's gains matches another person's losses.

Definition: Zero-sum games involve situations in which one person's gains are the result of another person's losses.  No wealth is created (or destroyed) in these games.

Examples: Examples of zero-sum games include options and futures.  If a person makes money on an options or future contract, it means the person who sold it to him lost money.  Another example is gambling: either you or the house win.

What about the stock market? The stock market is not a zero-sum game because stocks are not simply investments traded from one party to another.  Rather, they're representative of the underlying business.  So if the business creates value, the stock will do so for the investor as well.

and a link to the article

http://www.stockjargon.com/dictionary/z/zerosum.html


----------



## Grinder

I remmember having a heated discussion about this with a guy in a bar last year. Can't remmember exactly what was said as too much grog was drunk but heres my  take on it.

In theory it can be classified as a zero sum game or even negative sum game if you include fees, slippage etc but how I see it is from a practical perspective if I sold an option it does'nt mean whoever takes the other side will neccessarily lose. I might have the stock assigned to me which the buyer may have profited from making the buyer a winner but I might have sold the stock at a later date for a profit making me a winner also, thus we both win.

Even if it is a MM on the other end it still does'nt mean one of us has to lose. My intention might be different from what a MM is trying to acheive, thus there is no reason for us to be in competition with each other. 

Let us all be winners


----------



## wayneL

Yep Yep & Yep

Options are two sided contracts, so if we ring fence options from all other considerations, they are unequivocally a zero sum game; actually a negative sum game as Grinder said (and I think that's what skyquake was trying to say).

But... options were designed as insurance products and should be considered alongside stock positions as appropriate.

Consider: Trader A buys a call to speculate with limited risk on the stock rising. The trader who wrote the call, Trader B, did so as part of a buy/write and also wants the stock to rise (or stay still dammit! ) 

If the stock duly rises, they both get what they want, they both win. Remember, going back to the start of the thread, a call is a put and a put is a call. By virtue of converting the short call into a synthetic short put (the covered call), both have positive deltas.

Hence it is possible for both to win.

The married put stock hedge is the same situation. In fact synthetically identical. This time a synthetic long call (the long stock + long put) and the natural short put. Both long deltas and both happy for the stock to rise strongly.

Zero sum? Yes AND No.


----------



## wayneL

Tradesurfer said:


> The points earlier about the whole long or short vega/IV reminded me of a couple months ago as I think both of you have pointed out that its not a hard and fast rule. i think put i/v was much higher than call I/V some stocks that let me put on some nice sythetic time long positions. Pretty much financed all of the long call and in many cased collected a credit because of the skew.
> 
> I attached a chart for some discussion of 30 day I/V of puts and calls on the options on the VIX. Now offcourse with a floor of 0, we would naturally see the call I/V higher at lower VIX readings, but in a non scientific study(eyeballing the I/V call/put chart) there is some dicussion to be had about buying calls on the VIX when I/V is a) showing a big gap between, and b) when I/V is spiking.
> 
> Vice versa for when the puts are on top. When Puts reach a highest high in I/V buy puts.
> 
> Anyway, check out the chart and wouldn't mind some banter on the subject.
> 
> cheers
> 
> Derek




Derek

I thought there was something dodgy about that VIX IV chart... the disparities beteen put and call IVs.

Dean Mouscher has a great video on VIX options and deals with this phenomenon http://masteroptions.com/?p=82

For anyone ineterested in trading the VIX this is a *MUST VIEW*.


----------



## Grinder

ta for the link Wayne, DMOs explains it's well. I'm staying well away.


----------



## wayneL

Grinder said:


> ta for the link Wayne, DMOs explains it's well. I'm staying well away.




Well its like anything, as long as you know where the thorns are, it's possible to smell the roses.

I don't trade VIX, but will probably give it a go someday.


----------



## Grinder

I've got enough headaches with Cottles Hidden Reality, re-reading butterfly disection.


----------



## mazzatelli

Controversy

*"Never trade unlimited risk positions. Only play with limited risk"*

Reference is to short straddles/strangles, short puts/calls and ratio spreads.


----------



## cutz

mazzatelli said:


> Controversy
> 
> *"Never trade unlimited risk positions. Only play with limited risk"*
> 
> Reference is to short straddles/strangles, short puts/calls and ratio spreads.




**** yeah,

I used to play with unlimited risk (to zero) but an experience with MQG mid last September changed that, luckily the short sell ban caused the stock to gap up in a big way, i got out unscathed but the lesson is still etched in my mind.

As for ratio spreads I'm in two minds, i reckon they may be safe on index positions, should be able to exit in an orderly fashion, what do ya reckon.

Mazza it that still you, i've notice you've changed you name, nice pic BTW.


----------



## mazzatelli

cutz, it's still me 

I found short backspreads difficult to hedge, especially when :fan. Memories of a short call ratio on IBM gives me the shudders.
Plus I am not keen on its [d]gamma structure.
Maybe the others can elaborate

I occasionally short naked [synthetic] straddles, but cover it later on. 

Good to hear you survived MQG (I know you have a love relationship with it )

I guess the controversial point I am trying to raise is: can LR be more dangerous than UR?


----------



## cutz

mazzatelli said:


> I guess the controversial point I am trying to raise is: can LR be more dangerous than UR?




Ah,

I see the point your making.

LR can be dangerous if not played right, i guess a novice can take comfort in the fact that he's not losing more than his initial stake but theta will him alive eventually, well that's how i see it .

BTW, funny i should say that, last Friday i put on my first pure long gamma position, seems to contradict what i just said.

EDIT, LOL a long synthetic straddle of all things.


----------



## mazzatelli

The comparison I'm trying to convey [poorly ] e.g.

short 1x naked call [atm] vs. short 10x call spreads [otm]
Applying the original statement would favour the 10x short otm call spreads [LR]. Thus, still short gamma.
What are people's opinions? 

Awesome!! this is the first time I have heard your purely long options!! 
Nice time to be long vol though


----------



## cutz

Ah gotcha,

If i had to choose out of your two examples I'd go for the 1 by naked call, although i may get more credit for the bear call spread there's not much margin for error ( i.e. it expands to it's max loss fairly quickly ), at least with the naked call it is more probable that i can exit with a lesser loss.

(Have to admit i cheated with the above, ran it past hoadleys , nice lesson though.)


----------



## mazzatelli

You should compare the two with equal credit received.

But your right, I'd rather sell 1x atm than replicate the atm premium with wotm gamma.

When option deltas converge to 1, that _y_ lot of otm premium is in trouble [where _y_ > 1]. Upside curvature is a b*tch


----------



## cutz

mazzatelli said:


> Good to hear you survived MQG (I know you have a love relationship with it )




Actually a love/hate relationship, i keep getting my fingers burn't but i'm always going back for more.

Dunno what it is, some sort of magnetic allure.


----------



## mazzatelli

cutz said:


> Actually a love/hate relationship, i keep getting my fingers burn't but i'm always going back for more.
> 
> Dunno what it is, some sort of magnetic allure.




Like a hot ex-gf with a bad personality. Nothing but trouble and you tend to lose money, while the gains are only satisfactory 

I know how you feel brother...LOL jk


----------



## wayneL

mazzatelli said:


> You should compare the two with equal credit received.
> 
> But your right, I'd rather sell 1x atm than replicate the atm premium with wotm gamma.




In most cases, me too.

Adding to cutz's point, naked can be morphed into all sorts of positions, OTM credit spreads are very difficult to morph into something useful that you'd want.

On the other hand, it really depends on the instrument. 

Naked call on some small miner? No sirree! No way! Index or commodity when I've worked out my stats and probabilities? Yes sir, thank you very much.

Actaully, I use a totally different reasoning and psychology with these two strategies. The situation I would use is completely different for each.

As such, *I* find the comparison incompatible... but a very useful talking point nontheless.


----------



## Grinder

From a pyschological perspective LR spreads provides that mental comfort thats reassuring, but as we know they can be more dangerous when put on with size. I just can't bring myself to go naked.


----------



## mazzatelli

wayneL said:


> Actaully, I use a totally different reasoning and psychology with these two strategies. The situation I would use is completely different for each.
> 
> As such, *I* find the comparison incompatible... but a very useful talking point nontheless.




I guess my point was to argue the myth that LR is always safer, not to use the comparison as a basis to pick UR over LR, so I agree with your last statement. Sharp as always 

I remember back there was a blogger trading GOOG
Implied vol was ~ 70%
He could have shorted 1x atm straddle, but choose to short 20x IC's >1.5 sigma out. GOOG rallied and he lost much more than he would have with the naked combo due to the greater dgamma leverage in the IC [as Grinder points out].
Although the error was probably also related to the structure of the trade. He wanted to be short vol only, so choosing options that far otm was not optimal.

The leverage is the killer I guess .


----------



## Tradesurfer

> Quote:
> Originally Posted by Tradesurfer
> The points earlier about the whole long or short vega/IV reminded me of a couple months ago as I think both of you have pointed out that its not a hard and fast rule. i think put i/v was much higher than call I/V some stocks that let me put on some nice sythetic time long positions. Pretty much financed all of the long call and in many cased collected a credit because of the skew.
> 
> I attached a chart for some discussion of 30 day I/V of puts and calls on the options on the VIX. Now offcourse with a floor of 0, we would naturally see the call I/V higher at lower VIX readings, but in a non scientific study(eyeballing the I/V call/put chart) there is some dicussion to be had about buying calls on the VIX when I/V is a) showing a big gap between, and b) when I/V is spiking.
> 
> Vice versa for when the puts are on top. When Puts reach a highest high in I/V buy puts.
> 
> Anyway, check out the chart and wouldn't mind some banter on the subject.
> 
> cheers
> 
> Derek
> 
> 
> Derek
> 
> I thought there was something dodgy about that VIX IV chart... the disparities beteen put and call IVs.
> 
> Dean Mouscher has a great video on VIX options and deals with this phenomenon http://masteroptions.com/?p=82
> 
> For anyone ineterested in trading the VIX this is a MUST VIEW.
> __________________
> WayneL's Options Blog




Yeah, the trading platforms can be a challenge.I can probably get a better answer but with stock firms, they would have to pay for futures data feed, exchage fees etc. Also, they are set up to have one underlying symbol, not say an AUG VIX, Sep VIX etc, so a little data feed issue and a systems deal. VIX is a little odd in that its a listed option but is based on a future. Stock firms don't for instance offer calls and puts on Orange Juice futures. But anyway...

Since the underlying can be off (Cash vs Future)

For example the VIX cash is about 23, the future about 25 currently.

The Aug 25 put is showing IV at 9% and should be about 50%.

Aug 25 call showing IV at 131% and should be 95%

I think what I was really getting at though is deriving some trading signal off of the data.

There is still a seperation gap in the iv of puts vs calls. Mainly due to the reversion to the mean aspect of VIX. With it "lower" now, we would expect the market expectation to have a bias to the upside.

But looking at the graphs (albeit with IV's that are off), my on scientific theory is that when you have a wide seperation gap and a higher high by one of the sides (call it an IV spike)- once there is a lower high buy theoretically buy the option whose IV is higher.

I wasn't able to overlay a chart of near month VIX futures prices over that graph, but if I could we would see that the move was generally favorable for those holding the higher IV instrument.

anyway...thx for the discussion.

we'll save the "why are they showing theta values on VIX options on their pricing models" for another time


----------



## wayneL

mazzatelli said:


> I guess my point was to argue the myth that LR is always safer, not to use the comparison as a basis to pick UR over LR, so I agree with your last statement. Sharp as always
> 
> I remember back there was a blogger trading GOOG
> Implied vol was ~ 70%
> He could have shorted 1x atm straddle, but choose to short 20x IC's >1.5 sigma out. GOOG rallied and he lost much more than he would have with the naked combo due to the greater dgamma leverage in the IC [as Grinder points out].
> Although the error was probably also related to the structure of the trade. He wanted to be short vol only, so choosing options that far otm was not optimal.
> 
> The leverage is the killer I guess .




Totally agree, and the GOOG thing is a great example. 

The leverage thing is a point I've been trying to make around the blogosphere. It's not the strategy, it's the leverage.

People will quite happily enter a 100 share block of shares with immediate delta exposure ( +/- 100 deltas) without a worry in the world, but mention a 100 share + 2 x short option combo (synthetic short straddle with only the potential of +/- 100 deltas) and suddenly the option world starts tut tutting about all that unlimited risk. They prefer to see someone with 50 of those 1.5 sigma condors you mentioned with potential gamma/delta/vega measured in megatonnes.

It's totally illogical. Well meaning, but illogical.


----------



## wayneL

Tradesurfer said:


> For example the VIX cash is about 23, the future about 25 currently.
> 
> The Aug 25 put is showing IV at 9% and should be about 50%.
> 
> Aug 25 call showing IV at 131% and should be 95%




Hi Derek

I'm not trying to nail your balls the the wall here, just trying to get to the facts for the benefit of all. I'm going to check those IVs when the market opens because what you are saying here still amounts to great gobs of free money. 

If those figures are true I'm going to take on about a million conversions and retire rich.

Stay tuned.


----------



## wayneL

wayneL said:


> Hi Derek
> 
> I'm not trying to nail your balls the the wall here, just trying to get to the facts for the benefit of all. I'm going to check those IVs when the market opens because what you are saying here still amounts to great gobs of free money.
> 
> If those figures are true I'm going to take on about a million conversions and retire rich.
> 
> Stay tuned.




OK just ran through current August quotes through my model.

August futs = 26.6

Aug 25 call = 2.45 (approximate mid point of spread)
Aug 25 put = 1.15
Both come out close enough to 64% IV

Aug 27.50 call = 1.40
Aug 27.50 put = 2.60
Both come out close enough to 69% IV

Damn! No free money there.


----------



## mazzatelli

Grinder said:


> know what ya mean. Banked up on DDs waiting for the vega tsunami now. Sure enough it won't come, or at least won't come when I want it to.




This has been one monster rally, vols getting lower and lower.


----------



## cutz

Grinder said:


> know what ya mean. Banked up on DDs waiting for the vega tsunami now. Sure enough it won't come, or at least won't come when I want it to.






mazzatelli said:


> This has been one monster rally, vols getting lower and lower.




Are you guys also loading up anticapation of a vega explosion or playing it on a day to day basis.


----------



## mazzatelli

cutz said:


> Are you guys also loading up anticapation of a vega explosion or playing it on a day to day basis.




Personally initiated some otm calendars late last week, hedging with spot.
Some BS trading/hedges has reduced the cost of calendars, so lying in wait now.


----------



## Grinder

mazzatelli said:


> Personally initiated some otm calendars late last week, hedging with spot.
> Some BS trading/hedges has reduced the cost of calendars, so lying in wait now.




My DDs were put on a couple of weeks back in anticipation of a vega storm, now just working too darn hard keeping my ICs above water in this unidirectional BS market.


----------



## Silus

wayneL said:


> OK just ran through current August quotes through my model.
> 
> August futs = 26.6
> 
> Aug 25 call = 2.45 (approximate mid point of spread)
> Aug 25 put = 1.15
> Both come out close enough to 64% IV
> 
> Aug 27.50 call = 1.40
> Aug 27.50 put = 2.60
> Both come out close enough to 69% IV
> 
> Damn! No free money there.




Nicely done. Great %tages


----------



## mazzatelli

wayneL said:


> Damn! No free money there.




:birthday: 9,500 posts!!! :band:bier:



Grinder said:


> My DDs were put on a couple of weeks back in anticipation of a vega storm, now just working too darn hard keeping my ICs above water in this unidirectional BS market.




Good Luck with the IC's!!
ahhh DD's...those skitzophrenic spreads

There is talk of S&P hitting 1,000 before dropping like a brick
Back to scavenger mode methinks


----------



## cutz

mazzatelli said:


> There is talk of S&P hitting 1,000 before dropping like a brick
> Back to scavenger mode me thinks




Geez,

I hope you right, all this negative theta is eating me alive.

Actually not that bad, just something I'm not accustomed to.


----------



## mazzatelli

cutz said:


> Geez,
> 
> I hope you right, all this negative theta is eating me alive.
> 
> Actually not that bad, just something I'm not accustomed to.




I hope I'm wrong LOL, but remember last weeks topic, we can both be winners 

Are you gamma scalping this straddle of yours?
Would be good to try earn theta daily, so that it remains solely a gamma/vega bet


----------



## cutz

mazzatelli said:


> Are you gamma scalping this straddle of yours?
> Would be good to try earn theta daily, so that it remains solely a gamma/vega bet




No,

On top of my normal stuff, that index straddle is sort of a small live experiment of mine with futures. So it's a short SPI contract by 1 / long XJO sept calls by 5 ( XJO multiplier is 10 hence 5 contracts. ) can't really gamma scalp due to the size of SPI.

I'm actually long too much long vega by default due to leftover hedges on several positions and a fat finger episode on MQG yesterday which i'm in the process of unwinding for a profit if all goes according to plan, i could leave it on but i have trouble sleeping with to much time decay in my portfolio.

When i'm comfy with SPI i'll check out the Eurex products, multipliers of 10 and 10 on the futures and options, nicely matched.

BTW, that book just arrived, yeah you're right mazza heaps of math in it, it'll do my head in.


----------



## Grinder

A drop in the S&P can't come soon enough! My long calls are getting tired of doing all the heavy lifting for the ICs.


----------



## wayneL

mazzatelli said:


> :birthday: 9,500 posts!!! :band:bier:




LOL. I clearly talk too much.


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## cutz

Grinder said:


> A drop in the S&P can't come soon enough! My long calls are getting tired of doing all the heavy lifting for the ICs.




Geez,

Tell me about about it, first time experience with a one way market.

Some big time adjusting this week, that little SPI experiment has turned in the real deal, hopefully we get a reversal soon.


----------



## mazzatelli

mazzatelli said:


> There is talk of S&P hitting 1,000 before dropping like a brick
> Back to scavenger mode methinks




Thy crystal ball is partially working


----------



## wayneL

I think we've all been adjusting a bit more than normal lately:







It's been a really good test of trader's delta hedging strategies. Pro-active rules IMO. Contest risk has been heavy, but certainly better than delta galloping away.

It also highlights the shortcomings of using standard deviations in selecting strikes. I've been using closer strikes lately, even atm and hedging more frequently.

Happy camper here.


----------



## Grinder

wayneL said:


> I think we've all been adjusting a bit more than normal lately:
> 
> 
> 
> 
> 
> 
> It's been a really good test of trader's delta hedging strategies. Pro-active rules IMO. Contest risk has been heavy, but certainly better than delta galloping away.
> 
> It also highlights the shortcomings of using standard deviations in selecting strikes. I've been using closer strikes lately, even atm and hedging more frequently.
> 
> Happy camper here.





Not as happy as I'd like to be but pro- active as opposed to re-active is keeping me in the game. Stopped using SDs awhile back & just working of the greeks. Have also been bringing in the strikes for a better R/R.


----------



## cutz

LOL,

Looks like we've all been pretty busy lately, question i ask myself is whether to increase the downside bias to take advantage of any correction, problem is i'm normally incorrect trying to time the market.

Or maybe i should play it with the opposite bias of what i think i should be putting on.


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## mazzatelli

I wonder how Dan Sheridan students are doing?
If I recall correctly short strikes with a delta of < 10 were advocated 

Low index vol has kept me out of wingspreads for past 3 weeks
I can remember pre-Oct 08 index vols at around 25-30% was considered rich premium

I've only got some cheap put calendars in the event of correction
Feeling neutral atm LOL


----------



## mazzatelli

cutz said:


> LOL,
> 
> Looks like we've all been pretty busy lately, question i ask myself is whether to increase the downside bias to take advantage of any correction, problem is i'm normally incorrect trying to time the market.
> 
> Or maybe i should play it with the opposite bias of what i think i should be putting on.




That's going to be a personal decision
It *MIGHT* even be a good thing to become flat if you feel uncertain about reading the market


----------



## Grinder

cutz said:


> LOL,
> 
> Looks like we've all been pretty busy lately, question i ask myself is whether to increase the downside bias to take advantage of any correction, problem is i'm normally incorrect trying to time the market.
> 
> Or maybe i should play it with the opposite bias of what i think i should be putting on.




gave up on trying to time the market or pick direction, just sittin on the fence where I'm comfortable & adding weight to either side to manage risk. 



mazzatelli said:


> I wonder how Dan Sheridan students are doing?
> If I recall correctly short strikes with a delta of < 10 were advocated




Lol to em. Am picturing running of the bulls in Spain.


----------



## wayneL

Grinder said:


> Am picturing running of the bulls in Spain.




LMAO 

Dan ain't no dumb@ss though. I imagine they'll be right...ish. 

It would be interesting to see how they handle this though.


----------



## cutz

mazzatelli said:


> even be a good thing to become flat if you feel uncertain about reading the market




Thanks mazza good advice, managed to get sorta flat before  ( potentially ) getting  flattened, can't shake that hunch.

Now i can enjoy the weekend.


----------



## mazzatelli

Grinder said:


> Lol to em. Am picturing running of the bulls in Spain.




Ahh Pamplona, good memories



wayneL said:


> LMAO
> 
> Dan ain't no dumb@ss though. I imagine they'll be right...ish.
> 
> It would be interesting to see how they handle this though.




DS seems pretty genuine, no BS spruiker type promises to riches
I, like you guys, would be interested to see how they defend that type of condor. It would be extremely tough!!

I read an interview with DS, where he advised all his students to stay out for ~ month after Oct 08 last year. So they may not be in a trade.



cutz said:


> Thanks mazza good advice, managed to get sorta flat before  ( potentially ) getting  flattened, can't shake that hunch.
> 
> Now i can enjoy the weekend.




Awesome!! I found that if I was hoping too much for the opposite move [dependent on how much was at risk], I was wrong and it was time to get out. 

Controversial topic for the day:

"Firstly, here is the reason biggest reason anyone losses money [in options trading]: EGO!

With options traders it is exacerbated by the fact that options trader’s think they are so smart.

When other traders are wrong they get out and move on.

When options traders are wrong they try to brain their way out of it or convince themselves that there is a better way --- a repair strategy"


----------



## Grinder

mazzatelli said:


> Ahh Pamplona, good memories
> 
> Controversial topic for the day:
> 
> "Firstly, here is the reason biggest reason anyone losses money [in options trading]: EGO!
> 
> With options traders it is exacerbated by the fact that options trader’s think they are so smart.
> 
> When other traders are wrong they get out and move on.
> 
> When options traders are wrong they try to brain their way out of it or convince themselves that there is a better way --- a repair strategy"




I agree to a certain extent but don't think i'ts as much about ego as it is about opportunity denial. Think all traders go through the same emotions, however option traders due to the nature of options have the fortunate or misfortunate opportunity to be able to deny any loss by making a repair/adjustment or whatever one wants to call it.


----------



## wayneL

mazzatelli said:


> Controversial topic for the day:
> 
> "Firstly, here is the reason biggest reason anyone losses money [in options trading]: EGO!
> 
> With options traders it is exacerbated by the fact that options trader’s think they are so smart.
> 
> When other traders are wrong they get out and move on.
> 
> When options traders are wrong they try to brain their way out of it or convince themselves that there is a better way --- a repair strategy"



Hmmmmmm

I witnessed a guy (who runs another forum) morph himself deeper and deeper into the schtook on a TLS trade some time ago...ended up a massive loss. But, he was cranking up the risk each time too; the same logic as doubling down. (Subsequently decided that option trading doesn't add to society )

One the other hand, a successful morph/adjustment can rescue a trade going wrong.

The question option traders should ask themselves is: Do I really want the new position? Would I initiate the new position from scratch? If the answer is no, then just bail and move on.

This is part of the reason I have never liked WTFOTM credit spreads (apart from specific circumstances). They are just about impossible to morph/adjust into something that make sense. 

This is the same reason I like close to money condors. You have to adjust/morph sooner, but you end up with something that still makes sense. We've had one hell of a unidirectional month, yet I still have a position I like with max theta @ 980 on the SP500.


----------



## cutz

mazzatelli said:


> When options traders are wrong they try to brain their way out of it or convince themselves that there is a better way --- a repair strategy"




Yeah,

That's why i luv em, don't ever have to admit i'm wrong, just keep tweeking/adjusting/rolling till i get proven right,

( never mind the fact that each major adjustment normally cost money )


----------



## mazzatelli

The original quote was from Charles Cottle.

Too many adjustments could be comparable to overtrading. 



> The question option traders should ask themselves is: Do I really want the new position? Would I initiate the new position from scratch? If the answer is no, then just bail and move on.




Completely agree!! Especially for me who as a Perceiving function in their personality these questions kept me in check. 



> We've had one hell of a unidirectional month, yet I still have a position I like with max theta @ 980 on the SP500.



Noice!!


----------



## mazzatelli

An extremely skilled and experienced guru/member of ASF is attributable to the controversial topic of the day.

Do you indeed need a knowledge of locks[p/c parity], Greeks and dissection to trade options? 
The suggestion is that only strategies need to be learnt, and knowledge of strategies that "made money" in the past are retained.


----------



## Grinder

Don't think you need to know about greeks and dissection to trade options but it sure helps if you want to trade em profitably


----------



## mazzatelli

I was being a bit facetious, but Tom Preston of ToS dicussed once that you can ignore the Greeks for simple strategies like Iron Condors. 

For example, an IC with the spot below the mid point will have a positive delta. Hardly surprising news and definitely no need to refer to delta to come to this conclusion. 

Maybe there is more to this....


----------



## wayneL

mazzatelli said:


> I was being a bit facetious, but Tom Preston of ToS dicussed once that you can ignore the Greeks for simple strategies like Iron Condors.
> 
> For example, an IC with the spot below the mid point will have a positive delta. Hardly surprising news and definitely no need to refer to delta to come to this conclusion.
> 
> Maybe there is more to this....




A trader can ignore the Greeks, but it doesn't mean the Greeks will ignore the trader. 

I'm a bit surprised Preston said that TBH. Unless you put the IC on and look away until expiry, I'd want to know my Greeks for defence purposes.


----------



## Grinder

Had a lot of good times laying down IC trades without even knowing the names of the greeks. It caught up with me though, so now i get to know their personalities first then go for the trade 



mazzatelli said:


> I was being a bit facetious, but Tom Preston of ToS dicussed once that you can ignore the Greeks for simple strategies like Iron Condors.
> 
> For example, an IC with the spot below the mid point will have a positive delta. Hardly surprising news and definitely no need to refer to delta to come to this conclusion.
> 
> Maybe there is more to this....




I read that piece by Tom, kinda know what he means but have been converted so they now dictate how I'm going to position myself. That example above mazza may seem elementry but holds alot of weight.


----------



## mazzatelli

wayneL said:


> A trader can ignore the Greeks, but it doesn't mean the Greeks will ignore the trader.
> 
> I'm a bit surprised Preston said that TBH. Unless you put the IC on and look away until expiry, I'd want to know my Greeks for defence purposes.




More experienced traders often state that they already implicitly understand the structure of Greeks inherent in simple strategies. I know some [for certain trades] who compute nothing but implied vols and do not look at risk profiles. Maybe TP was referring to individual strategies [my quotation may be out of context, he is no dummy].

But on a portfolio basis, they observe net Greeks for variety of sigma intervals for risk mgmt purposes.

w.r.t high level dissection, I have seen some authorities advocate IC's and overlaying a variety of spreads over the top to negate risk expoures, without observing how convexity is altered. 
E.g. trader[x] had initiated a bull put spread. To hedge [x] shorted the shares. After a pullback [x] bought calls, rationale being to profit on rally. Effectively though the purchase of the calls converted a portion of the short shares to atm puts.  [This was without observing Greeks and dissection]


----------



## mazzatelli

Nothing you all didn't know btw
LOL


----------



## wayneL

mazzatelli said:


> he is no dummy




Indeed. I like TP, he's a sensible guy.

Is there a link to this anywhere?


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## mazzatelli

Ah. I have read the full transcript. Sorry TP!! 
The suggestion is to rely less on the Greeks once there is full understanding of the position.

This is different to ersatz [thanks Wayne ] experts who know jack about the Greeks and head into a position straight away.

When to ignore the Greeks

Yeah Wayne, I like him and the "sos"


----------



## wayneL

mazzatelli said:


> Ah. I have read the full transcript. Sorry TP!!
> The suggestion is to rely less on the Greeks once there is full understanding of the position.
> 
> This is different to ersatz [thanks Wayne ] experts who know jack about the Greeks and head into a position straight away.
> 
> When to ignore the Greeks
> 
> Yeah Wayne, I like him and the "sos"




Great, thanks for the link. 

I guess what he is talking about there is being subconsciously competent. Trade options for a while and you don't really look at the numbers, but you know what's happening Greek-wise because of the "rich mental map" we all develop with time and experience.

I only look at the number if I want to hedge it... how many deltas to get me back to zero, or how many vegas do I want to get rid of if I think a volatility change is going to hurt me etc.

I think that's what he is saying... that's what I'm getting from it anyway.


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## mazzatelli

This is the grail I have been seeking all these years
State of the art training. Soon you too can purchase your own PC!


----------



## Fox

What do you guys think of this as a controversial topic:

*That adjustment is the key to success and NOT mathematical/volatility analysis.*

In some ways, this is a Cottle vs. Natenberg debate. Is option success a black art or rock solid science? Using the swimming metaphor, the Natenberg camp will probably say that a human being will sink in a pool unless the salinity level is sufficiently high. The Cottle camp will probably say that kicking and doggie paddling will keep you afloat. Salinity is only a minor factor.

Any takers?


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## Grinder

I'll have to go with adjusting, still think you need to know the math & be able to understand vol analysis but it's adjusting that keeps me in the game. Theory makes sense on paper but falls short in practice.


----------



## wayneL

Fox said:


> What do you guys think of this as a controversial topic:
> 
> *That adjustment is the key to success and NOT mathematical/volatility analysis.*
> 
> In some ways, this is a Cottle vs. Natenberg debate. Is option success a black art or rock solid science? Using the swimming metaphor, the Natenberg camp will probably say that a human being will sink in a pool unless the salinity level is sufficiently high. The Cottle camp will probably say that kicking and doggie paddling will keep you afloat. Salinity is only a minor factor.
> 
> Any takers?




For me it's both!

I'll take the maths if I can find a trade like that. EG OTM Bull put spreads (I won't trade these unless I can get outrageously favourable odds) and seasonal non-tendencies on commodity option writes. But they don't show up all that often.

That means that to get a trade, most of the time it means doing the adjustment boogie. My bread and butter is thrust and parry, metamorphosis kung fu, partisan guerilla warfare... choose favourite metaphor. 

Many times it turns out to be wasted energy, I could have won by sitting on my hands, but I'd prefer to manage than hope. Long term it works better for me.

But each trader's situation is different. Each philosophy has its own set of unique risks, the worst of which is knowledge risk. That's why I think "understanding" option pricing is so important.... that encompasses both theory and experience.

Unfortunately we can only acquire the latter by building up a great big fat "You Idiot" file!


----------



## sails

I would also have to say both.  Wouldn't want to throw either one out - they are both necessary, IMO.


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## mazzatelli

Both, with > weight to vol in my case.


----------



## Fox

wayneL said:


> My bread and butter is *thrust *and parry, metamorphosis *kung fu*, partisan guerilla *warfare*... choose favourite metaphor.
> 
> Many times it turns out to be wasted *energy*, I could have won by sitting on my hands, but I'd prefer to manage than hope.




I have this wild hypothesis that energy (see examples in bold above) is being converted from one form to another when you adjust. Of course this energy needs to be converted intelligently in order to yield positive energy (ie. profits).

If the edge obtained from analysis is small, it is quickly dissipated with commissions, slippage etc. I think Natenberg uses the term "friction" ie. a form of negative energy. 

Any mathematical edges that are quantifiable using formulas and software are observed by all market participants. As such, the edge will only be an edge if there are few who understand it.

So it looks like I have two choices:

start trekking the serene mountain tops of China to seek out a kung-fu master from a Shaolin Temple.
enrol myself into Harvard University's Quantitative Finance course, and leave with a PhD.


----------



## mazzatelli

For option:
1) Shaolin masters are long gone having fled during the last persecution
2) Even a PhD won't guarantee trading success, though it would increase the chances of it coupled with experience


----------



## wayneL

mazzatelli said:


> Shaolin masters are long gone having fled during the last persecution



Too rigid in form and style anyway.

Bruce Lee would have been a great options trader.

http://www.fightingmaster.com/masters/brucelee/quotes.htm 

Change a few technical terms and you have some A1 options trading wisdom.


----------



## mazzatelli

Yeh, love Bruce Lee. 
I'm amazed how he advanced without completing Chum Kiu and Bil Jee. An intuitive & inquisitive mind, willingness to learn combined with hard effort - amazing!!!

Fox, asking if adjustment is more important than vol is like asking a martial artist whether punches are better than kicks or whether speed is more important than power.

You can get by with one, but ultimately we would like the synergy


----------



## Fox

Hypothetical scenario:

The year is 2017. A child prodigy has invented the perfect options model which every exchange in the world adopts. Retail traders no longer enjoy any mathematical edge in terms of being able to find mispriced options. You personally believe that your mathematical edge is now ZERO.

Would you give up options trading altogether? Or would you persist with trading because you still believe that adjustments alone will still keep you profitable?


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## cutz

Fox said:


> A child prodigy has invented the perfect options model which every exchange in the world adopts. Retail traders no longer enjoy any mathematical edge in terms of being able to find mispriced options. You personally believe that your mathematical edge is now ZERO.




Hi Fox,

I believe our mathematical edge is zero now, there's no way we'll ever see a mispriced option sitting in the order book and if we do brokerage and fees will render that arbitrage unprofitable. 

I'm not from an academic background so this is probably out of my depth but the best models in the world can't account for the unaccountable, when a position is initiated you're at the mercy of a random market.  You sell a call, the person using the hypothetical supreme modeler bought that call off you, the market tanks the next day, what you do next is what matters most.


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## Grinder

Think we're already there Fox. Well said cutz, you can't beat the bots so adjusting while not a science can at least level the playing field.


----------

