# Options Mentoring



## wayneL

Ahem.....er, well I'm not really comfortable with that term. But this is a follow on from Tech/A's expertise thread, where there was a lot of interest in options.

Some of us here have some experience....so lets just say "sharing what we know".

Firstly, options are a vastly complex subject. What I know has been slowly added to over the last few years and I don't think it is something that can be absorbed quickly...at least not for us booze addled old farts.

That complexity is what makes them so useful...yet dangerous. 

Useful, because you can construct a situation to take advantage of whatever view of the market you have. Indeed , you must have a view of where the market is headed, even if that view is merely "somewhere" or "nowhere".

Dangerous, because of the leverage and strange price behaviour (strange if you have not studied enough). Options have so many "gotchas" it's mind boggling and you are trading against the smartest ****holes in the universe, bar none...the market makers!

They do not have to be dangerous though, they can also be the most effective risk control tool.

It's a bit like handleing stallions. They have the wherewithall to rip your head off your shoulders, and in the wrong hands they have done just that. In the right hands they are your best friend and a joy to be with. Just never take your eye off them LOL


----------



## wayneL

A couple of free resources:

1/ If you click on my website link below, there is a free download for Charles Cottle's book "Coulda Woulda Shoulda". Charles has been a US options market maker for 25 odd years. It's a hard read, but in my opinion its the best book available.

Might be a bit advanced for some, so beginners should start with one the books by Bower or Tate or similar.

Try to get a solid grasp of the Greeks. Ignorance of these will be at you peril. Some of the seminar wombats are teaching that all this does not matter. Ther students wonder how there bought call option is in loss when the stock is up....hmmm go figure.

Any questions on the greeks are most welcome, I'll try and confuse you even more...er, less...or sumthin' 

2/ http://www.hoadley.net/options/strategymodel.htm This is a free strategy modeller which will give you payoff diagrams and you can play with different strikes, expiries, etc example as below.


----------



## wayneL

US market vs Aussie market

Apart from far greater choice and liquidity, the US market has two great avantages.

1/ Cost - brokerage is much cheaper

2/ You can trade ANY position online...any spread you can dream up, naked calls...anything.

Enouigh for now, avagoodweegend

P.S. This is not a monopoly, so join in all you options guys


----------



## DTM

Thanks for the information Wayne.  I have three questions:

1. Could you give us the effects of the greeks

2. What the market makers do and how they can affect the market ie by moving the market and their pricing models via greeks.

3. Some basic strategies you would use with different situations

Thanks in advance.   

Have a good weekend too.


----------



## tech/a

Thanks Wayne looking forward to some good discussion.

Perhaps a glossary of terms would be an idea as they come up
coupled with a fairly concise explaination.

*Wonder if Joe * can have a
single screen that can be added to as a term pops up rather than a thread which would have a glossary all over the place.

Thanks again---where would you like the banana's delivered?? (hahaha)


----------



## Joe Blow

tech/a said:
			
		

> *Wonder if Joe * can have a
> single screen that can be added to as a term pops up rather than a thread which would have a glossary all over the place.




Tech, I'll see what I can do.


----------



## doctorj

Perhaps we should set up a trading/investment Wiki to cover all related subjects including options.  See http://wikipedia.org/ for an example.  It's format is probably better suited to the task than using a forum as it links questions with answers more effectively and makes searching more efficient.


----------



## positivecashflow

Option Greeks:


         Theta:  Change in the price of an option with respect to a change in its time to expiration (time value).

         Vega:  Change in the price of an option with respect to its change in volatility

         Delta:  Change in the price of an option relative to the change of the underlying security.

         Gamma:  Change in the delta of an option  with respect to the change in price of its underlying security. 		

Rho:
Rho is the change in option price given a one percentage point change in the risk-free interest rate.

ASX Link to explain greeks in more detail:

http://www.asx.com.au/investor/options/greeks.htm


----------



## positivecashflow

Example of Greeks for a trade:


----------



## wayneL

Yes the greeks are where we should start and the definitions are all over the internet. The ASX definitions that Pos posted are, in my view both overly simplified and overly technical. I could never understand the standard definitions in a practical sense.

I hope to define them, and use examples in more understandable language...a tall order. 

I also like to lump in Implied Volatility with the greeks even though, strictly, it is not one of them.

Rho we can safely disregard in a stable interest rate environment...but be sure to fill in the correct risk free rate in your strategy modeller....5.75% I believe...close enough!

I like to separate them into two groups 1/ delta and gamma   2/ theta, implied volatility(IV) and vega (also known as omega)


----------



## wayneL

Lets see if I can cut through the confusion....

Delta:

As Pos posted - Change in the price of an option relative to the change of the underlying security.

Lets suppose we own some at the money call options in Delta Omega Gold LTD (DOG). The price we payed doesn't matter for the purpose of this example.

So lets say DOG moves up 15c during the days trading, but we notice that the options have only moved up 8c. The option price has moved up only 55% as much as the underlying.

This, my friends is what delta measures and is expressed as such- 55% - easy! It may also be expressed as a decimal i.e. 0.55.

Delta expressed as a plural (deltas) means the total exposure of the entire position. For example, if you have 10 US contracts (or 1000 options or 1 aussie contract) you will have 550 deltas...delta x total number of options.

OK, delta also changes depending on whether it is "in the money" (ITM), "at the money" (ATM) or "out of the money" (OTM) 

As we go further ITM the delta will increase until we get to a maximum of 100% or 1.0. An option with a delta of 100% will be WAY deep in the money...and if the share moves 10c the option will move 10c

Conversely, the further out of the money we go the lower the delta with a minimum of nearly 0 when way the %$#@ OTM.

This is why if you own OTM options, although cheap to buy, the underlying will have to move a LOT before the option moves.

With put options delta is always expressed as a negative number (eg -55%). The reason is simple. If you own a put the value moves in opposite direction to the underlying, share goes up, put goes down and so on.

Implications of Delta.

If you have bought an ATM call option and the share is going up your profit will inrease at a faster and faster rate until delta reaches 100%

If the share is going down, you will be losing money, but at a slower and slower rate, until delta reaches 0, which happens to coincide with the amount of money you paid for the option.

This is the reason a straddle can be profitable but more about that later...we will also talk about "delta neutral" later.

So how fast does delta change? This is what gamma measures.....


----------



## wayneL

Gamma:

Pos says: Change in the delta of an option with respect to the change in price of its underlying security. 

We have already seen that an ATM call has a delta of around 50 - 55%, and that as the share price goes up delta increases, and decreases as it goes down. (remeber puts have negative delta)

How quickly this occurs is the measurement of gamma. 

Some option traders who are very mathematically inclined, like to quantify gamma. I don't think it's necessary, but I do think it's important to know when and where gamma is at is maximum and what effect it has in a relative sense.

Gamma is greatly affected by implied volatility (we talk about that later). When IV's are very low the maximum gamma is ATM. As IV inreases, maximum IV moves ITM, so when IV's are very high maximum gamma may be a long way ITM.

Why is this important? If we are buying options, either alone or as part of a spread, it helps us select the best strike price. We want high gamma in our bought options.

There is another effect of IV on gamma. Gamma decreases as IV goes up.

This means that when IV's are very low, delta will change VERY quickly, and when they are high, very slowly.

Why do we want to know this? Well as an example; if you want to construct a delta neutral strategy such as a long straddle, we want IV's as low as possible so that the high gammas will take us into profit more quickly.

Incidentally the effect of time til expiry has the same effect on gamma as IV. Longer time til expiry - same as higher volatility and visa versa.

.....I don't know whether I've managed to simplify that or not.....hmmmmmm Perhaps I should have done implied volatility first, but that's next :-/


----------



## markrmau

Thanks for the info in this thread Wayne. I was hoping that after the explanation of terms / strategies, you or someone else could provide a real life demonstration about what you are thinking as you enter/exit a trade.

Also I note that this discussion is also valid for ASX trading warrants (except you can't write your own warrants). The advantage with the trading warrants is that if anyone has a mechanical system they want to back test, the warrant OHLC data is freely available through www.float.com.au - I couldn't find historical option prices though.


----------



## tech/a

Mark.

Im sure Wayne will get to this.
There is enough to absorb as it is!

Wayne I found your 

WHY this is important or WHY we do this as very informative.
I know its a bit painful but *Highlighting* these gems as bullet points saves scrolling and reading.


----------



## wayneL

Yes will get into some examples later, but there is a bit to get through yet.

This post is about intrinsic value, extrinsic value and implied volatility.

*Intrinsic value* is the amount of value an option is "in the money", simple as that. Consequently, ATM and OTM options have no intrinsic value. 

For example, if you own some call options with an exersize price of $30 and the underlying is trading @ $32, you own ITM call options. If the option expires with the underlying at $32, your option is worth $2, because you can exersize that option and buy a $32 stock for $30. This part is easy because it is readily quantifiable. (sorry if this is a bit basic for some of you but it is important for my point)

*Extrinsic value* is the market price of an option in addition to the intrinsic value. ATM & OTM options ar ALL extrinsic value because they have no intrinsic value. If in the example above the $30 call option was trading at $3.50 when the underlying is trading at $32, then we have $2 of intrinsic value and $1.50 extrinsic value. This extrinsic value is the puzzling part for the novice.

So how is extrinsic value priced? Some more explanations, then we get into that.

Most people refer to extrinsic value as time value. I don't, because time is only part of the picture. It is true that extrinsic value "tends" to go down as time goes by, but there are anomolies in option pricing that time does not explain.

Consider this example:

We have two mythical stocks, DOG and BARK both trading at $43.50

The DOG call options are trading @ $0.95 with 2 months to run.

The BARK call options are trading @ $3.55, also with 2 months to run.

To add to the confusion, a month ago the BARK options were trading for $2.70 when the underlying was at 43.50...cheaper yet with more time left than now.

WHY?

Enter *Implied Volatility*:....


----------



## wayneL

So what is *volatility*?

Investopeadia days: A statistical measure of the tendency of a market or security to rise or fall sharply within a period of time. 

We can measure volatility retrostectively by using a formula (which I can post if anyone wants) which will give us a percentage figure. This is refered to as *Statistical Volatility*

So if a stock is relatively stable and sedate, it's volatility may be around 15% or so. If a stock tends to bounce all over the shop very quickly it could have a statistical volatility of 50% or even much much higher.

So how does this affect option pricing?

This all goes back to extrinsic value. This extrinsic value reflects the risk taken on by the option writer (seller) that the option may expire ITM...and the risk that is may expire FAR ITM resulting in a loss for the writer. It is a "risk premium" not unlike insurance premium.

Think about it, time = risk, and volatility = risk...both together = big risk.

The more time left on the option the more chance that circumstances may push the underlying deep into the money....risk for the writer.

If you have a very volatile underlying, who knows where the hell the price will end up on expiry....risk for the writer.

Using the black-scholes option pricing model, using algebra, we can work out what volatility is priced into the option premium. But this my not reflect at all the statistical volatility of the underlying. It may be cheaper or one helluva lot more expensive than indicated by the recent past.

Why is this so? Often it is explained away as being underpriced or overpriced. But it is not this at all. It is the the *perception* of possible *future* volatility and therefore the risk to the option seller during the life of the option. This is called *Implied Volatility*.

Lets look at an example; WOOF is a biotech that has been plodding along in the market, not really going anywhere, and has a statistical volatilty of say, 20%. But it is known they have been working an a miracle drug promising eternal youth and the results of an extended trial are due out in 4 weeks time. When the results are released, it could mean a dramatic move to the upside or downside.

If you were an option seller, would you be selling WOOF options at supposed "fair value" of 20% volatiltiy.

NO BLOODY WAY MATE! The risk you are taking on, you might want 150% as it is likely to be a humungous gap when the news is released. We just don't know which way!

So just to repeat, Implied volatility(IV) is the markets guess of future volatilty.

There are other aspects to IV such as "Volatility Skew" and "Volatility Crush", which we will go into later.

Cheers


----------



## positivecashflow

Here is an example of Volatility Skew and Volatility Crush plotted on a graph. As wayne will probably explain, different expiry periods of options have different implied volatility levels. The difference is due to the expectations of traders and MMs that an option will move in the period specified. eg if WOOF was coming out with an announcement in 3 days that was expected to make the share price jump, then obviously the IV would be higher for options that expire near term and thus the options will increase in price (maybe due to demand).

 The first image depicts a huge "volatility skew" that existed between options that expired 7-30 days away (the red line) and longer term options that expired > 90 days away (black line). Maybe traders and MMs expected the stock to move in the future rather than near term. This is all maybes at this point. 

 The second image depicts a drop in the IV for the longer term options (black line). This is known as volatility crush, where the IV drops and the option loses value (as wayne explained IV is priced in the options).

There are various strategies that you can employ to play volatility skews, crushes and rushes (where IV rises and your bought options increase in value even if the stock does nothing).  

It is important that you manage IV effectively in your positions so that you make the most in the changes in the IV priced in options.

Back to you wayne.


----------



## wayneL

positivecashflow said:
			
		

> It is important that you manage IV effectively in your positions so that you make the most in the changes in the IV priced in options.




That deserves to be in bold!

*It is important that you manage IV effectively in your positions so that you make the most in the changes in the IV priced in options.*

IV can be a huge trap for the unwary and a great opportunity if you know what to do with it.

Good stuff Pos!


----------



## wayneL

Vega (sometimes known as Omega) is the effect on option prices from changes in Implied Volatility. 

Like Gamma, I don't bother to quantify Vega (you can if you have  a superhuman mathematical brain). But like Gamma it is necessary to know where vega has the greatest effect. 

Vega has the greatest effect when *At The Money* and diminishes the further you get away from the money. 

So what this means is, if you have bought an ATM option at high IV's ( which you want to avoid like the pox, unless as part of a spread), you're praying that IV's don't decrease, because it's gonna hurt. It will hurt less so if your option is away from the money. Conversely if you bought an option at low IV's, you don't care if IV goes up because it's to your benefit.

Example: MEOW is trading at $25 with option IV's @50%, and for some inexplicable reason, you buy the $20 call for $5.50, the $25 call for $2.15, and the $30 call for $0.65

For some equally inexplicable reason IV's fall to 40% during the day, and the price hasn't changed. This is what happens:

$20 call goes from $5.50 to $5.35, you lose 15c
$25 call goes from $2.15 to $1.75, you lose 40c
$30 call goes from $0.60 to $0.35, you lose 25c

So we can see here that *vega is greatest ATM.*

It's clear why we want to know this, If we're buying options we want to buy at lower end of an options IV' range so that vega will work in our favour ...and of course the opposite if we're writing options.

One more point, vega decreases the nearer we get to expiry.

One more greek to go... *Theta*


----------



## seaurchin

hi wayneL & tech /a and other traders...thanks for the interesting information on options etc.
I have only been paper trading and was successfull inside 2weeks.
so i went in and bought bhp calls monday sold tues. 20% gross profit.

However, I have good relationship with broker and trust him.

My question is I have only the use of ASX.site which is 20 minutes delay or so
Normally as you know you have m/depth to help see the supply demand of stocks instantly...ASX options I see open interest and volume only.

Is there a site which can have this info. faster and market depth.
thanks for your help.


----------



## tech/a

Fraid youll have to pay for live data.

I use Marketcast.$165/mth (SBS feed)
Think Bullcharts is $145/mth(Internet Feed)


----------



## wayneL

seaurchin said:
			
		

> hi wayneL & tech /a and other traders...thanks for the interesting information on options etc.
> I have only been paper trading and was successfull inside 2weeks.
> so i went in and bought bhp calls monday sold tues. 20% gross profit.
> 
> However , i have good relationship with broker and trust him.
> 
> My question is i have only the use of ASX.site which is 20 minutes delay or so
> normally as you know you have m/depth to help see the supply demand of stocks instantly...ASX options i see open interest and volume only.
> 
> Is there a site which can have this info. faster and market depth .
> thanks for your help.




Yep, as tech/a says you will pay handsomely for live data. One other source which may be less expensive is www.sanford.com.au

As far as market depth is concerned, I think with options it is totally irrelevant....particularly with aussie options where in 99% of cases, the market maker is on both sides of the bid and ask.

So you either hit the bid/ask, or place your order and wait to see if the market comes to you.

Cheers


----------



## money tree

comsec has good free options data

I never pay the ask or sell at the bid. Divide the spread and place your order in the middle.....eg:

spread 20/24

put order in @ 22

90% of the time you will be filled within 2 mins. The slightest volatility of the underlying will get you a fill.


----------



## seaurchin

THANK YOU VERY MUCH FOR THAT ADVICE FROM BOTH OF YOU.
M/depth ..well that is good then as it does help me make decision on intraday trading sometimes in bullish market buying shares.
Options ...as you suggest irrelevant market makers both sides.
Could any of you offer an opinion on what to buy next?
or is this time to wait on sideline?
much appreciated for your time. I will look to find a BUY and study and shall post it and ask for opinion ..hope that ok.cheers


----------



## eddievanhalen

Gday Wayne - I'm not an options traders as such but have a basic understanding. Well done on the thread etc..........just thought I'd point out a typo to avoid confusion for the newbies 

Post #15 you said "Most people refer to intrinsic value as time value." when you obviously meant extrinsic.

Cheers,

Ed.


----------



## wayneL

eddievanhalen said:
			
		

> Gday Wayne - I'm not an options traders as such but have a basic understanding. Well done on the thread etc..........just thought I'd point out a typo to avoid confusion for the newbies
> 
> Post #15 you said "Most people refer to intrinsic value as time value." when you obviously meant extrinsic.
> 
> Cheers,
> 
> Ed.




Ah yes, thanks Eddie. Perhaps Joe could correct that for us. 

Thanks in advance.


----------



## RichKid

wayneL said:
			
		

> Ah yes, thanks Eddie. Perhaps Joe could correct that for us.
> 
> Thanks in advance.




I think I've fixed it (post #15), let me know if I stuffed up.

BTW, is there somewhere I can get graphs like the ones shown by Pos for IV?? Are there free tools? I just use Comsec protrader2 and it's pretty basic for options but does have an option price calculator, don't know how good it is though. What do the guru's think of that price calculator?? Is it what they call 'fair value'? It shows my IV and the greeks with some variables like, time to expiry etc so I can fiddle with it a bit.


----------



## DTM

RichKid said:
			
		

> I think I've fixed it (post #15), let me know if I stuffed up.
> 
> BTW, is there somewhere I can get graphs like the ones shown by Pos for IV?? Are there free tools? I just use Comsec protrader2 and it's pretty basic for options but does have an option price calculator, don't know how good it is though. What do the guru's think of that price calculator?? Is it what they call 'fair value'? It shows my IV and the greeks with some variables like, time to expiry etc so I can fiddle with it a bit.




Rich, where do you find that feature?


----------



## RichKid

DTM said:
			
		

> Rich, where do you find that feature?




Hi DTM,
Which one? The options calculator? It's free with Protrader 2 (released last week). Go to the prices menu at the top toolbar (top left corner of screen): Prices-Exchange Traded Options- ETO valuation calculator. Pretty nifty, just don't know enough about options to know what to make of it. Thanks to Wayne, Pos, Guy Bower, Chris Tate (and you!) that should soon change. 

Anyone who doesn't have Protrader2 can see a demo of it on the www.commsec.com.au website- it'll have a sample of how the calculator works. You only need to place one options trade per quarter to get it free so I'm stoked about the money I'm saving (since I manage to lose so much!).


----------



## wayneL

The last greek is *Theta*

Most people will recognise this as *Time Decay* and is the theoretical amount that the value of an option will reduce in a day, all else being equal.

I DO like to quantify Theta and this is easily done in the strategy modeller by going to the position greeks menu and selecting theta. It will show you the theta in dollars for the whole position.

Lets think about why theta exists. We talked about "risk premium" above when we discussed extrinsic value and how time equals risk of the option expiring ITM. So logically each day that goes by means one less day of risk for the option writer. So risk premium reduces as time goes by...hence decay....easy.

As with the other greeks, it is handy to know when and where theta is greatest and least.

Theta is greatest when the option is ATM and, quite obviously, is higher the further away from expiry.

The higher the IV of an option the greater the theta.

We are told that Theta increases the closer to expiry it gets and ramps up considerably in the last 30 days in the life of the option. But this is only true ATM or near the money. Away from the money theta DEACREASES as time goes by.

Theta decreases the further away from the money you get. So as delta approaches 100% or 0%, theta is almost zero, even in the last few days.

The reason we want to know about theta is the most obvious of all the greeks. We want to know how much it is going to cost us to hold bought option positions and what we gain in return for taking on the risk of holding short (written) option positions; and so helps in the management of those open positions...exits etc.

Thats the last of the greeks. Next We go into a little more detail about Implied Volatility, then onto strategies.

Cheers


----------



## wayneL

More about Implied Volatility....

Earlier I described what IV is, but IV has some nuances that the option trader should know about. This knowledge, at the very least, will save you some losses and can also lead to easy profits if one knows what to do with it.

Firstly, most technical traders will know that periods of low volatilty will follow periods of high volatility, and that periods of high volatilty will follow periods of low volatility. In other words, volatility tend to cycle up and down. This is measurable statistically via standard deviation equations. 

"Implied Volatility" tends to somewhat mirror this statistical volatility in most cases.

How does this help? Well as IV is priced into the option, it may be an indication of when we should be buying and or selling options. The old addage of "buy low, sell high" applies to IV as well.

In other words if IV's are high, it would not be an ideal time to be a buyer of options. Not only will theta be higher, but you may be faced with declining IV's and therefore a rapidly decreasing extrinsic option value. This means you have to be VERY right. Even if you are right about your view of the market, but not right enough, you may STILL LOSE.

On the other hand if you buy options when IV's are in the lower quartile of there IV range, you may benefit from INCREASING IV....maybe enough to completely negate theta.

Of course the opposite applies when writing options.

The second little nuance of IV, is *"Volatility Skew"*

Volatility skew comes in two flavours *price skew* and *time skew*

*Price skew* is when the IV of options of the *same expiry date* but *different strike* price are higher/lower. that is to say that they are skewed.

Typically, IV's will increase the furthar away from the money you get. This is often refered to the "volatilty smile" because of the shape of the IV's plotted on a graph. 

Time skew is when the IV of options of the *same strike price* but *different expiry* are higher/lower. For example, at the time of writing, June ATM IDCC call options are trading at 118% whereas the Jan '06 options are trading at 53%.

Time skew is a little harder to find than Price skew, but represents a golden opportunity to lay on some low risk, high probability spreads.


----------



## wayneL

That's enough confusion for this thread....unless there are any questions, I'll move on to something else........

Cheers


----------



## wayneL

Here are some ioption quotes for IDCC that clearly show both *time* and *price* volatility skew....implied volatilities are in the red box marked.

Cheers


----------



## dutchie

Wayne, thanks for a great thread.

Would you be able to give us a few examples (using real values) of the use of the different greeks. I understand what each greek represents but am a bit fuzzy as how they can be used in trading (or not trading).

Thanks, Dutchie


----------



## hissho

time to update this post......

where can i get that "ioption" wayne?

cheers


----------



## wayneL

hissho said:
			
		

> time to update this post......
> 
> where can i get that "ioption" wayne?
> 
> cheers




 "ioption" should simply read "option", a result of fat fingers... apologies for the confusion.

The screenshot is simply interactivebrokers option quote platform... part of their Traders Work Station.

Cheers


----------



## wayneL

wayneL said:
			
		

> I also like to lump in Implied Volatility with the greeks even though, strictly, it is not one of them.




I have always lumped in volatility into the greeks even though it doesn't have a greek name. But I have discovered (or rather realised) that it does.

The measure of 1 standard deviation as an annualised figure (commonly known as implied volatility) is an input into the BSOPM. This measurement in fact has a greek name - SIGMA.

Happy at last, IV is a greek after all LOL


----------



## hissho

thanks Wayne! no wonder google got nothing when i tried to search "ioption"...

2 quick questions:
1) where can i find "cws"? can u put it on your website or email me? 
2) if i don't have access to brokers option quote platform, what can i use to find out greeks and SV and IV?

thanks a lot in advance
hissho


----------



## wayneL

hissho said:
			
		

> thanks Wayne! no wonder google got nothing when i tried to search "ioption"...
> 
> 2 quick questions:
> 1) where can i find "cws"? can u put it on your website or email me?
> 
> I'll email it to you. PM me your email.
> 
> 2) if i don't have access to brokers option quote platform, what can i use to find out greeks and SV and IV?




The option strategy modeller mentioned at the start of this thread will give you all the current greeks... including "sigma" (IV hehe). The derivatives add-in will calculate SV as well.

What markets are you looking at... ASX or US? Then I can tell you where to get IV and or SV history. Generally, You can get US IV/SV data for free from www.cboe.com. AUS data you generally have to pay for, or have webiress.

Cheers


----------



## Magdoran

Hello Wayne,


I’m pleased to see the great job you are doing with options.  You’ve come a long way indeed from when we chatted on the SG site a few years ago about options, well done!

So, are you trading options in the US mainly, or Australia, or both?  I also note you made some comments on silver on another thread, are you trading options on futures too?

I’m curious about what kind of strategies you’re into these days too... like are you doing any ratio positions, perhaps with mixed strikes and mixed expiry dates?  Pretty amazing what you can do, isn’t it?

Anyway, I hope you don’t mind me posting a few observations and slightly alternative viewpoints on your thread for general interest.

Top marks for the initiative!


Regards


Magdoran


----------



## Magdoran

Key Option Concepts:  DELTA

This might simplify some of the concepts above:


Delta:  The rate an option will change in value in proportion with the underlying.

•	Calls have positive delta – expressed from +1 to 100 (% to underlying movement)
•	Puts have negative delta – expressed from -1 to100 (% to underlying movement)
•	At the Money options typically have a +/- delta of 50
•	Way out of the money options have low deltas
•	Deep in the money options have high deltas.

Increased volatility – call deltas move towards +50 and puts towards -50
As time passes – call deltas move away from +50 and puts away from -50


Hope this helps


Magdoran
P.S. Based on Sheldon Natenberg "Option Volatility and Pricing"


----------



## Magdoran

Key Option Concepts: GAMMA

This might simplify some of the concepts above:


Gamma:  The rate an option’s delta changes as the underlying price changes.

•	Gamma is expressed as +/- delta points gained/lost when the underlying rises/falls
•	Calls and puts must have positive gamma. 
•	Gamma of an ATM option can increase dramatically as time moves closer to expiry, or volatility decreases (or both).

As time to expiration is increased and/or volatility is increased, options tend to become more ATM, with call/put deltas approaching +50/-50.

As time to expiration is decreased and/or volatility is decreased, option call/put deltas tend to move away from +50/-50.

An option which is ITM will tend to move further ITM, and an OTM option will tend to move further OTM.  ATM options with deltas near 50 tend to maintain delta despite time and volatility.

ATM in this case assumes the option most likely to end near the actual underlying price at expiration, and assigns a value of around +/- 50 to it.



Hope this helps


Magdoran
P.S. Based on Sheldon Natenberg "Option Volatility and Pricing"


----------



## wayneL

Magdoran said:
			
		

> Hello Wayne,
> 
> 
> I’m pleased to see the great job you are doing with options.  You’ve come a long way indeed from when we chatted on the SG site a few years ago about options, well done!
> 
> So, are you trading options in the US mainly, or Australia, or both?  I also note you made some comments on silver on another thread, are you trading options on futures too?




Hi Magdoran,

Welcome to ASF, your contributions will be a bonus for members here  

I am trading exclusively US options, and moving steadily over to futures options (as well as straight futures). Though will always try to have a hand in the stock market till.

There are several features of futures options that I am enjoying a lot, not the least of which is margin requirements. SPAN rocks.



			
				Magdoran said:
			
		

> I’m curious about what kind of strategies you’re into these days too... like are you doing any ratio positions, perhaps with mixed strikes and mixed expiry dates?




I'll put on any and every strategy. First point of analysis is IV/SV, then market view, various black swan scenarios and go from there. I'll lean towards the simplest strategy that will get the job done initially, and will leg in to more complex stuff if required for defence & or optimizing. This may include ratios mixed strikes/expiries etc.[/QUOTE]



			
				Magdoran said:
			
		

> Pretty amazing what you can do, isn’t it?




Indeed. I've ended up with some pretty creative positions from time to time. I've been an active campaigner for folks thinking beyond what some of the more asinine seminar presenters teach as "magic moo cows" and similar silliness (all fine strategies in their rightfull place, but not the traders panacea as presented)



			
				Magdoran said:
			
		

> Anyway, I hope you don’t mind me posting a few observations and slightly alternative viewpoints on your thread for general interest.




Fire away!! This game is so multifaceted that there is ALWAYS an alternative viewpoint. Re-reading through this thread, I also have alternative viewpoints to myself! LOL

Open discussion on options is "class A" learning IMO. 

Folks, 

Mag' knows his stuff, so listen up.

Cheers


----------



## Magdoran

US Market Vs Australian Market


I’d like to give a slightly different perspective on the appraisal earlier on the thread.

A lot depends on your trading style and preferences.  Yes the US market is more liquid, but there is a subtle reason for this other than just more volume being traded per se.

What a lot of new options traders fail to grasp at first is the difference in gradation of the strikes.  The US stock option gradation of strikes is either at $2.50 or $5.00 increments, while in Australia it is at $0.25 or $0.50.  This is why each strike has potentially more open interest there because the range of choices is very limited.

So why is this important you may ask?  Well, when selecting precise options based on a price and time objective, the risk and reward parameters become very different when you can select a strike which is likely to finish in the money at expiry as opposed to out of the money.  This can mean a great deal of difference in risk/reward (a US return for a similar stock move could be say around 50% - 150% where in Australia depending on a range of variables you may make the same, or well in excess of this range – perhaps as high as a 500% return for a similar percentage move in the underlying).

Another factor is that the option value increments for US stock options is set at 0.05 (5 cents) as opposed to (half cent) 0.005 gradations for Australia (that’s 10 times as fine – this is significant to many positions, especially if you want to exit a loser).

Also, the volatile movement in the US can see the underlying jump past your preset contingent orders, and unless you trade all night (or get up early to adjust in the morning before 6.00 AM during winter), you can wake up the next day to a huge loss.  Using market orders for contingent sell orders is probably the only way to ensure you get a fill, but at the real risk of getting a paltry sum for your position on stoploss contingent orders – especially vulnerable to intraday spikes.

The main problem in Australia is that there is the lower open interest, and problems with getting set in stocks designated “flex” (where the market maker doesn’t have to provide a market, and only had to show a market for a reduced period at their discretion).  You can trade these markets, but the spread is often going to favour the market maker more, hence you’re looking for a high probability trade with sufficient risk reward parameters to justify the spread risk undertaken).

From my experience, you have to keep a good armoury of strategies and tactics to select the right approach for each market.  It is important to be aware of these key differences when trading either market.

Hope this is of interest.


Regards


Magdoran


----------



## Magdoran

Hello Wayne,


Thanks for the welcome, and gratifying to see how much you’ve expanded your capabilities.  Futures are an interesting arena, one I more watch than trade currently.  I also moved more to the Australian market since I found my performance was better than in the US (I like my sleep – and try not to overtrade).  How are you finding the US market at the moment?

I’ve been doing a lot of work recently on hedging strategies combining options and futures (options on futures perhaps more precisely), but it’s pretty involved when you’re trying to work out a range of instruments to work in concert – still getting my head around how to automate this more.  So I share your enthusiasm for the breadth of opportunities, the things you can do are almost endless, aren’t’ they?

Nice to hear you are progressing well.  Over some time now, I’ve found that sometimes it’s better to keep things simple and not get bogged down in complexity… simple bullish strategies like bull puts when volatility is high combined with longer dated OTM calls and then selling current month calls a strike or two towards the money works well in a bullish market.  The danger being that the sold call may end up in the money at expiry, so have to manage these carefully.

The key is, “does it work in reality?”, isn’t it?  As T.S. Elliott said “between the theory and the practice falls the shadow”.

Thanks for the salutation too, much appreciated.


Regards


Magdoran


----------



## wayneL

Magdoran said:
			
		

> US Market Vs Australian Market
> 
> What a lot of new options traders fail to grasp at first is the difference in gradation of the strikes.  The US stock option gradation of strikes is either at $2.50 or $5.00 increments, while in Australia it is at $0.25 or $0.50.  This is why each strike has potentially more open interest there because the range of choices is very limited.




This is a good point Mag' and this can adversely affect the flexibility of what you can achieve in the lower priced stocks. Anything below say $15 is generally a waste of effort. 

However:

1/ Many US stocks are much higher priced, making those $2.50 - $5.00 (and sometimes $10.00) intervals relatively closer together (in % terms) . Consequently, I look for stock prices with a bare minimum of $20, and generally much higher. This alleviates this interval problem to a large extent.

Also there are the Index tracking ETFs such as SPY DIA IWM and QQQQ, all of which have strike intervals of $1.00. This make these quite sweet contracts to trade. ( there are also true index options as well, SPX OEX NDX etc)

In addition, futures option intervals are much more reasonably spaced. Another reason of my growing fondness for them.

2/ There is vastly more choice of optionable stocks to trade. If the interval is proving to be adverse to your intentions for the trade (and this does happen frequently enough), just move on to something else.




			
				Magdoran said:
			
		

> Another factor is that the option value increments for US stock options is set at 0.05 (5 cents) as opposed to (half cent) 0.005 gradations for Australia (that’s 10 times as fine – this is significant to many positions, especially if you want to exit a loser).




My comment regarding this largely reflect my comments on interval. It definately can be a disadvantageous factor, particularly in lower priced shares and WOTM options.

However there is some talk of moving on to 1c value increments. The exchanges are not keen on the idea, but I strongly feel this will happen at some point in the not-too-distant future. This will be a huge improvement when it happens.

**

As always, horses for courses and folks can certainly do well from the OZ options market. On balance though, I personally much prefer trading options in the Evil Empire. Mag' oobviously prefers the ASX. Both have advantages and disadvantages. In the end it may come back to style of trading as to which market is more suitable for an individual.

Cheers


----------



## wayneL

Magdoran said:
			
		

> Hello Wayne,
> 
> 
> Thanks for the welcome, and gratifying to see how much you’ve expanded your capabilities.  Futures are an interesting arena, one I more watch than trade currently.  I also moved more to the Australian market since I found my performance was better than in the US (I like my sleep – and try not to overtrade).  How are you finding the US market at the moment?
> 
> I’ve been doing a lot of work recently on hedging strategies combining options and futures (options on futures perhaps more precisely), but it’s pretty involved when you’re trying to work out a range of instruments to work in concert – still getting my head around how to automate this more.  So I share your enthusiasm for the breadth of opportunities, the things you can do are almost endless, aren’t’ they?
> 
> Nice to hear you are progressing well.  Over some time now, I’ve found that sometimes it’s better to keep things simple and not get bogged down in complexity… simple bullish strategies like bull puts when volatility is high combined with longer dated OTM calls and then selling current month calls a strike or two towards the money works well in a bullish market.  The danger being that the sold call may end up in the money at expiry, so have to manage these carefully.
> 
> The key is, “does it work in reality?”, isn’t it?  As T.S. Elliott said “between the theory and the practice falls the shadow”.
> 
> Thanks for the salutation too, much appreciated.
> 
> 
> Regards
> 
> 
> Magdoran




One thing I've noticed with professional/successful options players is the vast diversity in the ways in which money can be extracted from the market.

As you know, there are currently 4 greeks that can be traded either with an independant view or in combination with each other (excluding only Rho in this currently stable interest rate environmnt. That could change though)

This makes for a bewildering array of long, short, and neutral combinations of greek positions that can be exploited.

It's like 3d chess and a lot of fun to learn, grasp and implement.

...and the learning never stops. 

Cheers


----------



## Magdoran

Hi Wayne,


All the points you make are valid.  You are quite right, it is horses for courses, very much so, and I respect each trader has their own path to walk, couldn’t agree more.  That’s the beauty of these instruments – the ability to express each individual’s strengths (and perhaps weaknesses).

The US has vastly more optionable stocks, quite true, and the index and futures options are certainly better graded than the stocks.  Fully agree here (I was referring to stocks – no argument about indexes and futures).  The problem I do have with the indexes is that it is hard to get a good spread trade based on a range of factors – you rarely see a skew in the strikes for the indexes for instance, which limits opportunities other than to trade straight option positions.

Where the gradations in strikes have an impact is when you compare Australian stocks that are around or above $20 (e.g. COH, MBL, CBA, WPL, RIO) compared to similarly priced US stocks, the potential reward for a similar percentage move in each underlying is different given you can precisely choose a mildly OTM option which moves into the money before your time exit, gaining significantly in raw percentage returns (say 500% as opposed to say %150).  Makes a big difference to your bottom line when the market is trending nicely.

The difference also in value gradations can shave value off your entries and exits since you can’t move more finely, and I would argue that this adds up (in the market makers favour).  It would be great if the US exchanges embraced a 1 cent standard!

This assumes that the US $5.00 increment strike has a lower probability of moving into the money, and of course the delta on an Australian option that moves into the money (ITM) appreciates significantly as the underlying moves further into the money, hence the major difference in both the potential for significant rewards as well as the probability of success, wouldn’t you agree?

Great chatting Wayne!


Regards


Magdoran
P.S. You’ll be in trouble if my wife sees your comment on the “Evil Empire” – she’s from the US! She’ll probably want to join me on my trip to Perth soon, to wrap you over the head with a newspaper (or one of my options books), so watch out! Hehehe.  Mag


----------



## wayneL

Magdoran said:
			
		

> Where the gradations in strikes have an impact is when you compare Australian stocks that are around or above $20 (e.g. COH, MBL, CBA, WPL, RIO) compared to similarly priced US stocks, the potential reward for a similar percentage move in each underlying is different given you can precisely choose a mildly OTM option which moves into the money before your time exit, gaining significantly in raw percentage returns (say 500% as opposed to say %150).  Makes a big difference to your bottom line when the market is trending nicely.
> 
> The difference also in value gradations can shave value off your entries and exits since you can’t move more finely, and I would argue that this adds up (in the market makers favour).  It would be great if the US exchanges embraced a 1 cent standard!




Yes, I can see exactly what you are saying Mag. This perhaps highlights that, depending upon your philosophy of trading, one or the other may be better. I tend to think of my positions in terms position delta, position gamma, defence capabilities and total spread to exit if all goes pear shaped. I also think of profit/loss in terms of total capital, rather than individual positions. 

If I am going to initiate a long options position, based on the factors present in my market, I am more likely to go ATM or slightly ITM. Theta is at a maximum at this point, but so is vega and gamma and we are long these. Therefore I am pretty concious of IV levels relative to their recent history and avoid potential IV crush like the pox. In fact I like the potential of IV "rush" and will seek out those opportunities.

Otherwise, If I' keen on a particular opportunity and want a delta position, I'll just spread off straight away.

In general though, unless IV's are low and the outlook is for increasing volatility, I would prefer to have long theta (+) positions.



			
				Magdoran said:
			
		

> ....and of course the delta on an Australian option that moves into the money (ITM) appreciates significantly as the underlying moves further into the money, hence the major difference in both the potential for significant rewards as well as the probability of success, wouldn’t you agree?




I assume you are refering to higher gamma, due to lower IV in Oz options? 

Assuming that realised volatility reflects IV it shouldn't make a helluva lot of difference should it? The higher IV (and therefore lower gamma) stock should move proportionately more, realising simmiar gains in terms of capital employed?



> Great chatting Wayne!



Yes aways fun getting into the nitty gritty of options  




			
				Magdoran said:
			
		

> P.S. You’ll be in trouble if my wife sees your comment on the “Evil Empire” – she’s from the US! She’ll probably want to join me on my trip to Perth soon, to wrap you over the head with a newspaper (or one of my options books), so watch out! Hehehe.  Mag




 I'm a yank originally too, so I'm allowed  

I'll still remember to duck though... just in case


----------



## Magdoran

Hello Wayne,


So, which part of the states are you from?  I suppose you’ve been in Australia for a while then?

Ok, the point I was making about US Vs Australia is this:

Say we have two stocks trading at $40 (hypothetically let’s say DOX and CBA were trading at $40).

We project that each stock will hit $44.50 by 30 days to expiry.

DOX has a $40 and $45 call available ($5 increments).

CBA has literally 14 strikes available between these increments.

I used July calls for both, and added days for the US options to match the theta decay (I set the time to expiry and the entry and exit price to the same numbers for each stock).

I trailed a few different variables, and came up with a range of results where the CBA trade was making around 1000% ROI for several OTM strikes mid way between 40 and 45, while the DOX returns were more like 400% ROI for the two strikes available.

This is consistent with my experience trading both markets.  Trading OTM positions is more aggressive, but the rewards are far higher when the trade is correct.  Also, the delta effect is less if you are wrong for OTM positions.

I deliberately wanted to make the US look bad however, by selecting a price range which would show up the divergence clearly, so the difference is not always as great, it really depends on the entry and end price, and the time frame.  

If the US stock entry and exit line up favourably with the strike prices, the difference reduces.  But this range is affected by the width between the strikes, and severely limits the range of strategy choices in comparison, and waiting for the right movement in line with the limitations of the US strikes is restrictive in comparison.  Just think it through– 14 strikes available compared with 2.  Everyone reading this, please do the math yourself and have a play – see what you find.

Another factor to consider which options model you are using.  I prefer American exercise/ Binomial over European exercise Black and Scholes, I think the former gives a more accurate forecast on average.

Admittedly volatility is another key aspect to this equation, and on average the US has had much higher stock implied volatility than in Australia, hence credit positions are generally effective in the US, hence straight calls and puts work better on average in Australia than the Us since the implied volatility has been lower (although of course this can change).

Anyway, this is food for thought, isn’t it?


Happy modelling!


Magdoran

OTM = Out of the Money
ATM = At the Money
ITM = In the Money
ROI = Return on Investment


----------



## sails

Hi Magdoran,

Welcome to ASF!  It is a real pleasure to find someone else with such an interest in Aussie options!  

I've been trading Aus options for about 3 years now having started with SPI futures a few years previously.  In these 3 years of studying options and lots of testing and strategy experiments, live trading and general observations, I have found the best way for me to make money is simply being long premium but very short term - usually not too far OTM and mostly front month.  With some of our stocks being so chronically low in IV, I'm far more comfortable being long gamma.  For the short time I'm in a trade, theta is really not an issue.  So really interesting that you have come up with similar observations on the Aus options market.  

For a long time I tried to make +ve theta work for me in the form of credit type spreads, butterflies and all the variations I could find using Aus options, but without much success.  Also worked hard on delta neutral positions so didn't need to know where the stock might go, but in the end got back to work on the charts and let gamma work for me.  

I do agree with you that it is great to have so many strikes on higher priced shares - but did you know that the ASX stated some time ago now that they are changing CBA, RIO and MBL to $1 strikes?  CBA usually only averages a $2 range per month (exception this month!) so it will take the shine off it a bit.  I have noticed now that any new strikes added are in $1 increments - already started in June with 4050 being the last 50c strike.  Can understand with RIO and MBL being much higher priced shares, but think it's a bit mean on CBA.  

Cheers,
Margaret.


----------



## wayneL

Magdoran said:
			
		

> Hello Wayne,
> 
> 
> So, which part of the states are you from?  I suppose you’ve been in Australia for a while then?




I'm from the "New" New Mexico. i.e Southern California. And yes I've been here long enough that my relatives no longer understand a word I say! LOL



			
				Magdoran said:
			
		

> Ok, the point I was making about US Vs Australia is this:
> 
> Say we have two stocks trading at $40 (hypothetically let’s say DOX and CBA were trading at $40).
> 
> We project that each stock will hit $44.50 by 30 days to expiry.
> 
> DOX has a $40 and $45 call available ($5 increments).
> 
> CBA has literally 14 strikes available between these increments.
> 
> I used July calls for both, and added days for the US options to match the theta decay (I set the time to expiry and the entry and exit price to the same numbers for each stock).
> 
> I trailed a few different variables, and came up with a range of results where the CBA trade was making around 1000% ROI for several OTM strikes mid way between 40 and 45, while the DOX returns were more like 400% ROI for the two strikes available.
> 
> This is consistent with my experience trading both markets.  Trading OTM positions is more aggressive, but the rewards are far higher when the trade is correct.  Also, the delta effect is less if you are wrong for OTM positions.
> 
> I deliberately wanted to make the US look bad however, by selecting a price range which would show up the divergence clearly, so the difference is not always as great, it really depends on the entry and end price, and the time frame.
> 
> If the US stock entry and exit line up favourably with the strike prices, the difference reduces.  But this range is affected by the width between the strikes, and severely limits the range of strategy choices in comparison, and waiting for the right movement in line with the limitations of the US strikes is restrictive in comparison.  Just think it through– 14 strikes available compared with 2.  Everyone reading this, please do the math yourself and have a play – see what you find.
> 
> Another factor to consider which options model you are using.  I prefer American exercise/ Binomial over European exercise Black and Scholes, I think the former gives a more accurate forecast on average.
> 
> Admittedly volatility is another key aspect to this equation, and on average the US has had much higher stock implied volatility than in Australia, hence credit positions are generally effective in the US, hence straight calls and puts work better on average in Australia than the Us since the implied volatility has been lower (although of course this can change).
> 
> Anyway, this is food for thought, isn’t it?
> 
> 
> Happy modelling!
> 
> 
> Magdoran
> 
> OTM = Out of the Money
> ATM = At the Money
> ITM = In the Money
> ROI = Return on Investment




Cox, Ross & Rubinstein all the way  

Ok your scenario is most certainly true for a certain set of conditions. For those figures to works as posted:

*IV would be lowish... say ~15% or less.
*A $4.50 move would be a move not indicated by IV. I'm guessing it would be > 2 sigma, perhaps > 3 sigma. In other words a big move for this stock(s) (without knowing the exact time frame we are speaking of)
*Higher IV's would temper this markedly

Now I have a couple of problems with OTM options... and one of them IS more apparent in the US market.

*Position size would need to be increased exponentially the further we get away from the money to maintain position Delta
*Contest risk (transaction costs plus entry/exit spread) is increased... already double at 42.50 strike. This alone destroys any advantage OTM has with the range of returns that are within the high probability range. The move MUST be strong
*We are moving INTO or THROUGH an area of maximum theta, and beacuse of inreased position size, time will be of the essence. The longer we take to get to target the more or ultimate profitability is compromised. This may be alleviated by vega, but we don't know that.
*We don't get the benefits of gamma until we get a substantial move. The more probable range of returns will not benefit hardly at all.

All that said though, if the stock moves even further... say $45 -$48 You will kick one huge goal with the OTM call.

At the end of the day (or more accurately, at the end of the year) it is all comes back to the expectancy equation to see which is better. Because we are dealing with a highly chaotic subset of market dynamics, this can only be done accurately in parallel and in retrospect on real returns.

What tickles your fancy?...risk...reward....probabilty, in any combination you like!

Great brain exercise! (but I've got lactic acid build up, need to go do some warm down   )

Cheers


----------



## Magdoran

Hello Margaret,


Thanks for the welcome.  It is nice to find someone who is on your wavelength isn’t it?

Hmmm, it is a shame that the options are moving to $1 Increments for the higher priced stocks, most annoying really, but the percentages are still better than $5, wouldn’t you agree?

I certainly agree about the non directional and volatility plays being less effective over the past couple of years in the Australian market compared to straight positions on average.  You still could have entered a lot of bull puts though, and done very well.

Butterflies work well in sideways market (hence more effective in the US), so I can understand you not using them in such a strongly trending/volatile market in Australia from 2003 onwards.

With the higher volatility now though, maybe it’s time for a few credit positions – I’ve been thinking about ratio spreads recently, but never tried them in practice.

As for theta, agree, not an issue for short term long options.  But crucial for longer term plays, both credit and debit.  Have a look at my comments to Wayne I will post below for some of my musings, and see what you think.


Once again thanks for the warm welcome.


Regards


Magdoran


----------



## Magdoran

Hello “Mr NEW Mexico” (Wayne),


I bet your family back home can’t understand you with a Geraldton accent!

Now, you raise a lot of valid points:

Low IV:
Implied volatility is usually lower in Australia, around 15-20, some times lower, sometimes higher – this is certainly an important criteria to factor in to decide to go long a call or put, so agree here.

Significant move:
Why I chose a significant move is because it highlights the effect of a finer gradation in strikes.  Certainly entering an OTM long option requires a sufficient move to make a good profit (although you can still make 30-100%with a more common move as long as you don’t go too far OTM and ride the IV favourably).

The idea is to look for patterns where you are expecting an explosive move, and position accordingly to capture significant profits (partly to offset the times you get it wrong and do 30%, 50% or even 100% losses, plus the spread slippages and brokerage you correctly refer to).  You have to get 3 elements reasonably right – time frame, magnitude, and direction.

Implied Volatility:
Yes, IV is key.  If it is too high, this effects your strategy options, hence you start to consider either ignoring the opportunity, finding a different instrument, looking at credit spreads (like bull puts or bear calls for instance). But it also requires analysing the IV history, and projecting IV pretty much as you project stock movements, although the logic is different (as you know).  I try to project what is likely to happen in tandem with the underlying, and especially how it will affect the chosen strategy.  In fact, I have been known to spend more time working through the volatility scenarios than I did on the underlying chart.

Position Size:
Excellent point Wayne (MNM). You are right, you have to balance the position size with the risk, take into account the likely slippage and transaction costs, work out the probability of success, and look at the ramifications if you get it wrong (as well as if you get it right of course too).  

When I trade this kind of high risk trade, I accept I may make significant losses (up to 100%).  But if I can make higher returns from a sufficient number of successful trades, enough to counteract the costs and losses, I’m ahead.  But this is still a work in progress, and far from a proven methodology – it will probably take me another 2-3 years to fully develop it.  It is not for newbies, that’s for sure.

One point here is that the further OTM you go, the more time you should consider buying if long. You can play diagonal/calendar strategies here sometimes to help fund the position by selling at the same strike if conservative, or strike or two towards the money if more agressive in the current month (aiming to sell the most premium possible, usually with around 30 days to maximise theta decay in the sold position).  Again not for newbies, but works nicely in an orderly trending underlying.

Contest Risk:
Can’t say I really understand this.  I didn’t think the transaction costs were that great in the Australian market when the contract size is 10 times that in the states (1000 vs 100).  This also has a marked advantage for the Australian market.

As for theta decay, the rules are straight forward.  If long look to exit by the time the option is hitting 30 days (exception is to hang on when you bought OTM and it is deeply ITM – the theta decay and time value are often then a negligible component – one trick is to exit partial positions to lock in profit, say half, one third, or if conservative two thirds).

If short, try to sell with under 45 days time value and above 20 days if possible, also looking for IV skews in your favour.

Another trick in the book is to also enter a bull put or bear call at the same time as the single series long option – but only if you’re really sure it will either go sideways or in your direction, otherwise your exposure is much higher.  The idea is that if your OTM position does nothing for a month, the credit spread helped to negate the theta decay, and finance holding onto the long option If still confident of a move (if not wind it out on the trading plan criteria – time, stop loss, profit stop, or partial /complete exit).  The risk though is you get it really wrong, but at least your risk is limited in both cases.

Gamma:
Do you really use this a lot independently from all the other variables?  I don’t, it just factors in with my model, so I know what things are likely to look like within a range, based on price action and time (includes forecasting IV too by the way).  Gamma just helps to calculate how quickly the delta will change if your position moves in or out of the money, doesn’t it?

Significant moves in actuality:
Yes, if the underlying does move substantially in the direction you think it will, in the time you think it will, OTM positions really rake in the big profits, and this is really the challenge with this style of trading – time, direction, magnitude (and correct forecasting of IV).

What tickles my fancy??? 
Many things Wayne.  I’m not a “satisfiser” by nature, but a “maximiser”.  The ultimate objective is quite complex actually (funny, no one has asked me that for a long time), but in trading involves longer term targets, job satisfaction (I actually get a kick out of what I do), I like being able to recognise my errors and correct them (ala Soros), but it’s certainly nice to be right sometimes (which is probably universally true for everyone).  

How about you?




Hope your lactic acid build up abated!


Regards


Magdoran


----------



## wayneL

Magdoran said:
			
		

> Hope your lactic acid build up abated!




Remarkably, the body can use lactic acid for aerobic energy production. Unfortunately the brain runs exclusively on glycogen, so had to resort to a steady jog. (of course, the brain doesn't produce lactic acid anyway : )

***

Well what an interesting discussion! I don't think we've converted each other, but I don't think the goal was proselytization anyway. But certainly an appreciation of trading philosophy has been achieved.



			
				Magdoran said:
			
		

> Contest Risk:
> Can’t say I really understand this. I didn’t think the transaction costs were that great in the Australian market when the contract size is 10 times that in the states (1000 vs 100). This also has a marked advantage for the Australian market.




Just for clarification, contest risk is the immediate cost of a simultaneous entry and exit of position i.e. (spread x 100(or 1000) x contracts) + (commish x2)

A larger position size to achieve adequate delta increases contest risk.

Commish: costs me $0.75 per contract.



			
				Magdoran said:
			
		

> What tickles my fancy???
> Many things Wayne. I’m not a “satisfiser” by nature, but a “maximiser”. The ultimate objective is quite complex actually (funny, no one has asked me that for a long time), but in trading involves longer term targets, job satisfaction (I actually get a kick out of what I do), I like being able to recognise my errors and correct them (ala Soros), but it’s certainly nice to be right sometimes (which is probably universally true for everyone).
> 
> How about you?




Well... sticking strictly to trading matters....  I broadly catagorize option trades as a punt or a book and therefore traders as either bookies or punters. (purely from a philosophical standpoint. This is *not* to infer that the punter is a gambler. This is just to reflect the risk/reward/probabilities preferences of a trader ) The bookie side of things is what tickles my fancy. But I will readily punt when the opportunity arises. 

A bookie (and this time I'm refering to the trackside species) is, as a matter of survival, a punter as well. Books often should, or need, to be hedged with a punt. (Now speaking of the trackside AND the screenside bookie)

What part of Rome Revisited does your wife come from? Have you visited? What did you think?

Cheers


----------



## wayneL

> Gamma:
> Do you really use this a lot independently from all the other variables? I don’t, it just factors in with my model, so I know what things are likely to look like within a range, based on price action and time (includes forecasting IV too by the way). Gamma just helps to calculate how quickly the delta will change if your position moves in or out of the money, doesn’t it?




Mag,

Not really independantly with a directional trade, but a big factor in delta neutral trades as it is gamma that manufactures delta in this case.

When short gamma, obviously we want as little of it as practical and the plan is that theta will overcome any unwanted delta developed through gamma.

When delta neutral and long gamma, gamma is very much the prime consideration....well, and vega, but primarily gamma...  because we want those deltas showing up asap. 

The trading strategy known as "gamma scalping" where delta is continuously hedged thus locking in profits at regular and preferably very short intervals, indicates that gamma is the basis. But as with all strategies, the other greeks will always show up to play their own little role.

Very egotistical those greeks, they always want to have a say... just as bad as ex-yank option traders  

Cheers


----------



## Ageo

Magdoran said:
			
		

> When I trade this kind of high risk trade, I accept I may make significant losses (up to 100%).  But if I can make higher returns from a sufficient number of successful trades, enough to counteract the costs and losses, I’m ahead.  But this is still a work in progress, and far from a proven methodology – it will probably take me another 2-3 years to fully develop it.  It is not for newbies, that’s for sure.
> 
> Regards
> 
> 
> Magdoran





Hi Mag (great discussions btw),

i believe the above post is simply "positive expectancy"

Where your win/loss ratio might be less than 50% but your risk/reward is much higher. Knowing that you can achieve a higher risk/reward is so important and basically takes off the pain off being "right" and will allow you to take losses with a smile.

Remember positive expectancy should be based on worst case scenario which means your not always going to have a worst case scenario are you?   

Like you said if you use OTM bought calls (as with puts) and the moves your after make over 500%+ . Then basically you can afford to lose 4 times (as long as your position size stays the same). To me thats a 25% win/loss ratio but a 5:1 ROR (return on risk) ratio

So even if your so bad at picking entries you will still have fantastic system. And remember the higher your win/loss ratio the small the ROR ratio has to be in order to be profitable.

But imagine having a win/loss ratio of 50% and a ROR of 5:1 ratio?

hehe now we are getting somewhere!

Adrian


----------



## Magdoran

Hello Wayne,


My wife grew up in Kansas, but lived in LA for a while.  Yes, I’ve been there – love it!  It is freaky though how a whole country can drive on the wrong side of the road! (hahaha – when in “New Rome”).  But like Australia, it is a big country, and I’ve only see a fraction of it I’m sure.  I could spend lots of time there and still not see all I want to.  We’re looking to go over for thanksgiving later this year… looking forward to that.

As for conversion, that was never my intention.  I kind of think about individual preferences for markets and instruments along the lines of a smorgasbord – I like chicken and you like beef, and the next person is vegetarian… (Or I LOVE Chocolate, and someone else likes lemon cheesecake – better stop this, I’m getting hungry!).  

My purpose was to offer a different perspective for other readers to consider giving them more choices, and an insight into the experiences from those that have done it.  It is also a good vehicle for discussing the way that the different “Greeks” effect risk and reward, and illustrates just how important it is to really do the ground work about how options behave, and to develop the capacity to project/forecast potential results using this kind of instrument.


Contest Risk:
Aha, contest risk, I kind of remember this term now – sure, the cost to immediately enter and exit is certainly a factor with way OTM positions, and certainly options with wide spreads, so this is why this strategy needs careful planning and use only when being able to project in time, price, and direction accurately enough to select the best risk/reward parameters.  

This is only one of many approaches I use, and only in specific situations.  It is a tool in the shed.  But the process involved in considering this kind of trade really highlights the greeks, and shows the effect that different strike gradations can have in different markets (also shows how important IV is).

Now on this point of position size, actually you don’t increase the value (although you may trade more contracts in comparison).  Interestingly, I tend to keep these positions fairly small (under 10 contracts Australian); hence the only additional cost is the OCH fee in and out.

Punter Vs Bookie:
Interesting “track” analogy.  I suppose I’m a bit of both under your definition, but I’d like to think that I’m the “casino” Mark Douglas style, in that I’m employing a technical analysis and options edge… Ageo/Adrian’s comment is along these lines (kind of has elements of “positive expectancy”).

Gamma:
Delta neutral concepts at the advanced end get very hairy (which is why I set up a model and let the computer do all the hard sums).  The problem I have is that implied volatility really messes things up, along with theta decay if short an option under 30 days (which is often a primary focus of a market neutral credit spread).  Sure, with things like butterflies and condors, and perhaps in ratio spreads (especially in different time frames) this is a consideration, but I still hold IV is key here, and theta decay.

I never did really get into gamma type trades, (just didn’t see this style as attractive as other approaches in this kind of market), but I’d be interested if there is a gamma player out there who’d like to share their knowledge (this is not a strong suit of mine, trading this way).  Could be interesting…  (We could also talk IV though; I think this is really relevant in all trades).

I found McMilan’s book “Options as a Stratgic Investment” to be invaluable for this kind of options theory... ever get to read it?


Regards


Magdoran


----------



## wayneL

Magdoran said:
			
		

> We’re looking to go over for thanksgiving later this year… looking forward to that.




Have fun! But beware of constitution free zones (airports, and increasingly, everywhere else)



			
				Magdoran said:
			
		

> As for conversion, that was never my intention.  I kind of think about individual preferences for markets and instruments along the lines of a smorgasbord – I like chicken and you like beef, and the next person is vegetarian… (Or I LOVE Chocolate, and someone else likes lemon cheesecake – better stop this, I’m getting hungry!).
> 
> My purpose was to offer a different perspective for other readers to consider giving them more choices, and an insight into the experiences from those that have done it.  It is also a good vehicle for discussing the way that the different “Greeks” effect risk and reward, and illustrates just how important it is to really do the ground work about how options behave, and to develop the capacity to project/forecast potential results using this kind of instrument.






			
				wayneL said:
			
		

> .....but I don't think the goal was proselytization anyway. But certainly an appreciation of trading philosophy has been achieved.




 




			
				Magdoran said:
			
		

> Gamma:
> Delta neutral concepts at the advanced end get very hairy (which is why I set up a model and let the computer do all the hard sums).  The problem I have is that implied volatility really messes things up, along with theta decay if short an option under 30 days (which is often a primary focus of a market neutral credit spread).  Sure, with things like butterflies and condors, and perhaps in ratio spreads (especially in different time frames) this is a consideration, but I still hold IV is key here, and theta decay.




Indeed, IV is most certainly the key. The first point of analysis for me. This will immediately narrow down the selection of strategies I will employ in any given situation. This is where a lot of traders get into trouble. One must have a precise view of market direction (even if it is precisely imprecise). But then one must have a view of volatility within the term of the option. When all the planets line up, there is very high probability of profit.



			
				Magdoran said:
			
		

> I never did really get into gamma type trades, (just didn’t see this style as attractive as other approaches in this kind of market), but I’d be interested if there is a gamma player out there who’d like to share their knowledge (this is not a strong suit of mine, trading this way).  Could be interesting…  (We could also talk IV though; I think this is really relevant in all trades).




I don't think the technique is useable in the Aussie market, not in a gamma scalping context. I think gamma/VEGA  delta neutral trades have possibilities. I posted a paper trade along these lines on OSH somewhere on this board that turned out quite good.

In the US Gamma scalping is a great technique. But as mentioned above, all the planets have to line up. It can't be applied indiscriminantly (as with any trade) But when the right conditions turn up, I'm in. They work VERY well.



			
				Magdoran said:
			
		

> I found McMilan’s book “Options as a Strategic Investment” to be invaluable for this kind of options theory... ever get to read it?




Almost unbelievably, I have never read it. Haven't read Natenbergs book either. I learned mostly from Charles Cottle. By an incredible stroke of good fortune, I ended up in an IRC chatroom with him and able to ask questions directly.

The guy is a savant and incredibly generous with his knowledge (it was a free , public chatroom), and while the process did involve several episodes of brain fission, I did manage to pick up lots of stuff... enough to be able to put the missing pieces of the jigsaw puzzle together myself. (Saved all the transripts  ) I spend most of my time with modelling software and observing greeks real time (Ironically I used to enjoy observing certain types of Greeks:girl: while sitting in Melbourne cafe's before I started trading options  )

McMillans book is on the to-read list, as is Natenbergs. 

They are both highly regarded enough by people I respect for me to suggest them as must reads for any aspiring options trader.

Cheers


----------



## Magdoran

Hi Wayne,


Natenberg and McMilan are both on my shelf, and I refer to them from time to time.  I don't lend these out - but I do let the Guy Bower book out for newer to intermediate options players...

All well worth reading.


Magdoran


----------



## wayneL

At some stage I must aquire the aforementioned tomes. Better read what I've been suggesting people read huh?

I've got a couple of Cottles books, which have served as my options bibles.

I've also got a really interesting book - "Trading Options To Win" by Stuart Johnston. This guy thinks out of the square, and is at times, absolutely hilarious... he trades commodity options, and is into statistics, seasonals etc., not one price chart in the whole book. But of great interest even to a techie.

Cheers


----------



## sails

Magdoran said:
			
		

> Hello Margaret,
> 
> Thanks for the welcome.  It is nice to find someone who is on your wavelength isn’t it?
> 
> Hmmm, it is a shame that the options are moving to $1 Increments for the higher priced stocks, most annoying really, but the percentages are still better than $5, wouldn’t you agree?
> 
> I certainly agree about the non directional and volatility plays being less effective over the past couple of years in the Australian market compared to straight positions on average.  You still could have entered a lot of bull puts though, and done very well.
> 
> Butterflies work well in sideways market (hence more effective in the US), so I can understand you not using them in such a strongly trending/volatile market in Australia from 2003 onwards.
> 
> With the higher volatility now though, maybe it’s time for a few credit positions – I’ve been thinking about ratio spreads recently, but never tried them in practice.
> 
> As for theta, agree, not an issue for short term long options.  But crucial for longer term plays, both credit and debit.  Have a look at my comments to Wayne I will post below for some of my musings, and see what you think.
> 
> Once again thanks for the warm welcome.
> 
> Regards
> 
> Magdoran




Hi Magdoran,

Yes, it is a shame about the strike prices - but seems like that's what we've got to work with now.  The retail options trader doesn't seem to get much consideration from the ASX in spite of the fees they happily collect from us!  

I have traded quite of lot of bull call spreads (in preference to their bull put counterpart - same strikes) mainly due to the fact they are easier of manage if they go wrong.   But the thing I don't like about spreads in general is capping potential profits.  They don’t allow for profits to run on a good move.  All too often I've seen the short call increasing almost as fast as the lower long call (probably due to volatility smile) only to find the target has been reached  in the underlying and practically no profit in the spread.   After all, a spread may only have max profit of 10-20c and may have to wait closer to expiry to be achieved, so it’s almost easier to pick this up on a directional move with long premium.  However, I’m careful with position sizing as it’s possible to lose the lot especially with overnight gaps we see so frequently in the Aus market.  But then, also easy to lose on a spread too – just different greeks doing the damage.

One thing I really like with being long an OTM is if the trade goes the wrong way, delta slows down, however if I'm right, gamma increases and accelerates delta in my favour.  The trade-off's here are theta risk and possibly some fall in IV.   But as I mentioned before, I'm only in for such a short time that theta is not an issue and being either front month or close to it, the position is not so badly affected by IV changes.  

The closer I am to expiry, the closer the OTM strike needs to be.  I have been surprised at how well Aus options hold their value even fairly close to expiry.  Perhaps there are a lot of sellers out there closing short premium positions.

I’m being a lot more selective at the moment with IV’s running at higher levels, but generally still find the short term trades work OK provided I can find those quick moves together with selecting a suitable strike – and that’s where knowledge of the greeks is a necessity.  

Wouldn’t recommend anyone trying this without thorough testing as it’s too easy to lose money with long premium if the position is not actively managed.  It’s not a “set and forget” strategy.  Also, the way I use it is based on my interpretation of TA and targets, option greeks and probably some intuition thrown into the mix.  Of course, not every trade is a winner, so money management is still vitally important for overall success.   And like you, this is still a work in progress and still making improvements.  But then, I think option trading is always a work in progress!

I did have some success with butterflies on newscorp a couple of years ago – yes it was sideways with quite high IV.  I also found the max pain theory worked quite well at the time.  But when Murdoch decided to take his company to the US this affected liquidity a bit and IV levels came down.  I trialled max pain on other shares, but for some reason they do not seem to pin to the max pain strike with any regularity.

I'm interested in the diagonals you mentioned earlier – sounds like a calendar bear call spread?  Have you been trading these for a while and have you had any consistent success with them?  

I’ve read a bit about ratioed diagonals on another forum recently and they look quite interesting.  Low IV would be essential with more longs in a back month.  Looks like directional risk shifts to IV risk with this type of ratio spread so would not be so good in our current IV situation at the moment.

Cheers,
Margaret.


----------



## Magdoran

Hello Margaret,


Sounds like we’re on the same page for a lot of options approaches you’ve covered.  

I certainly agree you really need to consider how far OTM to go.  The usual rule of thumb I use is to set a target time you expect a movement to happen, and add to it (say 14 days or more), and buy with enough time to ensure there is still at least 30 days to expiry past the most conservative/worst case time projection, this way you can avoid a lot of theta decay.  This has to be balanced though with the raw exposure to strong adverse movements, and spread risk exiting when the market makers hit you exiting on weakness/stop.

You are quite right about the delta reducing as an OTM option moves further out of the money.  This is an advantage and helps to reduce risk, although the spread in lower volume traded options is the real danger.

Interestingly, I think that you can actually do quite well on longer dated trades in a strongly trending market.  My shorter term trades are either counter trend plays, or playing blow off moves after a confirmed breakout – but this is highly T/A oriented.  

The counter trend plays I have executed are quite risky - like buying puts against a strong bull market.  I’ve done a lot of these successfully taking advantage of the low IV for entry, and the IV rush on exit for fast moves down – you really have to take profits to work these effectively I have found (say half at key prices, exiting on strength), and gingerly winding them out since there is so much upside risk when adverse T/A indicates a good chance of a bullish resumption.

Bull Call spreads:
I have found these are pretty lame in most market conditions, and discarded using them a while ago.  When I did these initially, so many times my T/A target would be reached, and like you, the IV would kick up in the sold position, either negating most of the profit, or sometimes resulting in a loss.

The core idea of the Bull Call spread (and Bear Put) is to limit risk through selling a higher strike, but I found you really had to watch the IV since the further OTM call often had a lower IV, which characteristically increased while ATM or more so ITM.  They were really designed for mildly bullish markets to avoid theta decay and exposure.

I found that trading these in the US was suicide.  I don’t know how many of these I tried (I think about 10 overall) unsuccessfully around 2003-4 for a variety of reasons – adverse IV skews (sold call appreciating more in IV than the bought one), unable to exit either on profit or on stop (since the exit order was often 5 cents short of transacting while I slept since my IV calculations were sometimes fractionally out, or the US market moved against me so violently even the spread couldn’t reduce the loss).

I remember getting my T/A projections spot on with one bull call spread, but I never got to exit it for about 3 nights in a row, until I stayed up one night to force it to fill because of adverse skews, and my orders not filling.  By this time I went from a potential 100%+ gain to a substantial loss.

I quickly learned that single option positions were much more effective, especially in strongly trending markets, and that uncapped profits from OTM single series positions greatly outperformed the capped/brokerage riddled Bull Call/Bear Put spreads.

Key disadvantages/dangers are:
•	Brokerage:  4 legs – 2 to open, 2 to close
•	Adverse IV skews against your position
•	Difficulty winding out the position
•	Capped profits
•	Unfavourable theta decay

Bull Put spreads and Bear Call spreads:
I found that Bull Put spreads and Bear Call spreads are generally much more effective than Bull call/bear put spreads because you only need the market to go sideways or mildly in your favoured direction to make reasonable profits.  If you’re lucky you can just let the spread expire worthless and avoid the 2 extra legs in brokerage when the sold strike is OTM at expiry.

Also, you tend to be selling better IV returns ATM or slightly ITM to the OTM bought position on average.  For example, theoretically the idea is to aim for a 1:1 Ratio for maximum risk to maximum reward.  You can sometimes get 30-40 cents premium for a 50 cent spread if you’re lucky in the day when volatile movements are occurring in the Australian market, and it skews in your favour, leaving only 10-20 cent exposure for the maximum risk.

Theta decay usually works in your favour, especially with ATM/slightly ITM strikes sold with around 25-40 days time value (aiming for 30) – the theta decay over 14 days is usually profitable if you have to wind out the spread on technicals, and if you can hold for longer, the last few days to expiry are vicious on the sold position’s value.  I think this is a huge advantage over Bull Call spreads, especially in a higher volatility environment.

But, just like any of these kind of positions, they need to be managed, and wound out either in profit or at a protective stop – I don’t agree you just set them and forget them (although if your T/A’s any good you can sort of do this when there are good moves in your favour in your timeframe).

Key advantages are:
•	IV skews tend to be in your favour
•	Capped loss
•	Favourable theta decay
•	Sideways/ favourable movement usually ends up profitable
•	Can sometimes let the spread expire worthless for maximum reward

Diagonal Spreads:
These are fun.  You are right Margaret, these are combinations of calendar spreads with bear call/bull put elements, but the idea is you want to buy an OTM position, and finance it on the way up/down (usually up since downward moves are usually faster if strong).  

The idea is to sell closer to the money for the current/front month if you’re very confident it will expire worthless on a mildly trending underlying.  Sell at the same strike if there is some risk of the sold strike expiring ITM.  Sell away from the bought strike (if there’s sufficient premium – often not worth doing) when there is a real risk of a move too fast putting the sold position well in ITM at expiry.

The use of ratios gets a bit complex, but you can use ratios of 2:1, 3:2, 5:3 for instance.  This could be 5 bought and 3 sold for instance, or the other way around (but quite risky since there is an unlimited risk component involved – but usually good premium if you set it up right), with sold positions in the current month, at the same strike, close to the money, or further away – whatever corresponds to your T/A target, and your skew/hedging objective.  These can be morphed too by buying back positions, or selling, or both… this is a whole area of finesse though, and needs more than this cursory description.

The diagonals that work the best tend to be in a mildly trending market, and when there is sufficient premium to sell with 30 days time left, usually not too far from the money, but not too close to it.  If worried by the prospect of ITM expiry, you could consider making the position a ratio back spread by selling less contracts than the bought position, but the rules I’ve developed for this are quite involved, and very dependent on my T/A projections.

Fully agree that this is the time to be selective right now – a very volatile and hard to read market – for the shorter term.  As for butterflies, I’ve never done one, considered it, and modelled it for other people, but just don’t like the high brokerage, and the limited reward, especially when there’s better pickings to be had, but may use these in a sideways market if it eventuates.

Wow, that’s a lot of page space above, and I still haven’t covered half of what I set out to say… But I’m happy to go into more detail at some point in the future, but I hope this illustrates some of the points you were looking for me to cover.


Regards



Magdoran

Terms:
OTM = Out of the Money
ATM = At the Money
ITM = In the Money
ROI = Return on Investment
T/A Technical Analysis
Skew – where the volatility level/effect is different between different strikes in time or price, or both – where the natural readjustment of this can be advantageous or disadvantageous.


----------



## wayneL

Hey Guys/Gals,

Just a couple of comments

Sound like you guys are basically swing trading with options. You are buying delta with the view of exiting the entire position within a set, short time frame. I agree that straight option buys are the way to go here. Fugget diagonals (as you've discovered). Although they will reduce the purchase price of the bought call, it's not a lot... not worth the profit potential forgone. Plus contest risk doubles (not just commish, but buy/sell spread as well).

I am however puzzled as to the specific problems, re IV skews between the the bought and sold strikes. Although it does occur, I never experienced it to the extent you guys have. I would consider that an anomoly. Mag you were just unlucky... what sort of stocks were you playing?

Verticals should be used if one intends staying with the position and morphing as you go along. As a bread and butter strategy, they are second to none. But it's not a swing trade strategy. They are more a "part" of a string of strategies one can use as ones view changes, setting up advantage. They also have great use in adjusting deta neutral strategies... moving the goal posts so too speak.





Of course this is a different philosophy of trading options. 

Re Diagonal spreads

An excellent strategy. But what is a diagonal spread? It's a vertical spread with options of different expiry dates. Not that different is it? They do expose you to more downside risk in the short term, and also, as Margaret pointed out, potential vega risk as the longer dated options will be more vega sensitive. So caution with IV levels there. The flip side of that is we can benefit from vega if we buy low IV.

Folk who like CC's would do well to consider this strategy, particularly using LEAPS (Do you have those in OZ?){Leaps are bsically options with expiry dates > 9 months, up to 3 years...maybe long term warrants could be a substitute if not}

In many ways these have a lot of advantages over bull put spreads (the latest miracle strategy  ) if the intention is to use as a stand alone strategy. A slight ratio will correct the tendency to drop a bit of profit the further away from the sold strike you go... I presume thats why you would do that Mag.

Butterflies:

...rock on indecies (not XJO : ). Well I prefer condors (just a stretched out butterfly) This has been my bread and butter trade for a while now. (Legging in with writes and/or credit spreads and adjusting if necessary with verticals) Why? because indicies suffere from chronic overvaluation. It's a tidy little edge and margins on written futures options, because of the SPAN system, are very sensible. Got a thread on this somewhere.

Gawd we option traders can waffle.. thats enough, I'm off for a beer.

Cheers

PS Whats the very best strategy?

All of 'em.


----------



## Magdoran

Hello Adrian/Ageo,


I’m glad you like the discussions so far, and hope they are useful.

Now, I have been meaning to address the points you made earlier, since in a related way they are relevant to option trading.

As for “positive expectancy”, I actually think this is quite an involved topic (probably not suited to this thread), which is bandied about by all sorts of people, many with entirely different definitions (some talk about Van Tharp’s definition, and others seem to put their own spin on this subject).

Firstly, let me make a quick observation about this area – I agree on the whole with Wayne’s comments on other threads about discretionary trading vs mechanical trading.  I really think it is up to the individual how they trade, and as Wayne quite rightly states, there are many ways to skin a cat – certainly in this kind of market – the trick is to find your niche, isn’t it?

I’m firmly in the “intuitive” camp, and believe that while you can learn a lot from studying charts and other forms of financial/economic history (and I do think this is very worthwhile), that (ala Mark Douglas) “every moment in the market is unique”, and that “anything can happen”.

My belief (and I really challenge the questionable notion that anything can be proven to be true absolutely, or even subjectively in many cases – I have a real issue with determinism and the idea of inevitability) is that investments are inherently unstable and can fluctuate in value wildly; hence traders need to be flexible in their approach.  What was true yesterday may be totally untrue today.  Some mechanical adherents argue that you should develop a rigid system based on endless “back testing”, and that this will give you a casino like edge following a systematic formula.

I don’t agree with rigidity in thinking – sure, having a fixed view works for a limited period... and then it doesn’t.  I would argue that it is important to maintain a vigilant mind always feeling forward from the brink, aware that change could be just around the corner, and that a rigid system constrains the flexibility to both avoid unfavourable developments and take the appropriate action, and also to not properly orient oneself to take advantage of opportunities.

I subscribe to George Soros’ “Reflexivity” concepts, and follow his approach to “dynamic disequilibrium” (see Soros on Soros – which explains many of his theories in “The Alchemy of Finance”).  The key is to look for a divergence in reality from market perception, and take advantage of it decisively.  Staying out when conditions are not right makes a lot of sense to me, then striking hard when an opportunity presents itself, rather than plodding along with a stayed old system, and neglecting the big opportunities in the future.


What I’m saying here is that you can choose a Buffet style, or a Soros style, or even your own, and be successful or fail… it’s really up to the individual.  So as for my approach, it is constantly changing (hopefully in line with the market), and I believe most of the really successful players are the same.  They never stand still, do they?


Regards


Magdoran


----------



## hissho

HI Wayne


			
				wayneL said:
			
		

> Butterflies:
> ...rock on indecies (not XJO : ). Well I prefer condors (just a stretched out butterfly) This has been my bread and butter trade for a while now.




Why's that? why not XJO? 

thanks
hissho


----------



## wayneL

hissho said:
			
		

> HI Wayne
> 
> 
> Why's that? why not XJO?
> 
> thanks
> hissho




Condors are best in choppy, basically sideways markets, and the XJO has been trending strongly. You can shift the goal posts as you go along, but unless you want to get really agressive, this will reduce profitability. If you keep having to move the goalposts, risk reward starts looking a bit dodgy.

We don't want a trend.

Cheers


----------



## Magdoran

Hello Wayne,


I trade all kinds of strategies.  I basically trim my sails to the wind – adapt the most appropriate risk/reward strategy to the situation.  Most people have a preference, and mine is certainly directional, and really like to pick up nice capitulation/blow off moves if they’re around.

But my comments were aimed to address Margaret’s post, hence the focus on directional trades.  I note you like the non directional side of options trading, and certainly a lot of people do this very successfully in the states.

I’m perfectly happy hedging longer term positions, or adopting sideways or volatility strategies when appropriate.  But when you have such a strongly trending market in Australia, why wouldn’t you trade directionally?  (How often do sideways strategies make over 1000% ROI in under a month???).

Spreads:
Regarding my experience with Bull Call spreads - the IV skews were one key element, and if you try these, it is a problem if the bought call is closer to the money and the IV is higher, but that’s just one component… the other is winding out a spread when you’re not wanting to stay up all night. Perhaps I was unlucky, but why then did my OTM calls and bull puts make good returns when the bull calls didn’t? 

The profit movement in Bull Call spreads is lousy compared with OTM calls – you might just have well bought one strike OTM for a short move and taken the unlimited reward from the OTM call for a sustained greater magnitude movement (or tried going ATM or even slightly ITM).  The other thing I found was that bull put spreads really outperform bull calls.  Try replaying different conditions using the actual mid price for the spread, and see which yields the better risk to reward profile.  My money is on the OTM call (literally) and also bull puts/bear calls. Most of the stocks I was trading were Dow, some NASDAQ and S&P 500 constituents in answer to your question.

LEPO’s
Regarding the Australian market and long term options like the US LEAPS, check out the ASX site for details on LEPO’s – “Low exercise Price Option”, which have about 1 year to maturity, and involve a kind of margin element.  They are described as being a forward purchase of shares where you don’t pay the full premium up front, they are European exercise, only calls are available, and there are ongoing margin payments for both buyers and sellers.  Interestingly they have a very high delta and move closely in line with the underlying.  I’ve never traded these…

Ratio positions:
Re ratio usage – this is quite a detailed area, and probably needs a whole examination on its own at some stage, but the idea is to look to reduce initial outlays while increasing potential rewards for the back spreads, and look at locking in credits for ratio positions, with a chance of making good returns, but also risking unlimited exposure if a catastrophic move happens in the wrong direction.

The use of a ratio for OTM calls for instance is to help to finance the position/generate revenue on the way up, and also to reduce exposure if a major move happens against the position, but without sacrificing the unlimited reward aspect through the use of a ratio back spread approach if a major move occurs in the longer term projected direction, but occurs before the sold positions expiry date.


I hope this answers your questions… and yes, we options buffs can really ramble on, can't we?


Regards,


Magdoran


----------



## wayneL

Magdoran said:
			
		

> But when you have such a strongly trending market in Australia, why wouldn’t you trade directionally?  (How often do sideways strategies make over 1000% ROI in under a month???).




Indeed! Not withstanding, ROI is only part of the equation.



			
				Magdoran said:
			
		

> Regarding my experience with Bull Call spreads - the IV skews were one key element, and if you try these, it is a problem if the bought call is closer to the money and the IV is higher, but that’s just one component… the other is winding out a spread when you’re not wanting to stay up all night. Perhaps I was unlucky, but why then did my OTM calls and bull puts make good returns when the bull calls didn’t?




It's got me stumped. Without knowing the specific stock strikes expiries  etc etc I wouldn't even hazard a guess. I've put on hundreds of these and never experienced that..at least not to that extent. 

What genarally was time till expiry, distance between strikes etc IV's etc?



			
				Magdoran said:
			
		

> … and yes, we options buffs can really ramble on, can't we?




I remember looking at option traders threads before I was into them. Verbose jargonistic twaddle I thought. What have I become?  

: Cheers


----------



## Magdoran

Hello Wayne,


Yes, it is scary how much jargon creeps in, isn’t it… and after a while you start to lose your objectivity don’t you?  I can really appreciate what it must be like to be a newer player, and have to wade through a torrent of stuff you don’t understand (yet!).

I hope we don’t scare everyone away, so please, if any newer players have any questions, please ask away.  And please don’t feel intimidated, this is a really complex area, and if you don’t ask the silly questions, I can assure you, it’s unlikely you will get to ask the hard ones…

Re the Bull call spreads, just go back and see if you could have done better with OTM calls and bear puts, and compare the risk and reward.  The conclusion I came to is to ditch the bull calls – but that’s just me.

Regards,


Magdoran


----------



## wayneL

[verbose jargon]



			
				Magdoran said:
			
		

> Re the Bull call spreads, just go back and see if you could have done better with OTM calls and bear puts, and compare the risk and reward.  The conclusion I came to is to ditch the bull calls – but that’s just me.




For me it depends entirely on my view of price movement and volatility. 

OTM short verticals (if left till expiry and no defensive tactics are used) have an inherently poorer risk reward ratio than a long ATM vertical. However they have a higher probability of success. Basic stuff here. 

OTM short verticals are more about where the stock won't go(much the same philiosophy as a short put {or synthetic short put AKA Covered Call}) and realated strategies, rather than a speculative directional play. On the other hand ATM verticals have more speculative potential (but not as much as a straight long option).

More importantly from the standpoint of the morph player, ATM verticals have far more defensive and metamorphosis potential. The OTM vertical is a pig to play with in that respect.

In that sense IMO ATM vertical have WAY more risk/reward/probability potentail in the speculative, directional picking, dynamical hedging sense. Also not forgeting that the ATM vertical can be legged into from a long ATM or ITM options. (not practical in most cases from an option entered into when a fair way OTM)

In this way and if things go to plan, a trader work themselves into better than risk free situations, sweeping cash into our account as we go along.

However, I'm not averse to the OTM vertical in the slightest, for what is a condor, but two OTM short verticals (the iron version of anyway)? Along with chronic overvaluation, This is manna from heaven for the premium seller.

Thinking about the ATM vertical problem, I would sure be interested in the time til expiry and IV levels of the spreads you were putting on. This, along with the width of strikes can have a dramatic effect when IV levels start bouncing around. One of the key measurements here is position delta. This tells volumes.

[/verbose jargon]



			
				Magdoran said:
			
		

> I hope we don’t scare everyone away, so please, if any newer players have any questions, please ask away. And please don’t feel intimidated, this is a really complex area, and if you don’t ask the silly questions, I can assure you, it’s unlikely you will get to ask the hard ones…




Ditto that. 

Cheers

Image from CWS by Charles Cottle \/


----------



## RichKid

wayneL said:
			
		

> At some stage I must aquire the aforementioned tomes. Better read what I've been suggesting people read huh?
> 
> I've got a couple of Cottles books, which have served as my options bibles.
> 
> I've also got a really interesting book - "Trading Options To Win" by Stuart Johnston. This guy thinks out of the square, and is at times, absolutely hilarious... he trades commodity options, and is into statistics, seasonals etc., not one price chart in the whole book. But of great interest even to a techie.
> 
> Cheers




Hi Wayne,
What are those Cottle books? This is the link to the three books I found on Amazon by Cottle, I assume these are the ones ($300 for one of em- sheez!! (latest one at the top). http://www.amazon.com/gp/search/104-1098788-9571936?search-alias=aps&keywords=cottle options

I note that Coulda Woulda Shoulda was on your site- identical to the original? I also saw a new title by him which had come out earlier this year- Options Trading: The Hidden Reality. The latest one appears to be a collection of the previous material (with beautiful 'living' colour) and additions: 



> This new book is an expanded revision of "Options: Perception and Deception" and "Coulda Woulda Shoulda". OD was published by McGraw Hill in Hardback and I obtained the rights back to self publish the derivative CWS to give away at my brokerage firm from 2001 to 2003. Because they are out of print, OD sells from between $299 and $399 while CWS fetches between $55 and $125 where rare books are sold. "Options Trading: The Hidden Reality" not only printed in color has 100 more pages and features more dissection illustrations on popular wingspread (stretched-out condors, slingshots and skip-strike-flies) and calendarized spread (double diagonals, straddle strangle swaps and double calendars) configurations. I think what made OD in such demand were the 3D graphics and the Skew Library. They are both brought back in color along with the appendix proving Chapter 2's Options Metamorphosis.


----------



## Magdoran

Hello Wayne,


Re Bull Call spreads:
Going back through my notes on Bull Call spreads back in 2003-4, these were mid term trades of about a month projected duration.  The problems I identified was using strikes too close together, problems with winding out positions using contingent orders when the IV skewed against my positions, sudden adverse movements, and contingent stop loss orders not getting filled (since the gap against my position was so strong).

(The width of the strikes is important, and I’d agree you need to ensure the width is not too narrow or too wide…).

I was buying bull call spreads with around 65-90 days time value, with a 30 day trading horizon, and incorporated time stops at 30 days till expiry.  IV was mixed:  some high, some mid range… but none were really low (compared to Australia at the time anyway).

Oddly, all my Australian plays were successful at the time using bull call spreads, but on revision, straight calls/puts and bull puts/bear calls would have yielded better returns, and similar risk.  Now this is interesting because I think I never had a successful bull call spread work in the US, but did OK in Australia, what does that tell you?  Also interestingly, I had several successful OTM straight calls combined with bull puts in the US at the same time too…

Another element was my T/A was different at the time, and not as time/price accurate as now, and on a couple of occasions bought/sold false breaks – but this was then a T/A problem, not an options performance issue.

So there you have it Wayne… 

So, what is your approach/experience?  Time frame, strike width, market area, do you stay up to enter/exit?  Do you think the risk/reward characteristics of bull call spreads/bear put spreads are better than other alternative options strategies?  In essence what are the conditions you look for to select the appropriate strategy?


Regards


Magdoran
P.S. Love the diagrams!


----------



## Magdoran

Hello Wayne,


I’ve been meaning to comment on your chat with Cottle.  That was amazing actually getting to talk with Cottle online, what a scoop!

It’s great that you’re relating your experiences here, and I’m sure everyone will find the text recommendations useful.  I must go and have a look at some of your recommendations too sometime...

I tend to relate to RichKid’s comment about the price though (but if it’s really good, it’s just an investment, isn’t it? – Just as long as the “investments” don’t outweigh the returns huh? Hahaha).

But this is what the forum's all about isn’t it?  Sharing ideas, and developing…


Regards


Magdoran


----------



## wayneL

RichKid said:
			
		

> Hi Wayne,
> What are those Cottle books? This is the link to the three books I found on Amazon by Cottle, I assume these are the ones ($300 for one of em- sheez!! (latest one at the top). http://www.amazon.com/gp/search/104-1098788-9571936?search-alias=aps&keywords=cottle options
> 
> I note that Coulda Woulda Shoulda was on your site- identical to the original? I also saw a new title by him which had come out earlier this year- Options Trading: The Hidden Reality. The latest one appears to be a collection of the previous material (with beautiful 'living' colour) and additions:




Yep they're the ones Rich,

I've got "perception and deception" (didn't think it was still available) and of course, "coulda woulda shoulda".

Pass on perception and deception. It's more for the professional MM, it'll definately cause brain fission LOL.

CWS is the best for us mug punters. But it's still fairly advanced and pretty much jumps straight into the deep end. Can cause spontaneous combustion of any flammable material within 1.5 mters of your brain.

Haven't got the new one yet. Letting my brain degrade a few half lives first


----------



## wayneL

Magdoran said:
			
		

> Hello Wayne,
> 
> 
> Re Bull Call spreads:
> Going back through my notes on Bull Call spreads back in 2003-4, these were mid term trades of about a month projected duration.  The problems I identified was using strikes too close together, problems with winding out positions using contingent orders when the IV skewed against my positions, sudden adverse movements, and contingent stop loss orders not getting filled (since the gap against my position was so strong).
> 
> (The width of the strikes is important, and I’d agree you need to ensure the width is not too narrow or too wide…).
> 
> I was buying bull call spreads with around 65-90 days time value, with a 30 day trading horizon, and incorporated time stops at 30 days till expiry.  IV was mixed:  some high, some mid range… but none were really low (compared to Australia at the time anyway).
> 
> Oddly, all my Australian plays were successful at the time using bull call spreads, but on revision, straight calls/puts and bull puts/bear calls would have yielded better returns, and similar risk.  Now this is interesting because I think I never had a successful bull call spread work in the US, but did OK in Australia, what does that tell you?  Also interestingly, I had several successful OTM straight calls combined with bull puts in the US at the same time too…
> 
> Another element was my T/A was different at the time, and not as time/price accurate as now, and on a couple of occasions bought/sold false breaks – but this was then a T/A problem, not an options performance issue.
> 
> So there you have it Wayne…
> 
> So, what is your approach/experience?  Time frame, strike width, market area, do you stay up to enter/exit?  Do you think the risk/reward characteristics of bull call spreads/bear put spreads are better than other alternative options strategies?  In essence what are the conditions you look for to select the appropriate strategy?
> 
> 
> Regards
> 
> 
> Magdoran
> P.S. Love the diagrams!




Hi Mag,

I see a few areas where I do things differently. 

1/ Width of strike (as you've already mentioned) If too close together you have to increase the number of contracts do develop any sort of position delta... and the longer til expiry and the higher the IV, the more marked this becomes. Presuming we are on the positive side of the break even point... The longer dated vertical leaves you more suseptable to being short vega, without enough positive theta to develop some profit. The number of contracts also increases contest risk to unacceptable levels... 4 lots of commish plus 2 lots of spread, on a large number of contracts = ouch.

2/ The time stop. Again presuming we're on the right dide of the BEP. By exiting 30 days before expiry, you are not putting to use all that positive theta in the final 30 days. If possible you want the spread to expire, and let assignemnt/execise take you out... cheaper. Any pin risk can be dealt with if necessary.

3/ Using stop losses/contingency orders. MM's just love them, They know where people like to stop out and will widen the spread.. it's just giving them money. It's much better to morph than stop out. One of my most memorable trades was a long call, morphed to an ATM vertical, morphed into a synthetic put backspread on EBAY. Made a fortune on it.

Just my thoughts.


...later


----------



## wayneL

Magdoran said:
			
		

> So, what is your approach/experience?  Time frame, strike width, market area, do you stay up to enter/exit?  Do you think the risk/reward characteristics of bull call spreads/bear put spreads are better than other alternative options strategies?  In essence what are the conditions you look for to select the appropriate strategy?
> 
> 
> Regards
> 
> 
> Magdoran
> P.S. Love the diagrams!




Every situation is different. One way of looking at option trading, is selecting a strategy, and finding stocks to use it on

The other way is to find a stock you want to trade, and select strategies according to your view of it's movement/non-movement and IV levels (both relative and absolute).

I fall into the second group. I'm not looking to put on an ATM vertical per se', only if I think it's the best strategy at the time. Depending on how much of a smart-@rse I'm feeling, I may even leg in to the strategy I thinking of..

Every situation is different.



			
				Magdoran said:
			
		

> I’ve been meaning to comment on your chat with Cottle. That was amazing actually getting to talk with Cottle online, what a scoop!




Truly, it was an absolute fluke. This one guy had offered to teach us some stuff about options and made a time every week to do it (all for free... just to help out) His knowledge was good but he was very nervous and had a problem with delivery...stage fright basically.

His "associate" takes over to get this guy out of trouble... it was one Mr. C. Cottle. At the time I had no idea of the significance of what was happening, but he did it for several weeks. A very generous guy... very cool! 

The first guy was no dumb@rse either and was terrific with text-only chat.

Cheers


----------



## RichKid

wayneL said:
			
		

> Yep they're the ones Rich,
> 
> I've got "perception and deception" (didn't think it was still available) and of course, "coulda woulda shoulda".
> 
> Pass on perception and deception. It's more for the professional MM, it'll definately cause brain fission LOL.
> 
> CWS is the best for us mug punters. But it's still fairly advanced and pretty much jumps straight into the deep end. Can cause spontaneous combustion of any flammable material within 1.5 mters of your brain.
> 
> Haven't got the new one yet. Letting my brain degrade a few half lives first




Thanks Wayne, glad CWS is a bit hard too in your view as I couldn't really understand it at first blush. What little is left of my mind must be protected from people like Cottle so thanks for the warning, maybe the cover should have one of those radiation warning signs, red and yellow with a big exclamation mark, skull and crossbones etc.....

Is 'Options as a Strategic Investment' similar to Cottle in terms of depth or does it have additional material which will help in other fields of trading? Although I rarely trade options I find the concepts and observations re price have helped my in my general trading, especially the volatility studies.


----------



## wayneL

RichKid said:
			
		

> Thanks Wayne, glad CWS is a bit hard too in your view as I couldn't really understand it at first blush. What little is left of my mind must be protected from people like Cottle so thanks for the warning, maybe the cover should have one of those radiation warning signs, red and yellow with a big exclamation mark, skull and crossbones etc.....




LOL Perhaps we should lobby parliament for this. Everything else has to have a doggone warning these days.  



			
				RichKid said:
			
		

> Is 'Options as a Strategic Investment' similar to Cottle in terms of depth or does it have additional material which will help in other fields of trading? Although I rarely trade options I find the concepts and observations re price have helped my in my general trading, especially the volatility studies.




As I say I have never read it. At ~1,000 pages it must be pretty comprehensive, but allegedly is a comparitively, much easier read.

Cheers


----------



## RichKid

wayneL said:
			
		

> LOL Perhaps we should lobby parliament for this. Everything else has to have a doggone warning these days.



lol, Yes, very true! I still can't believe how easy it is to open an options trading account, I'd encourage people to sue if they make losses, you should see how simple the comsec forms and questionnaires are.


> As I say I have never read it. At ~1,000 pages it must be pretty comprehensive, but allegedly is a comparitively, much easier read.
> Cheers




Oops, sorry Wayne, I should be asking Magdoran the question. 

So do you think Johnston's suitable for beginners Magdoran? I've had a look at Natenberg and the statistical stuff in it is easier to undertand, has some diagrames too. btw, welcome to ASF! Sorry for not chatting earlier, didn't want to butt in on the high level discussions! 

Rich


----------



## Magdoran

Hello Richkid,


Thank-you for the warm welcome, and please don’t be put off by Wayne and I rabbiting on about options – it’s just nice to have a shared passion as I’m sure you’ll understand. I suspect I may have had a hand in piquing his interest into delving into options when we were chatting a few years ago on another site (am I right here Wayne?).  Hence the gratification seeing someone you’d chatted to about options in the past become a “monster” practitioner in their own right…

I do hope we’re not scaring people away, I’d be more than happy to go through the basics and up if there’s interest (and I’m sure Wayne and Margaret is the same, between the three of us, I’d suspect we’d cover a lot of ground).  So, the door is always open, and I’m happy to shed light on derivatives and how they work on this thread as best I can.  Anyway, Rich, you seem to have established quite a presence here on ASF yourself (I’ve read quite a few of your considered comments while browsing through the many threads on this site).

As for the Johnston book, I’ve never read it, so I can’t comment – I’ll pass that one back over to Wayne (seems I have yet another text to add to my to read list!).

McMillan’s “Options as a Strategic Investment” on the other hand is another matter.  It is often described in professional circles as “the options bible”, with good reason.  McMillan and Natenberg is a powerful combination if you want to get into advanced concepts.  

McMillan is easy to read, and very thorough. I refer to it constantly, especially when I’m considering more exotic strategies.  The text covers a range of market conditions, and carefully explains how to construct appropriate strategies for different market conditions, and goes into detail about the finer points of selecting the right options.  But it’s an advanced text, and probably more suitable for intermediate options traders and up.

If you want a good ground floor to intermediate text, Guy Bower’s “Options: A complete guide for investors and traders” would be more suitable for beginners.  The beauty here is that it will stand a new player in good stead for a long time, giving an excellent grounding for development.  Also, it’s written by an Australian, with local conditions in mind as well as overseas markets which is a plus.

Interestingly Wayne and I have not read each other’s texts, but I had heard of Cottle before – he has a good reputation in options circles, so I suppose I’ll have to read up on him too!


Regards


Magdoran


----------



## wayneL

Re: Johnstons book

http://www.amazon.com/gp/product/04...102-1029944-0335331?s=books&v=glance&n=283155

It's mainly about futures options, and it's not a book for beginners as it assumes a knowlede of the basics.

It's not a book "about" options, it's about writing strategies, seasonals, non seasonals, statistics and a good dose of humour thrown in for amusement.

It is a good read IMO, but very different to Cottle, McMillan et al.


----------



## swingstar

Hi guys

Great thread... 

I've been swing trading for a while using Dave Landry's techniques, but applying them to options instead of outright shares. I usually just buy calls/puts at the money or first in the money with 1-2 months left until expiry. So far have been doing pretty well (15-35% a month). I've also applied position sizing techniques from Tharp's books.

I still consider myself a major newb, so keep up the good discussion. I only knew what delta was before this thread!


----------



## sails

Hi Magdoran,

Thankyou for the detailed reply (Post #63) and my apologies for taking so long to reply.  We've been busy with visitors over the last few days, so I've managed to keep up with the reading of new posts, but wanted to take a bit more time to post a reply.

Re the bull call spreads, I think Wayne hit the nail on the head where the delta of both options ends up being too close - on a close spread there may only be a net delta of about 0.1 or 0.2.  If that's the case, then obviously the spread needs to be widened, but then that begins to increase directional risk making the OTM a better risk to reward.  However, in a slow move, a spread would certainly outperform the long call/put.  Always trade-off's in options!

One thing I'm puzzled is that you've found vertical credit spreads have worked better than vertical debit spreads.  If they are positioned at the same strike and in the same month - aren't they completely interchangeable?  I've compared these in Hoadley and they seem identical.   I can understand that an OTM bull put would behave differently to an OTM bull call as they are positioned at different strikes.  I haven't done live comparisions on these - so would be interested on what you have found.

When I did the Optionetics course, they taught that you should always go out a minimum of 90 days for debit spreads and less than 45 days for credit spreads - but I have since understood that both spreads benefit from the same greeks if at the same strikes and expiry month, so they should technically perform the same.  Obviously there is a cost of brokerage to close them which is not the same - the bull call expires worthless if it's wrong and the bull put expires worthless if it's profitable.

Would like to look into the diagonals a bit more - just wondering if you have a recent example you might be willing to share?  Doesn't need to be a real trade - just to give a better idea.  Woud be interested to see how far OTM you would go with your long and also how far out in time.

Will read through the other posts (you guys have been busy typing!) in more detail again sometime and will add any other comments or queries another day!

Thanks again for sharing,

Margaret.


----------



## RichKid

Hi Magdoran,
Thanks for all the help, picking up bits and pieces here and there, most likely will revisit this thread once I get into options seriously, may take years to feel comfortable! Currently just buying straight calls and puts. Thanks for the tips on the books, I do like Guy Bower's book, I'm so glad he published it instead of spruiking it as a weekend workshop.

Wayne,
Looks like Johnston is a bit too much for me, might give it a miss for the moment- thanks for the feedback.

Swingster,
Sounds like you're doing quite well, hope to hear of your adventures on ASF, feel free to start a 'follow my trade' thread if you like on options. We have a thread on real time examples of trades some members make in the Trading Tactics forum.  Must be quite a bit of activity at this time of year with prices going all over the place.


----------



## swingstar

Thanks RichKid. I'll think about doing that soon.

Re: activity, I've only been holding some AMC puts for the last couple of weeks. I reached my target for May so decided to stay out of the market whilst it's so volatile and unpredictable.


----------



## wayneL

sails said:
			
		

> When I did the Optionetics course, they taught that you should always go out a minimum of 90 days for debit spreads




I don't get that one Margaret! Presuming the debit spread is ATM (i.e. the bought option is ITM and the written option is OTM), that amount of time, and particularly when IV, is high is going to flatten delta right out. 

I mean thats fine if that is what the trader wants... as in a vega play with a directional bias, or specific time horizon. But thats not necessarily what a trader might want. I have no hesitation in entering atm verticals 30-60 days from expiry, if I'm after some delta and positive theta (presuming things go to plan). 

Remembering, when playing an atm vertical, we by definition have an expectation of not much higher that the higher strike. Therefore one can get delta a lot cheaper (in other words less number of spreads and therefore *less contest risk*) with nearer dated options.

Lets never forget contest risk. With a straight $27.50 call we can get 1000 deltas with the equivalent cost of 6 of the above spreads. It is a big consideration not taken into account often.... particularly if we plan entering *and* exiting before expiry 

For instance lets say we have XYZ @ $30 IV @35%. We want a $5 ATM spread, ie long $27.50 call and short the $32.50 call. Lets say we want 1000 deltas.

We can get 1000 deltas with 20 spreads with a 45 day till expiry series, plus some decent positive theta.

If we take a series with 135 day till expiry, we will have to buy 34 spreads to get our 1000 delta, with all the increased contest risk and negligable theta... YUCK!

The longer spread will have more vega, and that is a consideration that should be taken into account, but for the shorter term swing trades we seem to be mostly concerned with, I'll have the nearer dated spread thanks   

Not forgetting, if the time horizon is 4 months, then fine, take the longer ones.

I just hate it when these jerks say you should "always" do this or that. As you said Margaret, there are always trade-offs with options. We should be encouraged to trade-off the greek we don't want for the one we do want.

Cheers


----------



## sails

Warning - options jargon to follow - so if you're not into options suggest you  pass   .  
However, those that have an interest in options, I really encourage you to persist with these types of posts as difficult as they may seem and try to learn the jargon.  In the last 3 years of learning options it has been discussions like these that helped me more than seminars, etc in becoming fluent in the options "language" and understanding of the greeks.  Like any other career, we have to learn the necessary jargon if we are going to improve our chances of doing well at it.  While it doesn't guarantee trading success with options, it does help to eliminate unnecessary mistakes due to lack of knowledge  




			
				wayneL said:
			
		

> I don't get that one Margaret! Presuming the debit spread is ATM (i.e. the bought option is ITM and the written option is OTM), that amount of time, and particularly when IV, is high is going to flatten delta right out.



I agree Wayne - just checked their manual to make sure I had it right - and there it is in print!  The rationale given at the seminars was that with a debit spread you are buying premium so you must have more time and, of course, the opposite for credit spreads.  Anyway, I believe it is more to do with the positioning of the spread rather than just a blanket rule for all debit or credit spreads, eg. with an OTM bull call spread (or it's ITM bull put counterpart) it may be better to buy more time due to negative theta whereas an ITM bull call (OTM bull put counterpart) starts off as theta positive so technically better with less time.  

I haven't traded OTM bull call spreads further out, but have read of others that have with quite good results.  I really don't like the trade off of such a small delta position!



> Remembering, when playing an atm vertical, we by definition have an expectation of not much higher that the higher strike. Therefore one can get delta a lot cheaper (in other words less number of spreads and therefore *less contest risk*) with nearer dated options.



Spreads in near dated options do work well on a slow move, but since I actively hunt out potentially explosive moves, they seriously cap profits when right.  If I don't get the move I want, can always spread the long off into a calendar or a vertical - lots of options (pun intended     ).

However, I usually start with a smaller number of long calls or puts to get the deltas I want (in preference to placing a larger number of spreads with the associated contest risk) and then adjust if/as necessary.  However, no matter what strategy is being used, it's always important to know which greeks are at risk and how we plan to manage that risk.


----------



## Magdoran

Hello swingstar,

Sounds like you’re heading in the right direction.  Also, while I don’t want to make broad statements about the current market here, I think your approach of staying out of the market when you perceive that there is considerable risk, and are unsure what the market conditions are is very sensible, especially when using unhedged leveraged instruments.

Well done on the AMC trade, and sounds like the way I trade sometimes, exiting at a price and time target (at least a partial exit to lock in profit).  This is an effective method of swing trading, and if used correctly keeps profitable trades from becoming losers.

Also, getting your positions size right, ala Van Tharp is critical in my opinion to managing risk, so well done there too.

As for the discussions on this thread, as you can see, there are so many approaches to choose from, which is why it takes a long time to become really proficient in options trading in a broad sense, but don’t make the mistake of believing you have to know all the nuances.  You don’t.  Sometimes it makes sense to stick with a strategy you know, and become proficient using it.  Then you can slowly add to you repertoire at your own pace.

I think there are many roads to success here, the important thing is to simultaneously be effective in the field while growing in your knowledge.  Some options players focus solely on the non directional strategies like condors, butterflies, strangles and straddles.  Others are primarily directional, using straight calls/puts, bear calls/bull puts, bear puts and bull calls, ratio back spreads, diagonals, etc.  Some are “Greek players” focusing on volatility, gamma etc.  

The trick I think is to find out what works for you, and you will know this intuitively.  But the key is to fit the strategy to the conditions, or fit the conditions to your favourite strategy (seek markets that conform with your preferred strategy).

Interestingly Wayne and I are similar in that we like trading our favourite markets, and fit our approach to the market, while others scan for a market condition and have a favourite strategy.  Both approaches can work, it’s up to the individual.

Glad you are getting something out of the discussion, and please feel free to ask both the silly and the hard questions!


Regards


Magdoran


----------



## Magdoran

Hello Margaret,


Hope you had fun with the visitors (although it can be nice to get back to normal too, can’t it?).  No problem with replying, we all have higher priorities in our lives, don’t we?

Ok, here’s some points to consider about Credit vs Debit spreads:

Debit Vs Credit Spreads – Bull Calls Vs Bull puts, and Bear Puts Vs Bear Calls:
The key difference is the effect of time.  Time is detrimental to debit spreads, while it is helpful for credit spreads.  If the underlying goes sideways, the credit spread if positioned and entered correctly has a better chance of either becoming profitable, or at least breaking even than a debit spread. 

Of course, if the underlying moves in your favour, you may look to wind out the position at a certain target, in which case both strategies do well.  Beware though that a real risk to both positions is slippage based on the width of the bid/ask spread.  If the move is very favourable however, the credit spread expires worthless though reducing 2 legs of brokerage, where the debit spread requires some transaction to close it.  

The strategies are quite different in that a credit spread is benefiting from the time decay if the underlying doesn’t move much.  The debit spread will make a loss in many conditions where the credit spread will make a profit, or at least break even.  Even in loss situations, the debit spread will tend to fare worse, since you should really be managing these positions, and winding them out before expiry if they are going wrong.

Be careful of comparing exact or even equivalent strikes when you are dealing with a put spread and a call spread too, one being a debit spread and one being a credit spread.  Don’t just look at the risk and reward chart at expiry; this only gives you half the picture.  Have a look say 8, 10, or 15 days out from expiry and see the difference on your chart (I don’t know if Hoadley’s can do this?). Their natures are quite different, and the skews are often different - the POD/risk chart actually diverges as you approach expiry.

The point is that you may need to manage the credit position before expiry, and wind it out.  If you try to do this with the debit spread, the theta decay is likely to be unfavourable.  This is where the difference is most notable.  Of course there are other variables involved such as IV and how the underlying is moving.  You really want to enter the bull put/bear calls when you think the underlying is likely to move to a favourable forecast price within the projected time frame.  

There are some important points to note here about entering a credit position:

•	You are looking for a trending underlying to trade.  
•	Look for favourable IV skews
•	Should have at least a 1:1 ratio of risk to reward or better. 
•	They work better in high IV conditions.  
•	Time value premium is greatest ATM, so this is the area you want to sell in.
•	Aim for around 30 days to expiry
•	They are best entered on a counter trend against the main trend for the period selected (and it is at these times that the risk/reward ratios can move heavily in your favour – like 2:1, or even 4:1 in your favour – but this requires a bit of luck on the day, and a knowledge of how to finesse a good entry).

If the underlying for example moves slightly in your forecast direction, but not as far as projected, think about the effect on the two spreads.  The debit spread is losing value since the theta decay is detrimental to the more near the money bought position (as opposed to the credit positions sold strike), and the OTM sold position while compensating doesn’t lose as much value (as opposed to the credit spreads bought strike losing value more slowly).  A lot depends on a range of factors – where in the money you entered, how far the skew was in your favour, where the underlying moves, what IV does…

Think about this though.  If the underlying goes nowhere, what is IV likely to do? Hmmm, go up or down?  If the move is sideways, and there isn’t any news or events coming up (like reporting time), the IV is likely to fall, or at least not rise, isn’t it?  Which spread do you think will benefit from falling IV?  Consider that the objective of the credit spread is to sell to get a credit, and the aim is to keep as much of this credit as possible.

Traps for credit spreads:
Beware though, there is a catch!  That is the prospect of being exercised, so be careful about selling too far in the money with too short a time and not enough time value premium sold.  This is especially true for call spreads where you can end up owing the dividend, so be careful.  If there is a prospect of early exercise, it is worth considering winding out the position pre-emptively to avoid this kind of risk.

Morphing:
Another concept is how to morph these positions.  If the underlying in your view has clearly reversed and is going against your forecast direction, and in your considered opinion is likely to reach a target in the opposite direction, you may consider just buying back the sold option, and reversing your net direction.  Sure, you buy back the sold strike at a loss, and it is risky changing direction, but if you think the probability is sufficient, reversing can sometimes be a profitable choice.  But please exercise caution here, this is an advanced trading approach for experienced traders.


As for the Optionetics approach, I suspect that they have tailored the bull call spreads to the US market, and favour the OTM approach over the ATM/ITM versions.  The main aim is to have small debit amounts, and get a risk/reward graph with more maximum profit potential to maximum loss (they describe this sometimes as “bet a Volkswagen against a Ferrari” – no offence to VW drivers!).  The aim is to select the best bull call spread which has the most chance of success combined with a favourable risk/reward graph and a low debit entry.  They also try to avoid theta decay in debit positions, presumably to reduce this risk for part time traders…

How’s that Margaret?  Sorry, but the diagonals are even more involved, so I’ll have to find time to post that one up later (pressing things to deal with this week)…

Regards


Magdoran


----------



## Magdoran

Hello Richkid,

Great!  Hope the reading goes well.  Take your time though, this stuff takes a while to get used to, and to actually trade for real is a new dimension in itself.  

You are right in your comment that it takes years to really develop using these instruments – I’m learning every day!

Regards


Magdoran


----------



## sails

Hi Magdoran,

Thanks for the reply, however, I'm not sure that we are talking apples for apples here with the debit / credit spread issue though - so have put some thoughts below:



			
				Magdoran said:
			
		

> ...The key difference is the effect of time.  Time is detrimental to debit spreads, while it is helpful for credit spreads.  If the underlying goes sideways, the credit spread if positioned and entered correctly has a better chance of either becoming profitable, or at least breaking even than a debit spread. ...



If they are at the same strikes and expiry month, they form a "box" spread.  I first learned about them as well as other synthetic equivalents from Cottle's CWS and also Natenberg and McMillan explain boxes in their books.    As an example, I just had a quick look at NAB currently trading at approx $35 and the June $35.00 / $34.50 box is priced as below:

Strike   Option   Bid /Ask   Mid Price
$35.00  Call    .63/.67    .65
$34.50  Call     .94/1.00   .97   
= Total debit (risk) of 32c for a bull call with a max profit of 18c.

$35.00  Put    .51/.55    .53
$34.50  Put    .33/.37    .35  
= Total credit (max profit) of 18c for a bull put with an 32c risk.

I'll keep an eye on the progress of this box spread - as it is most unlikely that the box will ever be worth more than 50c meaning that when just trading one side of the box as a debit or credit spread, they technically should behave in the same way and time and IV fluctuations should affect both in the same way.  In fact, if it did move away from the 50c mark, I would first be looking for the reason why (eg divdends, etc) otherwise it would present an arbitrage opportunity = free money - and we know the MM's don't do that!  

Of course dividends, capital returns and the like do change the pricing of the box and some new option traders mistakenly believe that there is an arbitrage opportunity not realising the risks they are taking on with such a position.



> ... If the move is very favourable however, the credit spread expires worthless though reducing 2 legs of brokerage, where the debit spread requires some transaction to close it. ...



Totally agree that this is so - but also the debit spread doesn't need closing out when it's wrong which reduces brokerage.  However, if one has a large win rate with these, then it would be best to trade the bull puts to save on fees.



> ...Traps for credit spreads:
> Beware though, there is a catch!  That is the prospect of being exercised, so be careful about selling too far in the money with too short a time and not enough time value premium sold.  This is especially true for call spreads where you can end up owing the dividend, so be careful.  If there is a prospect of early exercise, it is worth considering winding out the position pre-emptively to avoid this kind of risk. ...



Agree - sold puts assignment don't have the risk of owing the dividend as sold calls do and is one of the reasons that dividends skew the box giving the illusion of a risk free trade.



> As for the Optionetics approach, I suspect that they have tailored the bull call spreads to the US market, and favour the OTM approach over the ATM/ITM versions.  The main aim is to have small debit amounts, and get a risk/reward graph with more maximum profit potential to maximum loss (they describe this sometimes as “bet a Volkswagen against a Ferrari” – no offence to VW drivers!).  The aim is to select the best bull call spread which has the most chance of success combined with a favourable risk/reward graph and a low debit entry.  They also try to avoid theta decay in debit positions, presumably to reduce this risk for part time traders…



Actually the example in my Optionetics manual is an ITM/OTM bull call spread, but agree that in the seminars they would teach selecting the best risk to reward as you have outlined above, however, their bull put example is an ATM/OTM spread.  I discussed this in a post to Wayne today where I believe that it actually depends more on where the spreads are positioned to determine their sensitivity to theta - not because they are a debit or credit spreads.  No question that an OTM/ATM bull put will behave differently to an ATM/OTM bull call (where the bull put sold strike is ATM and the bull call sold strike is OTM),

No rush on the diagonal question - when you have time is fine!  

Cheers,
Margaret.


----------



## wayneL

sails said:
			
		

> - just checked their manual to make sure I had it right - and there it is in print!




Hi Margaret,

I happen to be the proud owner (NOT) of "The Options Course" by Georgie Peorgie Fontanills. ( The chief clown at Optionetics for those who wonder who he is )  I just looked up the section on Verticals and this prompted an extended rant that my wife was forced to endure. She pretended to know what I was on about and agreed wholeheartedly... bless her.

Anyway, I think the whole chapter is a load of cobblers. 

I'll pick one example to completley destroy the credibility of this cowboy.
Stock trading @ $44
Long 1 45 put @ $3
Short 1 50 put @ $7.50

This produces a rather pretty looking payoff diagram with $50 risk and $450 reward. Hey not bad 9:1 risk reward and we take in $450 credit... wonderful.

Two problems with this. 1/ We are theta negative unless the stock goes above ~$45.30 and our probability of profit theoretically is < %50. We NEED to be right with direction, and we need to be VERY RIGHT to get maximum profit from this spread

2/ the sold put is WTFITM (Way The F%$# In The Money). If the cost of carry for the stock holders exceeds the extrinsic value for the puts, they're going to start exercising early i.e there is a strong possibility of being assigned stock early. This is not catastrophic in and of itself, however our $450 credit has turned into a $4,650 debit PER SPREAD! Is the cash in the account?

What we will have ended up with is a synthetic long $45 call at $4650 each. Doh!

If one particularly wanted this payoff diagram it would have been far smarter to use calls instead of puts... no risk of early assignment.... or.... looking logically here, we're looking at quite an explosive move at $44 to $50+. Why not consider the $45 call? IE what we would have ended up with synthetically anyway, and for a small fraction of what the synthetic version wo0uld have cost us.

I can't believe Georgie doesn't know all this stuff. If he doesn't, then WTF? But it looks to me more like intentional subterfuge... intellectual immorality. It seems he is presenting these spreads in the most favourable light possible without introducing the attentant risks and disadvantages.

Poor Show!


----------



## sails

Wayne,  it wasn't until I learned about synthetics, boxes, etc that I realised that there was never any need to do an ITM bull put spread and struggle with wide bid/ask spreads).  Much easier to the OTM bull call counterpart (same strikes) then, if the sold call doesn't have enough value to sell, as you say, just buy the call - fees are less, slippage is better, etc.

Undertanding synthetic equivalents has made option jigsaw puzzle pieces fit better into place.


----------



## wayneL

sails said:
			
		

> Wayne,  it wasn't until I learned about synthetics, boxes, etc that I realised that there was never any need to do an ITM bull put spread and struggle with wide bid/ask spreads).  Much easier to the OTM bull call counterpart (same strikes) then, if the sold call doesn't have enough value to sell, as you say, just buy the call - fees are less, slippage is better, etc.
> 
> Undertanding synthetic equivalents has made option jigsaw puzzle pieces fit better into place.




Yes that was the lightbulb for me too, Margaret.

... and folks, guess where Cottles book starts:

C O N T E N T S
C H A P T E R 1
Picking Up Where The Rest Leave Off - Synthetics                 1


Cheers


----------



## professor_frink

just starting cottle now- I'll come back in about 6 months when I've read, reread and understand it


----------



## Magdoran

Sorry Margaret,


This is a fiddly subject, isn’t it?  Perhaps I may not have explained myself very clearly, so I’ll try to clear a few things up here.  The exercise I set out to discuss was that in my experience bull puts tended to be profitable more often than bull calls in practice, and I was trying to reason why this was.  I did suggest that they were more likely to succeed IF they were entered correctly in the right conditions.  

I accept that some bull calls may outperform some bull puts both in theory and practice, just like any two strategies – sometimes the risk to reward is favourable, and sometimes it isn’t.  The objective was to determine the strategy we feel is most appropriate to meet our risk to reward requirements.

The particular results you came up with from the spreads you chose is in part because you chose strikes that are not equivalent, or for that matter realistic if one was to enter either strategy.  Firstly, the bull call spread does not have good risk to reward parameters, nor does the bull put spread, which also does not follow the parameters I set out in the previous post.

Secondly, in the example the two strategies use the same strike price levels for two totally different applications.  For a start, 34.50 is 50 cents OTM for a put, while it is 50 cents ITM for a call.  These are not equivalent strikes. Does that make sense?  What is happening here is that we are comparing an ITM debit spread with an ATM credit spread.  This is why we have ended up with some odd figures, wouldn’t you agree, and why this starts to become confusing?

In effect, I was not intending to look at spreads with arbitrarily fixed strike prices, but at the overall viability of different strategies to a situation in the real market.  I could also find examples where we pick two strike prices that have a radically different result to the one published, reversing the effect, but this isn’t really relevant to the points I was trying to make.  

Try this approach on for size:  Try selling the NAB June $36 put, and buying the June $35 put for the bull put spread.  (Have a look at the diagram attached – this is the yellow lines on the chart).

Compare this with buying the $35 June call, and selling the $36 June call for the bear call spread.  These have a very similar risk to reward chart (see the black lines on the attached chart).  This is roughly the equivalent of the bull put spread in strikes.

The net situation is similar.  Granted the charts are not significantly different.  What is different is the way these play out in the market.  In higher IV situation if you can sell the put in this case with a good skew, the time element is advantageous; this can be a great play to make.  

Certainly if you can get a good IV skew on a bull call this is a plus too.  The advantages I spelt out before though in the long run I think make the bull put a preferable play, but this is just my opinion.  Sometimes another strategy looks better, and sometimes it doesn’t.  But if you’re going to use bull calls, my suggestion is to also consider bull puts as an alternative (or the bearish equivalent), and be aware of the advantages and disadvantages of each.

Also, the volatility effects at these levels are quite different since one is ITM and the other is OTM relative to each spread.  Also, the acceptable risk reward chart for each strategy will be based in part on price and time objective and volatility outlook.

The big plus in my view is that the sold high IV tends to reduce the possibility of the skew moving against you, where this is sometimes a problem with bull calls.  A point to note here is that some people only look at the expiry graph, but don’t consider IV effects days out from the expiry which is where the action usually happens. Bu this assumes you consider this when you enter.


Hope this makes sense Margaret.


Regards,


Magdoran


----------



## Magdoran

Hello Margaret,


Respectfully, I just cannot agree with your conclusion in Post #94.  Again, are you sure you are choosing equivalent strikes, not exact strikes, (since exact strikes for a put and a call are radically different).  If you are talking about the configuration I posted above, then the outlay is about the same, and the risk to reward parameters at expiry is similar.

I do agree with the idea that sometimes it's worth just going for an OTM single option series, this makes a lot of sense from a risk to reward perspective.  Sometimes you can combine a bull put with an OTM call which is a bit like a synthetic, but with limited risk…

But I don’t agree at all with the idea that an ITM bull put spread is necessarily going to have wide spreads, and this is certainly not true for many traders I’ve worked with during the bull market.  In fact in my experience the reverse is true.  

The bull calls yielded less on average, and lost more, were harder to get a good skew in, and on the way out the skew often moved adversely – not as much of a problem for bull puts… but maybe this is a freaky skew that you have the opposite experience to mine, but maybe it is based on our T/A styles and time frames.

If you have a preference for bull calls, and it works for you, great!  Please, stay with what works for you.  But for me, I have the opposite experience.

Anyway, I think we’re going to have to agree to disagree on this one (which is common for traders – I like chocolate and someone else loves sticky date pudding).  As Wayne says “horses for courses”.


Regards


Magdoran


----------



## wayneL

What about assignment risk Mag?


----------



## Magdoran

Hi Wayne,


I did list upfront being exercised as one of the disadvantages to be aware of for credit positions - so any decision should consider all these factors to determine which way to go, shouldn't it?  It’s based on your forecast view of the underlying, isn’t it?

Anyway, you can get exercised with a bull call (less likely, and easier to deal with, but a nuisance just the same).

If the risk of being exercised is too high, how hard is it to wind out the position?  If you entered as suggested with sufficient time value premium, this should reduce the risk.  This kind of a position is a trade off, and should be used in the right conditions just like any other strategy.

Mag


----------



## wayneL

Magdoran said:
			
		

> Anyway, you can get exercised with a bull call (less likely, and easier to deal with, but a nuisance just the same).
> 
> Mag




Yes you can. but the short call is OTM and would require the underlying travelling past the sold strike. However because the burden cost of carry is upon the call seller, early assignmnent is most unlikely.

However with the ITM bull put, the sold strike is already substantailly ITM and inviting early assignment because of the put holders COC. Even with sufficient time value, alls you need is a few ticks against you to whittle that away. Unwinding in this situation doesn't necessarily prevent assignment, you may still end up with stock if the OCC has already notified your broker of assignment.

It's a shame there weren't more european style options around because of this nuance.


----------



## sails

Hi Magdoran,

No problem with agreeing to disagree - it makes for more interesting discussions when these things are bounced around    Oh, and I like chocolate and stick date pudding - in fact made sticky date for our visitors!  But we are all different, often see things differently and that's what makes life interesting.

While happy to share my views, I still like to keep an open mind to what is working for other option traders so look forward to further discussions and leave the credit vs debit spread alone.

I do agree that if something is working for you, don't change it.  For reasons I mentioned a few posts ago , I'm not too keen on bull calls either - still like to start off with long calls or puts then perhaps morph into something else if necessary.  

My own experience is that the further ITM the option is, the MM's seem to widen the bid/ask spread.  Just been a general observation, however, as I havent been trading them I may well be incorrect on that one - my apologies if I've got that wrong.

I am genuinely interested in what you have shared and will paper trade some of your ideas including the NAB $35/$36 bull put that you've suggested to get a feel for it.  

Thanks again!

Margaret.


----------



## Magdoran

Hello Margaret,


Aha, so we share another passion - CHOCOLATE!

As for discussions, I’m happy to chat to an extent, but since there is so much ground to cover in so little time, I prefer to focus on broad principles, and keep the momentum going.  I hope that’s OK with you?

Hey, the bull put strategy displayed for NAB was purely hypothetical; I certainly wouldn’t be trading this strategy right now from a T/A perspective.  This kind of spread is good in a trending bull market, not a correcting/consolidating one.  

The idea is to enter on the pull backs in a bullish drive looking for a fast move down to get set when the IV kicks up, and there is sufficient action as players push the option prices around while you have an order in with a set credit amount in your favour.  The spreads can really move around some days, and this is the trick to getting set with a good ratio.  But I wouldn’t be playing this kind of trade in this uncertain choppy market.

There are specific patterns I look for, and the whole approach usually includes some OTM diagonals too.  The key conditions are not evident anywhere (and may not be around for a long time).  You do want some trend in evidence.

Sorry, but there are so many aspects to trading, and perhaps we could look at how market makers work, and talk about the different players there like optiva and susquana, and timberhill to name a few….  There are all sorts of tricks to getting set at an advantage, and observing the market makers and other players is key to this, but this is a whole topic in itself.

If you really want to get into the nitty gritty sometime, happy to chat about it, but it may be unsuitable for this thread…


Regards,


Magdoran


----------



## Magdoran

Hello Wayne,


Re your post #101:  Yeah, didn’t we cover the risk of assignment in posts #90 and #100?

Sure, assignment is more likely to happen to bull put spreads than for bull call spreads, and said this too.  Each strategy has a trade off, and this is one of them.  That’s why I suggested how to manage this kind of strategy, and made the comment about this pitfall.

Now, if the market moves strongly against you, any directional position is going to suffer, isn’t it?  Different strategies will fare differently, but most will take a hit in a strong adverse move. If you decide to enter this strategy you should do so knowing the maximum loss, and how to manage the position.  

Re assignment – can’t happen if you’ve closed the position, and you’d know immediately if you were assigned, you’d have the shares in your account and a big red number.  It’s happened to me, and it’s no big deal.  That’s why you should get set with a good deal of premium, to reduce the risk, and offset any assignment activity if it occurs.  

Don’t forget, you still have the open long puts for protection, and they will have a value if you buy the shares on assignment day to fulfil the contract, or you could also exercise the long puts if required.

So, you raised a good point here Wayne, perhaps you would be kind enough to outline the mechanics of how assignment works, and your experiences on either side of it?


Regards


Magdoran


----------



## wayneL

Magdoran said:
			
		

> Hello Wayne,
> 
> 
> Re your post #101:  Yeah, didn’t we cover the risk of assignment in posts #90 and #100?




I hadn't considered that we were speaking of ITM credit spreads. This is something which is not normally considered in my circle of colleagues, precisely because of the assignment risk. 

Normally when speaking of credit spreads, OTM is the usual config. Apologies  for not picking this up. There must still be a few neutrons richocheting around upstairs.



			
				Magdoran said:
			
		

> Sure, assignment is more likely to happen to bull put spreads than for bull call spreads, and said this too.  Each strategy has a trade off, and this is one of them.  That’s why I suggested how to manage this kind of strategy, and made the comment about this pitfall.
> 
> Now, if the market moves strongly against you, any directional position is going to suffer, isn’t it?  Different strategies will fare differently, but most will take a hit in a strong adverse move. If you decide to enter this strategy you should do so knowing the maximum loss, and how to manage the position.




Agreed



			
				Magdoran said:
			
		

> Re assignment – can’t happen if you’ve closed the position, and you’d know immediately if you were assigned, you’d have the shares in your account and a big red number.  It’s happened to me, and it’s no big deal.  That’s why you should get set with a good deal of premium, to reduce the risk, and offset any assignment activity if it occurs.




Re asignment: I stand corrected.



			
				Magdoran said:
			
		

> Don’t forget, you still have the open long puts for protection, and they will have a value if you buy the shares on assignment day to fulfil the contract, or you could also exercise the long puts if required.




Yes, But a number of things are now possible, depending on capitalization and  the broker. We may have very expensive call options, we may have to involuntarily exercise our long puts, we may have to correct the stock position with an offsetting option to avoid coughing up more cash, the long stock may be immediately closed out and we end up with a long put only.

None of which is desirable.



			
				Magdoran said:
			
		

> So, you raised a good point here Wayne, perhaps you would be kind enough to outline the mechanics of how assignment works, and your experiences on either side of it?




The mechanics of this is available at any of the options exchanges sites.


----------



## sails

Hi Magdoran,

Sounds good to keep the momentum going on these discussions, but if I'm not clear about something, I like to ask questions until it becomes clearer or understand the other person's viewpoint.

Yes, I realised that the NAB bull put was hypothetical especially under these market conditions.   Don't worry - I never trade a new idea live until I've tested it, understand it and have a management plan!

I was only interested in an example of your diagonal to get an idea of where you are positioning the strikes and how you tie it in with your bull puts.  Like Wayne, I was wrongly assuming that your bull puts were OTM and the NAB hypothetical showed otherwise.  Quite happy with a past example when conditions were right - but agree that this would be a topic on it's own.



> ...Sorry, but there are so many aspects to trading, and perhaps we could look at how market makers work, and talk about the different players there like optiva and susquana, and timberhill to name a few….  There are all sorts of tricks to getting set at an advantage, and observing the market makers and other players is key to this, but this is a whole topic in itself. ...



This would be really interesting and would certainly like to understand more how they work (especially our local MM's) and would love to hear of any ways you've found to get a better advantage - sounds great!   

Cheers,
Margaret.


----------



## Magdoran

Hi Wayne and Margaret,


Sorry guys, was (and am) under a lot of pressure to produce a whole range of documentation (professionally, domestically, comments for this site – I promised hissho an XJO scenario I’ve been doing in bits for example) – add this in with trading imperatives, and a seminar to prepare for… let alone home life… you get the picture.  I was feeling frustrated late last night (and very sleepy - I don’t stay up to trade the US market) that you guys didn’t magically know everything I do… hey, why don’t you? Hahahaha… 

So, I’m a little bit more objective this morning, and of course you’re going to ask questions and raise issues and try to understand where I’m coming from…  I suppose I assumed we were covering all of this at a high level and I wouldn’t have to go into the detail.

On reflection, I can see that is precisely where you’d like to go, right hard into the detail on all levels, the unseen things like how to assess and deal with the actual risks, how to understand and fox the market makers, etc.  All important issues.  

My focus was on finding time to write more technical comments like on the diagonals for instance (then ratios, compare morphing, compare models, etc) but at a high level, then come back and talk about the nuances.  What I might do is to back burn all of this, and adopt a more open discussion format on the detail for a while, and cover the high level areas as the thread dictates at a significantly slower pace.  Works for me…

Anyway, it’s “Wayne€™s World” here! Hahaha


Must away! 


Magdoran


----------



## sails

Hi Magdoran,

I have a pretty good understanding of options in both theory and practice, so there is no need to go into such detail of option basics.  If I ask a question, it is on the assumption that we both have basic options knowledge and if it's over my head, I'll let you know!  Obviously there will be different view points from time to time as we've already discovered, but that's what makes a good discussion.

Regarding market maker activities, I do have a basic understanding of how it works and how they hedge.  Cottle's book devotes a whole chapter to Market Makers and explains the hedging mechanisms of conversions and reversals.  My main interest was piqued when you mentioned our local MM's as I thought you may have had some other interesting information that was more applicable to the local market.  So, definately no need to go into the basics - but if you have any practical suggestions in how to improve on order fill, etc - that would be great.

Sounds like you have a lot on your plate at the moment - so please do not feel under any pressure to reply to these topics until you feel you have more time.  

Cheers,
Margaret.


----------



## wayneL

Magdoran said:
			
		

> Anyway, it’s “Wayne’s World” here! Hahaha
> 
> 
> Must away!
> 
> 
> Magdoran




Because I have an opinion? hmmmmmmmm!


----------



## Magdoran

Wayne:  Meaning:  "it's your house (thread) - your'e the moderator - not trying to steal your thunder".

Margaret:  I know you are highly proficient at options...

Now we're really getting our wires crossed...

What's going on here - we've gone from cordial to less cordial for some reason.  Am I missing something?

Sorry if I've caused offence... none was intended.


Magdoran


----------



## sails

Hi Magdoran,

No offence at all - just trying to spare you time in typing so much detail as you so many other commitments.  That's all I was trying to communicate in my post as I know what it's like to be really busy.  Quite happy to wait until you have time to share some of your ideas   

Cheers,
Margaret.


----------



## wayneL

Magdoran said:
			
		

> Wayne:  Meaning:  "it's your house (thread) - your'e the moderator - not trying to steal your thunder".




I rarely have thunder, and usually only after a high fibre meal  

Don't worry about stealing thunder, if you have something to add, go ahead and say it. No problems here.



			
				Magdoran said:
			
		

> What's going on here - we've gone from cordial to less cordial for some reason.  Am I missing something?




Mag,

It's the lack of body language. We can misread each other on these forums. But most on this forum don't hold grudges at all anyway. Even if the debate becomes "robust" it doesn't mean anything really. 

But as traders we are good at offence and parry, it's what we do to survive. Discussion inevitably reflects this. Don't worry about it, we're all friends at the end of the day.

Cheers


----------



## cuttlefish

Great thread people - unfortunately I've got nothing to add since I'm new to options but have really enjoyed reading the commentary so far.


----------



## sails

Here is a link to the free "Options Trader Magazine" for May and June  
http://www.optionstradermag.com/v2ads.htm

Edit:  Just noticed that it is possible to download all the previous issues by clicking on the "Back Issues" tab on the left hand side of the screen.


----------



## Mofra

Sails,

Thank you very much for posting the link on behalf of all occasional lurkers like myself - finding the credit spread vs debit spread article very interesting


----------



## sails

Here's an interesting article on debit vs. credit spreads by one of the Optionetic's instructors - so obviously they don't all agree on this issue. I believe the author was previously a market maker:   http://www.optionetics.com/articles...idNo=14840&intChoice=0&mType=3&mSearch=kramer


----------



## Magdoran

sails said:
			
		

> Here's an interesting article on debit vs. credit spreads by one of the Optionetic's instructors - so obviously they don't all agree on this issue. I believe the author was previously a market maker:   http://www.optionetics.com/articles...idNo=14840&intChoice=0&mType=3&mSearch=kramer





Aha Margaret, I can see what you were getting at here...

Sure, this Scott chap is quite correct about the theory...  Where I’m focused is finessing skews in my favour, and exiting with a beneficial skew, and morphing.  




> When a trader is contemplating buying a call spread or selling a put spread at the same strike prices he/she is undertaking a major waste of time as they are the same thing – period. Let me clarify before people's diastolic pressure go through the sphygmomanometers. I am stating that the two spreads are accurately priced with no arbitrage potential, of the same month, same underlying, etc.  “How can that be, Kramer”? I really don't know, and I am still trying to figure it out, but it is so.”




What he’s talking about is a situation where there is no skew.  If the market traded perfectly all the time, then he’d be absolutely correct, there would be no difference in the two strategies as specified above, except perhaps the lack of brokerage for bull puts if they expire worthless.

Where there is a difference is in the way skews come about, and how IV will affect different strikes.  I’ve just found that in the market in Australia it was easier to enter bull puts with an advantageous skew over bull calls, and certainly so on exit.  Of course it’s possible for bull calls to have excellent skews too, but I just don’t see many here, but then I rarely look for these much anymore...

I did get one part wrong about using the term “exact strikes” in post 98.  This is incorrect where you sell a $40 put for 0.85, buy a $41 put for 0.45 yielding a 0.40 credit, and buy a $40 call for 1.35, sell a $41 Call for 0.75 for a debit of 0.60.  The risk and reward is the same.

Where this gets messy though is in the actual price you can get set at during normal trading (entry or exit), I have found from experience that you could get set with really good ratios for credit versions over debit.  I don’t know why this is, but this has been my experience to date.


Regards


Magdoran


----------



## ozambersand

Hope you don't mind me bumping this thread, but I found it doing a search and it's got lots of stuff I need to check on now and then, so I would prefer it closer to the top!  
PS Thanks for all the work that everyone contributed to it.


----------



## chops_a_must

Just a couple of questions. I'm motoring through those options books you recommend Wayne, some great stuff. Read the covered call section in the Mcmillan book twice now, and am a third through the Natenburg book. Should be doing study, but am enjoying them too much. 

Just on delta neutral strategies... what happens if you get an early excercise whilst using this strategy? And is this still profitable? If the market thinks there are a lot of people using this, will it start hunting certain levels? A lot of people have claimed they were ruined because agents knew positions and were targeting them, didn't they?

And is this strategy even possible on Oz stocks? Considering in a lot cases, you would need several 100k worth for a lot of stocks.

Is there any way I can write puts, with the intention of being comfortable with being assigned, for a $50 dollar stock in Oz, without needing 50k? Only say, wanting 5k of it?

Also, is there any easy reference to the full list of optionable stocks on the ASX? And which ones only settle every three months, and each month.

What is the full cost in brokerage on IB, from writing and purchase, to excercise/ assignment?

Does the fact that ASX options are in lots of 1000, rather than 100 lead to the illiquidity problems in Oz options? And do you think they would be better off changing that?

Sorry for the questions. Just very enthusiastic atm. Cheers.


----------



## wayneL

My answers in blue.



chops_a_must said:


> Just a couple of questions. I'm motoring through those options books you recommend Wayne, some great stuff. Read the covered call section in the Mcmillan book twice now, and am a third through the Natenburg book. Should be doing study, but am enjoying them too much.
> 
> Just on delta neutral strategies... what happens if you get an early excercise whilst using this strategy? And is this still profitable? If the market thinks there are a lot of people using this, will it start hunting certain levels? A lot of people have claimed they were ruined because agents knew positions and were targeting them, didn't they?
> 
> There are different ways of looking at this, all via synthetic relationships. Realistically there are two instances where you are in danger of early assignment on short . ITM puts and calls where there it is about to go ex-dividend and there is a financial benefit for the call owner.
> 
> With euro style options (index) this is not a problem.
> 
> Let's say you are constructing an iron condor. You will have a short ITM put which could get exercised early. The answer is to construct an all call condor.  People like to do irons for the credit, but at the end of the day there is not much difference, unless there is an issue with the spread. They are synthetically equal.
> 
> On the call issue, just watch for the ex div date is the obvious thing.
> 
> If you do happen to be assigned. It's a matter of re-evaluating where your at, and adjusting to suit. Lets say your assigned the short put in an iron condor. Now you have a leg of long stock. You can keep the stock and sell a call against it, and you have a synthetic short put again.
> 
> Will the market hunt levels? I don't know, but you should have a defence strategy in place.
> 
> On stocks, I don't go straight fro the condor. I'll do a credit spread and go delta neutral and start hedging with stock, roll, flip, or whatever if it goes pear shaped.
> 
> And is this strategy even possible on Oz stocks? Considering in a lot cases, you would need several 100k worth for a lot of stocks.
> 
> Is there any way I can write puts, with the intention of being comfortable with being assigned, for a $50 dollar stock in Oz, without needing 50k? Only say, wanting 5k of it? Not really. Not without the risk of the 50k position that I can think of.
> 
> Also, is there any easy reference to the full list of optionable stocks on the ASX? And which ones only settle every three months, and each month.
> 
> What is the full cost in brokerage on IB, from writing and purchase, to excercise/ assignment?
> 
> I don't know these two as will be different to US. Sails will know.
> 
> Does the fact that ASX options are in lots of 1000, rather than 100 lead to the illiquidity problems in Oz options? And do you think they would be better off changing that?
> 
> I reckon so. But don't have any evidence to prove it. But a lack of MM competition has a lot to do with it as well.
> 
> Sorry for the questions. Just very enthusiastic atm. Cheers.




Cheers, good questions


----------



## VolTracker

Here's a few links to ASX sites that might answer  a couple of chops' qn's.

List of Optionable ASX Stocks
http://www.asx.com.au/data/option_securities.pdf

Option codes list
http://www.asx.com.au/data/options_code_list.csv

Excel file of option stocks, volatility estimates from MM's and Div's updated weekly (Note that the divs are not that reliable).
http://www.asx.com.au/data/volatility_and_dividend_parameters.xls

cheers all


----------



## wayneL

Chops,

Just re-read my answers... what a load of poorly phrased rubbish. I don't know how anyone could understand what I was on about. I think I'll have another go after some caffeine.


----------



## Nick Radge

Its after 9am mate...try the one with the RED label...it might be in a different cabinet from the coffee though...


----------



## Nick Radge

Sorry, thats disrespectful for a class act. BLACK label...


----------



## wayneL

Actually, I've always been a fan of German wheat beer. But I now know what to bring if I'm ever looking for a bed in Noosa.


----------



## chops_a_must

VolTracker said:


> Here's a few links to ASX sites that might answer  a couple of chops' qn's.
> 
> List of Optionable ASX Stocks
> http://www.asx.com.au/data/option_securities.pdf
> 
> Option codes list
> http://www.asx.com.au/data/options_code_list.csv
> 
> Excel file of option stocks, volatility estimates from MM's and Div's updated weekly (Note that the divs are not that reliable).
> http://www.asx.com.au/data/volatility_and_dividend_parameters.xls
> 
> cheers all




Thanks mate. I did find the optionable stocks thing last night.

You wouldn't happen to have any comments on the ease of trade with the flex options would you?


----------



## chops_a_must

wayneL said:


> I now know what to bring if I'm ever looking for a bed in Noosa.



A pillow?


----------



## VolTracker

The way I understand it, FLEX options can be requested by a financial inst on stocks where regular ETO's are not available. ASX site explains it better.

As far as trading goes, they dont have the usual Market Maker obligations so getting a reasonable spread can be difficult to impossible.

Looking thru the FLEX stocks yesterday there was dribs & drabs volume on quite a few of them so they must be tradeable at least.

ABS (67 contracts), ALL(12), FMG(50), GFF(5), IPL(1), LEI(4) ....

Personally, I have found getting filled very hit and miss so I rarely trade them now.


----------



## chops_a_must

VolTracker said:


> The way I understand it, FLEX options can be requested by a financial inst on stocks where regular ETO's are not available. ASX site explains it better.
> 
> As far as trading goes, they dont have the usual Market Maker obligations so getting a reasonable spread can be difficult to impossible.
> 
> Looking thru the FLEX stocks yesterday there was dribs & drabs volume on quite a few of them so they must be tradeable at least.
> 
> ABS (67 contracts), ALL(12), FMG(50), GFF(5), IPL(1), LEI(4) ....
> 
> Personally, I have found getting filled very hit and miss so I rarely trade them now.




Thanks for that. I'd only be interested in writing covered calls, and writing naked puts for them, not actually trading them. Just wanted to make sure that that would be possible.

Thanks.


----------



## MRC & Co

Here is something I have been considering, do any of you guys buy DITM calls (as LEAPS) if you are thinking of going long for some time, as a way to gain leverage whilst negating added risk?  And if you use this strategy, do you use it the majority of times in the aforementioned circumstances?

Also, another quick question, on option probability calculators, how come if you set the strike at the current price, and expiration for say 3 months, it gives you a 50/50 probability, when infact the market is prooven to trend up 70% of the time?  

Cheers


----------



## wayneL

MRC & Co said:


> Here is something I have been considering, do any of you guys buy DITM calls (as LEAPS) if you are thinking of going long for some time, as a way to gain leverage whilst negating added risk?  And if you use this strategy, do you use it the majority of times in the aforementioned circumstances?



Valid strategy. 

But consider that vega (sensitivity to volatility changes) increases as you go out in time, so it can add risk if you buy at any old price. Best time to buy leaps with this in mind is when IV is cycling low. That way you can be long vega as well as delta.

Other greeks should be taken into consideration too. You will have to leverage 2x just to get the equivalent delta as a stock position and as gamma is also low with long dated options (but better when IVs are lower), the stock has to move in your favour a long way before the option starts to manufacture some extra delta. 

You will also be paying up front for all those carrying costs.

There are pros and cons.


> Also, another quick question, on option probability calculators, how come if you set the strike at the current price, and expiration for say 3 months, it gives you a 50/50 probability, when infact the market is prooven to trend up 70% of the time?
> 
> Cheers



Probability calculators, though definitely an aid, should be taken with a pinch of salt.


----------



## MRC & Co

Thanks Wayne,

Few things to think about there.  I will have to get a better understanding of ALL the greeks.  Have to keep reading over and over to let them sink in!  

Start of this thread is probably a good place to go back too as it explains them better than most books I have found!  

Thanks!


----------



## stargazer

Hi Wayne

I am looking to structure my trades so as to have a low exposure to the risk.  I would like to ask what is wrong with working with this type of structure.  I understand it at least..lol.  



Buy 1000 XYZ for $12.00 a share......................cost 12,000
Buy 1  12.50 put option for $1 a share ......................1,000
Total cost ..........................................................13,000

If stock goes against you and goes down potential max loss 3.84%

sell stock 12500
outlay     13000
             -500

You can also write a covered call but bit tired to work it all out now.

Why is this type of set up so risky as you have indicated in the past.

Cheers
SG


----------



## wayneL

stargazer said:


> Hi Wayne
> 
> I am looking to structure my trades so as to have a low exposure to the risk.  I would like to ask what is wrong with working with this type of structure.  I understand it at least..lol.
> 
> 
> 
> Buy 1000 XYZ for $12.00 a share......................cost 12,000
> Buy 1  12.50 put option for $1 a share ......................1,000
> Total cost ..........................................................13,000
> 
> If stock goes against you and goes down potential max loss 3.84%
> 
> sell stock 12500
> outlay     13000
> -500
> 
> You can also write a covered call but bit tired to work it all out now.
> 
> Why is this type of set up so risky as you have indicated in the past.
> 
> Cheers
> SG




Hi SG,

It's not that it's risky. You have limited your absolute downside risk to $500, that's fine.

But, you are trading other risks for removing that downside risk. You are paying someone else to take them on for you.

If those other risks are acceptable in exchange for limiting downside risk, you go ahead and put the trade on. If not, then don't trade.

Let's have a look:

* Your put option is 50c in the money. That means that *at expiry* you will incur maximum loss at any price up to $12.50 and you won't break even until $13.00. That means your stock could rise a full 8% and you still make a loss after costs.

* You are slightly increasing your contest risk, capital needed and carrying costs. Contest risk is brokerage and spread and you are adding at least one extra commission. You are using $13k for a $12k position and you are carrying that $13k position (loss of risk free bank interest received on cash).

OK here's a couple of things to think about:

* Always consider synthetically equivalent positions. What you in fact have in the above, is a synthetic $12.50 call option which you can buy for ~$600. If you like the above risk profile (the stock plus long put), you can achieve the exact same risk profile (once cost of carry on long stock is considered) with the long call.

* You are using much less capital, contest risk may be less (but certainly not more), and you are achieving exactly the same thing.

* Consider other strikes and expiries, think about which trade offs are best for you.

* There are other considerations, buts that's enough to think about for now.

Options are all about compromise, you are swapping one type of risk for another. That's good, because you get to choose which set of risks are most palatable to what you are trying to achieve.

Cheers


----------



## MRC & Co

Another strategy:

How many of you guys have at anytime consistently used bear call or bull put option credit spreads to eliminate directional bias (and risk) and gain some quick and consistent premiums?

I mean, in a bullmarket, wouldnt it give you a high probability return to trade bull puts due to the already evident probable directional bias, and in this current bear market, vice-versa? (i.e. trade bear calls?).

Especially on a shorter time-frame (no more than 60 days), to eliminate trend reversal and to maximise time decay.  Whilst only trading OTM strikes.

Seems simple and like a rather consistent strategy?

Any thoughts?

Thanks


----------



## Grinder

MRC,

    I share your sentiments, have been predominantly trading credit spreads of late for all the reasons you have listed. However, I do have some grievances with these types of plays, one being the capital that is tied up and another being insufficient premium that is generated from going OTM. This can be overcome at times by increasing position size or widening the cushion but taking on more exposure, which I don't like doing as I have an aversion to too much risk. Not too mention (which I will) finding an IV skew that won't hurt the spread too much or having to unwind to late in the game.
    Nevertheless, it's still my strategy of choice till I learn more about options... but what would I know? been trading for only a few months so I'm sure some of the pros on this forum can provide better analysis as to the pros & cons.... would welcome this.

my


----------



## MRC & Co

Thanks Grinder,

Yeh, the volatilty skew was another thing I was meant to throw in.  But as you say, can take longer and more time on the sidelines.  

I also agree, premiums would not be the greatest and the credit spread would tie up a bit of capital on margin.  

Do they make you maintain your entire potential downside from the go, or only a portion and a margin call if it turns against you (crosses your closest strike)?

Cheers


----------



## Grinder

MRC,

I enter the trade with the total margin required (prem margin on market + risk margin) which they calculate using the asx margin estimator. In addition to this they ask for 100% of the calculated figure as the overall total margin they hold, which means those funds are frozen till the position is closed. Ofcourse, the figure would obviously change as the market does each day, thus adjusting my overall total margin required at the end of each trading day. 

If any option traders out there use a provider that requires less margin, let me know.


----------



## wayneL

Grinder said:


> MRC,
> 
> I enter the trade with the total margin required (prem margin on market + risk margin) which they calculate using the asx margin estimator. In addition to this they ask for 100% of the calculated figure as the overall total margin they hold, which means those funds are frozen till the position is closed. Ofcourse, the figure would obviously change as the market does each day, thus adjusting my overall total margin required at the end of each trading day.
> 
> *If any option traders out there use a provider that requires less margin, let me know.*




If you trade US option and have enough capital,or, trade futures option, many brokers will put you on SPAN risk margining.

It's a very cool way of margining as you can even go the synthetic route on the same margin (say a synthetically equivalent collar).

 I wrote up some time ago on the topic http://sigmaoptions.blogspot.com/2007/01/new-margin-rules-for-option-positions.html


----------



## Grinder

Thanks Wayne,

     Sounds ideal, will check it out when or if I start trading US options.


----------



## chops_a_must

Wayne... I'm seeking some advice on a potential strategy - put bull spread.

Just wanting to know your opinions on them, especially if looking to have stock put to you.

I'm looking at a trade atm that I feel could be set up. Buying a lower put at a strike which if passed, would signal a breakdown and a no no. (The natural gas ETF UNG happens to be what I am looking at.)

But having the written put at a number of strikes higher than the lower put, rather than the next one.

The maximum loss being at the point of lower strike price, correct?

Also... should you leg into this trade if the premiums aren't at acceptable levels at one time or other? 

As an aside, what are the full brokerage fees for IB from opening to exercise? And can you hedge somehow so that the actual value of the trade, stays at the value of the opening of the trade in currency terms?


----------



## wayneL

chops_a_must said:


> Wayne... I'm seeking some advice on a potential strategy - put bull spread.
> 
> Just wanting to know your opinions on them, especially if looking to have stock put to you.
> 
> I'm looking at a trade atm that I feel could be set up. Buying a lower put at a strike which if passed, would signal a breakdown and a no no. (The natural gas ETF UNG happens to be what I am looking at.)
> 
> But having the written put at a number of strikes higher than the lower put, rather than the next one.
> 
> The maximum loss being at the point of lower strike price, correct?
> 
> As an aside, what are the full brokerage fees for IB from opening to exercise? And can you hedge somehow so that the actual value of the trade, stays at the value of the opening of the trade in currency terms?




OK what you have is a credit spread. The maximum loss is the width of the spread, minus the credit you received when you opened the strategy.

So for eg if the spread between the strikes is $5.00 and you receive  $1.00 credit when you opened it, then the maximum loss is $4.00. Multiply by 100 and your risk is $400 per spread.

You can hedge your currency risk by going into idealpro and buying back the Aussie dollars you used for the trade at a rate of $500 per spread in the above example.

Hmmm, but minimum on idealpro is $25k or something.... maybe another forex broker... buts thats the idea anyway.

Regarding total brokerage. Have only been assigned once, yonks ago and can't remember the total... It's cheap as anyway with IB.

If you're particularly looking to be assigned, why not just short the put straight out?


----------



## chops_a_must

wayneL said:


> If you're particularly looking to be assigned, why not just short the put straight out?




Because if it goes below the lower strike, I wouldn't want it.


----------



## wayneL

chops_a_must said:


> Because if it goes below the lower strike, I wouldn't want it.



 Fair enough.


----------



## chops_a_must

wayneL said:


> Let's say you are constructing an iron condor.




It wasn't you that brought down this bull with your "Iron Condors" was it? 



















> Cotabambas is a poor hamlet isolated in a remote corner of the Peruvian Andes. Each year for centuries the men of the village at their peril have climbed high into the mountains to bait and capture an adult Andean Condor, the world's largest winged predator. The condor and a bull are the centerpieces of an ancient ritual now enshrined as the Fiesta de Yawar. The condor, representing the Incas, overpowers a bull, representing the conquistadors. The condor is strapped to the bull's back and the bull, lacerated by the condor's powerful talons and maddened with pain, races around the barricaded central plaza chased by taunting villagers.




You guys should stop calling yourselves bears, and start calling yourselves condors!


----------



## chops_a_must

Wayne....

Coming into option expiry this week. My protective put is almost no chance to be in the money. What is your philosophy for dealing with this? Do you try and sell that? 

My written put will probably finish just out of the money, or on it, for maximum profit, but would like the underlying to finish just below.

I'm considering writing a call above now, to maximise profit, and either way will have a better break even point with bigger maximum profit potential.

Anything I'm missing... or should be aware of?


----------



## wayneL

chops_a_must said:


> Wayne....
> 
> Coming into option expiry this week. My protective put is almost no chance to be in the money. What is your philosophy for dealing with this? Do you try and sell that?
> 
> My written put will probably finish just out of the money, or on it, for maximum profit, but would like the underlying to finish just below.
> 
> I'm considering writing a call above now, to maximise profit, and either way will have a better break even point with bigger maximum profit potential.
> 
> Anything I'm missing... or should be aware of?




You've got a bull put spread right? i.e. written put, plus bought put at lower price?

Re: selling the long put... anything can still happen - Murphy's law.

As to what to look out for; if you have a short option with the underlying trading at or near the strike price, you have "pin risk".

This means, that you don't know whether you will be assigned or not at expiry. As I recall you want the stock, so that might not be a drama for you.

If you write a call (or take any new trade), you introduce a new potential reward, but also a new risk. That's for you decide whether you like the new risk profile. (the same applies for selling the long put)

Generally speaking though, spread traders have a look at risk/reward on an ongoing basis, If a spread has near 100% profit with time left to expiry, you really only have risk, but not much reward from this point on.

Just a couple of things to think about.

Another theory of mine; Murhpy's Law was probably originally coined by an option trader. :


----------



## chops_a_must

wayneL said:


> You've got a bull put spread right? i.e. written put, plus bought put at lower price?
> 
> Re: selling the long put... anything can still happen - Murphy's law.
> 
> As to what to look out for; if you have a short option with the underlying trading at or near the strike price, you have "pin risk".
> 
> This means, that you don't know whether you will be assigned or not at expiry. As I recall you want the stock, so that might not be a drama for you.
> 
> If you write a call (or take any new trade), you introduce a new potential reward, but also a new risk. That's for you decide whether you like the new risk profile. (the same applies for selling the long put)
> 
> Generally speaking though, spread traders have a look at risk/reward on an ongoing basis, If a spread has near 100% profit with time left to expiry, you really only have risk, but not much reward from this point on.
> 
> Just a couple of things to think about.
> 
> Another theory of mine; Murhpy's Law was probably originally coined by an option trader. :




That's correct.

The risk of being without cover on the downside is perhaps outweighed by the better break even point. Because in my mind, the chances are higher of the underlying falling within my break even point and lower strike, than they would be of clearing the lower strike outright.

What I could set up, is a call bear spread as well, so that there effectively cannot be a loss on that trade when the premium from the put is taken into account.


----------



## cutz

Hi All,

To the active option traders out there, what are you favourite strategies and do you put them on at once or leg in over a few days ? 
Also are there any preferences to index over stock options and vice versa.

P.S. please excuse my terminology, i'm pretty new to the scene.

Cheers,

Cutz.


----------



## mazzatelli1000

cutz said:


> Hi All,
> 
> To the active option traders out there, what are you favourite strategies and do you put them on at once or leg in over a few days ?
> Also are there any preferences to index over stock options and vice versa.
> 
> P.S. please excuse my terminology, i'm pretty new to the scene.
> 
> Cheers,
> 
> Cutz.




Hey Cutz, 

Welcome to the scene

Your questions will have been answered in other threads --- look in particular for posts by WayneL, Magdoran and sails.

My "favourite" strategy depends on the market conditions at any one time and my projections - i.e. volatility, IV levels, skews, underlying direction, time, what risk I want to expose myself to e.g. vega or delta and gamma. 

I prefer not to leg in, but sometimes due to liquidity issues, the only way to get in some positions is to do so.

Indexes are GENERALLY less proned to huge gaps like their equity counterparts, and hence more often are recommended for market neutral strategies.
So in that way index options are preferred over equity options for certain strategies.

Cheers


----------



## cutz

Thanks mazzatelli1000.

Another query i would like to put fwd,

Say you feel that the index has reached a bottom or close to it so you decide to write a couple of sort term index puts just out of the money,
4 weeks till expiry for example.

Would you protect your position with a further OTM bought put or alternatively don't buy a protective put but roll into the next month, next strike if the short puts become ITM due to an error in judging the index.

I am not seeking advice, just opinions as a have tried both methods without getting into trouble and i sometimes feel that i am paying a high price for having the protection of a bought put.


What are peoples thoughts on this.

Cheers,

Cutz.


----------



## mazzatelli1000

cutz said:


> Thanks mazzatelli1000.
> 
> Another query i would like to put fwd,
> 
> Say you feel that the index has reached a bottom or close to it so you decide to write a couple of sort term index puts just out of the money,
> 4 weeks till expiry for example.
> 
> Would you protect your position with a further OTM bought put or alternatively don't buy a protective put but roll into the next month, next strike if the short puts become ITM due to an error in judging the index.
> 
> I am not seeking advice, just opinions as a have tried both methods without getting into trouble and i sometimes feel that i am paying a high price for having the protection of a bought put.
> 
> 
> What are peoples thoughts on this.
> 
> Cheers,
> 
> Cutz.




Cutz
It depends on your risk tolerance

With some indexes, the futures are accessible all hours so it can be used to synthetically alter risk profiles, so some are comfortable being short naked premium on indexes whether it be calls or puts.

Others may put on the bull put spread and subscribe to the "insurance" policy school of thought - i.e. better to have losses limited in case that evil black swan decides to appear or as you mentioned - an error in judging the index.

Whatever you are comfortable with.

Me personally I like to keep MOST short premium strategies to the limited loss type.


----------



## cutz

Thanks again mazzatelli1000,

You mentioned synthetically altering risk profiles using futures, would an example of this be going short SPI futures + writing index puts ? 

Cheers,

Cutz.


----------



## mazzatelli1000

cutz said:


> Thanks again mazzatelli1000,
> 
> You mentioned synthetically altering risk profiles using futures, would an example of this be going short SPI futures + writing index puts ?
> 
> Cheers,
> 
> Cutz.




Cutz

Yes...that would be a synthetic short call, if your after that profile


----------



## wayneL

Just adding a few thoughts to the index short put vs index bull put spread question:

As discussed, the absolute loss is known with the bull put. In the event of a black swan, being naked short puts could be account destroying. However in 24 hour futures markets, you can have contingency orders in place to hedge you out with futures on your naked put if the market goes *poof* while you're sleeping.

But you are at risk of the platform/technology failing at the wrong time.

*Advantage => bull put*.

However, those long puts come at a price. Index options are skewed to the downside, so you will be paying up for the put hedge. You will need somewhere between 3 to 10 spreads to net the same dollars as a single naked put. Therefore your contest risk (bid/ask spread + commission) is 3 to 10 times higher. Very unpalatable when forced to adjust or close out.

*Advantage => naked put*

Then we have a look at the payoff diagram:






The maximum loss of the spread at expiry is greater than the naked put until you get past a certain point. Considering that indicies will give you continuity of pricing 99.9% of the time, allowing for timely adjustments and or exits:

*Advantage => naked put*

Then we have the greeks and volatility.

The naked put is long theta and short vega gamma all the time. The bull put is likewise while OTM. However once the price passes below the breakeven point, these greeks flop over; short theta and long gamma and vega.

As indexes sell off, implied volatility increases. So if the index starts dumping on you, vega is going to hurt you a lot more with the naked put, but it will help you in the bull put once you're ITM.

However this help via vega, turns to hindrance as that short theta will be high, so action will be required if it doesn't look like going back OTM. (Don't hope here)

The long gamma will always be a positive if ITM, thats a plus when your losing.

*Advantage => Mixed... depends on exact situation*

So looking at the overall picture, there are pros and cons for each in "normal" trading. But what of the 10 sigma black swan event? 

Survival is the key requisite for survival and that might resolutely sway the argument one way.

FWIW


----------



## peter2

Excellent post WayneL.


----------



## mazzatelli1000

wayneL said:


> But you are at risk of the platform/technology failing at the wrong time.
> FWIW




WayneL is spot on..one often only thinks of risks relating to market variables and often neglect those relating to execution.

Also, but this should not be the main consideration, there is opportunity cost of leaving your money as margin for collateral, while it could be utilised for other purposes.


----------



## wayneL

mazzatelli1000 said:


> WayneL is spot on..one often only thinks of risks relating to market variables and often neglect those relating to execution.
> 
> Also, but this should not be the main consideration, there is opportunity cost of leaving your money as margin for collateral, while it could be utilised for other purposes.




Yes, should have mentioned margin too.

This is an advantage of futures options and SPAN margining... none of this 15% of strike price nonsense for naked positions.


----------



## cutz

In light of current events and my level of experience the bull put spread appears to be the preferred strategy out of the two.

I am trying to get my head around what it is to be long/short Greeks.

Using Wayne's example “The naked put is long theta and short vega gamma all the time” I interpret this as an increase in theta and decrease in vega gamma as advantageous to the position, if the position is a bought put would you say that you are short theta and long vega gamma ? , as the opposite is true.

Therefore does being long Greeks mean a positive move in the particular Greek advantageous to the total position and being short Greeks mean a negative move in the particular Greek advantageous to the total position.

Please steer me in the right direction if this is not correct.

Thanks Guys,

Cutz.


----------



## mazzatelli1000

cutz said:


> In light of current events and my level of experience the bull put spread appears to be the preferred strategy out of the two.
> 
> I am trying to get my head around what it is to be long/short Greeks.
> 
> Using Wayne's example “The naked put is long theta and short vega gamma all the time” I interpret this as an increase in theta and decrease in vega gamma as advantageous to the position, if the position is a bought put would you say that you are short theta and long vega gamma ? , as the opposite is true.
> 
> Therefore does being long Greeks mean a positive move in the particular Greek advantageous to the total position and being short Greeks mean a negative move in the particular Greek advantageous to the total position.
> 
> Please steer me in the right direction if this is not correct.
> 
> Thanks Guys,
> 
> Cutz.




Im not sure what exactly your saying

But if your saying that say the naked put is short/negative gamma, and a more negative move will make it advantageous would not be accurate


----------



## wayneL

cutz said:


> In light of current events and my level of experience the bull put spread appears to be the preferred strategy out of the two.
> 
> I am trying to get my head around what it is to be long/short Greeks.
> 
> Using Wayne's example “The naked put is long theta and short vega gamma all the time” I interpret this as an increase in theta and decrease in vega gamma as advantageous to the position, if the position is a bought put would you say that you are short theta and long vega gamma ? , as the opposite is true.
> 
> Therefore does being long Greeks mean a positive move in the particular Greek advantageous to the total position and being short Greeks mean a negative move in the particular Greek advantageous to the total position.
> 
> Please steer me in the right direction if this is not correct.
> 
> Thanks Guys,
> 
> Cutz.




Not necessarily. Long and short mean slightly different thing when we talk about greeks.

Substitute long for + and short for - and that should help you understand the context.

Therefore long gamma is +gamma (or positive gamma). We don't necessarily benefit from an increase in gamma, but we benefit from being positive gamma.

Same with theta. Id we're -theta (short) it's working against us, but a decrease in theta might not necessarily be in our favour (e.g. we might have just had a volatility crush).

Vega is a bit different again, if you're long vega and increase will probably be most welcome.

(and visa versa on each example of course)

That should have totally confused you.


----------



## mazzatelli1000

wayneL said:


> That should have totally confused you.




Cutz, it would be better to understand what each Greek is trying to convey in terms of risk for each position.

Fire up Hoadleys or something similar and observe those 3D Greeks.
Then tamper with the parameters and observe the changes.

Should mess your mind up even more


----------



## wayneL

mazzatelli1000 said:


> Cutz, it would be better to understand what each Greek is trying to convey in terms of risk for each position.
> 
> Fire up Hoadleys or something similar and observe those 3D Greeks.
> Then tamper with the parameters and observe the changes.
> 
> Should mess your mind up even more



Indeed 

...and agreed.


----------



## cutz

Thanks Wayne,

Substituting Short with –, and Long with + has cleared it up.

Do you guys use the full version of Hoadleys Strategy Tool; I notice it’s been mentioned several times on this site.

Regarding index options, I currently dabble in XJO index options, but I was curious to know whether there are many differences in the dynamics between XJO and SPI options, ( apart from contract specs. of course).
I assumed there would have been higher turnover in the SPI options but looking at the SFE website depth page quotes are far and few between.


Cutz.


----------



## wayneL

I use the full version because I look at position greeks and do a lot of delta hedging, which you can't do with the free version (without a lot of number crunching)


----------



## cutz

Hi,

I have been playing around with the Hoadleys Strategy Tool but I am having a little bit of trouble with the Greeks, I will start with delta which is easiest to understand.

Using a BHP sep08 42.00 short call by 4 contracts @ $0.915 set up today, (example only), delta is 0.31. Reading the payoff diagram along the right edge, position delta reads -1300 at $38.8 (approx today’s closing price), does this mean the position will lose $1300 for every $1 increase in underlying ? Also what does (ESP) stand for on the position delta axis?

Position theta makes sense, it peaks ATM,

Position vega also seems to make sense peaking out ATM ($200 loss per 1% increase in underlying volatility.)

Position gamma peaks out ATM which reads off at -300 on the position axis, I can’t seem to get my head around this one, as the theoretical price calculator on my brokers site shows gamma 0.001.

Sorry guys,
I realize time has already been spent on Greeks, just trying to tie it in with the Strategy Tool.

Last of all, does the full version of Hoadleys Strategy Tool download prices and historical underlying volatility off free sites or does it require a data vendor for the volatility.

Cutz.


----------



## elbee

Cutz,

Yes the position described will at the moment lose about $1300 for a $1 increase in the underlying - delta of about .31 x postion size of 4 X 1000 unit size.

ESP is equivalent share position - ie. the option position is the equivalent (at the moment) of holding approx. 1300 shares.

The Hoadley tool can download option chains from free providers (including ASX delayed) and historical underlying prices for volatility calculations from Yahoo.


----------



## cutz

Hi Guys,

RE post #166.

It has finally clicked, looking at the chart, position delta reads -1300 at $38.8, and position gamma reads approx -280 therefore if underlying stock moves to $39.8 new position delta will -1300+ -280 = -1580.

Could someone please explain the thin blue curved line on the chart, my brain has locked up again.

Thanks,

Cutz.


----------



## elbee

If you mean the Hoadley Strategy Payoff chart then the thin blue line is the Profit or loss at the current time. The thicker darker blue line is the profit or loss at expiration.

Press the "cycle time to expiry" button at the top right of the sheet to see how these converge over time.


----------



## cutz

> If you mean the Hoadley Strategy Payoff chart then the thin blue line is the Profit or loss at the current time.




Of course,

Thanks elbee.

Finally all pieces on the trial version have gelled, now to move onto the full version.

Cutz .


----------



## cutz

Hi Guys,

On the subject of Greeks, I have come to the realization that maybe I have been neglecting this area, for instance my main strategy has been short calls and short puts several strikes OTM near expiry on several stocks that I am familiar with, I will try to set up those trades around areas of support/resistance but my only consideration so far has been delta and to a certain extent theta, which give me an indication on the likelihood of exercise on stocks I have held for a long term which I want to avoid.

I have started shorting index options but I normally back these up with further OTM bought positions.

My question is how long do you guys spends analyzing Greeks before putting on a trade, is it just as critical with the simple trades I have described or are the Greeks more relevant for complex strategies.

Cutz.


----------



## wayneL

cutz said:


> Hi Guys,
> 
> On the subject of Greeks, I have come to the realization that maybe I have been neglecting this area, for instance my main strategy has been short calls and short puts several strikes OTM near expiry on several stocks that I am familiar with, I will try to set up those trades around areas of support/resistance but my only consideration so far has been delta and to a certain extent theta, which give me an indication on the likelihood of exercise on stocks I have held for a long term which I want to avoid.
> 
> I have started shorting index options but I normally back these up with further OTM bought positions.
> 
> My question is how long do you guys spends analyzing Greeks before putting on a trade, is it just as critical with the simple trades I have described or are the Greeks more relevant for complex strategies, and what else should I be looking at for the strategies I have described ?
> 
> Cutz.



I a lot of delta neutral trades over the index (SP500) and some long gamma scalping on stocks when the planet are in line.

To me the greeks are paramount, particularly gamma and vega.

For instance if I sell an iron condor over the index, I want to know how much gamma and vega can hurt me. If IV is low, strikes will be closer, gamma will be higher and I am at significant vega risk if the index starts ploughing lower.

I like to delta hedge very frequently, and how I do that will be decided by the greeks and my volatility forecast. Also I want to hedge that vega, because that will hurt if IV takes off. I might do this by superimposing calendar spreads over the top of the condor, or I might use double diagonals instead.

And there is a big tip in that - Know how volatility changes are going to affect the greeks.

At times I might want to start adding delta and take a directional bias to some degree.

In other words, rarely will I have an off the shelf strategy in place.

It's a bit hard to consider everything when you're fairly new, but it is definitely the way folks should be thinking.


----------



## mazzatelli1000

cutz said:


> My question is how long do you guys spends analyzing Greeks *before *putting on a trade, is it just as critical with the simple trades I have described or are the Greeks more relevant for complex strategies.
> Cutz.




*How long analysing? *
As long as you feel comfortable you understand the risks you are exposing yourself to.

*Is it critical only for complex strategies*
It is just as critical for these "simple" trades as it develops analytical skills and these simple trades are often building blocks for "complex strategies".

When I first began trading options, I spent time analysing how the Greeks worked for each particular off the shelf strategy e.g. credit spreads, butterflies, DD, IC, but after a while you will just know that for instance Condors are negative gamma, long theta and short vega. 

After this stage of focusing on individual trades - I found myself with a portfolio of trades e.g. Condors overlapped with Calendars and which sometimes included stocks and futures as well. I started to contradict myself about what was making money and what was not, and what "net" risks I was exposing myself to. 

So analysing the Greeks on a portfolio basis and being able to quantify the amount of delta (for delta hedging), will help.

So basically, you CANT SKIP THE GREEKS... 

I am a mean bast**d for suggesting this, but you should also learn how to dissect positions - which is covered by an author by the name of Charles Cottle. 

This will keep you thoroughly confused for months to come


----------



## cutz

Hi guys, thanks for your inputs on Greeks.

Quick question on volatility,

Entering historic volatility into the modeling tool along with the contract specs gives us a theoretical value on the contract, entering last trade price in price override and hitting calculate implied volatility gives us implied volatility, obviously traders are bidding contract prices up or down which in turn drives imp vol depending whether they are feeling bearish/bullish on underling.

But from what I have been reading option prices are valued based on future imp vol therefore the above calculation is done in reverse, implied volatility first then theoretical value calculation is made, so if theoretical price does not match up with market prices the trade is not done.

Is this how you guys come up with an option value and how would you come up with future volatility, is a judgment call made using charted imp vol history? If this is the case what sort of software do you guys find useful to track the Aussie imp vol?

Cutz.


----------



## mazzatelli1000

cutz said:


> Is this how you guys come up with an option value and how would you come up with future volatility, is a judgment call made using charted imp vol history? If this is the case what sort of software do you guys find useful to track the Aussie imp vol?
> 
> Cutz.




Firstly cutz - i recommend you trawl through these forums as many of these questions have come up and been discussed at length!!

Option Value - pretty much - Black Scholes model has all its variables you need to input to spit out an option value.

Implied volatility which looks forward, is extracted from theoretical price by rearrnaging the Black Scholes formula.

It is very subjective IV. Yes you can look at past IV and find a period which closely correlates to current conditions now to try and forecast volatility movements.

You can also watch how HV and IV move in relation to each other to try and forecast IV and the magnitude of movement. 

You can also watch how IV and HV reacts to stock price to make assessments again. As WayneL alluded to before, often stocks and indices, when they start ploughing lower, IV tends to increase but not always and not for every stock/index/ETF.

Also be aware that volatility (HV or IV) in the long run tends to mean revert.

With regards to Aussie IV, i dont trade Aussie options so can't help a great deal.

There is www.ivolatility.com.au - heard good things

Also premiumdata.net has IV as an indicator option which can be imported into AmiBroker and MetaStock programs to make the appropriate analysis.

But that is all i know.
This has come up in other threads if i recall correctly, look for posts by sails.

Cheers


----------



## fimmwolf

> There is www.ivolatility.com.au - heard good things




Just wondering, should this URL be: http://www.impliedvolatility.com.au/


----------



## mazzatelli1000

fimmwolf said:


> Just wondering, should this URL be: http://www.impliedvolatility.com.au/




Yeah, i shouldn't be so lazy with my posts.
Apologies people


----------



## cutz

Hi All,

I have a synthetic long on at the moment, the underlying stock is going ex div. tomorrow, the long call leg of the position is in the money with only intrinsic value in its price, will I expect to see a drop in the value of the call by the amount of the dividend tomorrow ? Or has the dividend loss already been priced into the call, I didn’t expect to be holding a position through it ex div. I overlooked that aspect when I put on the trade.(another lesson learnt)

Thanks,

Cutz


----------



## elbee

The option price will already have the dividend factored in.


----------



## cutz

Thanks for the reply elbee,

So the following should happen, stock price should drop, call should remain stable therefore losing some intrinsic value and picking up some time value,

I guess a couple of clues should have pointed me to the fact that the underlying was going ex div, the fact that an ATM call was trading with intrinsic value only with a month remaining, I thought that was quite strange,but didn't look into why.

When I set up the position a couple of weeks ago I punched the figures into Hoadley’s, the short put leg was showing an IV of 85% and the long call was showing an IV of 37%, I was quite chuffed at this thinking I scored the call on the cheap but looking back it was trying to tell me something else, (i.e. ex div shortly)

cutz.


----------



## chops_a_must

I'm not so sure.

If the option only has intrinsic value left in it, can't you be exercised at the end of the day, and have the dividend stripped? 

I'd be looking at closing the position at the end of the day... but that's just me, and I'm not totally sure about this...


----------



## cutz

Check out ANZ6B, you will see what i mean, give or take a few cents,

cutz.


----------



## sails

cutz said:


> Thanks for the reply elbee,
> 
> So the following should happen, stock price should drop, call should remain stable therefore losing some intrinsic value and picking up some time value,
> 
> I guess a couple of clues should have pointed me to the fact that the underlying was going ex div, the fact that an ATM call was trading with intrinsic value only with a month remaining, I thought that was quite strange,but didn't look into why.
> 
> When I set up the position a couple of weeks ago I punched the figures into Hoadley’s, the short put leg was showing an IV of 85% and the long call was showing an IV of 37%, I was quite chuffed at this thinking I scored the call on the cheap but looking back it was trying to tell me something else, (i.e. ex div shortly)
> 
> cutz.




Looks like you have it sorted, Cutz .  Yep, cheap calls and expensive puts are a clue to dividends coming up. Such a large IV differential between puts and calls certainly gives it away.  Once the dividend is entered into Hoadley, it gives a different picture.  Box trades look like a risk free trade to the unwary prior to dividends - but the risks lurk in the dividend and potential assignment.

Depending on the rest of your position, you could consider exercising your long call before close today and pick up the dividend (and possibly the franking credit depending on your circumstances) - but would then have to be willing to take the downside risk on the shares.  Also, need to know your brokers fee structure on exercised options as it may not be worth the effort.  As you probably know, no use trying to hedge with a close-to-the-money put as the dividend is priced into the put.

Also, if you have WebIress, click on the Analytics tab, then Option Valuation. In the middle section, you can change the volatility, move Todays Date backwards and forwards.  Underlying Price can also be changed, but when the market is trading it keeps defaulting to the current price.  Changing price is easier to play with when the market is closed.  Anyway, when the changes are made, the option value changes in the top left hand box "Value".   It's a quick way to get an approximate price - although I feel Hoadley is still more reliable overall.


----------



## sails

chops_a_must said:


> I'm not so sure.
> 
> If the option only has intrinsic value left in it, can't you be exercised at the end of the day, and have the dividend stripped?
> 
> I'd be looking at closing the position at the end of the day... but that's just me, and I'm not totally sure about this...




Chops, not if it is a long call - he stays in control of exercise until expiry day when most brokers automatically exercise all ITM long options.


----------



## cutz

Thanks for all your inputs guys,

I decided to close out the position and take the profits off the table, I felt a little uncomfortable holding a position through it ex dividend, I will observe from the sidelines to see what happens to it tomorrow.

Sails, thanks for the tips, very helpful as always.

Unfortunately comsec charges 0.35% on assignment/exercise, I learned the hard way with covered calls on CSL some time ago, I was slapped with assignment and a hefty brokerage bill and a valuable lesson on covered calls

cutz


----------



## sails

With ANZ going xdiv tomorrow and NAB the next day, it's probably a timely reminder for anyone with  in-the-money short calls to consider closing out before xdiv day.  There is a high risk of being assigned later today (ANZ) and only find out about it tomorrow morning.  This means that as a short stock holder one is liable to pay the dividends 

Even if in a bull call spread, the long calls don't offer any real protection from having to pay the dividend.  If in a bull call spread where both strikes are in-the-money, it usually pays to either close both out the day before OR exercise the long calls which means one is long stock on xdiv day and will receive the dividend.  By exercising the long call and being assigned on the short closes the position and neutralises the dividend.  BUT check your brokers fees on exercise/assignment - could make a difference to how this is handles...

One catch to the above is if for some unusual reason the short calls aren't assigned - then one would be long stock the next day and is no longer the limited risk position offered by the original bull call spread.  

I normally use the rule of thumb that if both strikes are both deeply in-the-money, it is probably OK to assume assignment of the short call.  If they are closer to the money and if there is still a fair bit of time value, then may be best to simply close out.

Hoadley's  OSET has a tab for for working out the probability of early exercise.  Make sure imputs include correct dividend amount and date, IV, etc, etc.  Useful as a guide, but personally, I usually like to ensure a bit extra as a buffer.


----------



## sails

cutz said:


> Thanks for all your inputs guys,
> 
> I decided to close out the position and take the profits off the table, I felt a little uncomfortable holding a position through it ex dividend, I will observe from the sidelines to see what happens to it tomorrow.
> 
> Sails, thanks for the tips, very helpful as always.
> 
> Unfortunately comsec charges 0.35% on assignment/exercise, I learned the hard way with covered calls on CSL some time ago, I was slapped with assignment and a hefty brokerage bill and a valuable lesson on covered calls
> 
> cutz




Congratulations on a profitable trade, Cutz   A wise thing to do IMHO and you will most likely learn as much as if you were still in the position as you have had real money in that trade.  There will be many more opportunities down the track...

I was with AOT when Commsec bought them out.  I didn't stick around with Commsec because of that wicked .35% - AOTonline used to charge a flat rate of $30 for assignment - massive difference!  I wrote to them explaining that if I had a narrow bull call spread on a high priced stock, it would cost more in fees than the max profit in the spread.  But they were not interested - I guess just happy to fleece any newbies that come along...


----------



## cutz

Thanks Sails,

I keep promising myself that I have to change brokers, just got to get outside my comfort zone of dealing with an Australian firm.


----------



## sails

cutz said:


> Thanks Sails,
> 
> I keep promising myself that I have to change brokers, just got to get outside my comfort zone of dealing with an Australian firm.




Cutz, I tried IB, but found their platform very confusing with Oz options and their customer service didn't seem to know much about Oz options either.  Maybe I was too quick to give them a go before they got everything up and running properly.  They didn't have any greeks available for Oz options at that time.

I currently use an Aussie broker Trader Dealer (Rob is the options broker to talk to there - although he goes on holidays soon for a about three weeks) and also have an account with OX as a backup.  OX has the better fees if on frequent trader status, but it is nice to have someone pick up the phone straightaway with TD in the rare event it is required.  OX would often just take my name and number and get a broker to call back.  Too bad if it was urgent - like trying to close a trade and losing profits coz their platform has a glitch!

TD exercise fees are same as their stock fees and I'm on a good rate with them but it's still a bit expensive when compared to OX.  But then OX doesn't have WebIress and I don't think I could Oz trade options without it now.  I usually do enough trades each month so I don't pay extra for WI. So, if it's any help, that's the pros and cons with the two I use.


----------



## cutz

Yep, 

I use Webiress with comsec and its quite good, so at this stage I’m leaning towards setting up an account with OX and also keeping comsec up and running just so I could still use Iress to push through trades that don’t run the risk of assignment.

I like the look of IBs Traderworkstation with all the Greeks and put/calls nicely laid out on one screen but a poster put up a question on why the Greeks weren’t showing and I’m not sure how he went, also as you pointed out its nice to be able to pick up the phone and get through to someone who knows what’s going on.

Cutz.


----------



## Grinder

How can we get the best of everything? like the way it is in the US, with a broker like TOS all in one. Any ideas?

With commsec for their customer service which is always good for ops & free pro trader 2 (pissing me off lately though) but the excuberant fees compared to OX deters me. Mostly trade through OX eventhough they seem to have only 2 guys working the desk, who are never their, and without the greeks it makes it tough, so have impliedvolatilitytracker site with hoadleys to assist. Spoke with IB, but it was like pulling teeth to get basic questions answered. 

Now that I've had a whinge and trashed everyone, feel much better, but still in same predicament. Is traderdealer the answer Sails? I remmember there was some drama after opes prime went down.


----------



## mazzatelli1000

Grinder said:


> How can we get the best of everything? like the way it is in the US, with a broker like TOS all in one. Any ideas?
> 
> With commsec for their customer service which is always good for ops & free pro trader 2 (pissing me off lately though) but the excuberant fees compared to OX deters me. Mostly trade through OX eventhough they seem to have only 2 guys working the desk, who are never their, and without the greeks it makes it tough, so have impliedvolatilitytracker site with hoadleys to assist. Spoke with IB, but it was like pulling teeth to get basic questions answered.
> 
> Now that I've had a whinge and trashed everyone, feel much better, but still in same predicament. Is traderdealer the answer Sails? I remmember there was some drama after opes prime went down.




Ahhhhh all the same reasons that led me to trade options in the US and give up on Oz

IB was never a broker to be obtaining help from like TOS. Low cost, learn to use it yourself sort of broker. 

OX is terrible - they got a few Customer Rep guys whose job it seems is to answer all your questions in one sentence


----------



## sails

Grinder said:


> How can we get the best of everything? like the way it is in the US, with a broker like TOS all in one. Any ideas?
> 
> With commsec for their customer service which is always good for ops & free pro trader 2 (pissing me off lately though) but the excuberant fees compared to OX deters me. Mostly trade through OX eventhough they seem to have only 2 guys working the desk, who are never their, and without the greeks it makes it tough, so have impliedvolatilitytracker site with hoadleys to assist. Spoke with IB, but it was like pulling teeth to get basic questions answered.
> 
> Now that I've had a whinge and trashed everyone, feel much better, but still in same predicament. Is traderdealer the answer Sails? I remmember there was some drama after opes prime went down.




Oh yes, if only we could have the best of everything for Oz options - but realised is probably not going to happen for a long time yet.  Oz markets are probably just too small.

Yes, I found IB customer service very difficult.  They tried hard to help, but it was frustrating on my part. They only seemed to have their general customer service people available during Oz trading hours - couldn't get the specialist people who are probably only available during US trading hours.

I don't know if TraderDealer is for everyone - works for me, but no bells and whistles either - just excellent customer service.  If WebIress ever get round to adding the ability to enter option spreads on line (even two legs as OX already do), it would make it much easier.  At this stage I email option spread orders to TD - they could also be phoned.  Once they enter it into the system, they give me the code for that combo, and then I control that order myself eg. can amend price, amend quantity, delete and re-enter later if I want to as I would for any other order.  One of the cool things is that you can then bring up a market depth window to see if anyone else is trading that same spread.

TD was bought out by MDS finance after the Opes Prime debacle - hopefully MDS are doing OK!  Funds are held in a bank CMT, so they should be OK.

I would much prefer to trade US options due to all the benefits of trading with TOS and the cheaper fees, however, present circumstances have made it almost impossible to work at night and sleep in the day, so I'm stuck with the Oz market at the moment and I personally feel TD is the best around for my needs anyway.


----------



## Grinder

Thanks for your insight Sails, will continue to push on with my predicament and debate the pros & cons of each broker till I eventually convert to the US.


----------



## sails

Grinder said:


> Thanks for your insight Sails, will continue to push on with my predicament and debate the pros & cons of each broker till I eventually convert to the US.




Yes, it's a trade-off what ever we do.  Trade the US and put up with sleepless nights and the effects that has on lifestyle OR put up with the difficulties in the Oz market and attempt to keep fees under control.

All the best with your deliberations...


----------



## cutz

I’m with you sails, aussie options during the day. I don’t think I could handle the nightshift; I probably fall asleep in front of my computer. 

I am interested to here from the guys and girls who trade through the night and how those sorts of hours are handled.


----------



## mazzatelli1000

cutz said:


> I’m with you sails, aussie options during the day. I don’t think I could handle the nightshift; I probably fall asleep in front of my computer.
> 
> I am interested to here from the guys and girls who trade through the night and how those sorts of hours are handled.




The nightshift defnitely has its challenges, but considering the timeframe of the option spreads I utilise, I feel it does not require me to sit in front of my computer all night. 

I usually wake up 4:30a.m. for my daily exercise and so will have a look at how the US market is panning out and make any trades if my entry criteria is satisified, as usually around this time it is the afternoon session of trading. 

Also, before I goto bed I will look at the index futures before open and assess whether I will need to stay up to manage etc. 

So there are grudge days where you will feel extremely tired, but it is not every single day. 

I have had to give up intra day trades on the /YM as I simply cannot stay awake all night.

Always been considering the Hong Kong, Singapore and Korean markets, but I dont know much about them and data is not readily available like US.


----------



## Grinder

mazzatelli1000 said:


> Always been considering the Hong Kong, Singapore and Korean markets, but I dont know much about them and data is not readily available like US.




Same. Spoke to a rep at IB about Kospi ops, was'nt able to get much relevant info though.


----------



## cutz

Hi all,


Does anybody have any use for those 1point strike price options, is it some 
sort of quasi futures type contract ? or am I way off the mark. What I am looking at the moment on the screen is XJO1O, the Nov call which has an open interest of 203, only 20 contracts were traded last Friday and 1 last Thursday, it doesn’t seem to be very liquid so I was curious on wide the spreads on offer would be and if they would closely resemble the ASX200 index at the time the spread was requested.

Thanks in advance.


----------



## sails

Hi Cutz - check out this page on the ASX site  http://www.asx.com.au/products/options/lepos.htm


----------



## cutz

Thanks Sails,

Yeah, it looks like it may behave like a futures contract, I will be interested to see what the spreads are like.


----------



## sails

Yes, check them out - hopefully they have improved.  It was a long time ago since I looked into them and the spreads were pretty wide.

Barrier warrants also move a lot like futures with smaller spreads - especially if the SPC is 1.  Worth looking at, but wouldn't rush in until it's properly understood with all the associated risks.  Citibank seem to be the main ones providing the barrier warrant series - and I'm not sure about their reputation.  If you're interested, I will spell out what I know about them...


----------



## Reealjrd

Well Friends,

Trading in commodities futures market is a very good idea. Well trading in futures and options is risky but good too.


----------



## mazzatelli1000

Reealjrd said:


> Well Friends,
> 
> Trading in commodities futures market is a very good idea. Well trading in futures and options is risky but good too.




Options were designed to minimize risk.

It's only risky in the hands of the wrong person


----------



## cutz

Reealjrd said:


> Well Friends,
> 
> Trading in commodities futures market is a very good idea. Well trading in futures and options is risky but good too.




Yeah, i dunno about that, i have found shares to be a lot more risky than options.


----------



## cbacamden

Agree 100% about the risk ! Options, warrents etc are only risky if you get greedy, carless or forget the high leverage and time decay.

I personaly love Warrent Minis - Again, the only time I have got in trouble is when i have been been greedy (ie: not stuck to the rules)


----------



## cutz

Hi all,

I set up a short index strangle last month but recent events has caused the put leg to turn against me , therefore today with 2 days to go I rolled the put into December with a strike 4 levels down.

I thought about letting the losing trade cash settle on Thursday and set up another short put position on the same day but I decided to roll into the next month today, I sort of feel this could be a case of 6 or  ½ dozen the other, any thoughts on this, i.e. should I have waited till expiry as this is a cash settled series.

I’m prepared to cop a bit of flak here as it looks like I’m fighting against the market trend but I do feel a minor bounce could be coming and I do want to take advantage of high IV.

BTW, I’m not after advice, just opinion on how the experienced would have handled this.

Thanks in advance.

Cutz.


----------



## sails

Hi Cutz - I have no experience in uncovered short positions, so hopefully someone else can help here.  Any short option trades for me are always covered with a long option somewhere - I like to sleep at night 

Theoretically though and with IV so high, I am guessing you have sold a reasonably fat premium further OTM in December.  

I think you would need a crystal ball to know if it was better to roll now or at expiry as it will depend largely on what the index does between now and then.  Hopefully someone else with more experience in this strategy can help...


----------



## cutz

sails said:


> Theoretically though and with IV so high, I am guessing you have sold a reasonably fat premium further OTM in December.




Hi Sails

Yes that's the case, the Nov was trading with intrinsic value only and the Dec had a good serve of time value due to the high IV.

Late Note, Actually Sails i went from Deep ITM to ITM


----------



## sails

cutz said:


> ...
> Late Note, Actually Sails i went from Deep ITM to ITM




Just as well it's an index trade - otherwise the short put would have been high risk for assignment! 

Are you rolling your calls down as well to bring in a bit more premium?  Even so, would have to take care how far they are rolled down as you don't want to have the call side going against you if the market decides to take a breather.

From what I have read of others doing these types of trades is to roll the short option down & out (for puts - up & out for calls in a rising market) at some point where it can be done for even or a credit.  I would imagine this would need to be done well before it is ITM especially for a strangle.  Not much help for this situation, but maybe something to backtest for future trades


----------



## cutz

Hi All,

Yeah Sails just as well it was an index option, although I do have protective longs in place on stock options 95% of the time. 

Here’s the trade that went pear shaped for whoever is interested, perhaps a lesson on not what to do, feel free to comment or criticise.

Initially when I set up the short strangle in early oct. XJO seemed to have some support at 4000, IV was high, so I set up the short put OTM leg. Over the next few days XJO rallied IV was still high I then set up the short call OTM leg. I’ve done this type of trade many times before with success so I guess I was I bit sloppy.

But as it turned out 4000 didn’t hold so I had to take some defensive action which I left a little late.

A few lessons I will take from this trade are, (1) Have a protective long on the down side in place even though it is an index option, (2) close out the leg that’s showing a profit rather than wait for expiration and risk giving your profits back especially in these volatile conditions, I did have that opportunity on the short put but I chose to hang on, (3) The short call leg will expire worthless but I should have closed it out and rolled down a couple of notches.


----------



## mazzatelli1000

cutz said:


> Initially when I set up the short strangle in early oct. XJO seemed to have some support at 4000, IV was high, so I set up the short put OTM leg. Over the next few days XJO rallied IV was still high I then set up the short call OTM leg. I’ve done this type of trade many times before with success so I guess I was I bit sloppy.
> 
> But as it turned out 4000 didn’t hold so I had to take some defensive action which I left a little late.
> 
> A few lessons I will take from this trade are, (1) Have a protective long on the down side in place even though it is an index option, (2) close out the leg that’s showing a profit rather than wait for expiration and risk giving your profits back especially in these volatile conditions, I did have that opportunity on the short put but I chose to hang on, (3) The short call leg will expire worthless but I should have closed it out and rolled down a couple of notches.




Cutz, 
I have had near heart attacks and seizures from putting short strangles on in the past 

As sails has outlined you should roll down the call to beef up the premium. I have in the past created a straddle at my break even point, but only because I believe the underlying was stabilising there --- so in this example I am still rolling down a call, but all the way to my short put strike - creating the short straddle. But one must consider collateral requirements and the risk the underlying could reverse.

Better to have the "wings" 

The other thing is to tighten your breakevens as it gets closer to expiration and lock in the profits

Theoretically you can try to keep the position delta neutral - but the collateral and commissions might be too much.

That is as far as my experience with short strangles.
Sorry I can't be any more help.


----------



## Grinder

Hey Cutz,

Your fairly brave to initiate anything uncovered in the present market climate, or even anytime. The strangle was'nt a bad idea and it sounds like you had a plan initially, don't know if I would have played it much different. Would have probably adjusted and taken smaller profits earlier when the market was giving them out, but thats just my comfort level. Sounds like you know what you should have done.


----------



## cutz

Thanks for your inputs guys,

Yeah I had a plan to start but I guess in the attempt to squeeze every bit of theta out of the position I got bitten, classic case of greed bias. I agree with you Grinder, in hindsight I would have closed out early, I have done this many times before on stocks options and the index but for some reason I was convinced there was going to be a bounce on the index. Every now and again I try to predict the market with little success so I should really stick to directional neutral strategies.

Mazza, what’s meant by the term “tighten your breakeven” and how would you implement it in a strangle?


----------



## sails

cutz said:


> ...A few lessons I will take from this trade are, (1) Have a protective long on the down side in place even though it is an index option, (2) close out the leg that’s showing a profit rather than wait for expiration and risk giving your profits back especially in these volatile conditions, I did have that opportunity on the short put but I chose to hang on, (3) The short call leg will expire worthless but I should have closed it out and rolled down a couple of notches.




It's a shame that the best lessons are usually learned painfully where in "hindsight" it is clear what we should have done.  I have had many such lessons 

I think your idea of adding a protective long in future on the down side makes a lot of sense volatility wise.  IV usually rises as the market falls which we know hurts short options, so that protective long would not only hedge downside directionally, but also help to hedge against rising IV.  The thing against could be the cost due to IV smile - but probably better to pay up and keep the risk under control.  On the upside IV usually declines a bit, and this would help your overall strangle position together with timely defensive action.

You could still manage your short position as if there were no protective long - i.e. still roll down and out diagonally if the market looks like it's got more down to go.  

Something else to look at now is the possibility of adding (or rolling) a short December call (but allowing enough room for the market to oscillate on the upside - if it can remember how ).   and perhaps using some of that premium to pay for a cheap OTM put.  May be too far gone in the down trend to do so, but it might give you a little peace of mind which helps rational thinking (at least for me!). 
Eg the 4000 Dec call would bring in around 43c at the moment (you might be happy to sell a lower strike and pick up more premium) and a Dec 2500 is currently bid at 15c (no ask though).

Also, if it keeps moving down, see if it's worthwhile to roll your short put down and out even further.  For instance, December 3700 put bid/ask 334/363 - could be rolled to March 3400 for bid/ask 345/389.  If these the two legs are ordered as a combo, it often saves a lot of slippage.  

Anyway, not advice - just some ideas to think about.  All the best with it


----------



## cutz

Hi Sails,

Yes I am in the process of setting up the dec call legs, I have pre-purchased the protective deep OTM calls to be on the ready, but I’m holding off on the shorts calls, I’m feeling a bit gun shy as I don’t want to be caught out in that overdue bounce. 

I tell you what; the market markers are being a bit cheeky.


----------



## sails

cutz said:


> I tell you what; the market markers are being a bit cheeky.




Yeah, like I said somewhere recently - they're not into charity...


----------



## jackson8

hi guys 
a question concerning margins
am writing covered calls over a stock i own osh but wish to now consider the synthetic stragety of selling otm naked puts over osh as well ......will receive premium and if sp falls below strike am quite happy to be assigned

if i sell 1 contract naked call at $4. strike   sp now aprox $4.60  will i be required to lodge as cash colateral $4000 (1000x$4) or am i only required to fulfill a margin requirement of a lesser value depending how underlying sp behaves

with thanks gary


----------



## sails

jackson8 said:


> hi guys
> a question concerning margins
> am writing covered calls over a stock i own osh but wish to now consider the synthetic stragety of selling otm naked puts over osh as well ......will receive premium and if sp falls below strike am quite happy to be assigned
> 
> if i sell 1 contract naked call at $4. strike   sp now aprox $4.60  will i be required to lodge as cash colateral $4000 (1000x$4) or am i only required to fulfill a margin requirement of a lesser value depending how underlying sp behaves
> 
> with thanks gary




I think it varies between brokers - some want 100% cash cover for short puts - others are OK with varying degrees of margin.  Best to check with your broker...


----------



## cutz

jackson8 said:


> hi guys
> a question concerning margins
> am writing covered calls over a stock i own osh but wish to now consider the synthetic stragety of selling otm naked puts over osh as well ......will receive premium and if sp falls below strike am quite happy to be assigned
> 
> if i sell 1 contract naked call at $4. strike   sp now aprox $4.60  will i be required to lodge as cash colateral $4000 (1000x$4) or am i only required to fulfill a margin requirement of a lesser value depending how underlying sp behaves
> 
> with thanks gary




Hello gary,

To work out your margin requirements assuming you’re with comsec go to this site http://www.asx.com.au/opc/OpcStart?Mode=M  ,find your underlying then select your  contract from the drop down box then hit go, a new screen will come up ,in the no of contracts field select no of positions, because it will be a short put make sure you put a minus on front of the number, when you’re done hit recalculate it will then show you risk margin, premium margin and total margin, to calculate margin that's required by comsec just double the total margin that is shown on the ASX site. 

Cheers 

cutz


----------



## cutz

Hi gary,

The list of stocks you can use as collateral is here http://www.asx.com.au/data/acceptable_stocks.pdf OSH is on the list and it gets a haircut of 30% but I don’t think you can lodge it as collateral as it may be reserved for your covered call, so unless you have other stocks available you will have to submit cash. Just a word of caution it always pays to have plenty of margin in the tank on short postions as running on the limit may have its dangers but i will leave that to the more experienced for further comment if req.

Cutz.


----------



## jackson8

have had first experience with margins today
have only been writing covered calls with the stock being held as colateral
so have not had to worry about margins

but just recently upgraded option account to level 4 which now allows sale of naked puts and calls ( calls im not interested in )  

had a sms today saying had been rejected settlement of a margin on my sold call as no funds in my cash account and charged $54 for the trouble

seems that since the upgrade of options level the stock wont cover any large rises and margins may be called , has to do with the ability to now go naked . 

have found it a bit confuseing so will just have to keep account topped up like you say cutz

what i find hard to beleive is that you only find out about margin call at beginning of each day yet there is no provision for me to be able to have instantaneous transfer of funds into there account  .......think they would give you 24 hrs to transfer funds as most banks only transfer overnight

suppose its all a learning curve 

thanks for your help guys


----------



## cutz

Hi Jackson8,

With a level 4 accounts you need to ring up comsec on their options line and request to lodge securities as collateral from your nominated HIN overwise they will start pulling cash from your bank account, I think this happens automatically on a covered call only account but not on a level 4 account, best ring them up to elaborate.

Your position statement will show your current margin level and what’s still available; I start to sweat when I approach 50%, any higher I begin closing out positions.


----------



## KFC soup

can you do spread on comsec?


----------



## jackson8

not that i am aware of


----------



## jackson8

just a comment concerning trading over internet versus phone

wanting to ring my options desk just to check on a couple of trades i had made over the internet

put on hold for all of twenty minutes so would hate to think the financial implications of wanting to close out a position which was going against you


----------



## cutz

Hi Jackson8 

Are you using webiress with comsec, without it on days like today it would be like driving blind.


----------



## jackson8

cutz said:


> Hi Jackson8
> 
> Are you using webiress with comsec, without it on days like today it would be like driving blind.




no not at this stage cutz  .........am only writing calls over shares i own but am thinking of selling long dated otm puts.

do i need to be aware of implictions with puts stragety such as dividends or the like

thanks gary


----------



## cutz

Hi again,

Refer to Sails's posts #183 and #186 for div. implications, also can i suggest you sign up for webiress, at least for the free trial period, then if you are still happy to use it's free anyway if you do a small amount of trades per month.
BTW this doesn't mean i am happy with comsec, i feel i'm getting stitched up with brokerage costs but i am not changing brokers till this market mayhem has sorted itself out.
Also Options As A Strategic Investment is essential reading if you're looking at getting fired up in this game.


----------



## cutz

gary,

Be careful with covered calls if you have no intention of selling the underlying,
Manage the position to avoid assignment esp. with comsecs charges.
I learnt quickly the hard way with unwanted CGT implications and the trouble of buying back those stocks.


----------



## mazzatelli1000

cutz said:


> Also Options As A Strategic Investment is essential reading if you're looking at getting fired up in this game.




Brings back memories ---gosh that was a dry read (but essential)


----------



## jackson8

cutz said:


> Hi again,
> 
> Refer to Sails's posts #183 and #186 for div. implications, also can i suggest you sign up for webiress, at least for the free trial period, then if you are still happy to use it's free anyway if you do a small amount of trades per month.
> BTW this doesn't mean i am happy with comsec, i feel i'm getting stitched up with brokerage costs but i am not changing brokers till this market mayhem has sorted itself out.
> Also Options As A Strategic Investment is essential reading if you're looking at getting fired up in this game.




i appreciate your help  ..........

agree with your comments about comsec and i know there are cheaper brokers out there but  feel  secure useing them at this stage and the amount of paperwork to sign up elsewhere can be a bit daunting.

will check out posts mentioned above

thanks gary


----------



## sails

jackson8 said:


> no not at this stage cutz  .........am only writing calls over shares i own but am thinking of selling long dated otm puts.
> 
> do i need to be aware of implictions with puts stragety such as dividends or the like
> 
> thanks gary




I think I only mentioned short calls and dividends in earlier posts.  Short puts do not carry the same dividend liability.  It is most unlikely that a short put would be exercised the day before x-div as most will want to retain ownership of their shares to receive the dividend and would therefore wait until at least the day after before exercising their long puts.  In fact, it it happened, you should be entitled the dividend as a bonus.

If your short puts are ITM in the days following Xdiv - there is a much higher level of being assigned as long stock holders have received their entitlement to the dividend and if there isn't much time value left in their ITM long puts (your short puts) - they are quite likely to exercise.

Short puts do have the advantage of being increased in price due to the impending dividend factored into them - which then dissipates after xdiv day. 

Also, interest rates affect longer term options.  A simple example is when buying a longer term call option, interest is pre-paid and is why calls are so much more expensive than puts as they have some reduction due to the interest rate component of their pricing.  It is worthwhile, IMO, to fully understand these other forces which are at work in option pricing.

Anyway, all this is my  and only of the top of my head!  Suggest you read some good option text books to confirm my ideas and make sure you understand how dividends are factored into option pricing.


----------



## mazzatelli1000

jackson8 said:


> i appreciate your help  ..........
> 
> agree with your comments about comsec and i know there are cheaper brokers out there but  feel  secure useing them at this stage and the amount of paperwork to sign up elsewhere can be a bit daunting.
> 
> will check out posts mentioned above
> 
> thanks gary




Not only are there cheaper options - but more efficient too, particularly concerning spreads etc. I know I have banged on about this before, but I cannot understand why people stick with Commsec. If one is treating this as a business, it would be extremely poor practice.

You can still keep Commsec for data purposes, but for execution defintely look somewhere else.


----------



## cutz

Hi all,

I want to run down a trade I just put through for comment,

I now normally set up put credit/call credit spreads depending on the market conditions at the time, with stock options I prefer to deal with underlying stocks I own as I feel like I know them well, I don’t want to  assigned therefore that’s why I add wings to the short call, I know this may sound weird.

If the stock moves up through my lower strike I normally carry out a diagonal roll into the next month, if the stocks explodes through the lower strike the roll could end up being 2 months fwd which I don’t like to do and luckily this is a lot rarer, therefore I’m rolling so I don’t have to take a loss on the call spread and I don’t want to be assigned.

Today I put on a backspread i.e. I sold 4 calls and bought 8 calls with the strikes further apart, the calls I purchased cost the same as if I would have put on just a simple call credit spread (relatively), now I know this position is long Vega and IV on this particular stock is likely to decrease but the intent of this trade is to cover myself if the stocks keeps running up.

So the end result is I’ve obtained some good premium, (but it could have been much better because I stuffed this trade up), I feel this stock may continue running up but I’m not 100% on this.

If the stocks keeps running up follow up action may not be as painful.

Feel free to give me opinions on this, and don’t hold back on flack as i can take it.


----------



## wayneL

cutz said:


> Hi all,
> 
> I want to run down a trade I just put through for comment,
> 
> I now normally set up put credit/call credit spreads depending on the market conditions at the time, with stock options I prefer to deal with underlying stocks I own as I feel like I know them well, I don’t want to  assigned therefore that’s why I add wings to the short call, I know this may sound weird.
> 
> If the stock moves up through my lower strike I normally carry out a diagonal roll into the next month, if the stocks explodes through the lower strike the roll could end up being 2 months fwd which I don’t like to do and luckily this is a lot rarer, therefore I’m rolling so I don’t have to take a loss on the call spread and I don’t want to be assigned.
> 
> Today I put on a backspread i.e. I sold 4 calls and bought 8 calls with the strikes further apart, the calls I purchased cost the same as if I would have put on just a simple call credit spread (relatively), now I know this position is long Vega and IV on this particular stock is likely to decrease but the intent of this trade is to cover myself if the stocks keeps running up.
> 
> So the end result is I’ve obtained some good premium, (but it could have been much better because I stuffed this trade up), I feel this stock may continue running up but I’m not 100% on this.
> 
> If the stocks keeps running up follow up action may not be as painful.
> 
> Feel free to give me opinions on this, and don’t hold back on flack as i can take it.




It's a bit hard to comment without knowing more specifics cutz:


Underlying position
Price of the underlying
Striking prices and expiries of the options
Net Premium (debit or credit)

Cheers


----------



## chops_a_must

wayneL said:


> It's a bit hard to comment without knowing more specifics cutz:
> 
> 
> Underlying position
> Price of the underlying
> Striking prices and expiries of the options
> Net Premium (debit or credit)
> 
> Cheers




Talking options in your sleep I see. 

What time is it over there? Go to bed!


----------



## wayneL

chops_a_must said:


> Talking options in your sleep I see.
> 
> What time is it over there? Go to bed!




I just got back from my local... sleeping in tommorrow.


----------



## Grinder

Its a descent hedge you got depending on your greeks, just thinking if ya stock keeps running up and IV continues to fall your backspread will start looking pretty ordinary. However, if your stock shoots the moon sometime soon your ratio wings will propell you some good coin. 

Keep an eye on IV fluctuations & if you don't see a big move within a couple of weeks look to roll up & out before your long calls get eaten up in value.


----------



## sails

Options are all about trade-offs and shifting risk.  Obviously in your new trade, there is some added protection with the second call, however, now there is increased  risk due to the larger difference between strikes and with only three weeks to expiry in December, theta could be working fairly hard against your FOTM long calls.

Have you put it into Hoadley and then run the your new back spread compared to your original trade?

Perhaps you could also look at leaving one call at your normal position and then sacrificing a little of your premium to pay for one higher?  Only a suggestion as I rarely do straight credit spreads.  Don't like being short gamma near expiry


----------



## cutz

The underlying is BHP, the strikes are at 30 and 35, net premium is $2820, the circumstances around this trade are I initially wanted to set it up as bearcall spread and I totally cocked up the long call leg as I described in the wings thread, i.e. the hedge buy to open went in as a sell to open which I had to reverse just before the market closed and add some, so I ended up short 4, and only long 1. Last night lying awake thinking about what to do I decided to close out the hedge and introduce a higher amount of further out long calls. 

The reasoning for this is if the price hovers around today’s level everything is fine, if it moves up to towards 35 with a week to go I might go for a diagonal roll. If the BHP keeps driving up I am protected from assignment due to the long puts becoming profitable. This position expires in Dec but I feel a little more comfortable with this instead of a bearcall as BHP seems to be moving up unrestrained.

Yep, I did run this through hoadlys and there is definitely more risk and theta between the strikes is a killer, but I’m more comfortable with this especially the way BHP is running.

Due to what happened yesterday this has been my sloppiest trade to date but i feel it won't bite me too hard.


----------



## cutz

WayneL 

It's good to hear from you again.


----------



## sails

Hi Cutz,

It sounds like you are comfortable with the position and, more importantly,  have a pre-determined management plan.  And at least BHP has better liquidity than some.

I think one has to find their own niche in options trading and seems trial and error is the best way to get there with so many different strategies and moves available.

I have often read that managing positions is most probably the key to successful options trading - and you seem to have that under control!

Be interesting to see if Wayne has any suggestions...


----------



## cutz

Thanks Sails.

Probably not the best spread to use but due to the amount of friction in my 
brain the only why I get it is through actual experience when trying new things.

In theory I guess this trade would have been suited to increasing volatility and I’m not sure if BHP can continue its surge so we’ll see how it goes.


----------



## wayneL

Not much really to add. If it's the risk profile you desired at the time and are aware of the risks, that's completely fine. See how it plays out.

All stuff for the experience pot.


----------



## cutz

G’Day Everyone

I was after an opinion on setting up spreads,

Basically I’ve set up credit vertical spreads on an US index fund, Feb expiry. I started off with the Call side then added the Put side when the market turned so I ended up with a condor, last week I closed out the short call leg which turned out to be a bit premature.

This morning I’ve started looking at the March expiries and I decided to buy some cheap OTM calls which I eventually plan to use as the hedge for the call credit spread.

Does anybody else use this strategy to put on spreads rather than putting on the spread at once? I tried this with XJO options FEB expiry, (i.e. picking up cheap calls in preparation for a bounce just before late last weeks collapse) 
but as it turned out the calls I purchased are now so far OTM that the market will have to move up quite a bit to put on a viable short call leg. 

Normally I set up spreads at once. Am I wasting my time legging in to spreads as described above? My first attempt with the XJO call spread looks like it may fail, as there only 17 days to go till expiry.

It’s starting to appear that the strategy I’ve described could be relying too much on picking direction which i'm finding is impossible to do these days.

Any thoughts?


----------



## jackson8

hi cutz

have tried this sort of stragety as well by purchasing way otm options with a fair bit of time left as a first leg into a spread
but after consideration i figure that if the market moves enough to make it profitable i then have just repurchased the position to close out for a profit with only one brokerage fee 
its something i have tried to get my head around
have some wotm xjo puts which may use as an insurance to short some bhp or nab puts similiar to a credit spread but utilising index as the wings and stock options  as the short ..........hope this all  makes sense  . its a bit early for me on a saturday morn.


----------



## Grinder

cutz said:


> G’Day Everyone
> 
> I was after an opinion on setting up spreads,
> 
> Basically I’ve set up credit vertical spreads on an US index fund, Feb expiry. I started off with the Call side then added the Put side when the market turned so I ended up with a condor, last week I closed out the short call leg which turned out to be a bit premature.
> 
> This morning I’ve started looking at the March expiries and I decided to buy some cheap OTM calls which I eventually plan to use as the hedge for the call credit spread.
> 
> Does anybody else use this strategy to put on spreads rather than putting on the spread at once? I tried this with XJO options FEB expiry, (i.e. picking up cheap calls in preparation for a bounce just before late last weeks collapse)
> but as it turned out the calls I purchased are now so far OTM that the market will have to move up quite a bit to put on a viable short call leg.
> 
> Normally I set up spreads at once. Am I wasting my time legging in to spreads as described above? My first attempt with the XJO call spread looks like it may fail, as there only 17 days to go till expiry.
> 
> It’s starting to appear that the strategy I’ve described could be relying too much on picking direction which i'm finding is impossible to do these days.
> 
> Any thoughts?




I don't try & leg in. Don't find it worth it, can't pick direction even in a calm environment. If I was going to do it, would got another month out, can give you more time, keep gamma away. I ailways spread em, might not be same expiry but both legs get put on at the same time.


----------



## cutz

Hi Guys,

I’ll put up one of my positions for comment, it’s one that’s going a tad pear shaped. What was originally an XJO iron condor has turned into a call back spread due to the fact that I closed out the put short side and added long calls as defence, the strikes are as follows, 3700/4200 ratio of 1 to 2. (6 short 12 long may ex).

Due to the market pushing upwards I am now approaching the valley of death as mazza nicely put it, no convenient instruments exist for gamma scalping, with 2 weeks to go I need a solid push up or down on the XJO.

Any tips anyone ?, I’m inclined to sit it out for 2 weeks and maybe add some more longs because anything is possible (up or down) but I’m wondering if I should roll out Monday into June in case we get bogged down around the 4250 zone.

Thanks

Cutz.


----------



## jackson8

cutz said:


> Hi Guys,
> 
> I’ll put up one of my positions for comment, it’s one that’s going a tad pear shaped. What was originally an XJO iron condor has turned into a call back spread due to the fact that I closed out the put short side and added long calls as defence, the strikes are as follows, 3700/4200 ratio of 1 to 2. (6 short 12 long may ex).
> 
> Due to the market pushing upwards I am now approaching the valley of death as mazza nicely put it, no convenient instruments exist for gamma scalping, with 2 weeks to go I need a solid push up or down on the XJO.
> 
> Any tips anyone ?, I’m inclined to sit it out for 2 weeks and maybe add some more longs because anything is possible (up or down) but I’m wondering if I should roll out Monday into June in case we get bogged down around the 4250 zone.
> 
> Thanks
> 
> Cutz.




Hi cutz

I am empathetic to your situation and I don’t know that I can be of any help as I am only new to the game , but I will offer you my thoughts on the situation

Firstly one can only hope that bad sentiment will set in again and the  market falls , that would be the obvious but there is no guarantee of that happening

By adding more longs are you talking about out of the money as you would need quiet a rapid push upwards for them to be of much benefit , I suppose its bit of a gamble.

Rolling out may only be prolonging the agony especially if the market keeps rising and  rolling out and up it is still going to hurt. Especially as your shorts are quite deep itm.

Out of curiosity where was the market when you put the spread on and did you think about defending the position earlier in the game when the trade started going against you .

I subscribe to a thread by a usa. IC  Trader who suggests making adjustments in stages as soon as the trade starts going against you . he suggests taking long positions underneath the short strike as a defensive strategy as your short becomes threatened
It obviously costs some but offers a bit of protection on any further upward movement. If the strike is further threatened he would then buy more protection of the same

I suppose there has to be a trade off between throwing more money into the hat or just plain relinquishing the position

Sorry that I can not be of more help , hopefully someone with more experience than myself can offer some tips

I will add a link to one of his latest blogs as it may be relevant to your situation 
http://blog.mdwoptions.com/options_for_rookies/2009/05/trading-iron-condors-more-risk-reducing-investment-ideas.html


----------



## cutz

Hi gary,

It was the 14 of Apr, and I was feeling particularly bearish, (it shows because XJO was trading just above 3700), it started as a 5 to 8, then a 6 to 8 and finally a 6 to 12 as the days/weeks progressed, in hindsight I could have purchased some STW to flatten out the position at around 3800 but the push through 3900 took me by surprise.

3850 will get me back in the green and so would 4550 so I’ll guess I’ll suck it and see, it least the put leg turned out OK, I traded in and out of that short leg twice moving the strikes up.

Unfortunately STW doesn’t seem to follow XJO precisely and i can’t short it to defend a pear shaped put spread.


BTW the long calls where quite cheap when i did the final adjustment, only $40 each, also thanks for the link.


----------



## Mark Wolfinger

jackson8 said:


> Hi cutz
> 
> I am empathetic to your situation and I don’t know that I can be of any help as I am only new to the game , but I will offer you my thoughts on the situation
> 
> I will add a link to one of his latest blogs as it may be relevant to your situation
> http://blog.mdwoptions.com/options_for_rookies/2009/05/trading-iron-condors-more-risk-reducing-investment-ideas.html




Hi,

I appreciate your linking to my blog.  That's how I found my way to this forum.

Back spreads produce wonderful looking risk graphs, but, as you already know, become very risky positions when held to expiration.  That's one of the reasons I recommend buying calls with equal or lower (or puts with equal or higher) strike prices than your short options.

Thus, instead of buying more 4200 calls, I like the idea of buying (to close) some of your short calls and selling new call spreads that are further out of the money to partially offset the cost of those calls.  It's too late to do this for May positions, and is more appropriate with more time before expiration.

Here is the idea in greater detail:
http://blog.mdwoptions.com/options_...dors-more-risk-reducing-investment-ideas.html


Mark


----------



## mazzatelli1000

Hi Mark, 

Welcome to the forum.
I have read your posts on ET back in the day and found some insights very valuable.

Thank you for popping in and helping


----------



## cutz

G’Day Mark,

Thanks for your comments,

Yep I agree rolling out some shorts earlier would have been a better strategy.

I guess in hindsight my biggest error was putting on a position that reflected my sentiment to heavily, as it’s turned out i was incorrect but I’ll see how the market plays out in the next two weeks. I’ve always liked backspreads as it gives me a certain level of comfort knowing that an extreme move will allow me to save the position, (except for when the market is bogged down between the strikes  )


----------



## sails

Yes, welcome to ASF, Mark!  

We can certainly use some help here.  WayneL was a wonderful souce of knowledge, but has been AWOL for some time now - we are hoping he will return one day. Mazza pops in occasionally these days and shares his wisdom with us.

 Personally, I don't have the necessary risk tolerance for ICs and have found them difficult to adjust when things go pear shaped, and so feel I am lacking in practical experience to answer questions such as the one Cutz asked. 

I used to be an avid ET (options) lurker - only occasional now.  Learned a lot over there and have also read some of your posts.  It takes a bit of time and patience to sift through some of the rubble though. 

Trading options in the Oz market is pretty tough with high data fees, broker fees, exchange fees and unacceptable slippage, IMO.  I have found it doesn't suit all types of options trading over here.

Cheers


----------



## sails

mazzatelli1000 said:


> Hi Mark,
> 
> Welcome to the forum.
> I have read your posts on ET back in the day and found some insights very valuable.
> 
> Thank you for popping in and helping




PS - Nice to see you pop in too, Mazza!  Hope all is going well...


----------



## Mark Wolfinger

*welcome to ASF, Mark!  

I don't have the necessary risk tolerance for ICs and have found them difficult to adjust when things go pear shaped, and so feel I am lacking in practical experience to answer questions such as the one Cutz asked. 

I used to be an avid ET (options) lurker - only occasional now.

Trading options in the Oz market is pretty tough with high data fees, broker fees, exchange fees and unacceptable slippage, IMO.  I have found it doesn't suit all types of options trading over here.

Cheers
*
G'day to all.

Thanks for the welcome.  Due to the time difference, I doubt I'll be able to reply to questions immediately, but will continue to pop in here.

Regarding iron condors and adjustments:  I don't believe any specific strategy is best for everyone - and iron condors have not treated me well as the markets are making alrge moves in one direction.

Options are tools that can be used to adjust the risk of any position:  delta, gamma, theta, or vega risk can be changed as needed.  But, with fees so high and slippage too costly, it's sad that you must try to trade positions that require as few adjustments (none is best) as possible.  That's very limiting.

Does IB charge too much in Oz? (or is it Os?)  [Please help me out if I use incorrect terms - I don't want to be rude!]  We always had high commissions, then competition began to reduce those fees.  Today, they are very low at some brokers.

Again, I appreciate the welcome.
Hope to see you often.

Mark


----------



## jackson8

hi mark

having read much of the material that you have made available on your site it is good to hear from you

in my previous posts on this thread i have made mention of the fact that i have followed your blog and have found it a valuable source of information. have found your twitter site a valuable point of access to your posts as well as others who have the same interests in options trading

i have been trying to aquire a copy of your 'options rookies book' but have been unable to find a distributer here in oz,
do you know of  a distributer whom i may be able to contact to purchase a copy.

i know that i can purchase it os. but the shipping fees seem a bit outrageous so am still trying to find a copy through local channels

also have you thought of making the book available for purchase as a downloadable ebook.  it seems to be the way now with the speed and ease of access to the internet

gary


----------



## Mark Wolfinger

*


jackson8 said:



			hi mark

having read much of the material that you have made available on your site it is good to hear from you

in my previous posts on this thread i have made mention of the fact that i have followed your blog and have found it a valuable source of information. have found your twitter site a valuable point of access to your posts as well as others who have the same interests in options trading

i have been trying to aquire a copy of your 'options rookies book' but have been unable to find a distributer here in oz,
do you know of  a distributer whom i may be able to contact to purchase a copy.

i know that i can purchase it os. but the shipping fees seem a bit outrageous so am still trying to find a copy through local channels

also have you thought of making the book available for purchase as a downloadable ebook.  it seems to be the way now with the speed and ease of access to the internet

gary
		
Click to expand...


*

Gary,
Thanks.

I have had this request from others in OZ.  I think it's a shame that shipping costs are so high.  It costs 13.80 USD in postage - for me to ship the book from here. The publisher charges more.  I have no idea what Amazon gets for shipping.

The publisher is unwilling to sell an electronic version, and I have no control over that decision.

I did not come to this forum to try to sell books (but would be very pleased to do so). This site has a bookshop.  Maybe I can get them to order a small number (5?).  I know that would save on shipping costs.  I'll write to them and see if I get get the book available at a low enough price to make it attractive.   

If others express an interest, that may be enough to persuade the bookshop owners.

Thanks for inquiring.  I'll let you know if I hear anything.
Mark


----------



## sails

Mark Wolfinger said:


> ...G'day to all.
> 
> Thanks for the welcome.  Due to the time difference, I doubt I'll be able to reply to questions immediately, but will continue to pop in here.
> 
> Regarding iron condors and adjustments:  I don't believe any specific strategy is best for everyone - and iron condors have not treated me well as the markets are making alrge moves in one direction.
> 
> Options are tools that can be used to adjust the risk of any position:  delta, gamma, theta, or vega risk can be changed as needed.  But, with fees so high and slippage too costly, it's sad that you must try to trade positions that require as few adjustments (none is best) as possible.  That's very limiting.
> 
> Does IB charge too much in Oz? (or is it Os?)  [Please help me out if I use incorrect terms - I don't want to be rude!]  We always had high commissions, then competition began to reduce those fees.  Today, they are very low at some brokers.
> 
> Again, I appreciate the welcome.
> Hope to see you often.
> 
> Mark




Mark, no problem with delayed replies.  I think we all understand the time differences perfectly - some of us stay up a bit too late at times to watch the action on the US!  We have a few short cuts when typing Australia - Oz, Aus, Ozzie, Aussie, etc.  

IB's option pricing offers a huge improvement for small lots under 10.  Most Oz brokers have a minimum fee structure which usually improves a little once you get over 10 contracts.  Not good for newbies wanting to get their feet wet in live option trading, so IB offers some relief there.  However, for much larger positions, it is possible to get it cheaper per contract than IB.

I have traded some US options with TOS and with the likes of GOOG and NDX - all for $1.50 per contract traded.  Also, US data is free, no extra exchange fees and very little slippage.  Although we have 1000 shares per contract in standard Oz options, some of our share prices are well below the price of US shares.  That's the reason I went for the higher priced NDX, as I needed less contracts per trade and the fees were no more than pocket money. 

Compare that to here in Oz - data fees start at $37.50 per month (IB's data fee) and can go up to $100+ per month if used in conjunction with other useful software packages.  Then the ASX charges $1.12 for every option contract traded.  Add to that brokers fees which range from a minimum of about $26 - $45+ per trade (or leg of a trade).  If you go over 10 contracts, then it increases around 10% of that per contract.  And then slippage - can be pretty wild if it's down to you and the MM with no one else in sight.  Although BHP and a few others are more liquid, but again, it severely limits the opportunities.  IB charges a flat rate of $3 per contract (includes exchange fees) which is a bonus for newbies or for those of us wanting to try out something new - but it doesn't resolve the problem of slippage.

Oh, and the other thing is that very few Oz brokers allow you to trade option spreads online.  Of course, IB is one that you can do some spreads.  Although it once denied me a basic butterfly as it said that combo wasn't available.  Otherwise, I email options spread orders to my favoured Oz options broker.  Once they have entered the position into the system, I am then able to completely manage the position on my own with a lot of flexibility.  But emailing is pretty cumbersome and then, because it's a spread, you are at the mercy of a MM for a fill.  Some Oz brokers won't let you do credit spreads and are very picky with any sort of options selling.  So lots of limitations.

As it's not practical for me to be up at night to trade at this point in time, so I rarely trade option positions in our local market.  Currently trying my hand at futures - I reckon the losses incurred will be no worse than the costs of trading options!  It's a shame as I have put an enormous effort into learning options only to find it's pretty difficult to overcome the fee issues here.


----------



## mazzatelli1000

sails said:


> PS - Nice to see you pop in too, Mazza!  Hope all is going well...




Thanks M
The cranium has been expanding...

I hope your "sailing" along well too (I know poor joke


----------



## mazzatelli1000

cutz said:


> Hi gary,
> 
> It was the 14 of Apr, and I was feeling particularly bearish, (it shows because XJO was trading just above 3700), it started as a 5 to 8, then a 6 to 8 and finally a 6 to 12 as the days/weeks progressed, in hindsight I could have purchased some STW to flatten out the position at around 3800 but the push through 3900 took me by surprise.
> 
> 3850 will get me back in the green and so would 4550 so I’ll guess I’ll suck it and see, it least the put leg turned out OK, I traded in and out of that short leg twice moving the strikes up.
> 
> Unfortunately STW doesn’t seem to follow XJO precisely and i can’t short it to defend a pear shaped put spread.
> 
> 
> BTW the long calls where quite cheap when i did the final adjustment, only $40 each, also thanks for the link.




I would prefer to have backspreads in the back months to account for -/+ 2 sigma moves (depend on vols)

Then play any short gamma stuff in front months
But this is very fee intensive, and in Oz that would be pretty terrible

Have you modelled how quickly theta will go against you in the next 2 weeks assuming vols/delta is constant?


----------



## Grinder

cutz said:


> Hi Guys,
> 
> I’ll put up one of my positions for comment, it’s one that’s going a tad pear shaped. What was originally an XJO iron condor has turned into a call back spread due to the fact that I closed out the put short side and added long calls as defence, the strikes are as follows, 3700/4200 ratio of 1 to 2. (6 short 12 long may ex).
> 
> Due to the market pushing upwards I am now approaching the valley of death as mazza nicely put it, no convenient instruments exist for gamma scalping, with 2 weeks to go I need a solid push up or down on the XJO.
> 
> Any tips anyone ?, I’m inclined to sit it out for 2 weeks and maybe add some more longs because anything is possible (up or down) but I’m wondering if I should roll out Monday into June in case we get bogged down around the 4250 zone.
> 
> Thanks
> 
> Cutz.




G'day Mark,

Glad to see ya pop into the ASF, you'll be greatly welcomed. Have enjoyed reading your blog & sifting through your many posts on ET. Keep up the good work 

For the all the reasons Sails & others have mentioned, will now be soley trading the US options market. So might trouble you for a few hints  from time to time. 

Cutz, Being so close to May expiry probs would'nt add to the existing position, like this set up if you had more time on your hands.


----------



## mazzatelli1000

Grinder said:


> For the all the reasons Sails & others have mentioned, will now be soley trading the US options market. So might trouble you for a few hints  from time to time.




So... you have finally come to the dark side :vader:
Welcome.....Feel the power
See Mark is on our side too
LOL


----------



## Grinder

It's been a long time coming, tried to resist for so long, but have finally succumb to the powers of the dark side.


----------



## cutz

Thanks for your comments everyone, i think i'm set for another action packed week.   

BTW mazza yep I have checked out theta and it’s just popped below 0, dropping to  -350 as we head towards 4200, by then gamma will kick in and launch me into hyperspace  , (I wish, seriously though a correction back to 3700 isn’t out of the question in the next two weeks, touch and go maybe ?)


----------



## jackson8

cutz said:


> Thanks for your comments everyone, i think i'm set for another action packed week.
> 
> BTW mazza yep I have checked out theta and it’s just popped below 0, dropping to  -350 as we head towards 4200, by then gamma will kick in and launch me into hyperspace  , (I wish, seriously though a correction back to 3700 isn’t out of the question in the next two weeks, touch and go maybe ?)




hi cutz

have spent much of the weekend looking into ways of adjusting trades especially those that turn ugly

having thought about your situation a bit more, would it be prudent to take some defensive action now by purchasing back a quantity of the shorts whether it be 1 or 2 of them .

this would reduce your overall loss should the market keep rising which is good but  at the same time possibly locking in a loss now depending on how much premium was received from the initial sale of the put spreads and the call spread

it must be hard to make that call as no-one likes the idea of loseing money but it may reduce your loss over the longer term should the market keep rising.

of the top of my head i think mark may have mentioned something of this in one of his blogs

gary


----------



## Mark Wolfinger

sails said:


> It's a shame as I have put an enormous effort into learning options only to find it's pretty difficult to overcome the fee issues here.




Wow.  I had no idea that trading options was so costly where you live.

Are there government regulations, is the cost so high because there is no incentive for anyone to lower them?  And add slippage to that!  It's a wonder anyone trades options.

I remember when it was important to find trades that I could hold without adjustment - that was many years ago when commissions were much higher here.  That's not good.  Adjustments are part of the game, but very costly for you.  I agree that it's a shame.  Can you negotiate fees with a broker?

Mark


----------



## mazzatelli1000

cutz said:


> Thanks for your comments everyone, i think i'm set for another action packed week.
> 
> BTW mazza yep I have checked out theta and it’s just popped below 0, dropping to  -350 as we head towards 4200, by then gamma will kick in and launch me into hyperspace  , (I wish, seriously though a correction back to 3700 isn’t out of the question in the next two weeks, touch and go maybe ?)




Grinder was more direct in that theta is a bit heavy coming the next few weeks and since your not able to scalp to offset some of that theta bleeding adding more longs might not be too good.

You should model that the vol line will drop as well with a rally to 4200
Will delta/gamma profits beat that and theta as well?

Wasn't your upper breakeven 4550?


----------



## mazzatelli1000

Mark Wolfinger said:


> Can you negotiate fees with a broker?
> 
> Mark




There aren't many brokers to choose from so making negotiations could be  difficult and I think sails has alluded to the fact that spread orders aren't available so this will require legging in - even more commissions. Many here have had to turn to US markets.

I do not think that any government re

The market makers here are also a very dodgy bunch, leaving pretty wide spreads. Nothing like their American counterparts.


----------



## cutz

mazzatelli1000 said:


> Grinder was more direct in that theta is a bit heavy coming the next few weeks and since your not able to scalp to offset some of that theta bleeding adding more longs might not be too good.
> 
> You should model that the vol line will drop as well with a rally to 4200
> Will delta/gamma profits beat that and theta as well?
> 
> Wasn't your upper breakeven 4550?




Hi mazza, yeah i've come to the realization that this position is ugly as the rally isn't going to continue, and it's to late to defend, all I’m relying on now is a correction, if it doesn’t happen that’s OK, I’ll take a loss on this one and set I’ll up for June better prepared.

Mark I’ve only been trading options for a bit less than 2 years but IB setting up on the ASX has been in my mind fantastic, they are miles ahead of what I was used to in terms of competiveness and technology.  The spreads here are wider and sometimes non existent but I stick to the most liquid of options most of the time. ( i just can't resist the allure of MQG  )


----------



## sails

Mark Wolfinger said:


> ... Can you negotiate fees with a broker?




Thanks Mark, I have tried.  It is possible to get brokerage down with large size, but that doesn't help with per contract exchange fees or the slippage issues.  Also, most brokers here are fairly vicious with stock fees on exercise / assignment.

Trading large size here with options is a worry as it would be too obvious - one feels like a small fish sharing a small pond with some large sharks.  

It's no wonder so many Oz option traders prefer to trade the US if they can handle the night shift - and I don't think our exchange cares about it.  I have emailed them on occasions too, but they prefer to stick to their policies.

Which reminds me, we have seen one little change - there used to be a one and a half hour lunch break in the Oz options market every day...   Thankfully the ASX finally saw the light on that one...


----------



## sails

mazzatelli1000 said:


> ...The market makers here are also a very dodgy bunch, leaving pretty wide spreads. Nothing like their American counterparts.




Well said, Mazza 

Yeah, sailing along quite well - thanks!  The avatar shows our view which inspired the nick.  

Are you back in Oz?


----------



## cooper1308

Cutz,

In regards to broker negotiation what sort of volume are you trading per month? May be able to sort something out.

Sails you'll probably know this, but from what I can see commissions through IB can be more costly in Aus (not taking into account wider spreads) than US. They charge US.70c for option contract that cover lots of 100 shares, whereas Aussie options are AUD$3 for for exposure to 1000 shares.

So for traders looking for exposure to 1000 shares fees would be US$7 on the US markets as opposed to AUD$3 on the ASX. Or does the liquidity issue more than cover this?


----------



## cutz

cooper1308 said:


> Cutz,
> 
> In regards to broker negotiation what sort of volume are you trading per month? May be able to sort something out.





Hi cooper1308, i'm sorry but i'm happy with my current broker i think it was someone else that was asking about negotiation.


----------



## sails

cooper1308 said:


> ...Sails you'll probably know this, but from what I can see commissions through IB can be more costly in Aus (not taking into account wider spreads) than US. They charge US.70c for option contract that cover lots of 100 shares, whereas Aussie options are AUD$3 for for exposure to 1000 shares....




I agree - only IF you compare apples with apples.   eg. If trading a $30 stock here vs. a $30 stock there.  But that's only on brokerage - doesn't address all the extra fees we get here.

The difference comes where you can trade options on stocks like GOOG trading around $400 being many times higher in price than our humble Oz stocks. I also traded NDX over there and only needed one contract to do the job of about 5-10 BHP contracts out here (can't remember the exact comparison..  Cost was a tiny $1.50 for each trade with no data fees and no further exchange fees.  TOS charges on assignment were $15 flat.  Absolutely no comparison to the rip offs going on out here.

Not only do you get free data in the US, brokers such as TOS also supply magical option software for absolutely not cost as well.  

And slippage (a cost often overlooked) can be a shocker here in Oz.


----------



## jackson8

hi cutz

looks like the gods may be smiling upon you today

lets hope the xjo follows the downer that the dow. had overnight

gary


----------



## cutz

Hi Gary,

Yeah it looks like I may get out of this one unscathed ; we’ll see how things pan out over the next few days.

I may even have a play and see if I can turn it into something else before expiry, maybe a short fly or a 3700/3900 backspread or perhaps close the position entirely and start afresh for June.

I tell you what, I learnt some good lessons over the past couple of weeks, I actually thought I had ICs stitched up.


----------



## mazzatelli1000

sails said:


> Well said, Mazza
> 
> Yeah, sailing along quite well - thanks!  The avatar shows our view which inspired the nick.
> 
> Are you back in Oz?




Where is that view btw?

I am back temporarily for assessment
Ugh!!!


----------



## mazzatelli1000

cutz said:


> Hi Gary,
> 
> Yeah it looks like I may get out of this one unscathed ; we’ll see how things pan out over the next few days.
> 
> I may even have a play and see if I can turn it into something else before expiry, maybe a short fly or a 3700/3900 backspread or perhaps close the position entirely and start afresh for June.
> 
> I tell you what, I learnt some good lessons over the past couple of weeks, I actually thought I had ICs stitched up.




LOL congrats 
Since when was short gamma this nice 
Which God did you send sacrifices to ?

More often than not i've seen the spot move to where I would like it AFTER expiration
HAHAHA


----------



## cutz

Thanks Mazza,

These moves couldn't come soon enough, i can relax a bit now.


----------



## jackson8

cutz said:


> Hi Gary,
> 
> Yeah it looks like I may get out of this one unscathed ; we’ll see how things pan out over the next few days.
> 
> I may even have a play and see if I can turn it into something else before expiry, maybe a short fly or a 3700/3900 backspread or perhaps close the position entirely and start afresh for June.
> 
> I tell you what, I learnt some good lessons over the past couple of weeks, I actually thought I had ICs stitched up.





hi cutz

how did things pan out today . were you able to make any adjustments to your advantage

tempting fate to wait to see what happens over the next few days

this is probably where it is valuable to have good technical analysis skills, i myself have never been much good at t/a. never been able to predict the next move.

gary


----------



## cutz

Hi Gary,

Yeah i made some major adjustments to the positions to get me back into the sleeping zone.


----------



## mazzatelli1000

cutz said:


> Hi Gary,
> 
> Yeah i made some major adjustments to the positions to get me back into the sleeping zone.




LOL 
I forgot Oz has different expiry to US
Expiration tonight


----------



## jackson8

cutz said:


> Hi Gary,
> 
> Yeah i made some major adjustments to the positions to get me back into the sleeping zone.




hi cutz

i would be interested to know what adjustments you have made as i am quite uneducated when it comes to that sort of thing

i have done a lot of work with spreadsheets and excel charts looking at different scenarios but have not had to put them into practice as yet

do you have the fully paid version of hoadleys to utilise as a tool for your trades

gary


----------



## cutz

jackson8 said:


> hi cutz
> 
> i would be interested to know what adjustments you have made as i am quite uneducated when it comes to that sort of thing
> 
> i have done a lot of work with spreadsheets and excel charts looking at different scenarios but have not had to put them into practice as yet
> 
> do you have the fully paid version of hoadleys to utilise as a tool for your trades
> 
> gary




Hi Gary,


With the May 3700/4200 i purchased 8 3900 calls to lighten up the load, i also had a 3600/4100 backspread sitting in my other account ( i didn't want to talk about those) at the same ratio which i closed out completely and set up a May 3700/3900 2 to 4 and a 3800/4300 into June at a ratio of 6 to 12. I also placed some put spreads and had a play with some stock options. 

I seem to be exhibiting some end of year recklessness.

BTW, regarding hoadleys I’ve only got the free version as I’m not sure if it’s able to download XJO price history off yahoo, I say this because ninja trader doesn’t do it. 

Can anyone confirm if hoadleys can actually retrieve data for XJO off yahoo.


----------



## cutz

BTW, anyone reading the previous post please don't follow my trades, they're now destined to go wrong.


----------



## jackson8

cutz said:


> BTW, anyone reading the previous post please don't follow my trades, they're now destined to go wrong.




thanks for that cutz


i know that some people are hesitant to post their trades as it is supposed to invite doom , but im not superstitious 

always open to the experiences of the more sophisticated traders as i find it a good way to learn more about the game

you obviously see value in having wide spreads of 500 
have those longs ever come to fruition or do you utilise soley to limit margin requirments


----------



## cutz

Hi Gary.

LOL, I’m far from sophisticated and you’re right I am slightly superstitious so I was hesitant posting up my position but the reason why I have a backspreads (put and call) going on is because if the index explodes through the outer strike I feel I can save the position, something you can’t do with an IC , if the price ends up between the strikes I have half a chance saving the position by doing a diagonal roll, so the intent of heavy outer wings is predominately defensive in my case.

The 500 between the strikes is the max risk on the position I’m comfortable with, it’s all a matter of personal preference.

BTW, Grinder,Mazza,Sails, or anyone else i am open to criticism or helpful hints.


----------



## mazzatelli1000

cutz said:


> Hi Gary.
> 
> LOL, I’m far from sophisticated and you’re right I am slightly superstitious so I was hesitant posting up my position but the reason why I have a backspreads (put and call) going on is because if the index explodes through the outer strike I feel I can save the position, something you can’t do with an IC , if the price ends up between the strikes I have half a chance saving the position by doing a diagonal roll, so the intent of heavy outer wings is predominately defensive in my case.
> 
> The 500 between the strikes is the max risk on the position I’m comfortable with, it’s all a matter of personal preference.
> 
> BTW, Grinder,Mazza,Sails, or anyone else i am open to criticism or helpful hints.




Where is the confidence man??? 

Maybe if you summarise your intent with the trade, dissection would be clearer


----------



## cutz

mazzatelli1000 said:


> Where is the confidence man???
> 
> Maybe if you summarise your intent with the trade, dissection would be clearer




Good evening mazza,

Here's the intent of my trades,>> effectively neutralized all May positions,  still feeling particularly  bearish so that’s why I started with a new 3800/4300 call backspread into June, still got room to maneuver on this one if I’m wrong, (I can compress the spread ), I also initiated a new June put backspread but still a little gun shy on this side, I haven’t got the full amount on yet, 3400/3000 4 to 8, I’ll finish it off if this correction steps up a notch.

The new  May 3700/3900 2 to 4 was to help sort out today’s credit shortfall for the above, bit of a gamble but the additional risk doesn’t worry me.

Reflecting back I feel i may have set the put strikes to low but I’ll guess we’ll see how things pan out.

Hope it makes sense.


----------



## mazzatelli1000

cutz said:


> Good evening mazza,
> 
> Here's the intent of my trades,>> effectively neutralized all May positions,  still feeling particularly  bearish so that’s why I started with a new 3800/4300 call backspread into June, still got room to maneuver on this one if I’m wrong, (I can compress the spread ), I also initiated a new June put backspread but still a little gun shy on this side, I haven’t got the full amount on yet, 3400/3000 4 to 8, I’ll finish it off if this correction steps up a notch.
> 
> The new  May 3700/3900 2 to 4 was to help sort out today’s credit shortfall for the above, bit of a gamble but the additional risk doesn’t worry me.
> 
> Reflecting back I feel i may have set the put strikes to low but I’ll guess we’ll see how things pan out.
> 
> Hope it makes sense.




Good Morning cutz,
Apologies if I came across as "disclose your trade!!!", was multi-tasking at the time and typed without thought 

Assuming 3800/4300 backspread done for a credit. 

Prognosis:
Backspreads are 1) long vol, 2) Ideal for -/+ signficant sigma moves

Absent an analysis of vol skew and current IV range, your bias is short deltas. With that an increase in vol line is expected. 

For the short call, weighing delta gains versus DvegaDspot losses needs to be considered. I assume in Hoadley, vol is constant over all strikes, so model manually.

The long call 4300, may be too far OTM for any sensitivity to IV - Vega gains may be minimal despite higher ratio.

There is nothing wrong with the position, just additional considerations to size up whether risk:reward is desirable.

With regards to the diagonal roll, is this simply rolling the short strike to the back month at a higher strike with no long hedges? (NB no need to disclose)

My thoughts at his stage of my development, are that I rather consider adjustments that reduce risk and reward slightly or increases/locks reward, rather than play the defensive adjustments. 

Sometimes defensive adjustments create more headaches via increased risk,  less reward and new undesirable exposures of the Greeks, when it is better to offset and move on to a new trade.

All IMHO and please DYOR.


----------



## cutz

Hi Mazza, 

Thanks again for your comments,

You’re correct, this position is a credit spread, using yesterday’s prices IV is running at 29.5 on the short and 26.8 on the long so that looks OK, yep the call side of the position is short delta to about 4200 but I may bring another long into the spread at strike lower than 4300 still undecided. (I’ve left the put side out of the equation as it’s not finished, i don't really like it, may bring it up)

By the way when I’m refer to a diagonal roll that’s with hedging.


----------



## mazzatelli1000

cutz said:


> using yesterday’s prices IV is running at 29.5 on the short and 26.8 on the long so that looks OK,




I have quickly inputted this so may not be accurate
Plot of vega of the backspread - assumption constant vol
Maybe reconcile to Hoadley

PS: Good luck!!!


----------



## cutz

Hi Mazza, thanks.

3D looks nice, 

I’m not sure if I’ll be able to use long vega to my advantage on the call spread,  I reckon if the index continues making gains IV may continue dropping away, it has picked up this week but I dunno if it’s temp or not.

How about a put backspread to initiate a volatility play, sound attractive?, I’m having trouble reading the market, I didn’t like the finish on the US last night but i'm still feeling bearish.

How are you playing things ATM ?

Geez, I wish I had crystal balls.


----------



## mazzatelli1000

cutz said:


> Hi Mazza, thanks.
> 
> 3D looks nice,
> 
> I’m not sure if I’ll be able to use long vega to my advantage on the call spread,  I reckon if the index continues making gains IV may continue dropping away, it has picked up this week but I dunno if it’s temp or not.
> 
> How about a put backspread to initiate a volatility play, sound attractive?, I’m having trouble reading the market, I didn’t like the finish on the US last night but i'm still feeling bearish.
> 
> How are you playing things ATM ?
> 
> Geez, I wish I had crystal balls.




Yes, profits will come from directional/deltas

Put backspread is good, OTM put calendar hedged with spot based on discrete intervals.

I liked the finish last night, hit the sweet spot of many of my flys..pity I had scaled out the majority of them by then. LOL

Was short vol but now long vol bias. Currently assessing POT 105 Jun/Sep Put Calendar.


----------



## cutz

Hi guys, 

On the subject of backspreads, I’ve been playing around with a MQG call backspread on hoadleys, seeing I’m bearish on this stock I was looking strikes of 32/40, ratio of 1 to 2, if the stock keeps running up from today’s price of $34.60 instead of reversing i'll neutralize delta at $35/36 and buy a couple cheap puts, profits will then come in from the upside and downside is still protected, if the stock collapses the initial credit is kept. A rough description but I hope you know what I’m getting at. I chose MQG because it’s capable of making big moves and it's IV have settled down somewhat.

Any flaws in this strategy, everything about it looks good but am I looking at it the wrong way round? It’s the best I can get considering I can’t do the opposite side because of the short selling ban. (Shame because going long volatility/short delta on this via a put backspread also looks attractive)


----------



## jackson8

cutz said:


> Hi guys,
> 
> On the subject of backspreads, I’ve been playing around with a MQG call backspread on hoadleys, seeing I’m bearish on this stock I was looking strikes of 32/40, ratio of 1 to 2, if the stock keeps running up from today’s price of $34.60 instead of reversing i'll neutralize delta at $35/36 and buy a couple cheap puts, profits will then come in from the upside and downside is still protected, if the stock collapses the initial credit is kept. A rough description but I hope you know what I’m getting at. I chose MQG because it’s capable of making big moves and it's IV have settled down somewhat.
> 
> Any flaws in this strategy, everything about it looks good but am I looking at it the wrong way round? It’s the best I can get considering I can’t do the opposite side because of the short selling ban. (Shame because going long volatility/short delta on this via a put backspread also looks attractive)




hi cutz

how  many months out are you thinking of placing the trade

looking at a risk chart it would have to make a pretty hefty move upwards to come into profit if june contract looking to $46 + with such wide strikes

obviously if sp slumps not a problem 

how will you defend if starts entering the valley of death

gary


----------



## cutz

jackson8 said:


> hi cutz
> 
> how  many months out are you thinking of placing the trade
> 
> looking at a risk chart it would have to make a pretty hefty move upwards to come into profit if june contract looking to $46 + with such wide strikes
> 
> obviously if sp slumps not a problem
> 
> how will you defend if starts entering the valley of death
> 
> gary




Hi Gary,

Assuming a ratio of 4 to 8, buy 1000 shares at 35 and a 26 put if I’m wrong and the stock creeps up, the loss zone then exits at about $42.5. If the stock keeps marching on the long calls will start doing their thing, but I’m skeptical on this sort of thing happening.

I was looking at Jun expiry because I’m bearish on MQG so I’m relying on the stock to tank within the next couple of weeks then I’ll buy back my short calls ASAP.


----------



## jackson8

cutz said:


> Hi Gary,
> 
> Assuming a ratio of 4 to 8, buy 1000 shares at 35 and a 26 put if I’m wrong and the stock creeps up, the loss zone then exits at about $42.5. If the stock keeps marching on the long calls will start doing their thing, but I’m skeptical on this sort of thing happening.
> 
> I was looking at Jun expiry because I’m bearish on MQG so I’m relying on the stock to tank within the next couple of weeks then I’ll buy back my short calls ASAP.




hi cutz
just out of interest can you acheive the same results by purchasing deep itm calls and buying puts to cover instead of purchasing the stock


----------



## cutz

jackson8 said:


> hi cutz
> just out of interest can you acheive the same results by purchasing deep itm calls and buying puts to cover instead of purchasing the stock




Yeah, Gary.

Your correct, so obvious but yet I didn’t see it. Assuming the stock doesn’t correct and it marches up to $35 I can buy a 28 strike call, should have a delta of .92, effectively the same as 920 stocks, also buy a 28 strike put for next to nothing (assuming the MM's come to the party).

Bingo, similar graph as before but done with a 2.7K credit. 

Heaps better.

Actually, It's a better looking graph than before, geez i luv options.


EDIT>> Been playing with the strikes on plan "B" (assuming correction doesn't happen) and it's a matter of balancing risk/reward to whatever is optimal.


----------



## jackson8

cutz said:


> Yeah, Gary.
> 
> Your correct, so obvious but yet I didn’t see it. Assuming the stock doesn’t correct and it marches up to $35 I can buy a 28 strike call, should have a delta of .92, effectively the same as 920 stocks, also buy a 28 strike put for next to nothing (assuming the MM's come to the party).
> 
> Bingo, similar graph as before but done with a 2.7K credit.
> 
> Heaps better.
> 
> Actually, It's a better looking graph than before, geez i luv options.




hi cutz
just of the top of my head purchasing the 28 put still puts a risk on the downside of 7k less premium received for shorts= 4.3 k max loss(less cost of put)

could there be a even balance in a higher strike put as insurance will cost a bit more but reduce that 4.3k loss in the event of a sharp fall down to or below 28


----------



## cutz

Hello again Gary, 

I've been playing with strikes and yes a $30 put and call seems to achieve a better outcome (on the defence side), i think it's a matter of fine tuning and seeing what pricing you get on the day. If things start going pear shaped this week defence may not be necessary.


----------



## jackson8

cutz said:


> Yeah, Gary.
> 
> Your correct, so obvious but yet I didn’t see it. Assuming the stock doesn’t correct and it marches up to $35 I can buy a 28 strike call, should have a delta of .92, effectively the same as 920 stocks, also buy a 28 strike put for next to nothing (assuming the MM's come to the party).
> 
> Bingo, similar graph as before but done with a 2.7K credit.
> 
> Heaps better.
> 
> Actually, It's a better looking graph than before, geez i luv options.
> 
> 
> EDIT>> Been playing with the strikes on plan "B" (assuming correction doesn't happen) and it's a matter of balancing risk/reward to whatever is optimal.




in retrospect
the positiion you are talking about -1  +2 on mqg is one halve of a short fly  -1  +2  -1 without the higher sold strike  from my understanding the short fly is a volatility play but as in your case it will require quite a large move upwards  direction to make it profitable. to retain profit it will need to trade below its current sp down to 32 for max profit or above 45.80 (aprox)

my point is ? i am not quite sure but wondering if there is another way of acheiveing the same outcome with out the large risk involved should the sp keep rising but not enough to enter profit on the long side.

from the way i see it you are relying of the sp to nose lower from the moment it is put on  as your short is already itm any rise will result in a deficit 

with your longs being so far away your position looks almost like a itm sold naked call with the insurance being so far away from the strike  

just that the earlier posts on the xjo position raised the problems that can occur with these types of trades if they go drastically wrong


----------



## jackson8

cutz said:


> Yeah, Gary.
> 
> Your correct, so obvious but yet I didn’t see it. Assuming the stock doesn’t correct and it marches up to $35 I can buy a 28 strike call, should have a delta of .92, effectively the same as 920 stocks, also buy a 28 strike put for next to nothing (assuming the MM's come to the party).
> 
> Bingo, similar graph as before but done with a 2.7K credit.
> 
> Heaps better.
> 
> Actually, It's a better looking graph than before, geez i luv options.
> 
> 
> EDIT>> Been playing with the strikes on plan "B" (assuming correction doesn't happen) and it's a matter of balancing risk/reward to whatever is optimal.





hi cutz

sorry for labouring this out but you have me intrigued now with this speculative trade

with your short over $2 itm it seems to be quite costly to try to defend . if you are looking at buying a 30 call if the sp reaches 35 it quickly changes your whole risk/reward profile but puts you in debit and still will require a decent rise in sp to over 40 to acheive a profit

if this situation were to arise you could at the same time as purchasing your long call sell another higher strike and turn it into a long fly giving yourself a more even profit or loss scenario

it seems a purely directional play and is a bit like lighting a stick of dynamite that has a very short fuse , could easily blow up in your face

but i am only a rookie and as such am probably over cautious.

gary


----------



## mazzatelli1000

cutz said:


> I’m bearish on this stock I was looking strikes of 32/40, ratio of 1 to 2, if the stock keeps running up from today’s price of $34.60 instead of reversing i'll neutralize delta at $35/36 and buy a couple cheap puts, profits will then come in from the upside and downside is still protected, if the stock collapses the initial credit is kept.






jackson8 said:


> it seems a purely directional play and is a bit like lighting a stick of dynamite that has a very short fuse , could easily blow up in your face




I guess this was what was trying to be discussed in an earlier exchange. The vol of the entire strip would not be favourable with the up move.
Pure directional - short deltas.

The risk here is overtrading - overhedging - adding longs when it moves up a tad etc
I think even with option strategys that are not as delta sensitive as being long/short the spot, you still need to have a directional/vol bias.

Like my thoughts before, sometimes when you are wrong it is better to cut losses early, even with limited risk stratgies and especially since this backspread is directional spec and gamma scalping is not an option.



cutz said:


> Assuming a ratio of 4 to 8, buy 1000 shares at 35 and a 26 put






jackson8 said:


> just out of interest can you acheive the same results by purchasing deep itm calls and buying puts to cover instead of purchasing the stock




long stock + long put = long call
In this case the 26 call

I haven't got up to read the rest in detail, but it sounded like you were considering buying straddles at the 30 strike level?


----------



## cutz

Thanks guys,

Talked me out of it, I’ve dropped the idea on MQG call backspread and I’ll look at this from the put side, same ratio as before 4 short 8 long, strikes of 34/30, a big bearish move will achieve excellent results, a bullish move will achieve good results, stock stuck between 27 and 34 requires attention but MQG is one of those stocks that can’t sit still.

I guess I was bogged down before with the idea that you can defend the call backspread by buying deltas to steepen up the right side of the graph something you can’t do from the put side because of the difficulty in shorting here but as Gary pointed out that buying ITM calls/(puts) achieves the same thing, a case of tunnel vision on my behalf.

Sorry to be banging on about backspreading but I think it’s become one of my core strategies but I feel I’m not 100% with it, just tossing up ideas, other things to consider is liquidity and pricing I get at those strikes, although those things have been OK lately.


----------



## mazzatelli1000

cutz said:


> Sorry to be banging on about backspreading but I think it’s become one of my core strategies but I feel I’m not 100% with it, just tossing up ideas, other things to consider is liquidity and pricing I get at those strikes, although those things have been OK lately.




Everyone has their niche
Maybe a suggestion for you to research and explore

Short premium in equity/index components
If you are worried of broad market sigmas - replicate long index gammas via strangles
Ratio will depend on correlation measures you feel comfortable with


----------



## cutz

mazzatelli1000 said:


> Short premium in equity/index components
> If you are worried of broad market sigmas - replicate long index gammas via strangles
> Ratio will depend on correlation measures you feel comfortable with




Gotcha,

An example would be buy an XJO strangle 1000 points wide, maybe into July, short gamma trades on the front months, perhaps try to identify market turning points and lay on positions as appropriate.

I like it.

(maybe not so wide on the strangle)


----------



## mazzatelli1000

Yes that is the basic gist

The fun never stops


----------



## mazzatelli1000

mazzatelli1000 said:


> Was short vol but now long vol bias. Currently assessing POT 105 Jun/Sep Put Calendar.




Ahhh hindsight

Should have put this one on in more size


----------



## cutz

Good luck with it mazza,

Interesting vehicle you've got there.

I thought I’ll have a play with MQG as a long vol play into June, hopefully the market action picks up again. Today looked good but not good enough


----------



## jackson8

hi all

have been spending some time reading up on 
gamma neutral delta neutral trades using the underlying as the hedge for delta

specifically looking at applying to calender spreads
the gamma neutral aspect looks like a ratio spread

would welcome any comments from  experienced oppies

gary

as an example .... osh trading at $5.12
-5 june $5 puts
+9 august $4.75 puts
hedge with aprox. 888 of underlying
from my understanding the idea to roll the june puts out to july near exp.

will this sort of setup require constant adjusting ?


----------



## mazzatelli1000

jackson8 said:


> hi all
> 
> have been spending some time reading up on
> gamma neutral delta neutral trades using the underlying as the hedge for delta
> 
> specifically looking at applying to calender spreads
> the gamma neutral aspect looks like a ratio spread
> 
> would welcome any comments from  experienced oppies
> 
> gary
> 
> as an example .... osh trading at $5.12
> -5 june $5 puts
> +9 august $4.75 puts
> hedge with aprox. 888 of underlying
> from my understanding the idea to roll the june puts out to july near exp.
> 
> will this sort of setup require constant adjusting ?




Gary,
This is a question for you
Which Greek are you trying to profit from??


----------



## jackson8

mazzatelli1000 said:


> Gary,
> This is a question for you
> Which Greek are you trying to profit from??




thanks mazza for the reply

having a basic understanding of how the greeks work i am still at the point where as you say i am trying to see how the greeks can be used to profit

or to put it another way making the greeks work to  my advantage

in this instance i expect that both gamma and delta are intertwined and the other vega would affect the outcome

so the way i see it there would have to be a very large fall  for the position to make a large profit via gamma 

the delta hedging is there to try to even out any loss on the longs should the sp rise dramatically 

rise or fall in vega (vol) will also have effect over the term of the contract

isnt what i am looking at just a diagonal calender spread with extra longs as insurance.

gary


----------



## cutz

Hi Gary,

Sorry to butt in,

I don't know enough about calendars because i don't put them on and i can't visualize in my head how they behave but as far as neutralizing delta and gamma it looks like you may have an outlook on future volatility.

Am i on the right track here ?


If so you may need to add that into the equation.


----------



## mazzatelli1000

jackson8 said:


> as an example .... osh trading at $5.12
> -5 june $5 puts
> +9 august $4.75 puts
> hedge with aprox. 888 of underlying
> from my understanding the idea to roll the june puts out to july near exp.
> 
> will this sort of setup require constant adjusting ?
> isnt what i am looking at just a diagonal calender spread with extra longs as insurance.




Dissections:
1) 5x Bull Put Diagonal Jun/Aug 4.75/5p + 4x Aug 4.75p
2) 5x Bull Put Spread Jun 4.75/5p + 5x Jun/Aug 4.75p Calendar + 4x Aug 4.75p
3) -5 by +9 Diagonal put backspread (maybe cutz' eyes will light up lol)



jackson8 said:


> gamma neutral delta neutral trades using the underlying as the hedge for delta





jackson8 said:


> in this instance i expect that both gamma and delta are intertwined and the other vega would affect the outcome





jackson8 said:


> rise or fall in vega (vol) will also have effect over the term of the contract




Gamma is the second derivative of Delta and will always be intertwined.
You discussed that Gamma and Delta will be neutralised at inception. Then the primary exposure the trade implies is to Vega.

The position is net long options in the back month, making the bias long vol.

Dynamic hedging is then utilised to isolate implied vol exposure. Delta hedging intervals will need to be determined wehther ad hoc discrete deltas/time or utility based - so you will expect adjustments with stock.



jackson8 said:


> so the way i see it there would have to be a very large fall  for the position to make a large profit via gamma




When you observe the structure as a backspread, yes this is correct.
The question boils down to what is the objective you are trying to achieve with this trade? 

Apologies if I have raised more questions than answers 

EDIT: cutz beat me to it with a much more concise response LOL


----------



## cutz

mazzatelli1000 said:


> EDIT: cutz beat me to it with a much more concise response LOL




Nah,

Your responses are always excellent, gives me something to think about.

BTW what do you mean by " ad hoc discrete deltas/time or utility based "


----------



## jackson8

cutz said:


> Nah,
> 
> Your responses are always excellent, gives me something to think about.
> 
> BTW what do you mean by " ad hoc discrete deltas/time or utility based "




thanks for your input mazza and cutz

am trying to broaden my trading from just putting on naked puts

i dont like putting on new types of trades until i have fully investigated and understood the strategy . cash is too hard to come by to throw caution to the wind

i know the naked put is high risk in itself but i only put on small no. of contracts way otm and on a limited choice of stock 

has to be within my risk profile. 

gary


----------



## cutz

No worries Gary, keep the options conversation going, it’s all pretty interesting.

Just a small hint with OTM naked puts, it always helps having some WOTM longs in place just in case, you may not need them but if you ever do, you’ll be glad you did.


----------



## Grinder

cutz said:


> No worries Gary, keep the options conversation going, it’s all pretty interesting.
> 
> Just a small hint with OTM naked puts, it always helps having some WOTM longs in place just in case, you may not need them but if you ever do, you’ll be glad you did.




Agree with that. Not a fan of going naked (except at home). Probs would'nt do it on a stock unless i really want to own em, index maybe.. but am a fan of sleep. (which I'm not getting as much as I would like, trading the US at night)

Have been working putting on my positions with extra built in insurance thus minimizing the need for adjustments, came back from vacation with a different outlook  Will let you how it goes.


----------



## mazzatelli1000

cutz said:


> BTW what do you mean by " ad hoc discrete deltas/time or utility based "




Since you cannot continuously delta-hedge and transaction costs are a hindrance:

Ad hoc discrete deltas/time - IOW you select a certain number of deltas to rebalance at intervals, e.g. position delta absolute value is 200 or every day/week/month one balances deltas. 

Utility based - deals with taking into account transaction costs vs. risk tolerance/aversion and developing optimal hedging bands/asymptotes.


----------



## mazzatelli1000

jackson8 said:


> i know the naked put is high risk in itself but i only put on small no. of contracts way otm and on a limited choice of stock





cutz said:


> Just a small hint with OTM naked puts, it always helps having some WOTM longs in place just in case, you may not need them but if you ever do, you’ll be glad you did.




Short OTM gamma :hide:



Grinder said:


> Agree with that. Not a fan of going naked (except at home).




Not a pretty sight when things go bad 
In HK some traders are in shorts and T-shirts
LOL



Grinder said:


> (which I'm not getting as much as I would like, trading the US at night)
> 
> Have been working putting on my positions with extra built in insurance thus minimizing the need for adjustments, came back from vacation with a different outlook  Will let you how it goes.



How are you finding US markets?
More static hedging added to the arsenal I see. Please keep us posted!!!

BTW, WayneL and sails both gone? I wonder if old age caught up to them?


----------



## sails

mazzatelli1000 said:


> ...BTW, WayneL and sails both gone? I wonder if old age caught up to them?




Old age...  never... 

No, not gone - just been more busy than usual and will stay that way for a while.  I still try to keep up with reading on ASF - but not a lot of time for posting!

WayneL - he really seems to have disappeared this time..  Hopefully he will return one day...


----------



## mazzatelli1000

sails said:


> Old age...  never...
> 
> No, not gone - just been more busy than usual and will stay that way for a while.  I still try to keep up with reading on ASF - but not a lot of time for posting!
> 
> WayneL - he really seems to have disappeared this time..  Hopefully he will return one day...




Ahhhh good news then, you can keep us hotheads in check LOL
Hope all is well!!

WayneL, yes he said he would come back after moving house...maybe they finally slayed him in his coffin, him being Dracula and all  :batman:


It would be good to see him back.....


----------



## cutz

mazzatelli1000 said:


> Since you cannot continuously delta-hedge and transaction costs are a hindrance:
> 
> Ad hoc discrete deltas/time - IOW you select a certain number of deltas to rebalance at intervals, e.g. position delta absolute value is 200 or every day/week/month one balances deltas.
> 
> Utility based - deals with taking into account transaction costs vs. risk tolerance/aversion and developing optimal hedging bands/asymptotes.




Thanks mazza, gotcha on that.

Grinder, are you up all night or do you catch the final couple of hours ? I tried it for a couple of months but i closed out the last of my small SPY positions last expiry after coming home from a night out.

I was profitable and i loved the liquidity but being up at night got to me.


----------



## Grinder

cutz said:


> Grinder, are you up all night or do you catch the final couple of hours ? I tried it for a couple of months but i closed out the last of my small SPY positions last expiry after coming home from a night out.
> 
> I was profitable and i loved the liquidity but being up at night got to me.




I knock off bout 11pm & get up 5am next day to trade the last hour of the US. So im getting 6 hrs shut eye as opposed to my usual 8 hrs.


----------



## cutz

Hi Guys,

I came across an interesting post some time ago which mentioned that a stock can drift towards a strike with a high amount of open interest toward expiry (i haven't been able to trace that thread), I was reminded of this post last week as I had a QBE call backspread on recently with the lower strike at $19, I can’t recall the OI at the time I set it up but i assume that $19 would have been a popular strike.

Anyway to cut a long story short I rolled that position out a couple of weeks ago to avoid trouble and sure enough QBE finished up at around $19 last expiry.

I’ve noticed this happen a few times but I assumed it’s just been coincidence, can anyone shed any light on the dynamics of this phenomena, i haven't read about it anywhere  i’ve also ordered a copy of that book Sails mentioned, Options Market Making but any opinions will be appreciated.


----------



## mazzatelli1000

Pinny Friday

I do not know how applicable it is to Oz market, maybe some of the resident MM's can shed light.

But for the US there is research and empirical evidence that there is excess drift generated by delta hedging and rollver arb activities that pushes a stock towards a strike price on expiration most notably on optionable stocks. Hence your observation of pinning.

The effect is most pronounced on expiration day, and models for stock pinning are created for those days, as there is discrepancies with the Black-Scholes Model.

Open Interest is not necessarily causation for Stock Pinning due to if I remember of the top of my head:
1) As above pinning mostly occurs on expiration day nearing the end of the session
2) With OI, it is not clear whether MM's are short or long gamma

BTW Option MM by Baird is a great text, should be in every option traders library IMHO.


----------



## cutz

Thanks for your reply mazza,

Pinny friday i luv it. ( obviously Pinny thursday with us)

Yeah I’ve seen it happen with us on a couple of occasions especially with banks, dunno maybe it’s because I play around with them.

I also notice you’ve read the text i mentioned, wasn’t sure whether to get it or not, sounds like I made the right call, eagerly anticipating its arrival.


----------



## mazzatelli1000

I wouldn't be surprised with any of the large stocks. Im sure I've seen a post by sails on something like this in Oz.

You should probably consider high options turnover along with OI.
My friend runs analysis on this behaviour to trade on expiration day (US).

Baird - you'll like his ideas, he likes long wrangles ( put + call backspread) in the back month + short gamma in the front month.

Will be fun, better than McMillan IMO


----------



## Grinder

I've read some stuff on it awhile back, can't remmember where, if I do I'll post it here. Maybe Mark (ex MM) can tell us if there is any real substance to it.


----------



## sails

Yeah, I have found the pinning theory quite fascinating, although the stock doesn't consistently pin at the highest open interest level - obviously nothing is going to work all the time.

STO for May09 had a large lot of OI showing up very clearly at the $14.14 strike - and the that was the low of the day for STO on Thursday (expiry day).  They don't always show up quite so clearly -but that was a good example of one that did hit the highest OI level during trading on expiry day.

I have been running excel spreadsheets for some time now that tracks and retains information for the few stocks I watch, eg. volume, OI levels and changes.  From that info I can also run further calculations including put/call ratios, cumulative volumes, etc.  It's a bit of work to keep up, but it's something I have found interesting.

Apart from expiry, sometimes high OI levels will act as support or resistance which gives a different source of information other than just from the charts.

I usually try to find potentially good expiry trades where I can set up a low dollar risk trade going into expiry with potential high reward.  Prefer that than taking higher dollar risks on condors and the like.  These expiry trades don't always work, however with so little risk, it doesn't do much damage to the account.  I see it as just another tool for the options tool kit.


----------



## cutz

Excellent Sails,

Sounds like you have a lot of bases covered, something I’ve never really considered but I’ll keep an eye on from now.

QBE is of interest to me, noticed there’s above average OI at $23 and a cluster around $21, so it should be interesting to see how things play out this month (Although small OI compared with the US markets).

Thanks again for the heads up everyone.


----------



## jackson8

hi cutz

will mention this although bit different to what you have talked about 

of the top of my head i remember reading an article which spoke about the relationship of large volumes of OI of deep in the money strikes

something along the lines of helping to push the sp up or down leading up to exp and the resulting price day after exp

high volume deep itm calls pushing sp up and ditto for puts
possible to do with positions being covered


----------



## mazzatelli1000

sails said:


> I have been running excel spreadsheets for some time now that tracks and retains information for the few stocks I watch, eg. volume, OI levels and changes.  From that info I can also run further calculations including put/call ratios, cumulative volumes, etc.  It's a bit of work to keep up, but it's something I have found interesting.




Hey M, I know your busy nowadays, but have you ever considered setting up database infrastructures and queries for this? 
Its much more efficient and scalable as I have seen with fellow quants, tracking hundreds of stock, how often they finish close to a strike and running simulations.

Yeah I share the same sentiment about Condors and Credit spreads are 
I think the attraction is probability of win over R:R

Anyways my fellow oppies, I will be embarking on a project which will consume my time so will farewell ASF yet again LOL.

Thank you for the dialogue, it has been entertaining and enlightening!!

Le deseo la mejor de las suertes


----------



## cutz

mazzatelli1000 said:


> Anyways my fellow oppies, I will be embarking on a project which will consume my time so will farewell ASF yet again LOL.
> 
> Thank you for the dialogue, it has been entertaining and enlightening!!
> 
> Le deseo la mejor de las suertes




Good luck with it all mazza,

Thank's for putting in the time to help out us newbies.

Hope to hear from you soon.


----------



## cutz

jackson8 said:


> of the top of my head i remember reading an article which spoke about the relationship of large volumes of OI of deep in the money strikes
> 
> something along the lines of helping to push the sp up or down leading up to exp and the resulting price day after exp
> 
> high volume deep itm calls pushing sp up and ditto for puts
> possible to do with positions being covered




Yeah i see what you mean, i guess if there are heaps of traders selling DITM's the hedging requirements of the MM's can influence the price, especially since those types of options are running at close to delta 1.

Good stuff, something else to look into.


----------



## Grinder

mazzatelli1000 said:


> How are you finding US markets?
> More static hedging added to the arsenal I see. Please keep us posted!!!




I've started to build in smaller positions in my overall position in order to reduce the need for adjustments & manage individual greeks.   

btw, on the US markets I'm like a kid in a lolly shop It just feels right.

best of luck mazza.


----------



## sails

mazzatelli1000 said:


> Hey M, I know your busy nowadays, but have you ever considered setting up database infrastructures and queries for this?
> Its much more efficient and scalable as I have seen with fellow quants, tracking hundreds of stock, how often they finish close to a strike and running simulations.
> 
> Yeah I share the same sentiment about Condors and Credit spreads are
> I think the attraction is probability of win over R:R
> 
> Anyways my fellow oppies, I will be embarking on a project which will consume my time so will farewell ASF yet again LOL.
> 
> Thank you for the dialogue, it has been entertaining and enlightening!!
> 
> Le deseo la mejor de las suertes




My excel skills are petty basic, so not sure that I have the skills to set up data bases such as you suggest.    And still improving on the ability to see where the stock might be headed into expiry.  Some months / stocks I can get it spot on and other times it is extremely illusive.  I feel there are some gaps in my learning curve in this issue.  It is one of the reasons I keep historical information, so that if something new comes to light, I can go and have a look to see how it would have performed on previous months.  I have thought it might be more of an art form, but if the quants can get it right, it would have to be strongly mathematical!

And it's about to get busier soon - our unit is under contract (yes-that lovely view is about to belong to someone else), so it's a case of finding somewhere else to live and moving house... 

Anyway, all the best with your project, Mazza and look forward to your next visit here at ASF! 



Grinder said:


> I've started to build in smaller positions in my overall position in order to reduce the need for adjustments & manage individual greeks.
> 
> btw, on the US markets I'm like a kid in a lolly shop It just feels right.
> 
> best of luck mazza.




lol Grinder - and such cheap lollies too!  It certainly makes one even more dissatisfied with Oz options and I will probably continue to hold off until I am able to sort out the sleep issues with night trading.


----------



## jackson8

hi all 
interested in feedback of similiar experiences

have had an open position on a way otm sold put on sto which i sold day after price drop from equity raising

with the sp up this morning by about 30c i placed a buy to close order just below mms offer

it sat there all day and sto sp slowly dropped towards its previous close , so thought well that wont be filled 

on checking the order after close i find it was filled just before closing time, even though sp had dropped 25c from when i had originally placed order so  theorectically my bid should not have been filled as value of oppie would have been more as sp dropped

could it be that some of the spreads through out the day are not true value and then they are obliged to fill orders at end of day based on true value

hope this makes sense
gary


----------



## cutz

Hi Gary,

I can't really shed any light on your question at the moment but  MM's aren’t  obliged to fill retails order towards the end of the day unless of course you hit the bid/ask,  or a close enough price they deem reasonable.

All I can say is I have had orders filled in stages so I never assume a market maker is always taking the other side. Recently I had a MQG put sell order sitting in the system for half the day only to be partially filled after the close, again I assume by a retail trader like myself who was more willing to trade at that price.

Yeah dunno, maybe someone else can fill us in.


----------



## Grinder

jackson8 said:


> hi all
> interested in feedback of similiar experiences
> 
> have had an open position on a way otm sold put on sto which i sold day after price drop from equity raising
> 
> with the sp up this morning by about 30c i placed a buy to close order just below mms offer
> 
> it sat there all day and sto sp slowly dropped towards its previous close , so thought well that wont be filled
> 
> on checking the order after close i find it was filled just before closing time, even though sp had dropped 25c from when i had originally placed order so  theorectically my bid should not have been filled as value of oppie would have been more as sp dropped
> 
> could it be that some of the spreads through out the day are not true value and then they are obliged to fill orders at end of day based on true value
> 
> hope this makes sense
> gary




Don't know about that, but I do know they work in mysterious ways (is a nice way to put it). I've also had the odd order get filled after close in a simmilar situation to what you described, thought it was alittle peculiar but cest la vie. 

Cutz mentioned about orders being filled in stages, this makes sense as they would be looking to stay hedged at all times, could be that they just needed to take it then to balance their books.

or

my conspiracy theory, they would'nt take your trade at your price earlier in the day as you priced it too fair, so instead they wait till you cave a bit on the price (knowing your the only fish in the pond) By EOD they take the trade knowing you won't move on it. End result they still cut a profit through the transaction, but not as much as they would have hoped. Im probably way off the mark though.


----------



## warezwana

Sore eyes from reading this ENTIRE thread  but great work to ALL the experienced members that spent soooooo much of their time talking options... I found the 1st 11pages or so very everwhelming  but good to see such effort from you guys

*Tech, Wayne, RichKid, Magdoran, Sails* sorry if I missed anyone...

Off to ask something on a new thread... Thanks guys for your forum input.

As for the 'mentoring' I cant help but wonder if there is any people out there wiling to let newbies look over their shoulder as they trade


----------



## wayneL

mazzatelli1000 said:


> Pinny Friday
> 
> I do not know how applicable it is to Oz market, maybe some of the resident MM's can shed light.
> 
> But for the US there is research and empirical evidence that there is excess drift generated by delta hedging and rollver arb activities that pushes a stock towards a strike price on expiration most notably on optionable stocks. Hence your observation of pinning.
> 
> The effect is most pronounced on expiration day, and models for stock pinning are created for those days, as there is discrepancies with the Black-Scholes Model.
> 
> Open Interest is not necessarily causation for Stock Pinning due to if I remember of the top of my head:
> 1) As above pinning mostly occurs on expiration day nearing the end of the session
> 2) With OI, it is not clear whether MM's are short or long gamma
> 
> BTW Option MM by Baird is a great text, should be in every option traders library IMHO.




I've just been catching up on a few of these threads and this caught my eye.

Adam Warner, an ex MM at AMEX who blogs at The Daily Option Report and elsewhere, writes quite often on the pinning phenomena. It's a good blog to keep an eye on.

http://adamsoptions.blogspot.com/search?q=pinning

He's also written a book that's due to be released soon:







I get the impression that there is a fair bit about it in there. I'll be getting it when released.


----------



## cutz

Hi Guys,

Can anybody recommend an options contract similar to our XJO, (index cash settled ) or SPY series (underlying S&P 500 ETF) that's traded in Europe.

Evening hours sound attractive (as opposed to the US 11.30 pm open) and XJO has its moments especially OTM.

Hope i'm not highjacking your thread Wayne, couldn't find one more appropriate. 


Thanks in advance.


----------



## wayneL

cutz said:


> Hi Guys,
> 
> Can anybody recommend an options contract similar to our XJO, (index cash settled ) or SPY series (underlying S&P 500 ETF) that's traded in Europe.
> 
> Evening hours sound attractive (as opposed to the US 11.30 pm open) and XJO has its moments especially OTM.
> 
> Hope i'm not highjacking your thread Wayne, couldn't find one more appropriate.
> 
> 
> Thanks in advance.




Cutz,

Off the top of my head, there are options on FTSE futures. Ticker symbol Z if you're on IB.

I'll have a dig around and see what else there is.


----------



## wayneL

wayneL said:


> Cutz,
> 
> Off the top of my head, there are options on FTSE futures. Ticker symbol Z if you're on IB.
> 
> I'll have a dig around and see what else there is.




Cutz,

There is a FTSE 100 ETF... IYR I think it is.

Then there are DAX futures options, big contract though if that's a problem. 

ESTX50 is another smaller European index future with options too.

FWIW


----------



## cutz

Thanks for the replies Wayne,

Just got to get my head around all the different exchanges and indices, would you consider the FTSE to be the european benchmark ?

I want to pick an index that i can familiarize myself with, i've heard of a few others (over in europe) but haven't payed much attention till now.


EDIT>> Sorry guys, i think i should have stuck my query in the international index trading thread but my  query relates more to index option trading.


----------



## wayneL

cutz said:


> Thanks for the replies Wayne,
> 
> Just got to get my head around all the different exchanges and indices, would you consider the FTSE to be the european benchmark ?
> 
> I want to pick an index that i can familiarize myself with, i've heard of a few others (over in europe) but haven't payed much attention till now.




Hmmmm tough question.

ESTX50, though a smaller contract @ â‚¬10 per point, represents the 50 largest companies in the whole of Europe, so is probably the most representative.

FTSE is £10 per point and represents only companies listed on the LSE. It's all in English though and has BHP in it so most akin to the XJO.

DAX is German and much bigger.

I do US indices mainly but fiddle a bit on the FTSE... I guess the one with the best liquidity is best, but don't know which one that would be at this point. I only have LIFFE subscription (FTSE).

FTSE suits my purposes.


----------



## cutz

Got it Wayne,

I'll research those you suggested this weekend, ESTX50 is looking good at this stage.


----------



## cutz

Hi guys,

I've was checking out the euro markets last night and i've come to the conclusion that ESTX50 is what i'll follow (thanks Wayne ), i also came across EXW1 which is the iShares ETF version i plan to use for adjusting purposes.

A question i have is is this practical ?, ESTX50 closed at 2469.2 up 0.24%, EXW1 closed at 25.295 up 0.14%, is the percentage difference due to the fact that the ESTX50 futures keep trading when the equities markets close so a divergence may occur.

What do you guys reckon, EXW1 for hedging adjustments to ESTX50 options positions, is this practical. 

BTW tips on how this can be handled on Hoadleys will be appreciated.


----------



## cutz

OK guys,

I've been playing with Hoadley's and i've decided to ditch the idea of using stock to obtain 0.5 delta adjustments to index option positions ( in my trials an adjustment of less that what a futures contract will obtain )

I guess this goes back to what you were talking about mazza when you were referring to delta-hedging on an ad hoc/discrete basis, no point trying to get point 5, adjust when it's out of whack by 1 ( for example) which equals 1 futures contract.

Dunno what i was thinking.

Futures are the go.


----------



## wayneL

cutz said:


> OK guys,
> 
> I've been playing with Hoadley's and i've decided to ditch the idea of using stock to obtain 0.5 delta adjustments to index option positions ( in my trials an adjustment of less that what a futures contract will obtain )
> 
> I guess this goes back to what you were talking about mazza when you were referring to delta-hedging on an ad hoc/discrete basis, no point trying to get point 5, adjust when it's out of whack by 1 ( for example) which equals 1 futures contract.
> 
> Dunno what i was thinking.
> 
> Futures are the go.




You can delta hedge with verticals if you want fractional deltas. I find this far more useful as far as incrementally morphing positions as well.

simple example

1000/1100 short strangle can be hedged and gradually morphed to say a 1100 straddle and then to a 1100/1200 straddle, using 1000/1100 verticals then 1100/1200 verticals.


----------



## freebird54

this happens to me all the time.........................

my conspiracy theory, they would'nt take your trade at your price earlier in the day as you priced it too fair, so instead they wait till you cave a bit on the price (knowing your the only fish in the pond) By EOD they take the trade knowing you won't move on it. End result they still cut a profit through the transaction, but not as much as they would have hoped. Im probably way off the mark though.[/QUOTE]


----------



## Grinder

freebird54, eventually it will happen enough times to piss you off for good.


----------



## moXJO

Is djx for djia


----------



## cutz

What do you guys reckon about cfd's to hedge/adjust XJO options.

SFE traded XJO(IQV6) looks fairly liquid, they appear to be handier than SPI contracts when used in conjunction with options.

Any thoughts ?


----------



## wayneL

moXJO said:


> Is djx for djia



Mo, yes

SPX, and even NDX & RUT are far more liquid though.


----------



## wayneL

cutz said:


> What do you guys reckon about cfd's to hedge/adjust XJO options.
> 
> SFE traded XJO(IQV6) looks fairly liquid, they appear to be handier than SPI contracts when used in conjunction with options.
> 
> Any thoughts ?




The only issue I can think of cutz is how margin will be treated. Whether that might be a problem or not, I don't know.


----------



## wayneL

I bailed from my IC position at the close today, that was one wild ride. 

I don't want to divulge my exact positions, but it won't be too hard to figure out. It all started on 16th July with a fly @ 930 sold strikes on ES. 
Adding additional flies morphed it to a condor with 955 mid point. 
Morphed to a BWB with sold strikes @ 980 
Morphed to a straight fly @ 980
Morphed to IC with mid point @ 1005
Had some 950 put calenders at one point that I could have added to if necessary. 
I also added a little bit of size as I went along.
Exited today with the market at 1005ish.

Escaped with a nett profit of about 1/3 of the original Iron Fly credit (normal goal is 50% of original fly credit) and considering where we started from, I'm as happy as a pig in mud.

These were all low prob spreads with the full intention of adjusting morphing as we went along.

This cycle was an awesome test of the low prob philosophy. It works.

High prob ICs would have been a nightmare during this cycle IMO.

FWIW


----------



## mazzatelli

Awesome...You are the master!!! 
Thank you for sharing

BUT you initiated the fly on my b'day so in reality you were divinely blessed 

I only took first order vol bets on indicies last month. Was too chicken to initiate any short index gamma


----------



## mazzatelli

Let's play CSI :cowboy:
These are assumptions - not Wayne's actual position



wayneL said:


> It all started on 16th July with a fly @ 930 sold strikes on ES.



Assuming 50 point fly [880/930/980] ~ $36.00 credit



> Adding additional flies morphed it to a condor with 955 mid point.



Added 930/980/1030 fly



> Morphed to a BWB with sold strikes @ 980



Sell 880/930/980 BWB [-1/+3/-2]
Becomes 930/980/1030 BWB [+2/-3/+1]



> Morphed to a straight fly @ 980



Up on embedded vertical in BWB 
Bought back 930/980 Bull put 
Becomes straight fly [930/980/1030]



> Morphed to IC with mid point @ 1005



Long the 980/1030/1080 fly



> Had some 950 put calenders at one point that I could have added to if necessary.
> I also added a little bit of size as I went along.
> Exited today with the market at 1005ish.




I like it


----------



## wayneL

Pretty close. 

The exact trades don't matter. It was the concept I was trying show... how one can go about collecting premium without trying to write strikes ten million standard deviations away from the action; how you can write much closer to the action and shift the goal posts as you go along.

The side benefit is that in the event of a bona-fide black swan overnight move, the total dollar risk is significantly lower than a high prob IC.

The downside is the cost, in terms of contest risk and locking in delta losses, of the frequent adjustments. Effectively, it's gamma scalping in reverse. Understand that that is what it is and it helps with the timing of adjustments. 

In other words, try to minimize the amount of deltas that are manufactured, and allow sister theta to do her job without gamma butting in and spoiling the show.


----------



## sails

Well done with your trade, Wayne.  It's definitely my favourite style of options trading - low risk with with lots of morphing as the market gives opportunity.  

However, contest risk makes it a useless exercise in the Oz options market - any profits are so often exceeded by slippage and fees.  No one has ever yet convinced me that the Oz option market makers don't want customers except for the new suckers who will pay their prices.

Mazza - yeah it's good to be back and to get some time out for me.  Though, it will be somewhat intermittent for a while yet...


----------



## wayneL

sails said:


> However, contest risk makes it a useless exercise in the Oz options market - any profits are so often exceeded by slippage and fees.  No one has ever yet convinced me that the Oz option market makers don't want customers except for the new suckers who will pay their prices.




This is something I cannot figure out about the Oz options market... self defeating numpties I reckon (though I'm sure they rake in the dough). 

Two other things inhibit liquidity (IMO)

Too many strikes, spreading the OI out too thinly
The 1000 share contract size


----------



## cutz

sails said:


> However, contest risk makes it a useless exercise in the Oz options market - any profits are so often exceeded by slippage and fees.  No one has ever yet convinced me that the Oz option market makers don't want customers except for the new suckers who will pay their prices.




G'Day sails welcome back,

Yeah that's me playing around with MQG options, they see me coming a mile away.

On a serious note XJO aren't too bad, they're my main play at the moment but it's been a challenging month, managed to collect premium moving put verticals up several times as the market ploughed higher but i also left some lottery tickets on the table, (i.e only partially closing out the wings) the other side of the coin is i'm stuck in the valley of a call backspread which i unfortunately flattened out a little early last week perhaps prematurely.

Anyway it should be interesting to see how next week pans out.


----------



## sails

wayneL said:


> This is something I cannot figure out about the Oz options market... self defeating numpties I reckon (though I'm sure they rake in the dough).
> 
> Two other things inhibit liquidity (IMO)
> 
> Too many strikes, spreading the OI out too thinly
> The 1000 share contract size




I am concerned if they drop the contract size down to 100, both brokers and ASX will use it increase their revenues somehow.


----------



## Grinder

http://www.sfomag.com/article.aspx?ID=1260

WayneL: The Supertrader of Index flys.



wayneL said:


> I bailed from my IC position at the close today, that was one wild ride.
> 
> I don't want to divulge my exact positions, but it won't be too hard to figure out. It all started on 16th July with a fly @ 930 sold strikes on ES.
> Adding additional flies morphed it to a condor with 955 mid point.
> Morphed to a BWB with sold strikes @ 980
> Morphed to a straight fly @ 980
> Morphed to IC with mid point @ 1005
> Had some 950 put calenders at one point that I could have added to if necessary.
> I also added a little bit of size as I went along.
> Exited today with the market at 1005ish.
> 
> Escaped with a nett profit of about 1/3 of the original Iron Fly credit (normal goal is 50% of original fly credit) and considering where we started from, I'm as happy as a pig in mud.
> 
> These were all low prob spreads with the full intention of adjusting morphing as we went along.
> 
> This cycle was an awesome test of the low prob philosophy. It works.
> 
> High prob ICs would have been a nightmare during this cycle IMO.
> 
> FWIW




nicely done.


----------



## wayneL

Grinder said:


> http://www.sfomag.com/article.aspx?ID=1260



Cool 

Obviously a different approach, but 100% agree with the general philosophy.

Thanks for the article.


----------



## wayneL

With the SP futs *down about 20 points*, I have some thoughts in the third person:

wayneL is extremely happy to have jagged an excellent exit at Friday close.

wayneL is extremely happy to have dodged the Gamma Monster that is coming out to play today.

wayneL was thinking of legging in this time, with something +vega -delta to start with.

wayneL thought there is no hurry, he'll do it on Monday.

wayneL is kicking himself.

wayneL would be about 20k up if he had taken the position he was looking at. 

But wayneL consoles himself with the fact it could have gone the other way.

 wayneL shivers.

wayneL reconsiders the wisdom of legging in to =delta spreads.

LOL


----------



## Grinder

know how ya feel, been there many times myself. Have been waiting patiently with my time spreads for a vega storm for what felt like an eternity, to finally close em out... only to see the storm on the horizon Fortuntely have held onto a few DDs.

I sooo want to leg in, but Mr market seems to know that & thats what keeps me from doing it.   

have a few beers and it will all miracously disappear.


----------



## mazzatelli

mazzatelli experienced excrutiating pain and anxiety Wed, Thurs and Fri last week as SPX danced near 1,015.



wayneL said:


> With the SP futs *down about 20 points*, I have some thoughts in the third person:




mazzatelli is extremely happy with this development 

mazzatelli will laugh like a maniac very soon :bananasmi

mazzatelli hopes he will not have to eat his words LOL


----------



## cutz

Nah, this sounds too good to be real, the prospect of leftover wings turning into golden tickets, dow futures nearly down 200 points, grinder's vega storm about to erupt.

Gee i luv options.


(oops i think i may have jinxed myself )


----------



## wayneL

mazzatelli said:


> mazzatelli experienced excrutiating pain and anxiety Wed, Thurs and Fri last week as SPX danced near 1,015.
> 
> 
> 
> mazzatelli is extremely happy with this development
> 
> mazzatelli will laugh like a maniac very soon :bananasmi
> 
> mazzatelli hopes he will not have to eat his words LOL



LOL

Should get a nice vol rush too.. just at the right time?


----------



## mazzatelli

wayneL said:


> LOL
> 
> Should get a nice vol rush too.. just at the right time?




LOL
Wish I was booking vega gains 

I was short the bear NT at 1,015, expiry 19/8
Closed that and can sleep well now
hahaha

It would have been aces being up 20 G's!!! But you're right Mr Murphy always lurks

Upon cleaning out my computer I came across a Gamma scalping article I saved a while ago. Turns out it was by Dean Mouscher, the same person that Wayne posted the VIX links to.

Thought I would link it here, before I erase it:

Gamma Scalp


----------



## Grinder

Waynel, 

I was going over Mazzas guesstamation of your something from nothing fly trade in a hellish month and was wondering with the beauty of hindsight that is, do you think a CTM IC with fewer adjustments would have performed better or worse than your IB with more adjustments (factoring in contest risk, fees etc..) I know it all depends on the adjustments, just trying to gain a better understanding of the trade offs between the 2 in a unidirectional month.


----------



## wayneL

Grinder said:


> Waynel,
> 
> I was going over Mazzas guesstamation of your something from nothing fly trade in a hellish month and was wondering with the beauty of hindsight that is, do you think a CTM IC with fewer adjustments would have performed better or worse than your IB with more adjustments (factoring in contest risk, fees etc..) I know it all depends on the adjustments, just trying to gain a better understanding of the trade offs between the 2 in a unidirectional month.




In hindsight, yes.

In hindsight I will always look back and say I didn't need to make x,y & z adjustment, or learn something to improve what I'm doing. But in hindsight I could have just bought 500 futures and retired rich. 

My philosophy (and it's only my philosophy, it might not suit others) is to:


Collect premium every single month
Be able to sleep at night

There is always the balance between the market whipsawing on you and having to de-adjust, or having to adjust having waited for the whipsaw and it not happening - and having to lock in a higher loss. 

What you are doing here is sort of like gamma scalping in reverse. The thing with close to money strikes is that it is likely you will HAVE to adjust at some stage. The question is whether less adjustments with less contest risk and possibly higher delta losses is better than more contest risk but possibly less delta losses... AND a higher chance of an overall loss.

Obviously spreads are important. Try this on SPX or some other instrument with wide spreads and get cut to ribbons. I've traditionally used ES because of tighter spreads than SPX. I've never used SPY because of some margin factors in the way I used to trade.

But actually for this sort of thing SPY has the tightest spreads and I've just started using it instead. It makes quite a bit of difference, even with higher commission costs because of the smaller contract size.

The adjustments are a subjective judgement, there's not a lot really mechanical or rule based about when and where to adjust. At the end of the day, you try stuff and see how it works out for you.

That's what I did and found this works well for what *I'm* trying to do, what others do has to suit them and where their circumstances are. That might be a different philosophy altogether.


----------



## wayneL

The other point I should mention is that adjustments need not be all in one block.

Supposing (for ease of example) you have 20 x 950 straddles and the market starts moving up. You can morph that to a 950/1000 strangle by trading 950/1000 call verticals. But you don't have to do them all at once, you can do one at a time if you want* in a process*.

FWIW


----------



## Grinder

I definitely get what your saying & share the same philosophy. I've put in alot of hours on my IC manouvering & am becoming pretty comfortable with managing em on the SPX & RUT. IBs just don't sit well with me (think I just don't fully understand them well enough) but would like to add them to the arsenal at some stage so I appreciate you posting your war stories.


----------



## cutz

Hi Guys,

Anyone know where i can get daily info on SPY option assignments, i just want to keep track of which strikes are getting assigned daily.

BTW, sorry about my short lived burst of public euphoria, try not to do  it again.


----------



## wayneL

cutz said:


> Hi Guys,
> 
> Anyone know where i can get daily info on SPY option assignments, i just want to keep track of which strikes are getting assigned daily.



Don't know cutz.



> BTW, sorry about my short lived burst of public euphoria, try not to do  it again.




Uncle Ben saved the world see....


----------



## wayneL

***wonders if after a 50 SP point move in three days, we are in for another one way market.

Already been doing a two-step, quick-step and a bossa nova, a little Victor Silvester, and a Rudy Valentino on my Sept options. 

***wishes Uncle Ben would STFU! :


----------



## Grinder

cutz said:


> Hi Guys,
> 
> Anyone know where i can get daily info on SPY option assignments, i just want to keep track of which strikes are getting assigned daily.




no idea either.



cutz said:


> BTW, sorry about my short lived burst of public euphoria, try not to do  it again.




fortunatly I 'shat my daks' & closed all my DDs when it was heading down, now just holding a couple of WTFOTM puts in case it rears it's head again.



wayneL said:


> ***wonders if after a 50 SP point move in three days, we are in for another one way market.
> 
> Already been doing a two-step, quick-step and a bossa nova, a little Victor Silvester, and a Rudy Valentino on my Sept options.
> 
> ***wishes Uncle Ben would STFU! :




Im prepin myself for it.


----------



## cutz

Thanks anyhow guys,

Reason i ask is i initiated a short fly last night centered around the US am price which i later changed my mind and turned into a backspread by closing out the lower wing, a little uneasy about copping an early assignment if the stock heads south but i guess in the unlikely event that the short leg gets assigned the spread should perform as originally intended when the S&P 500 cops a pummeling. 

Not 100% sure how to handle a mix of long stock and long puts in a spread but i'll cross that bridge when i get to it.

BTW it's not a huge spread so assignment wont be a problem.


----------



## Fox

Greetings. This is my first post and I would like to say hello to everyone. I have been fascinated by your forum threads as they have opened my eyes quite a lot. I'm grateful for the effort you guys put in to help novices like myself.

I have noticed Cottle mentioned a lot in here and decided to get myself a copy of his latest book. Hopefully, after reading his book I can follow the forum threads better. Also thanks to forum members I have joined Interactive Brokers and that alone saved my tons as compared to my naive earlier days with ETRADE and CommSec. 

The concept of morphing was/is new to me. I used to accept defeat when my trade went against me. I am very determined to learn how to morph properly. I relish every line written in this thread to pick up as much as I can. Again, hopefully reading Cottle's book from cover to cover and trying to follow your posts will help me get there one day (and soon ... ).

For now, can I get help with abbreviations. I know that most forums will have a thread on this but I have not been able to find it using the search function. In particular I am unsure that the "WTF" in "WTFOTM" means. The only "WTF" I know is from the gutter .  

Thanks everyone. And hello all!


----------



## cutz

Fox said:


> For now, can I get help with abbreviations. I know that most forums will have a thread on this but I have not been able to find it using the search function. In particular I am unsure that the "WTF" in "WTFOTM" means.




Welcome Fox,

WTFOTM= Way the f*** out of the money or in other words deeply out of the money.


----------



## mazzatelli

cutz said:


> Not 100% sure how to handle a mix of long stock and long puts in a spread but i'll cross that bridge when i get to it.




If assigned, short the calls to replicate -put
Welcome Fox


----------



## Grinder

Fox said:


> The concept of morphing was/is new to me. I used to accept defeat when my trade went against me. I am very determined to learn how to morph properly. I relish every line written in this thread to pick up as much as I can. Again, hopefully reading Cottle's book from cover to cover and trying to follow your posts will help me get there one day (and soon ... ).




hey fox,  Cottles a tough read (for me anyways) so take your time with it & don't be deterred if you don't get it staright away. Suggest registering free at www.riskdoctor.com/index.html where lessons are sent with activities, this makes it easier to digest if you aint a quant or rhode scholar.


----------



## Fox

Thanks for the welcome cutz, mazza and grinder.

Thanks for explaining WTFOTM, cutz. Ah! my mind wasn't in the gutter after all 

Grinder, I have survived chapter 1 of the book by registering for the free course RD1. I'm still considering signing up for the paid course RD2 to assist with the rest of the book. 

I'm certainly no rhodes scholar and can only dream of being a quant. So, I'll need to really work at this. I like Wayne's method of collecting premium with adjustments in between. If I can get that from Cottle's book, I'll be over the moon. If anyone can point me to good threads here with regard to adjustments, that would be much appreciated.


----------



## mazzatelli

wayneL said:


> Already been doing a two-step, quick-step and a bossa nova, a little Victor Silvester, and a Rudy Valentino on my Sept options.




At your age? :

Ugh. I felt the brunt of the morning strength today on the Nikkei


----------



## wayneL

mazzatelli said:


> At your age? :
> 
> Ugh. I felt the brunt of the morning strength today on the Nikkei




Well I would prefer to quietly sip my beer in the corner, but will dance for food.


----------



## Grinder

Fox said:


> Thanks for the welcome cutz, mazza and grinder.
> 
> Thanks for explaining WTFOTM, cutz. Ah! my mind wasn't in the gutter after all
> 
> Grinder, I have survived chapter 1 of the book by registering for the free course RD1. I'm still considering signing up for the paid course RD2 to assist with the rest of the book.
> 
> I'm certainly no rhodes scholar and can only dream of being a quant. So, I'll need to really work at this. I like Wayne's method of collecting premium with adjustments in between. If I can get that from Cottle's book, I'll be over the moon. If anyone can point me to good threads here with regard to adjustments, that would be much appreciated.




Spend some time on the search function & you'll find loads invaluable dialogue from Waynel, Mazza, Sails & others. The adjustment/morphing will come with time & practice, stay on Cottle & keep working on the craft & you'll be up to speed in no time. Will post some links to docs tommorow.


----------



## Grinder

Fox, go half way down in the link below, it might give you alittle of what your after.

https://www.aussiestockforums.com/forums/showthread.php?t=14164&highlight=options+adjustments&page=2


----------



## Fox

Thanks for the link Grinder.That post was exactly what I was looking for. I am not at the stage to comprehend it fully yet but with Cottle's book and the post you dug up, I should eventually get there. I pretty much have the same question as Cutz in post #8 of that thread ie. when should adjustments be done to defend a short position. 

Right now, my impression is that adding/subracting verticles and butterflys is the essence of adjusting. Knowing when to adjust is the part I have to figure out. I read chapter 5 of Cottle where he described adjusting straddles using verticles. In that section, he adjusts to lock in profits and he describes it as a better method to gamma scalping.

On a related topic, has anyone observed or mentioned the similarities of option dissection and the fourier series? In the case of the fourier series, it is quite amazing that a square wave is made up of multiple sine waves. In a similar way, it is astounding to know that an iron condor is made up of butterflies. Who figured this out? Was it Cottle? Anyone know? Whoever it was, like Fourier, he's a genius. It's too mind boggling for my simple mind.


----------



## mazzatelli

Hi Fox, 
Engineering background?

Charles, wouldn't have been the first to invent dissection, but definitely the first educator to introduce it to retail.


----------



## suhm

hi new to options here and have been doing a bit of reading and had a few questions I hadn't been able to find or figure out an answer to.

1. Is there a formula to determine an option price not using a normal distribution? I've only done some stats courses since high school so its a bit beyond me to try to alter the black scholes equation myself.

2. If the current share price is 20c and a call option is exercisble for 30c but you are issued with 2 shares, would you then put 40c as the share price and would delta being 200% alter the value of the option?

3. I have a problem with liquidity in some of the shares that I wish to purchase, i.e. I would not mind buying at the last share price or I am the last one who bought and wish to buy more but there is often a gap up to about 40% until the next shares are offered at limit.
Do the option market makers cover less liquid stocks? 
I'm guessing probably not but I haven't activated my account yet so I don't know. 
I figured at this stage I'd definitely just lose money trading options and the time decay doesn't really suit me so I was just trying to use them to augment my curent investment style.


----------



## wayneL

suhm said:


> hi new to options here and have been doing a bit of reading and had a few questions I hadn't been able to find or figure out an answer to.
> 
> 1. Is there a formula to determine an option price not using a normal distribution? I've only done some stats courses since high school so its a bit beyond me to try to alter the black scholes equation myself.
> 
> 2. If the current share price is 20c and a call option is exercisble for 30c but you are issued with 2 shares, would you then put 40c as the share price and would delta being 200% alter the value of the option?
> 
> 3. I have a problem with liquidity in some of the shares that I wish to purchase, i.e. I would not mind buying at the last share price or I am the last one who bought and wish to buy more but there is often a gap up to about 40% until the next shares are offered at limit.
> Do the option market makers cover less liquid stocks?
> I'm guessing probably not but I haven't activated my account yet so I don't know.
> I figured at this stage I'd definitely just lose money trading options and the time decay doesn't really suit me so I was just trying to use them to augment my curent investment style.




Are your questions regarding company options, or exchange traded options? Your questions 2 & 3 seem to indicate company options.


----------



## Fox

mazzatelli said:


> Engineering background?




Hey Mazza, 
Good guess. Electrical Eng background, but that was many, many moons ago. Hardly had any opportunities to put waveform dissection to work when working as an engineer. Hopefully, options dissection will have (successful) practical applications for me. 

Really enjoying Charles' book at the moment. I'm a slow reader and it's a tough read. The more I get it, the more I appreciate the generous contributions from guys like yourself, Grinder, Wayne, Cutz etc. It's precious info. Thanks very much guys.

BTW, I read somewhere in this forum that you were a quant. Is that true?

Cheers,
Fox.


----------



## mazzatelli

Awesome!!! 
Know quite a few people with hard science and engineering bg that became traders. 

The oldies [, they will kill me one day] sails and WayneL have at least 2 decades of trading experience b/t them [Wayne may have more, I heard he is the undead], so like you I am grateful for their contributions.

I've only had trading roles[finance related] before & after completing post grad in QF few years ago. Dislike and *refuse*  to be a coder/developer despite the greater job security. LOL
Also did a year of time as an accountant. Ugh.


----------



## suhm

For question 2 I was talking about company issued options, but they are listed on the ASX.

With regards to question 3 I was referring to exchange traded options, enquiring if there was an open outcry system and if the market makers would take an opposing position in an illiquid stock.


----------



## mazzatelli

suhm said:


> 1. Is there a formula to determine an option price not using a normal distribution? I've only done some stats courses since high school so its a bit beyond me to try to alter the black scholes equation myself.




Adjustments for non-Gaussian density is reflected in strike and tenor skew [vol].


----------



## christhong

hi guys.

does anyone know what happens to one's options in a company if that company is taken over? much thanks in advance!


----------



## cutz

hi christhong,

I haven't had much experience with takeovers but are you talking about exchange traded options ?


----------



## christhong

cutz said:


> hi christhong,
> 
> I haven't had much experience with takeovers but are you talking about exchange traded options ?




yeah cutz, i've got a call option for OZL and there was some speculation as to whether or some other company (eg bhp) will try to take it over for its assets so i'm wondering what'll happen to my options if, hypothetically, OZL gets taken over say right now.  before anyone can sell/exercise their options.


----------



## wayneL

christhong said:


> yeah cutz, i've got a call option for OZL and there was some speculation as to whether or some other company (eg bhp) will try to take it over for its assets so i'm wondering what'll happen to my options if, hypothetically, OZL gets taken over say right now.  before anyone can sell/exercise their options.




Your option position will be adjusted to account for it somehow, as is the case in all corporate actions. Your options won't just be cancelled. Keep an eye on the ASX site in such circumstances.


----------



## mazzatelli

Wilmott vs. CNBC

The chick looks clueless


----------



## cutz

mazzatelli said:


> Wilmott vs. CNBC
> 
> The chick looks clueless




Interesting mazza,

The two reporters don't seem interested to hear about what's still lurking in the background, just wanting some rubbish for the feeding frenzy.


----------



## wayneL

mazzatelli said:


> Wilmott vs. CNBC
> 
> The chick looks clueless




Sounds like Wilmott is long gamma.


----------



## mazzatelli

wayneL said:


> Sounds like Wilmott is long gamma.




Wilmott actually trades? : jk
Not surprising really, he and Taleb are good buddies

Yeah cutz, its better for ratings to get a stock pick


----------



## cutz

Hi fellow option enthusiasts,

Does anyone have any tips on straight out directional plays, for instance buying  ATM puts as a strategy, tried one one the other day with XJO but i'm starting to regret it now, i was thinking along the lines if you don't get a big move within  2 days get out or maybe stick with futures.

What da ya reckon, how long do you guys let negative theta run till you decide it's time to get out (assuming the underlying is refusing to move) ?


----------



## mazzatelli

Try model it as Shadow Theta
Too many variables [vol, direction, time] to be able to suggest options vs. spot.
Personally I would short the futures in the majority of cases if pure directional bet.


----------



## wayneL

cutz said:


> Hi fellow option enthusiasts,
> 
> Does anyone have any tips on straight out directional plays, for instance buying  ATM puts as a strategy, tried one one the other day with XJO but i'm starting to regret it now, i was thinking along the lines if you don't get a big move within  2 days get out or maybe stick with futures.
> 
> What da ya reckon, how long do you guys let negative theta run till you decide it's time to get out (assuming the underlying is refusing to move) ?




If I take a directional punt with long options, it's basically a trend trade on 30 minute bars. Long puts are not bad because you pick up vols as it goes in your favour. I'll have an if/then plan in place which evolves as I either win or lose.

I like to morph, but sometimes an inglorious exit is the only way.

A 30-60 ema (34 or 55ema if you like fib nos.) on 30min bars is what I use as decision points.


----------



## Grinder

I don't take directional bets unless used for protecting a position. If was going to I would probably go further out in time to give it a chance, if the move does'nt come anytime soon would look at converting it to a maybe a vertical spread or even a ratio by selling an extra one further out. If the market goes your way it can redeem itself, if it does'nt then morphing from their onwards into something with limmited risk would be the next move.


----------



## cutz

Thanks guys,

Decided to exit that strategy and adjust the current index spread i've got on, i think in hindsight best not aim for a king hit, eats to much into the carefully built up spread profits.


----------



## Grinder

think so too. The only potential windfall I get to relish in is the very very occational leftover otm put or call that all of a sudden comes good.


----------



## mazzatelli

cutz said:


> Decided to exit that strategy and adjust the current index spread i've got on, i think in hindsight best not aim for a king hit, eats to much into the carefully built up spread profits.




Probably not the best thing to be fading against your current position


----------



## Tysonboss1

Hi Guys,

I have just linked an options trading account to my commsec margin loan and wish to write covered calls.

Does anyone know how I would go about doing this. I can't seem to find how to do it.


----------



## cutz

Tysonboss1 said:


> Hi Guys,
> 
> I have just linked an options trading account to my commsec margin loan and wish to write covered calls.
> 
> Does anyone know how I would go about doing this. I can't seem to find how to do it.




Are you able to access your account ?

If you can just short a call option.


----------



## Tysonboss1

cutz said:


> Are you able to access your account ?
> 
> If you can just short a call option.




I want to write a covered call so as to collect a premium.

do you know how I do this on the commsec website.

I have been trying to figure it out with no luck,

if you could tell me what I need to click on it would be great. ( I know this sounds like I am brain dead But I am seriously having trouble finding info on how to do it)


----------



## cutz

Tysonboss,

Assuming you're not using iress go to trading>>advanced options>>select options from dropdown box (near where you enter stock code) >> enter stock code/expiry/call >> select at the money or out of the money >> hit get quote >> select the option >> hit sell under the option quote panel >> order pads comes up, make sure your selling to open then enter your details >> hit proceed.

Hope that helps, just be careful, check and double check everything.

BTW, premiums are pretty lean at the moment.


----------



## Tysonboss1

cutz said:


> Tysonboss,
> 
> Assuming you're not using iress go to trading>>advanced options>>select options from dropdown box (near where you enter stock code) >> enter stock code/expiry/call >> select at the money or out of the money >> hit get quote >> select the option >> hit sell under the option quote panel >> order pads comes up, make sure your selling to open then enter your details >> hit proceed.
> 
> Hope that helps, just be careful, check and double check everything.
> 
> BTW, premiums are pretty lean at the moment.




Thanks for that,

So I am guessing that you can only trade options on a limited number of companies, I own heaps of MCW that I was hoping to write some covered calls on but it looks like this isn't possible.


----------



## wayneL

Tysonboss1 said:


> Thanks for that,
> 
> So I am guessing that you can only trade options on a limited number of companies, I own heaps of MCW that I was hoping to write some covered calls on but it looks like this isn't possible.



ASX options market can become frustrating very quickly indeed.


----------



## cutz

Tysonboss1 said:


> Thanks for that,
> 
> So I am guessing that you can only trade options on a limited number of companies, I own heaps of MCW that I was hoping to write some covered calls on but it looks like this isn't possible.




Yeah no worries,

Checked it out on iress, no options listed for Mac. Countrywide.


----------



## wayneL

FYI

The ASX list of optionable stocks http://www.asx.com.au/data/option_securities.pdf

Also a list of optionable stocks on CBOE (about 70% of all optionable stocks in the US). http://www.cboe.com/TradTool/Symbols/SymbolEquity.aspx


----------



## Tysonboss1

wayneL said:


> FYI
> 
> The ASX list of optionable stocks http://www.asx.com.au/data/option_securities.pdf
> 
> Also a list of optionable stocks on CBOE (about 70% of all optionable stocks in the US). http://www.cboe.com/TradTool/Symbols/SymbolEquity.aspx




Cheers wayne, I was actually trying to find that list today.

Thanks for your help Cutz, I sold my first covered calls today.

Big clap for TysonBoss, WOO HOO.


----------



## cutz

Congratulations Tysonboss1,

I remember the day i sold my first covered call, on BHP at the tail end of the last bull market, the subsequent period was option trading heaven.

Things have changed a little now, gotta get used to reduced IVs.

BTW, these days i don't like covered calls, if i have one on i manage it as if i don't own the underlying.


----------



## jayinoz

What is the best value option trading sites for asx + more liquid markets on the one site? I use Etrade for asx trades and $45 per contract seems steep + asx costs.

Interactive brokers seems to have very poor service. i have been trying to get an account created with them for 2 months. They never offer any support via email or phone. Their Sydney number just rings out all the time.

What brokers\platforms do others recommend? 

Finally I cannot understand why Etrade will not allow me to write Short Put's against shares I own. As I understand that I must pay say $38 for BHP shares @ XXX date. Being bullish I thought it would be a good way to make income without missing out on a bull run, as late. So naturally i write covered calls and they have all been exercised. Missing out on the last months Bull market, approx 7% portfolio gain. 

Why do the brokers not allow selling of option puts, if you have a bullish frame of mind? 

Thanks for ur help.




Cheers

Jay


----------



## cutz

Hi Jay,

The best option brokers here are IB, account opening is no problem provided you take the time to study and correctly fill out the forms.

Commsec are OK, they allow any strategy providing you have the margin and don't do anything silly.

I don't understand how you short puts against shares you own, also you've highlighted why the covered call strategy can be flawed.


----------



## jayinoz

cutz said:


> BTW, these days i don't like covered calls, if i have one on i manage it as if i don't own the underlying.




So you are trying not to be exercised and get say a 10% gain (On option trade amount) for example then cashing in on your option trades?

After having such a high number of shares exercised lately. It a good\bad senario--good you sell for price to make profit + 2-5% income. Bad that you missed out on a possible bull run. To get back some losses from last year.

But isn't it a bitch when you do this then find you could have made 200%. The 'what if's' in option trades are vast and numerous.


----------



## cutz

jayinoz said:


> So you are trying not to be exercised and get say a 10% gain (On option trade amount) for example then cashing in on your option trades?




Hi Jay,

Haven't really got any targets on, any profit is good but i'm particularly cautious with a few things, say i sell some calls against a stock i own i may buy some calls at a slightly higher ratio further out, with BHP i generally go $5-$4 strike value out. If the price explodes i haven't capped the upside. This can also be done with puts.

Anyway generalized only but that's the idea.


----------



## jackson8

jayinoz said:


> What brokers\platforms do others recommend?
> Why do the brokers not allow selling of option puts, if you have a bullish frame of mind?
> Thanks for ur help.
> Cheers
> Jay




hi jay
personally i prefer commsec for trading options have always received good service from them and i like using a national broker

to sell puts you may need to apply for a higher level of trading with your broker . you may currently only have a level which allows covered selling such as your calls over stock you already own
to sell puts you would be going naked unless you have the stock short
just be prepared to have to put up the margin requirements 
with commsec that is double the asx calculated margin 

gary


----------



## cutz

Morning all,

What are peoples thoughts on buying/holding stock as a long term strategy coupled with trading options in the short term, reflecting back on the last couple of financial years the option trading environment was pretty good but it  was no fun watching my favorite blue chips copping a beating.

Now that it seems like a good time to cash in a little i was curious to know how you hardcore guys and girls play it, cash only ?, 50/50 ?, stock only ?, what do ya reckon


----------



## wayneL

cutz said:


> Morning all,
> 
> What are peoples thoughts on buying/holding stock as a long term strategy coupled with trading options in the short term, reflecting back on the last couple of financial years the option trading environment was pretty good but it  was no fun watching my favorite blue chips copping a beating.
> 
> Now that it seems like a good time to cash in a little i was curious to know how you hardcore guys and girls play it, cash only ?, 50/50 ?, stock only ?, what do ya reckon




Think of Cottle's option metamorphosis diagram on page 45 of The Hidden Reality. The premise of that particular diagram is that each position pictured can be created from long stock, the position in the centre of the diagram. It's certainly one way of going about it.

On the other hand, each position can be created without the stock at all.

I suppose owning the stock "keeps" you in the market, whether that is desirable or not depends on what you're trying to do. If the stock is an "investment", keep it and if capable, (which I'm certain you are) trade options around it IMO. 

Disclaimer - Just my opinion; for amusement value only.


----------



## mazzatelli

cutz, this long term stock isn't MQG is it? :


----------



## cutz

mazzatelli said:


> cutz, this long term stock isn't MQG is it? :




LOL, nah don't own MQG stock, although i used to.

The only MQG interest i have now is a conservative Oct put backspread combined with a call credit spread.

Oh, nearly forget to mention, still got some Sep puts i accidently bought last month, meant to short, didn't want to pay up to reverse and the rest is history.


----------



## cutz

wayneL said:


> I suppose owning the stock "keeps" you in the market, whether that is desirable or not depends on what you're trying to do. If the stock is an "investment", keep it and if capable, (which I'm certain you are) trade options around it IMO.




Thanks for your thoughts WayneL, these days i'm starting to wonder if owning 100% stock and no cash is a rational choice especially after witnessing first hand how irrational the markets can be.

Dunno if it's the wine but i'm even considering cashing in more stock and just focussing on options ( actually this started with the unloading of BXB last week ).

I guess what I'm getting at is am i kidding myself by putting on a decent backspead on the index, shorting the futures and cheering the market down and at the same time my "long term stocks" are taking a beating (hypothetical situation)?


----------



## Tysonboss1

Hi Guys,

Can anyone give me a brief explanation about how your shares are called away should some one exercise a call option I have sold. I am just after some info on the actual mechanics  of the transaction.

For example, when do the socks disappear from my portfolio, when can I expect payment, does it only happen at the expiration date or can it happen sooner, will they be called away even if the stock only hits the strike price for a few minutes and ten drops again.


----------



## wayneL

Tysonboss1 said:


> Hi Guys,
> 
> Can anyone give me a brief explanation about how your shares are called away should some one exercise a call option I have sold. I am just after some info on the actual mechanics  of the transaction.
> 
> For example, when do the socks disappear from my portfolio, when can I expect payment, does it only happen at the expiration date or can it happen sooner, will they be called away even if the stock only hits the strike price for a few minutes and ten drops again.




Technically, your shares can be called away at any time (if the options are American style which all stock options are).

In reality, nobody with their head screwed on is going to do so *unless there is a benefit in doing so.*

Exercising a call option before expiry is never optimal unless thunder certain circumstances where is a dividend involved.

Think of the other side of the trade, someone has bought the call option you sold them. If there is no ex-dividend event in the life of the options, why would he exercise early when you are carrying the stock for him, and he will forfeit any time value in the option by doing so? It ain't going to happen... unless the call owner doesn't know what they're doing. But it would be remiss of me to say that it is not possible, it is, just not very likely

Dividends however may cause early exercise. If the dividend is greater than the forfeited time value left on the option PLUS the cost of buying the corresponding put (thereby having the equivalent synthetic call option. i.e long stock, long put).

The chance of having your stock assigned early are therefore very slim, even if substantially in the money... but you will know the circumstances where it is likely as per above.

N.B. This applies to short calls only, short puts have a different dynamic.

If you assigned you will receive an exercise notice from your broker after the close of trading and your shares are gone the next day. Normal settlement rules apply.

If you want to keep your stock, and you think early exercise in optimum for the buyer, you can always buy back the call (and sell another strike/expiry if you want).


----------



## mazzatelli

cutz said:


> Thanks for your thoughts WayneL, these days i'm starting to wonder if owning 100% stock and no cash is a rational choice especially after witnessing first hand how irrational the markets can be.
> 
> Dunno if it's the wine but i'm even considering cashing in more stock and just focussing on options ( actually this started with the unloading of BXB last week ).
> 
> I guess what I'm getting at is am i kidding myself by putting on a decent backspead on the index, shorting the futures and cheering the market down and at the same time my "long term stocks" are taking a beating (hypothetical situation)?




Having 100% of your liquid assets in the market is a bit dangerous 
Sounds like your conflicted with timeframes. I guess you should assess whether your happy with your long term methodology? [Don't detail anything, just sth to think about]


----------



## Grinder

Cutz, there are many ways to look at it and it does'nt have to be one or the other. Once you work out what you want from different investments and the timeframe they sit in I'm sure it will become very clear. I like to diversify with different assests and do what feels most comfortable to me, at this stage thats trading options to generate extra income & holding IPs for future security. It might not be the best way to go but it's the one that makes most sense to me 

On a simmilar note, thinking about T-bills or the like instead of fronting up with cash for my margins on my spreads, this way I can gain a smidgen more $$. Anyone do this?


----------



## cutz

Thanks for the insights guys,

It's seems like i should be playing the two (long term/short term) as two separate strategies.

While i'm here i have question regarding option types, i've been watching Estoxx50 for  a while now they look good and the hours are great but i've been unable to pull the trigger on a trade due to the fact that i don't fully understand the weekly options, http://www.eurexchange.com/market/quotes/IDX/STX/BLC_en.html.

The options that expire on the 3rd friday are the ones where the action's at but i also notice that some the weeklys also have spreads showing but no action (i.e 1st friday, 2nd friday, 4th friday, and 5th friday )

Can someone please explain the point of those oddball series, i'm a little confused.


----------



## Fox

cutz said:


> cash only ?, 50/50 ?, stock only ?, what do ya reckon




My motive in learning about trading options is that I hope to be able to generate a *regular * income from trading. 

I have had success in long term investments as well as systems where I have a very small edge. While both were great, they could not give me the certainty of a monthly paycheck. My hope is that options trading with the appropriate strategy will give me that certainty/regularity of income. 

The point I'm trying to make is one that Mazza has already made. Do you want long term income or short term income? Or both? If you have reached the point where you can profit consistently from options trading, then 50/50 or any other ratio will be just a matter of personal choice. After all who needs long term investments if the option market is your personal ATM .

Again


----------



## Hyperion

Sorry if this is a stupid question, but can someone please explain why time value is greatest for an ATM option (compared to ITM and OTM options)?

Thanks


----------



## wayneL

Hyperion said:


> Sorry if this is a stupid question, but can someone please explain why time value is greatest for an ATM option (compared to ITM and OTM options)?
> 
> Thanks




That is the point of greatest risk of the option expiring in the money, without actually being in the money.

Think of being a seller of naked options. ATM is where you take the most risk, hence should be paid more for that risk.


----------



## freebird54

cutz said:


> Hi fellow option enthusiasts,
> 
> Does anyone have any tips on straight out directional plays, for instance buying  ATM puts as a strategy, tried one one the other day with XJO but i'm starting to regret it now, i was thinking along the lines if you don't get a big move within  2 days get out or maybe stick with futures.
> 
> What da ya reckon, how long do you guys let negative theta run till you decide it's time to get out (assuming the underlying is refusing to move) ?




Graham Dyer in his negative newsletter http://www.depression2007.com/ latest has tipped buying  XJO puts for 12/09 and 12/10 around the 2700 - 3000 level - For insurance I jumped in too.
He is so negative its a worry but he is well respected


----------



## cutz

Hi fellow enthusiests, 

Is it just me or have the last couple of months been difficult to earn a crust.

I've got a question regarding spreads, do most exchanges only accept simple generic spreads ( 1 to 1 verticals/calenders/butterflys/condors ect )? 

Reason i ask is i tried to push through a wrangle, (double ended backspread centered ATM ) but the exchange rejected the order so i legged it, dunno if it was just finger trouble but i was careful setting up the combo and the negative indicative price read correctly, from this info i assumed it was good to go.

Any tips ? 

EDIT >> Just to add, with negative indicative prices the bids are quoted high and the asks are quoted low, when buying for credit slip your negative order just under the bid ( on the high side ) and gently work it down towards the ask. Opposite to close the deal.

Is this correct ?

( Only game enough to experiment with the above on the Eurex, €4.5 spread on a 4 leg combo, what a beautiful thing )


----------



## mazzatelli

Maybe try: Anticipate a drop in vols, then execute as fly + strangle


----------



## cutz

mazzatelli said:


> Maybe try: Anticipate a drop in vols, then execute as fly + strangle




Thanks for turning the lights on mazza, i've just set it up as a -straddle / + strangle, ready to close.

So i take it the exchange won't accept a wrangle.


----------



## mazzatelli

cutz said:


> Thanks for turning the lights on mazza, i've just set it up as a -straddle / + strangle, ready to close.
> 
> So i take it the exchange won't accept a wrangle.




For MM's, I'd imagine it be easier to manage and dissect as generic combos. But I've limited experience with Euro market.


----------



## wayneL

mazzatelli said:


> Maybe try: Anticipate a drop in vols, then execute as fly + strangle




Another little advantage of being _au fait_ with synthetics  

(Not really synthetics... dissection really, but synthetics will lead into dissection)


----------



## Fox

Why does IV for front month options increase just before expiry?

Today is 21 Sept 09. Expiry is on 23 Sept 09. The Sept options for CBA, WOW, WES have higher IVs than the Oct and Nov expiries. CBA Sept IV is around 32% whereas Oct and Nov IV is about 27%. Is it common for IVs to increase for front month options just before expiry?

Could it be due to frantic activity to close positions?


----------



## sails

Fox said:


> Why does IV for front month options increase just before expiry?
> 
> Today is 21 Sept 09. Expiry is on 23 Sept 09. The Sept options for CBA, WOW, WES have higher IVs than the Oct and Nov expiries. CBA Sept IV is around 32% whereas Oct and Nov IV is about 27%. Is it common for IVs to increase for front month options just before expiry?
> 
> Could it be due to frantic activity to close positions?




Yes Fox, I have noticed that on several occasions too.  IV tends to fall off more as the strikes go further OTM and ITM, but those closer to the money often still hold a fair bit of extrinsic value.  BHP is an interesting one to watch and particularly on expiry day when close to the money premiums are often quite high in the morning and you can watch the premium evaporate as the day progresses.

I don't know what causes it, but I suspect it has something to do with the MMs tactics to make money out of it...  

As a safety measure, if IVs look a bit out of whack, always check if there are dividends, earnings or report announcements just before expiry as that can have a significant effect on front month IVs.


----------



## wayneL

Fox said:


> Why does IV for front month options increase just before expiry?
> 
> Today is 21 Sept 09. Expiry is on 23 Sept 09. The Sept options for CBA, WOW, WES have higher IVs than the Oct and Nov expiries. CBA Sept IV is around 32% whereas Oct and Nov IV is about 27%. Is it common for IVs to increase for front month options just before expiry?
> 
> Could it be due to frantic activity to close positions?




IIRC, Black Scholes et al underestimates risk of American options close to expiry so MMs compensate by jacking prices a bit. Not 100% sure on this point, but I recall a discussion on it from somewhere.


----------



## Fox

Hmm... interesting. If this observation is as expected (ie. predictable), then this would be another reason for closing out ATM long flies and ICs early, say a week or so before expiry. The reason being that ATM flies are short vega.

I say this is from practical experience. I was going to exit a fly with a handsome profit today. When the MM refused to give me anywhere near the fair price predicted by Hoadley, I couldn't understand why at first. It was only when I noticed the increased IV that it made sense to me.


----------



## mazzatelli

Fox said:


> I say this is from practical experience. I was going to exit a fly with a handsome profit today. When the MM refused to give me anywhere near the fair price predicted by Hoadley.




lol
Flies are most sensitive during the last week. Personally prefer to hold near expiration to book gains.
Watch for theta gain > vega losses. 

But its not uncommon to close the straddle and forfeit the sale of the wings.

Plus, Aus MM's are crooks.


----------



## cutz

My take is on the thinly traded series like Sep CBA puts, the spreads are fairly wide to begin with, ( IV results are pretty sensitive going into expiry).
I know if i were short on a just OTM i'd be eager to get out and pay up rather than extract a few cents from the MM's, this of course drives up IV.

Setting up a new spread into Oct not under as much pressure to do a deal so you may not need to pay up. Legging into a spread and slowly working your order, you may be able to extract better prices.

BTW wayneL, thanks for the heads up on the euro market some time back, it's a thing of beauty.


----------



## wayneL

Fox said:


> Hmm... interesting. If this observation is as expected (ie. predictable), then this would be another reason for closing out ATM long flies and ICs early, say a week or so before expiry.






mazzatelli said:


> lol
> Flies are most sensitive during the last week. Personally prefer to hold near expiration to book gains.
> Watch for theta gain > vega losses.




This bit is more art than science... plus a bit of luck/tin @rsiness 

Depending on the position you end up with, premium remaining and the gamma risk... and how adventurous you feel, there is nothing wrong with trying to go for expiry (or close to. I went to the wednesday before expiry on this last cycle. I could have held and made maximum profit, but at the point it became a gamble and not a proper risk reward scenario, I was out.

It can be a dance with the devil, but not always necessarily so. There is a point where adjustments just aren't worth it, so it becomes a day to day decision process.

But... there is certainly nothing wrong with being a professional coward and cutting it loose early.  

I'm more likely to exit the condor early (if that is the position I have ended up with, but play the butterfly for as long as possible, as a comparison.


----------



## cutz

Hi Fox,

Interesting observation if you want to check out those CBA puts that are about to expire. Many of the strikes are lit up with tight spreads and IV has dropped right off, yesterday no spreads were showing and whatever was going through was at inflated IV.

What a difference a day makes.


----------



## Tysonboss1

Hi Guys,

I sold 5 covered call contracts for WDC with a strike of $13.50 for 16c / share.

WDC traded well over $13.50 today but closed at $13.51.

Do you think the options would have been exercised, and if they were how and when will I find out.


----------



## sails

Tysonboss1 said:


> Hi Guys,
> 
> I sold 5 covered call contracts for WDC with a strike of $13.50 for 16c / share.
> 
> WDC traded well over $13.50 today but closed at $13.51.
> 
> Do you think the options would have been exercised, and if they were how and when will I find out.




Yes, highly probable, but not a certainty!

You will know in the morning - how you find out will depend on your broker - some send an email or notification of the sale of your shares.  If nothing from your broker, check your account in the morning to see if your shares are no longer in your account.  Hopefully you have a fee friendly broker...

And, if unsure about the process, contact your broker.


----------



## cutz

Tysonboss1 said:


> Hi Guys,
> 
> I sold 5 covered call contracts for WDC with a strike of $13.50 for 16c / share.
> 
> WDC traded well over $13.50 today but closed at $13.51.
> 
> Do you think the options would have been exercised, and if they were how and when will I find out.




Hi Tysonboss1,

Looks like you got out of that one unscathed, well done.


----------



## sails

Sounds like you did OK with that one, Tysonboss1.

Also, my apologies for not reading your question properly - I simply assumed you were 1c ITM when I said it was highly probable - when your calls were actually 1c OTM.  My mistake...


----------



## Fox

Can I ask for help with interpreting this screen shot?

1. Is this commonly referred to as volatility "smirk" as opposed to a "smile"?
2. Why does this happen?
3. Could this mean that the market believes that the spot will be falling and therefore the lower strikes are in demand? Thus causing IV of lower strikes to go up?

Thanks.


----------



## mazzatelli

Smile infers higher vol for both upper and lower strikes in reference to atm vols.

Various reasons but common themes in equity/index markets:
1) demand for portfolio hedging
2) stock returns exhibit kurtosis and skewness. Strike skew is to adjust for assumptions of [log]normal densities and constant vol in pricing
3) Dealers/makers hedging to protect short puts


----------



## wayneL

mazzatelli said:


> Smile infers higher vol for both upper and lower strikes in reference to atm vols.
> 
> Various reasons but common themes in equity/index markets:
> 1) demand for portfolio hedging
> 2) stock returns exhibit kurtosis and skewness. Strike skew is to adjust for assumptions of [log]normal densities and constant vol in pricing
> 3) Dealers/makers hedging to protect short puts




IMO (and it is opinion) 2) is the overriding factor in this Fox. A 5% (or whatever) down day is far more likely than a 5% up day. The option pricing model does not know how to account for this this, so MM's crank up IVs a bit to reflect the risk.

If you have a look at event sensitive commodity vols (gold oil, coffee etc), the skew is often to the upside.


----------



## Fox

mazzatelli said:


> 2) stock returns exhibit kurtosis and skewness. Strike skew is to adjust for assumptions of [log]normal densities and constant vol in pricing



Thanks Mazz/Wayne. I learnt so much from this one line Mazz wrote. Took a bit of googling and Natenberg, but I got there.

I had not noticed or known about this before. I had a quick look at BHP and NWS. As per your statement, they both exhibited the same strike skew as well. I must adjust my modeller to handle this.

I've always heard about the volatility smile. As such, I assumed that ITM and OTM strikes will have higher IV's. I did not realise that the smile applied to WITM and WOTM strikes only. Thank you.


----------



## cutz

Hi Fox,

FWIW forget about what i said about SPI futures being too big to use, depending on how big XJO positions you have on you can get back to within ~ +/-1 delta then fine tune with options if you so desire. 

I'm still coming to grips on this concept myself, don't seem to have the luxury of massive time decay to mask deficiencies in technique these days. 

It's seems like the experienced guys dynamic delta hedge awaiting big moves as opposed to getting rid of negative theta which was the impression i was under.

Any comments on this ?


----------



## Fox

cutz said:


> It's seems like the experienced guys dynamic delta hedge awaiting big moves as opposed to getting rid of negative theta which was the impression i was under.
> 
> Any comments on this ?



From where I'm standing, it appears to me that *"dynamic delta hedge awaiting big moves"* and *"getting rid of negative theta"* mean the same thing ie. they don't contradict each other.

Just to make sure we are on the same page, let's use the example a long straddle which can be described as such:

The underlying is at $50.
We buy a $50 call and buy a $50 put.
Theta is most negative when the underlying is at $50.
The straddle is profitable if the underlying moves rapidly above $70 or falls below $30.
Theta is around $30 per day and increasing by the day.

*1.The "dynamic delta hedge awaiting big moves" interpretation*
As long as the underlying hovers around $50, we dynamic delta hedge by shorting shares when the price goes above $50, and buying shares when the price drops below $50. This is also known as gamma scalping. We profit from every scalp. Theta still remains around $30 per day after each scalp ie. theta is independent of each scalp.

*2.The "getting rid of negative theta" interpretation*
As long as the underlying hovers around $50, theta will increase each passing day. The profit we collect from scalping will help offset the amount we lose due to the effects of theta. Eg. if theta is -$30 per day, and our scalping profit is $30, then we *got rid of negative theta* for that day.

*3.The "awaiting big moves" interpretation*
If the underlying moves to $70, then we can exit profitably. If we choose to exit the game, we sell both put and call options. If we want to have some more fun, we morph our position into a $70 put and a $70 call. This way, we are delta neutral again and face a new round battling negative theta.

It's hard to communicate effectively via a forum, but interpretation (1) and interpretation (2) mean the same thing to me. Does the above scenario portray your question correctly?


----------



## Hyperion

Hi all,

I was wondering if anyone could recommend some websites which explain the black scholes option pricing model with reasonable depth.

Thanks

Hyperion


----------



## mazzatelli

Hyperion said:


> I was wondering if anyone could recommend some websites which explain the black scholes option pricing model with reasonable depth.




For explanation of underlying intuition
If you actually want to learn derivation [stochastic calculus involved], which can help explain BSM, I'd look at Hull's book.


----------



## cutz

Thanks Fox,

I see what your getting at, in my case i need to gamma scalp if the index starts heading down and my funny wrangle starts picking up deltas, something that's pretty pronounced in the final week, not so obvious at first because the delta curve is quite flat with heaps of time remaining.

Actually mazza pointed this out some time ago when we were talking backspreads.

Fingers crossed we see some action tonight.


----------



## Fox

wayneL said:


> IIRC, Black Scholes et al underestimates risk of American options close to expiry so MMs compensate by jacking prices a bit. Not 100% sure on this point, but I recall a discussion on it from somewhere.



Natenberg Chapter 18, Page 398, paragraph 2 discusses this very point and agrees with the view that the models undervalue ATM options as expiration approaches.


----------



## Hend0

Hi All,
First post I guess - just picked up McMillans Options as a Strategic Investment - and my, what a book it is! You could do some serious damage to someone with it hehe 
I'm sure over time I will have many a question. Getting ready to make my first trades - and as all say, the more education you have, the better your chances for success 

I'm sure I'll have some questions along the way as this is an excellent thread.

Cheers,
H

ps
Natenburg next? Here
Or Cottles Shoulda, woulda coulda? Here


----------



## cutz

Hend0 said:


> ps
> Natenburg next?
> Or Cottles Shoulda, woulda coulda?




Hi Hend0,

Get both of them, 2 good reads from two different angles.

I especially enjoy reading Cottle's insights from the trading floor.


----------



## wayneL

Hend0 said:


> Hi All,
> First post I guess - just picked up McMillans Options as a Strategic Investment - and my, what a book it is! You could do some serious damage to someone with it hehe
> I'm sure over time I will have many a question. Getting ready to make my first trades - and as all say, the more education you have, the better your chances for success
> 
> I'm sure I'll have some questions along the way as this is an excellent thread.
> 
> Cheers,
> H
> 
> ps
> Natenburg next? Here
> Or Cottles Shoulda, woulda coulda? Here



Hi Henda 

Always nice to have new inmates at the asylum  McMillan sure can defend life and property if necessary. 

I Agree with Cutz, get both.

I reckon this a better place to buy Natenberg however.


----------



## Fox

In *general terms*, can it be said that IV rises before company earnings report and IV falls subsequent to that? I would be interested to know if this is the case from you personal observations or from studies conducted. In the meantime, I look at the top few Oz companies during the last cycle and I'll report my findings here.


----------



## Fox

CBA, TLS and BHP IVs around earnings report date is shown below. Drops in IV for CBA and TLS are significant.


----------



## wayneL

Fox said:


> In *general terms*, can it be said that IV rises before company earnings report and IV falls subsequent to that? I would be interested to know if this is the case from you personal observations or from studies conducted. In the meantime, I look at the top few Oz companies during the last cycle and I'll report my findings here.




As a general rule of thumb ====>>> YES!

But as with anything in the real world, not necessarily. LOL

It boils down the the question of whether traders expect the ER to move the stock and to what magnitude.

Here's GOOG, guess where the earnings are  :


----------



## Fox

wayneL said:


> Here's GOOG, guess where the earnings are  :



Wow! You can devise a calender by observing GOOG IV spikes. I was recently teaching my kids how they can tell time using cycles of the moon and the sun. I'll need to add ER to that list. I smell strategies to exploit this. Thanks for the info Wayne.


----------



## Fox

Can I get help interpreting today's NAB Nov option prices as shown in the figure below (post #482)? NAB has already reported its earnings yesterday. Ex-dividend date, 13-Nov-2009, will occur during the lifetime of the Nov option series. Can I get an explanation on the following:

1. If NAB is going ex-dividend in Nov, shouldn't the put options be more expensive than the call? ie. should the put IV be higher than the call IV?
2. Given that the call IV is significantly higher than the put IV, wouldn't the market makers have locked in profits via conversions, to a point where put and call IVs will be more or less equal? 

Thanks in advance.


----------



## Fox

Here is the NAB screenshot:


----------



## freebird54

Did anyone notice the STO DEC Puts yesterday gave a much better % return than your blue chip WPL's etc.with a much less capital risk - yes I sold STOI57 up to 78c


----------



## sails

Fox said:


> Can I get help interpreting today's NAB Nov option prices as shown in the figure below (post #482)? NAB has already reported its earnings yesterday. Ex-dividend date, 13-Nov-2009, will occur during the lifetime of the Nov option series. Can I get an explanation on the following:
> 
> 1. If NAB is going ex-dividend in Nov, shouldn't the put options be more expensive than the call? ie. should the put IV be higher than the call IV?
> 2. Given that the call IV is significantly higher than the put IV, wouldn't the market makers have locked in profits via conversions, to a point where put and call IVs will be more or less equal?
> 
> Thanks in advance.




Hi Fox - I have often noticed that TWS doesn't always get Oz dividends correct, and of course, that will affect IV%.  Don't know why it's not always correct - have sometimes questioned if IB somehow adjust it for the AUD which then mucks it up for those of us using AUD as the base currency.  That's just conjecture on my part ... lol

There is a means of checking and, if necessary, changing the dividend amount in TWS.  Because it's the weekend, I can't log into IB to refresh my memory on how it's done - so suggest you do a search in TWS on Monday to find out where to check/change the divvie and see if that solves the problem.  If not, will have to dig deeper...


----------



## Fox

sails said:


> to check/change the divvie and see if that solves the problem.



I checked the ex-dividend date on TWS and that was correct ie. 13 Nov 2009. I did not check the dividend amount. I have since found out that NAB will be paying 73 cents. I'll need to confirm that on TWS has it as 73 cents on Monday.

ANZ is also going ex-div in November. This IV discrepancy also appears there.


----------



## sails

Fox said:


> I checked the ex-dividend date on TWS and that was correct ie. 13 Nov 2009. I did not check the dividend amount. I have since found out that NAB will be paying 73 cents. I'll need to confirm that on TWS has it as 73 cents on Monday.
> 
> ANZ is also going ex-div in November. This IV discrepancy also appears there.




Yeah - don't remember any problems with TWS divvie dates - only with the amount.  Be interesting to see if that's the problem here.


----------



## Fox

sails said:


> Yeah - don't remember any problems with TWS divvie dates - only with the amount.  Be interesting to see if that's the problem here.



Hi Sails, 

You are spot on re. incorrect divvie amount in TWS. The amount was $1.04 in the TWS Model Navigator, when it should be $0.73.

It is good to get an explanation to make sense of the numbers. Thanks Sails.


----------



## sails

Fox said:


> Hi Sails,
> 
> You are spot on re. incorrect divvie amount in TWS. The amount was $1.04 in the TWS Model Navigator, when it should be $0.73.
> 
> It is good to get an explanation to make sense of the numbers. Thanks Sails.




No worries, Fox- glad it's sorted.


----------



## Fox

*Delta hedging (again)*

ASF has been quiet lately, hasn't it? Perhaps this will breathe a bit of life back into it.

I'll start with a whinge. October was disaster for me. The "You Idiot" file was steadily accumulating with expensive mistakes. The latest one was my decision to adjust on a weekly basis, instead of on an "as required" basis. Last week was horrendous for my equity and index option positions. By the time the weekly adjustment was due, the underlying had moved 6% to 8% and my ships had sunk.

I had to pick myself off the floor, dust myself off and get back on the horse again, with expensive losses locked in. For November, I'll only trade XJO and tightly manage it by adjusting on an "as required" basis. 

The waffling above serves as a background to my current focus on hedging. I recall Wayne's previous post where he talks about delta hedging by using the underlying during the day and adjusting his option legs at the end of the trading day. I also recall Mazza's old post where he mentions about hedging using the underlying only towards expiry, but not during early days.

I am tempted to delta hedge a fly or IC using the underlying as it cost less in commissions and contest risk. The drawback would be a reduction in theta if the underlying moves WOTM/WITM. I would like to hear your preferences when delta hedging eg. when you would use the underlying over options, what are the advantages of using underlying over options, or if you have some sort of hybrid system that you are happy to share.

One advantage using the underlying that I can think of, is early morning trading. The first half hour can see rapid price movements sending your short gamma position into frightening territory right before your eyes. That's also the time when MMs don't start quoting yet. So the underlying is very handy is such situations.


----------



## cutz

Hi Fox,

Actually October was kind to me, pity all the action started on my first day away, minor problem.

With XJO's my preference now is not to use the underlying to hedge delta, start off with a larger position in the front month showing good positive theta, something similar to your iron flys, but with slightly heavy wings.

On the back months i have 2 to 1 put and call backspreads which grow and tend to flatten out as time goes by, actually this week is a good time to get out of the Nov expiries.

One thing i want to ask Fox is why do you want to maintain perfect neutrality with XJO's, are you anticipating a drop-off in volatility ?


----------



## Fox

Hi Cutz,



cutz said:


> With XJO's my preference now is not to use the underlying to hedge delta, start off with a larger position in the front month showing good positive theta, something similar to your iron flys, but with slightly heavy wings.
> 
> On the back months i have 2 to 1 put and call backspreads which grow and tend to flatten out as time goes by, actually this week is a good time to get out of the Nov expiries.



I'm having difficulty understanding your method. I tried simulating sample positions in Hoadley but it did not help, as it looked like two iron flies with differing expiries. It's probably due to incorrect details such as choice of strikes and ratios of option legs for different expiries and strikes. 

Do you put on the back month spreads the same time that you put on the front month spread? Are the strikes for the front and back month the same? Is the intention of this position to be delta and gamma neutral and profiting from theta?

Would this be a sample trade? With the underlying at 50
B45Px5/S50Px4/S50Cx4/B55Cx5  (Larger front month IB with heavy wings)
B45Px2/S50Px1 (Back month put back spread)  
S50Cx1/B55Cx2 (Back month call back spread)



cutz said:


> One thing i want to ask Fox is why do you want to maintain perfect neutrality with XJO's, are you anticipating a drop-off in volatility ?



Because my main position is a iron fly, and flies being short gamma, price movements in either direction will hurt me. A fall in volatility will be excellent of course, but I'm being neutral mainly because I'm short gamma.


----------



## cutz

Hi Fox,

Yeah i have difficullty understanding my own method ,

Basically what i'm trying to achieve is a position that is protected by backspreads in the back months, what you described is a fairly good description.

It's something i have difficulty modelling, because of all the different strikes but the weekly outcome has to be credit generation keeping within defined risk parameters, pulling positions around helps to achieve this and that why I love IB because this can be done without blowing out brokerage costs.

One example of what i did recently is set up a small index backspread into Jan centered at around recent price action, this has helped to generate credits to lay off some Nov puts in turn remove very profitable Nov calls and put on some Dec calls at a lower strike with heavy wing protection.

Setting up a mix of small equity positions helps heaps because of the bigger moves, i've removed most of the shorts from the call backspreads and now the leftover wings can help defend the index call positions, of course the downside with equity positions are the unexpected surprises so you need to keep an eye on which strikes are getting assigned, copped one recently with a WOW put backspread, it's now a collared position with extra calls at a higher strike, my excuse on that one was i was away on holidays .

I'm gonna get cained for saying this but maintaining perfect neutrality using the underlying i can't quite grasp. Say you've gained some deltas on your iron fly because the market has been hammered so you sell some futures but now you've increased the downside risk.

Hope it makes sense, i'm not the best person to describe option trading as I'm still learning myself.


----------



## cutz

BTW, the long gamma in the back months provides protection in case the index starts making some big moves.

This has been suggested to me by mazza and grinder, works well.


----------



## Fox

cutz said:


> BTW, the long gamma in the back months provides protection in case the index starts making some big moves.
> 
> This has been suggested to me by mazza and grinder, works well.



Hi Cutz, 

I think I have a better understanding now. I added some additional back month wings to my iron fly and the protection against big moves is really very effective. The trade off is a very small reduction in theta but the protection you enjoy (against large moves) is huge.

It makes a lot of sense to do this because the time value decay for the back month wings is low, but the long gamma benefits are significantly large. Good bang for buck, IMO. 

This back month wing would have helped with my equity option IBs during the recent 6% to 8% downturn in the last week or so. I see this protection as being useful if you are not able to monitor your position temporarily eg. going away for a short holiday.

Thanks for a really useful concept to think about. Thanks to Mazza and Grinder too for this idea. 

How was your holiday? I can't imagine wanting a holiday from options. Too enjoyable and exciting for me. Better than a rollercoaster .


----------



## cutz

Hi Fox,

Holiday was good, packed a Macbook so i still managed to sneak some trades through, wasn't running iress on the small screen hence the WOW mishap (wasn't watching daily course of sales).

With your back month long gamma try modeling a wrangle >> 4100 long put by 2 / 4500 short put by 1 / 4500 short call by 1 / 4900 long call by 2.

Keep the ratios the same (2/1/1/2) and have a play with size, try Dec and Jan.


----------



## Grinder

Hey guys, 

When it comes to hedging I try and keep it simple, no futures or underlying for me, just options. I want to keep my delta as close to neutral as possible whilst keeping the other greeks happy, that means letting theta do his thing without gamma arking up too much or vega getting carried away.

Cutz mentioned the wrangle, a great way to keep all the greeks in line. As is adding calanders or DDs depending on your view of vol at the time (also a handy way to offset some risk). Another hedging alternative is adding long puts or calls in the same month or front month (depending on time to expiry) a strike or two in front of a spread, this way it won't take much from your credit (if front month can create a credit) & acts like a slingshot when that giant move comes along. 

There is a plethora of hedging possibilities out there, all depends on how you choose to defend... just mentioned a few here


----------



## sails

Fox said:


> Hi Cutz,
> 
> I think I have a better understanding now. I added some additional back month wings to my iron fly and the protection against big moves is really very effective. The trade off is a very small reduction in theta but the protection you enjoy (against large moves) is huge.
> 
> It makes a lot of sense to do this because the time value decay for the back month wings is low, but the long gamma benefits are significantly large. Good bang for buck, IMO.
> 
> This back month wing would have helped with my equity option IBs during the recent 6% to 8% downturn in the last week or so. I see this protection as being useful if you are not able to monitor your position temporarily eg. going away for a short holiday.
> 
> Thanks for a really useful concept to think about. Thanks to Mazza and Grinder too for this idea.
> 
> How was your holiday? I can't imagine wanting a holiday from options. Too enjoyable and exciting for me. Better than a rollercoaster .




Hi Fox,

I'm sure you are aware that buying wings in a back month is highly susceptible to IV movement, but thought I would point it out in case someone newer to options reads all this and doesn't realise how dangerous it is to add back wings in when IV is high and likely to fall.

It can be a good strategy when IV is typically fairly low after the market has been travelling up for some time and is likely to spike up a bit should the market fall.  

Quite some time ago, I paper traded some multi-strike calendars before going live with them - and only went out 2-3 months for the back month long.  I just put them on randomly as an experiment and couldn't believe how much money was made or lost on those back months as IVs fluctuated.  It made front month theta look very tame!

It was so impressive, I asked my Oz broker if I could do reverse calendars (when IVs were high and likely to fall) - but they wouldn't allow it. If the market moves up nicely with accompanying IV fall, you usually get to keep a fair bit of the credit you received.  The worst scenario is that it stays still and front month theta eats away at the long.

Anyway, my conclusions were to only put long positions on in the back month when IVs were at historical lows plus a bit of T/A indicating a possible turn back down.  Then, if I was wrong and IV continued to fall, at least there wasn't as far to fall and the gamma in the call side would help a little... 

Apologies if this is going over old ground... 

EDIT:  Yes, it is a real fascinating learning curve and can feel quite addictive!  I'm actually glad of the "forced" time out for the last few months as it is a good discipline to be able to walk away - and the plus side is that it helps to put things into better perspective.... FWIW...lol


----------



## Fox

Hi Sails,



sails said:


> I'm sure you are aware that buying wings in a back month is highly susceptible to IV movement, but thought I would point it out in case someone newer to options reads all this and doesn't realise how dangerous it is to add back wings in when IV is high and likely to fall.



Actually I had not considered falling IV when playing around with Hoadley. That's the story with options, isn't it? There is always a trade off somewhere. Better to find out from you than from painful personal experience. I guess a back month wrangle instead of back month wings will mitigate some of the effects falling IV. 

The main point I got from these recent discussions was how others stay delta neutral with wrangles. My delta neutral repertoire has been limited to morphing between flies and ICs, which has been unsatisfactory because the contest risk has been overwhelmingly bad. I've started delta hedging with the underlying and so far, I've found it to be convenient, precise and cheaper (ie. less contest risk). Perhaps delta hedging with the underlying will keep me in the game in Oz.

In the mean time, I'm all ears for other delta hedging strategies. 



sails said:


> Apologies if this is going over old ground...



It's not old ground for me, and for the newbie lurkers of this forum. You input is much appreciated.


----------



## sails

Fox said:


> Hi Sails,
> 
> 
> Actually I had not considered falling IV when playing around with Hoadley. That's the story with options, isn't it? There is always a trade off somewhere. Better to find out from you than from painful personal experience. I guess a back month wrangle instead of back month wings will mitigate some of the effects falling IV.




Problem is that the 2:1 ratio of long to short legs in the back month adds up to being vega positive.  Just add the vega of the two longs less vega of the short to get net vega for the position.

For a visual look at it, enter a long straddle or strangle (or even a wrangle) into Hoadley in a back month.  Copy that to the comparison table and then alter IV up or down in one of them. (I think I used to enter IV manually with copy & paste rather than use the Hoadley button which changes IV for both.)  You will get a very clear picture of what IV does to the trade.

In my experience, delta hedging can be a difficult with small positions, so if you can do it with the underlying, it might be better for you.  I have also been guilty of hedging so tightly that it was impossible to make money....
But that was all part of the learning curve!


----------



## cutz

Hi Guys,

Agree with what's being said here, a back month wrangle on an underlying like MQG is definitely a bad idea, haven't plugged it into Hoadleys because i only stick to front months on equity options but i suspect negative theta would be a killer.

I reckon i'm guilty of over-hedging on XJO's and a deep seated fear of another volatility explosion doesn't help but my rule of thumb with back month wrangles is if i'm not getting decent credit i'm paying too much. A kick up in IV will cause this but the past few months have been OK.

BTW Sails thanks for your inputs, glad you're back in town.


----------



## Fox

sails said:


> For a visual look at it, enter a long straddle or strangle (or even a wrangle) into Hoadley in a back month.  Copy that to the comparison table and then alter IV up or down in one of them. (I think I used to enter IV manually with copy & paste rather than use the Hoadley button which changes IV for both.)  You will get a very clear picture of what IV does to the trade.



Did the visual comparison of falling IV for various back month wrangles using Hoadley. The results really do speak for themselves. 

I re-read Cottle's chapter on the greeks (in particular, vega) and had a much better understanding this time. He describes back months as more of a "vega play", whereas front months are more of "theta vs gamma play".



> It can be a good strategy when IV is typically fairly low after the market has been travelling up for some time and is likely to spike up a bit should the market fall.



Sigh! It's all about vol at the end of the day. If I only knew the secret to predicting vol . Good to know of some predictable vol patterns like the one you described above. I think that it would be useful to start a thread on common vol patterns.


----------



## Grinder

Fox said:


> I re-read Cottle's chapter on the greeks (in particular, vega) and had a much better understanding this time. He describes back months as more of a "vega play", whereas front months are more of "theta vs gamma play".




This is pretty much how I see it also, when used for hedging purposes I prefer using same month or front month in most cases, the gamma can still come to the rescue if required. I try not too add too many back months if I don't have to unless it looks attractive to do so, vega is one less thing I would then need to worry about.  




Fox said:


> Sigh! It's all about vol at the end of the day. If I only knew the secret to predicting vol . Good to know of some predictable vol patterns like the one you described above. I think that it would be useful to start a thread on common vol patterns.




Good thread idea. Vol patterns don't always stay true to form though  I see pedicting vol as less forgiving then direction, am still rubbish at predicting it but close enough is good enough sometimes.


----------



## cutz

Quick question here guy's,

Does anyone juggle flys to expiry or is it a lost cause.

Say it's sitting right on centre strike today with 4 working days to go, positive theta is kicking along, is it worth experimenting?


----------



## sails

cutz said:


> Quick question here guy's,
> 
> Does anyone juggle flys to expiry or is it a lost cause.
> 
> Say it's sitting right on centre strike today with 4 working days to go, positive theta is kicking along, is it worth experimenting?




Yeah - it's a difficult decision!

Because markets don't stand still, there is a good chance it will move away in the next 4 trading days.  My own rule is to exit if the centre strike is hit close to expiry as probability favours a move away and with negative gamma starting to kick in, it won't take much to hurt the position. 

It is tempting to hang on and hope because there is still a fair bit of theta in the atm sold strikes... lol

In situations like this, it's often good to ask yourself - would you initiate that same fly now if you had no position at all?  Would it be an acceptable risk/reward?  If the answer is no - then that's probably your answer to close it and bank your profits.  

If the longs have practically no value, you could consider only closing the shorts and leave the almost worthless longs as lottery tickets going into expiry.  It may not even be worth fees to close the longs anyway and if the market does cross your long strike, gamma will be your best friend!

And Fridays - often MMs wind volatility down by Friday afternoon - can sometimes be a good time to do any buying.  I have often found IVs are actually higher on the following Monday morning.  Not guaranteed and can depend on other influencing factors (eg earnings, divs, etc).  If our local MMs read this, it probably won't work for a while to confuse the issue...  

If you do end up with a long option ITM on the XJO, I believe you have to request exercise at expiry.  I don't think it's automatic - will try to find the article in the ASX site.  I'm not sure how this works with IB as I had a long ITM XJO option in the demo and it didn't show up in the exercise window.  

Do you know how IB handle ITM long index options at expiry, Cutz?

EDIT - can't find the article I'm looking for on the ASX site.  I think it was it one of their newsletters that explained that there is no automatic exercise for ITM long index options and that the holder will have to request exercise.  
While looking for the above - I found this link which confirms that MMs hedge XJO options with the SPI. http://www.asx.com.au/products/pdf/index_options.pdf


----------



## cutz

Thanks heaps Sails for knocking some sense into me.

Very tempting to hang on but your idea of closing out the shorts seems like the best option.

Some time ago i had short XJO's expire just ITM , outbound cash settlement occurred, i assume the opposite will be true with a long ITM with inbound auto cash settlement occurring.

I've never had the pleasure of a long expiring ITM.


----------



## sails

Hi Cutz, 

Without a crystal ball, we won't know if that is the best decision until Thursday next week.    Personally, I don't like atm shorts so to expiry due to escalating negative gamma.

If I'm trading into expiry, I actually prefer to be long in the last few days *IF* conditions are favourable.  Gamma easily outruns theta in a fast move.  Don't know about index options, but BHP was the one I used to watch mostly for signs of a potential strong move into expiry.  Have long had an interest in maximum pain theory and expiry in general.  Probably attracted by the low risk/high reward nature of the trades.  It's not the ultimate strategy by any means, but is simply another string to the bow for me when actively trading!

EDIT - an after thought with the longs.  If they really are worthless, I would leave them especially if brokerage will cost more than what I would get back on selling them.   However, if there is some decent value in them, it's probably better to bank the money.  Again, ask the question - would you initiate a strangle at those strikes and at that price so close to expiry.


----------



## cutz

Hi Sails,

Lots to consider, 

After much deliberation i may play this out a little longer, just want to see if i can land a small fly into expiry.

Got a funny feeling this could the first and last time i'll try this.

Long gamma in Jan if things go pear shaped.


----------



## Fox

Hi all,



sails said:


> If the longs have practically no value, you could consider only closing the shorts and leave the almost worthless longs as lottery tickets going into expiry.



I've experienced one occasion where I tried closing the short and leaving the worthless long as a lottery ticket. I found that my order to close the short was not being filled. I then changed my order form closing a short to closing a vertical (ie. both my WOTM long and short legs) and it was filled with a much more favourable price.

Cottle does say that MMs prefer "flat" trades. I presume by "flat",  he means a short paired with a long, as it is limited risk. I suspect that was why I had a better fill when closing a vertical instead of an outright short.

Personally, I was happy with that trade because the lottery tickets were just that ... a long shot. It was not my intention to purchase this wager. It was more of a wager by default. I was happier to have more money in the bank than having a punt with long shot bet. 



sails said:


> And Fridays - often MMs wind volatility down by Friday afternoon - can sometimes be a good time to do any buying.



I must keep that in mind. Unfortunately, I sold a wing earlier today  without the benefit of your tip.


----------



## sails

Fox said:


> Hi all,
> 
> 
> I've experienced one occasion where I tried closing the short and leaving the worthless long as a lottery ticket. I found that my order to close the short was not being filled. I then changed my order form closing a short to closing a vertical (ie. both my WOTM long and short legs) and it was filled with a much more favourable price.
> 
> Cottle does say that MMs prefer "flat" trades. I presume by "flat",  he means a short paired with a long, as it is limited risk. I suspect that was why I had a better fill when closing a vertical instead of an outright short.
> 
> Personally, I was happy with that trade because the lottery tickets were just that ... a long shot. It was not my intention to purchase this wager. It was more of a wager by default. I was happier to have more money in the bank than having a punt with long shot bet.




I agree.  If you can get a better price by trading the spread, then that's the way to go.  Lottery tickets should be cheap - extremely cheap.  If they are down to half a cent, it will cost money to close them - even with IB's brokerage rates, so in that case it's smarter to leave them there.  Also, if the longs are that cheap, chances are it won't help to get a better price on the shorts.

If the the shorts are ATM and front month (as Cutz described today) - they are usually the most liquid and it can sometimes be possible to get a reasonable price without trading the spread.

Just some food for thought... 



> I must keep that in mind. Unfortunately, I sold a wing earlier today  without the benefit of your tip.




It's definitely not guaranteed!  Be interesting to check it out on Monday to see how it compares.  If the markets are up on Monday with an accompanying  drop in IV, it might have put you in front today with the market down a bit.


----------



## mazzatelli

cutz said:


> Does anyone juggle flys to expiry or is it a lost cause.
> 
> Say it's sitting right on centre strike today with 4 working days to go, positive theta is kicking along, is it worth experimenting?




It's been a while...
I have a model for short term stat vol, so holding depends on the output.
PnL is still path dependent


----------



## cutz

Hi Mazza,

Ended up cutting the trade at 3 working days to go. It was still looking alright, consolidation at around 4700 but I couldn't handle the excitement, threat of a gamma runaway looked pretty menacing.


----------



## Fox

Help! I've just had the wind knocked out of my sails. 

I was piloting my XJO low prob IC nicely for the past fortnight. I watched the IV fall gently as XJO traded nicely within a tight range. Theta was fattening my IC nicely. My thoughts were on exiting soon and celebrating Christmas on a high.

24 hours is a long time in politics, they say. Add options to that list as well. Today I woke to find XJO crash a steep 3%. Being delta neutral, I was able to handle the delta generated. But IV rose a whopping 4% as well, sinking my IC into further despair. A sharp rise in IV was something I did not handle well.

Expiry is 20 calendar days away. I have adjusted my IC ie. locked in a loss and got myself delta neutral again. My current plan is to wait for IV to settle lower and exit with a small loss/profit. I figure that 20 days will give XJO enough time to settle and for IV to go lower. Will that be wishful thinking? If not, what would be a prudent thing to do now? 

To prevent a future mishap like this, I am contemplating this plan. If I find my low prob IC to be moderately profitable and IV is low, add a long vega spread (a calender or back month wrangle?) to get myself vega neutral. I view this as a way to lock in my profits against adverse IV moves. Any comments about this sort of approach? Good, bad, ugly?

Falling spot prices and rising IV seem to go hand in hand. Any general advice on mitigating the double whammy effects of a spiking IV and falling spot price on a fly or low prob IC would much appreciated.


----------



## mazzatelli

1 adjustment locked in a loss? 
If that is the case, it is highly likely your r:r is poor for any hedging to be effective


----------



## cutz

Hi Fox,

Not sure how Monday will pan out but one idea for XJO is to put on a short fly in a backmonth centered around todays action, maybe even without the short lower strike giving you a backspread.

Of course this all depends on what happens overnight and you outlook on the index, if IV kicks up further, negative theta will be nasty.

Just an idea, still learning myself so hopefully one of the pros can be more helpful.


----------



## Fox

mazzatelli said:


> 1 adjustment locked in a loss?



Not quite 1 adjustment. I have made multiple adjustments prior to today's > 2 sigma downward move in XJO. I had suffered some small losses from over adjustments in the last fortnight. I also locked in some losses from the previous dip in XJO at the end of Oct. Today's daily move was the largest for a long time (last five months according to The Age). Basically, I've just managed to get my IC profitable again when today's events wiped out my gains.



cutz said:


> Of course this all depends on what happens overnight and you outlook on the index ...



Thanks for your suggestion Cutz. Not quite sure about the outlook. Read some reports that the Dubai situation is a storm in a tea cup. I guess everyone takes their lead from the US. So, we'll have to see how US closes the week. The SPI has improved slightly as I type this.


----------



## Fox

After thinking about what Mazza and Cutz said, it would seem that some form of back month wing (eg. Cutz's backspread suggestion)  is the way to go, when handling sharp price falls and sharp IV increases. Especially after a fall in in recent IV.

For a start, additional wings should improve my r:r ratio ie. taming gamma. Back month wings on the put side of my IC acts as a natural defence against a sharp price fall/sharp IV rise combo. Perhaps this is what Grinder refers to as "built-in protection"? 

I'm not sure about a back month wing on the call side of my IC. Price rises tend to be accompanied by a fall in IV and therefore a back month call wing might not be such a good idea. I will need to play with Hoadley to have a feel for this, and to see where the tradeoffs are. I'm sure theta will suffer to some degree. Hopefully not too much. 

Thanks guys for your ideas.


----------



## mazzatelli

Depending on how much unrealized profit is available to be booked, it may be more prudent to simply offset the position.

vega &/or gamma risk can often overpower theta - which is why I prefer to trade with a bias in vol &/or direction. Nothing more frustrating than seeing a position accumulate theta gains, only to be negated by v/g on any particular day.

Each to their own...


----------



## Fox

mazzatelli said:


> Depending on how much unrealized profit is available to be booked, it may be more prudent to simply *offset *the position.



Hi Mazza, I notice that you use the term *offset*, which I am not too clear on. By *offset*, am I correct to assume that this means taking some profit off your position and reducing your risk? Eg. harvesting an embedded fly from a pregnant butterfly?



mazzatelli said:


> vega &/or gamma risk can often overpower theta - which is why I prefer to trade with a bias in vol &/or direction. Nothing more frustrating than seeing a position accumulate theta gains, only to be negated by v/g on any particular day.



Hear, hear. That, I now finally understand.


----------



## Grinder

Fox said:


> After thinking about what Mazza and Cutz said, it would seem that some form of back month wing (eg. Cutz's backspread suggestion)  is the way to go, when handling sharp price falls and sharp IV increases. Especially after a fall in in recent IV.
> 
> For a start, additional wings should improve my r:r ratio ie. taming gamma. Back month wings on the put side of my IC acts as a natural defence against a sharp price fall/sharp IV rise combo. Perhaps this is what Grinder refers to as "built-in protection"?
> 
> I'm not sure about a back month wing on the call side of my IC. Price rises tend to be accompanied by a fall in IV and therefore a back month call wing might not be such a good idea. I will need to play with Hoadley to have a feel for this, and to see where the tradeoffs are. I'm sure theta will suffer to some degree. Hopefully not too much.
> 
> Thanks guys for your ideas.




Now were cooking with gas.. it's these situations that I'm glad to have my built in protection (a position that it is constructed upon the opening of an IC or thereabouts) that could be anything from a kite spread (aptly named by the rookies guru Mark Wolfinger) to a debit spread in a back month that is half the size of the IC or perhaps a DD or calander etc.. anything that has opposing greeks to offset the risk. Having some of these as stand alone positions or as added protection goes along way reducing the need for a quick adjustment and can also create profit on their own, it's all a trade off though.

Like mazza says about vol, all depends on your view. Really knowing the greeks puts it all into perspective, the trade off between gamma & theta, the effect vega will have etc.. Whereas the strategies above are just tools that can be used to combat one over the other.

A rule of thumb for me fox is, if I can offset risk over locking in a loss I will.

hope some of this helps, sounds like your on the right track.


----------



## cutz

Hi guys,

I was after an opinion on managing an iron fly.

Is there anything fundamentally wrong with rolling up/down one side (generating credit) and pulling short positions off the other side to keep delta in check, what you end up with is crossed short strikes and a messy looking position.

Does anyone consider this to be an acceptable practice as an alternative to using spot.


----------



## wayneL

cutz said:


> Hi guys,
> 
> I was after an opinion on managing an iron fly.
> 
> Is there anything fundamentally wrong with rolling up/down one side (generating credit) and pulling short positions off the other side to keep delta in check, what you end up with is crossed short strikes and a messy looking position.
> 
> Does anyone consider this to be an acceptable practice as an alternative to using spot.




Example?


----------



## cutz

Hi WayneL.

For simplicity index level is at 4600 after moving up from 4500.

A 4000/4500/4500/5000 iron fly ten times is turned into a 4100/4600 by 10 on the put side and a 4500/5000 by 7/10 on the call side to bring up delta.

Rough hypothetical only but something like that.


----------



## mazzatelli

Silence, sinner!!!:evilburn: Don't you read the options bible?

There shouldn't be a problem, you're readjusting the goal posts knowing your +theta style. Personally would KISS, because of the extra slippage + commissions.

Risk shifts to the downside due to the 10:7 ratio - you comfortable with that after a +100 point move?


----------



## cutz

Thanks mazza,

Just wanted to make sure I'm not doing anything silly but I see your point, perhaps closing a couple of short puts and buying a SPI contract can achieve a better outcome.

Anyway my favorite market is closed and its time for beer.

Merry Christmas all you crazy option fanatics.


----------



## mazzatelli

Yes Merry Xmas and Happy NY to fellow ops traders!!!

cutz, maybe get rid of MQG as an adj? lol just joking


----------



## wayneL

Καλά Χριστούγεννα! Ευτυχισμένο το Νέο Έτος!

May the Greeks be kind to you in 2010.


----------



## Fox

2009 has been a fruitful and eventful year. Fruitful because, with the tremendous help from forum members, I have got to a point which I could not have possibly arrived without ASF. Eventful because the learning journey has been exhilarating, yet difficult and financially painful. Thanks, guys (and gal) for a fabulous 2009.

I look forward to a consistently profitable 2010 and wish success for all forum members. I also look forward to interesting, educational and entertaining posts for 2010. Happy New Year everyone!


----------



## Grinder

ASF option traders,

All the best for a successful 2010, both finacially and in life. 

Im now the proud father of a beutiful baby boy  So may the new year bring calm non trending markets so I can continue to grind out theta, allowing me to adjust less and profit more and hopefully get some sleep.


----------



## Fox

Option gurus,

In your experience, is reviewing and adjusting your income trades only *once *a day sufficient? If not, is continuous monitoring and adjusting the best way to go?

I personally like the idea of adjusting at the close of day for these reasons:
1. Keep my deltas under control and ready to withstand a gap during the opening of the next trading day. I'm focused on XJO at the moment and XJO options typically open with a gap from the previous night's SPI futures price movements.
2. Avoid frequent adjusting due to daily highs and lows, when my delta limits are temporarily breached.

I'm sure there are advantages to continuous monitoring and adjustments. I'm more interested in finding out if any of you can trade profitably by monitoring/adjusting just once a day when dealing with income trades over index options. Any thoughts or comments on this topic will find an appreciative ear.

Thanking you.


----------



## Grinder

Fox,

Replied on the other thread but will continue here.

I hear what your saying about end of day with your deltas and price gaps but for me it's kinda like chess not checkers. In a week I might only trade two or three times, it all depends on what I have on. If my positions are behaving they way i want them to then no adjustment is required and if it's time to open some trades I will. Patience and discipline play a big part in how I trade. 

Most of my planning is done outside of market hours so I know what i want to do whatever happens during market hours, the only time when the last 2 hours is'nt sufficent is when adjustments are required all at once on seperate indexes. This is when I'll find myself pushed for time trying to adjust multiple positions before the market closes. For this reason i have found that extra protection handy when pressesd for time.


----------



## Fox

Grinder said:


> ...for me it's kinda like chess not checkers.
> 
> Most of my planning is done outside of market hours so I know what i want to do whatever happens during market hours, the only time when the last 2 hours is'nt sufficent is when adjustments are required all at once on seperate indexes.



Thanks Grinder for your thoughts. As you know, I'm still trying to find my way with income trades. I've been guilty of both over *over *and *under *adjusting in my trades so far. I'm trying to find a good balance between the two and your ideas have helped. Thanks.


----------



## mazzatelli

Fox said:


> In your experience, is reviewing and adjusting your income trades only *once *a day sufficient? If not, is continuous monitoring and adjusting the best way to go?




Difficult to say, since it depends on the trading style, signals, products traded, asset classes
I manage from a book perspective, so deltas from other tickers will offset for example index deltas

Hedging approach is utility-based, so performed only when required


----------



## cutz

Hi Everyone,

Thought I'll run something by the experts,

I've noticed that quote widths on aussie american style and euro style options to be the same, any traps or quirks if shorting an euro style and going long american style within an equity backspread.

I'm experimenting with this approach in my aussie account.


----------



## freebird54

I have had good years in options [covered calls and selling puts] $20,000 income WDC, WPL, BHP

But this year a disaster - Rolling BHP, STO, expired TAH, TLS premiums so low as volatility less

Anyone like to comment on what they have been doing


----------



## mazzatelli

cutz said:


> I've noticed that quote widths on aussie american style and euro style options to be the same, any traps or quirks if shorting an euro style and going long american style within an equity backspread.
> 
> I'm experimenting with this approach in my aussie account.




You're paying more for your long hedges, than if you were long European gamma.
The only time their values would = when all extrinsic value has bled from both styles.


----------



## cutz

Gotcha Mazza,

So I take it apart from that it shouldn't be too much of a problem,

It's a strange way of doing it but I'm OK with taking a little less on the short if it means I wont cop an early surprise if the underlying takes a flogging. 

The lack of open interest on the euro styles is a little disconcerning thou, some have zero, that's why I stuck with the americans on the longs.

At least this way half the position will have liquidity problems instead of the lot.


----------



## cutz

freebird54 said:


> Anyone like to comment on what they have been doing





Butterflys and backspreads,

Thing I've changed thou is the distance of body to wings, this huge grinding rally has highlighted that my call backspreads initially weren't tight enough, more set up for higher speeds.

Leftover puts from adjusted put sides should serve rather well *if* the market takes a beating.


----------



## Grinder

Simmilar to Cutz but ICs as per usual with added backspreads and the like to have my P/L graphs point upwards.


----------



## freebird54

freebird54 said:


> I have had good years in options [covered calls and selling puts] $20,000 income WDC, WPL, BHP
> 
> But this year a disaster - Rolling BHP, STO, expired TAH, TLS premiums so low as volatility less
> 
> Anyone like to comment on what they have been doing




I posted this to a slow thread that I cant edit so..............
I have done some nice trades lately - covered calls and the occasional put on stock I am happy to buy.

But I am trading a lot more frequently on up days sell cov calls and down days sell puts.

More than $1000 profit on BHP calls and STO puts this week

Is there a site that gives % return over the number of weeks to expiry or any % return?


I know the AFR publishes them for % return/annum but too late and not always accurate?

On the enclosed watchlist I need to setup an extra column with a formula that automatically calculates the % return/month on an option

This I have to change many times a day of course

So any excel experts?

Pasting the csv below in to excel

The calculation will be column h2 etc. [Last trade  ] divided by strike/exercise price e2 x 100 to give a percentage/annum  then divided by 8 or 9  which is weeks to expiry then x 52 to annualise then /12 to give a monthly figure
Weeks to expiry date column d2 from this week so = 8 weeks to 24/6 expiry info below from westpac watchlist today

I bought back BHP June $43 calls I did a few days ago and I look for 2% per month so for BHPGS8 the calculation is [where / = divided by]

when I sold the call I got 1.77 so calculation is

1.77/43 x 100 = 4.11% per annum/9weeks = 0.45 x 52 weeks = 23.74%/12 = 1.97% per month

So the guy who sold them back to me today got...................................................

 .95/43 x 100 = 2.2% per annum /8 weeks = 0.275 x 52 weeks =14.3% / 12 = 1.2% per month




Name Code Call/Put Expiry Date Exercise Price Bid Offer Last Change ($) Change (%) Last Trade Time High Low Volume Open Interest Contract Size % return per week
options BHPGS8 Call 24/06/2010 43 0.92 0.98 0.95 -0.42 0 2:10 PM 0.97 0.94 39 1023 1000


----------



## wayneL

freebird54 said:


> ...on up days sell puts (synthetically) and down days sell puts.




corrected


----------



## cutz

Hi Freebird54,

WayneL already has pointed out that the two are one, but as far as your returns go to get the full picture you may need to include the losses on the BHP stock in the covered call package, that's something you can't ignore and it may lead you to reassess the whole strategy.

Especially during these types of markets.


----------



## freebird54

BHP holding is still in profit, even today,  on my buy figure and if ever I am exercised the profit is locked in on the call [except the lost use of the funds if a long way out]

I would record the loss if that ever happened.

Thanks for your reply.


----------



## ftw129

Firstly, apologies if my question has already been addressed in this thread. It is a 28 page thread full of great info which I intend to read through later today.

1. Has anyone here used IB's TWS for Gamma Scalping? There seems to be a time lag between the Risk Navigator and the live price action which I imagine will become frustrating. 

2. Is there a better way of monitoring your position in TWS, specifically your Gamma scalping position/s?

3. What alternative platforms or perhaps plug-ins can anyone recommend that are ideal for Gamma Scalping?

Thanks in advance.


----------



## nardir4

wayneL said:


> A couple of free resources:
> 
> 1/ If you click on my website link below, there is a free download for Charles Cottle's book "Coulda Woulda Shoulda".
> .




Thanks for the offer,but can't see it anywhere on your website


----------



## cutz

nardir4 said:


> Thanks for the offer,but can't see it anywhere on your website




Hi Bro,

I think Wayne's post is 8 years old, if you really want a copy, amazon may still sell it.


----------



## nardir4

cutz said:


> Hi Bro,
> 
> I think Wayne's post is 8 years old, if you really want a copy, amazon may still sell it.




Thanks Cutz,I didn't notice the date on the original post.I googled the book and found it free
as a pdf file.


----------



## So_Cynical

This seems to be the only active options thread, i probably need a little Mentoring anyway..just wanted to announce that i sold my first ever option/s today, covered call of course, thinking that everyone starts that way.

Made $34 :bananasmi


----------



## Sharkman

So_Cynical said:


> covered call of course, thinking that everyone starts that way.




pretty much... and then we get served an assignment on our first covered call, and come to the realisation that it ain't share rental


----------



## So_Cynical

Sharkman said:


> pretty much... and then we get served an assignment on our first covered call, and come to the realisation that it ain't share rental




Never ever considered it to be a rental of any kind, i consider it a straight out punt..i feel a bit like a bookie, i offered a bet and someone took it, and while i very much doubt i will be assigned on this trade im 100% prepared to do so and accept the 35% profit on the sale of the stock.

Them's the brakes i guess. :dunno:


----------



## Sharkman

So_Cynical said:


> Never ever considered it to be a rental of any kind, i consider it a straight out punt..i feel a bit like a bookie, i offered a bet and someone took it, and while i very much doubt i will be assigned on this trade im 100% prepared to do so and accept the 35% profit on the sale of the stock.
> 
> Them's the brakes i guess. :dunno:




why do you very much doubt you will be assigned? because it's really way OTM? what are you referring to when you say you've made $34, is that what IB is saying the position PNL is? or are you referring to the premium collected? please don't tell us you sold 20 contracts on something at 0.02, ie. $40 premium - $6 brokerage 

now i'm not the most experienced options trader on here, and i only have experience trading ASX ETOs, so i'm happy to be corrected if someone like wayne posts on here and says i'm wrong... but personally i wouldn't make a habit of selling way OTM covered calls. IMHO it just isn't worth it, you're selling premium into the low end of the delta skew curve (ie. you're giving away cheap gamma)... so you might pick up a few bits of change here and there by doing it, but eventually something is going to blow thru the strike and you'll wind up leaving a lot of money on the table - the foregone profit on one position may well dwarf the bits of premium picked up on several other covered calls that expired worthless.

FWIW, if i decide i'm ok with getting something called away at a certain price, i won't sell a covered call until the strike i'm looking at gets to a minimum of 25 delta, and even if it does, if i think the IV being offered is too low (and this can get a bit subjective as you have to weigh up what sort of upcoming price sensitive or macro events might be on the horizon) i won't do a covered call. the IV will generally keep dropping at lower and lower deltas on the call side, so you end up selling cheaper and cheaper gamma the higher you set your strike. not saying this is the only way to do it, but it's just my method as far as covered calls are concerned.


----------



## So_Cynical

Sharkman said:


> why do you very much doubt you will be assigned? because it's really way OTM? what are you referring to when you say you've made $34, is that what IB is saying the position PNL is? or are you referring to the premium collected? please don't tell us you sold 20 contracts on something at 0.02, ie. $40 premium - $6 brokerage




18% OTM Nov expiry is why i doubt i will be assigned, of course anything can happen, dividend on the way etc...but i consider myself to be a pretty good judge of where price action is headed...and like i said i consider it a punt and im the bookie so i set the price and if the punter can see value then well ok.

The good thing i like about covered calls is that i can use a strike price that i would be happy to sell at anyway...and its a $34 premium that IB hasn't taken anything from yet so i suppose i can minus $6 from it, my first time so im not 100% sure.


----------



## Sharkman

fair enough. if it's an ASX ETO then 18% OTM is really far OTM for just about anything on there so yeah very little chance it will be assigned

IB will have taken the commish out before they put the proceeds into your available cash balance. i was kinda assuming you'd done an ASX ETO trade so 20 contracts @ 0.02 would get $40 net premium, commish is 30c / contract = $6 so that would leave $34 of proceeds. not sure what it would be for US options, i'm still umming and ahhing over whether i should branch out and start trading those

i don't know if i'd consider myself a bookie when i sell options - whether you buy or sell, i'd say it's really the MM who's the bookie, not us, both bookies and MMs are the ones who are sitting on both sides of the bet and they'll take a bit of juice each time. if it's ASX ETOs you're trading, there will come a time when you will rage against the MMs soon enough...


----------



## So_Cynical

Sharkman said:


> fair enough. if it's an ASX ETO then 18% OTM is really far OTM for just about anything on there so yeah very little chance it will be assigned
> 
> IB will have taken the commish out before they put the proceeds into your available cash balance. i was kinda assuming you'd done an ASX ETO trade so 20 contracts @ 0.02 would get $40 net premium, commish is 30c / contract = $6 so that would leave $34 of proceeds.




Ok good to know 



Sharkman said:


> i don't know if i'd consider myself a bookie when i sell options - whether you buy or sell, i'd say it's really the MM who's the bookie, not us, both bookies and MMs are the ones who are sitting on both sides of the bet and they'll take a bit of juice each time. if it's ASX ETOs you're trading, there will come a time when you will rage against the MMs soon enough...




Yes ASX ETO's i hold 3 stocks i plan to write calls over (short term plan) BLD, CPU, SUN. all stocks held over 12 months and all in double figure profit so im ok with having to sell them if it comes to that....i mean don't ride a bike unless your willing to fall off hey.

I think i may have already experienced a bit of MM frustration...i first wrote the calls on Monday at the last quoted price and was surprised to see the order unfilled the next day, i cancelled that and tried an at market order and was again surprised to see that not filled...i thought i must of done something wrong (IB noob) and so cancelled that after it sat there unfilled for an hour or so.

Next day went half a cent under, unfilled and then today i got aggressive and went a full cent under the quote and was filled.


----------



## wayneL

So_Cynical said:


> I think i may have already experienced a bit of MM frustration...i first wrote the calls on Monday at the last quoted price and was surprised to see the order unfilled the next day, i cancelled that and tried an at market order and was again surprised to see that not filled...i thought i must of done something wrong (IB noob) and so cancelled that after it sat there unfilled for an hour or so.
> 
> Next day went half a cent under, unfilled and then today i got aggressive and went a full cent under the quote and was filled.




Good ol' Aussie RTs eh?... the stingiest SOBs on the planet and not enough competition to keep the bastards honest.

Just a point, you don't have to wait to be assigned. If it goes ITM and you don't want to sell the stock for any reason (say to avoid a CGT event), you can buy the call back.

You'll take a loss on the call, but the sums might work better, depending on what you're trying to achieve.

There are other reasons not to wait til expiry. On WTFOTM calls (and it stays WTFOTM) you'll get most of your decay well before expiry. No point holding a nearly worthless short (risk for no reward) when you can close it out and re-write for more premium.

Just a couple of thoughts.


----------



## Sharkman

wayneL said:


> Just a point, you don't have to wait to be assigned. If it goes ITM and you don't want to sell the stock for any reason (say to avoid a CGT event), you can buy the call back.




not as easy as it sounds on the ASX though. if you let it get too far ITM or it's too close to expiry, the MMs tend to play hardball with you. i've already gone into a rant in some other thread about how i had NAB 30-28.50 put spreads a couple of months ago, wanted to take the whole spread off when the stock was about 28 a few days to expiry, only to see a bid/ask of 1.98/2.26 when i was trying to sell back the 30 puts, and didn't even get filled at 2.05. if you had something similar in reverse - eg. sold NAB covered calls at 28 and the stock rose to 30. you could be faced with a similar bid/ask, if they really played hardball and made you cross the whole spread, that's 0.85% of the stock price in extrinsic that you'd have to pay - for something that would have to have a delta of over 90! ouch!

OTOH it's not always a reflex decision to close it out as soon as the underlying gets close to your strike, because that's when you start to get decent theta. so it's a bit of a tightrope act as you can't let it get too far ITM (unless you're happy to just take the assignment come what may), but in order to collect good theta you probably do need to be willing to let it get a little bit ITM within the option's lifetime due to the course of normal market fluctuation.



wayneL said:


> There are other reasons not to wait til expiry. On WTFOTM calls (and it stays WTFOTM) you'll get most of your decay well before expiry. No point holding a nearly worthless short (risk for no reward) when you can close it out and re-write for more premium.




would you be inclined to write WTFOTM covered calls in the first place though wayne? the decay is faster early on in the options life for way OTM contracts, but that decay is still going to be chicken feed seeing as the net premium itself will be chicken feed at such a low delta. plus the IV is usually pathetically low at the high strikes (relative to IVs at the lower strikes for the same underlying and expiry), and commish takes a larger hit % wise out of the premium collected, all of which dissuade me from selling really low delta covered calls.


----------



## Sharkman

So_Cynical said:


> I think i may have already experienced a bit of MM frustration...i first wrote the calls on Monday at the last quoted price and was surprised to see the order unfilled the next day, i cancelled that and tried an at market order and was again surprised to see that not filled...i thought i must of done something wrong (IB noob) and so cancelled that after it sat there unfilled for an hour or so.
> 
> Next day went half a cent under, unfilled and then today i got aggressive and went a full cent under the quote and was filled.




were you looking at the last quoted bid/ask, or the last traded price?

the last traded price can easily be completely different from what the option would trade at now, particularly for illiquid contracts (like the way OTM calls you've mentioned) because that transaction could have been done days ago and since then the underlying has probably moved.

even the last quoted bid/ask probably won't be an accurate reflection of what the price would be in order to transact now as the underlying will have moved from yesterday to today, there'll be an extra day of decay etc.

you have to look at what the bid/ask is now, not the last traded price or the last quoted spread. eg. the NBBO on a certain call contract may have been 0.24/0.26 at the close yesterday, with a last traded price of 0.25, but if the underlying gapped down overnight the NBBO on the same contracts might be 0.15/0.17 today. no way you'll get filled if you put in an offer at 0.25.

if the contracts you tried to trade did not show any NBBO whatsoever, it means they're so illiquid that the MMs can't even be bothered quoting a spread. in that case i think what you need to do is "express an interest" in the contracts, and you do that by putting in a bid or offer that's way out of market and in your favour, eg. if you estimate the "fair value" of the contracts would be around 0.10, based off the IV that the contracts of the same underlying & expiry that do have an NBBO are trading off, then stick in an offer of 0.20. that way you don't risk getting insta-filled at a suboptimal price (as you don't really know what the spread is at this point), but by sticking in an order, you're signalling that you're interested in trading these contracts, so the MMs are supposed to be obliged (as part of their licence - they're supposed to be providing liquidity after all) to quote a spread for these contracts (it will probably be a stupidly wide spread though). once they do you can then modify your order and start trying to work the spread to get a fill.


----------



## So_Cynical

wayneL said:


> There are other reasons not to wait til expiry. On WTFOTM calls (and it stays WTFOTM) you'll get most of your decay well before expiry. No point holding a nearly worthless short (risk for no reward) when you can close it out and re-write for more premium.




Good point, i was looking at expiry as the end game but time decay works in the call writers favour i guess, as long as the option stays way OTM.....ok so to close it out i simply buy the same call in the same quantity? 




Sharkman said:


> were you looking at the last quoted bid/ask, or the last traded price?
> 
> the last traded price can easily be completely different from what the option would trade at now, particularly for illiquid contracts (like the way OTM calls you've mentioned) because that transaction could have been done days ago and since then the underlying has probably moved.
> 
> even the last quoted bid/ask probably won't be an accurate reflection of what the price would be in order to transact now as the underlying will have moved from yesterday to today, there'll be an extra day of decay etc.




Ok i didn't really consider all that.



Sharkman said:


> i think what you need to do is "express an interest" in the contracts, and you do that by putting in a bid or offer that's way out of market and in your favour, eg. if you estimate the "fair value" of the contracts would be around 0.10, based off the IV that the contracts of the same underlying & expiry that do have an NBBO are trading off, then stick in an offer of 0.20. that way you don't risk getting insta-filled at a suboptimal price (as you don't really know what the spread is at this point), but *by sticking in an order, you're signalling that you're interested in trading these contracts*, so the MMs are supposed to be obliged (as part of their licence - they're supposed to be providing liquidity after all) to quote a spread for these contracts (it will probably be a stupidly wide spread though). once they do you can then modify your order and start trying to work the spread to get a fill.




Ok ill give that a try...a different mind set to stocks seems to be needed...so many things to consider.

-------------

Thanks guys much appreciated.


----------



## Sharkman

So_Cynical said:


> Good point, i was looking at expiry as the end game but time decay works in the call writers favour i guess, as long as the option stays way OTM.....ok so to close it out i simply buy the same call in the same quantity?




time decay works in your favour if you are an option writer regardless of whether it's ITM, ATM or OTM. whether it will compensate you for the short gamma or not however is a different matter...

if you select your open position, IB will show a BUY, SELL and CLOSE command. the CLOSE command is essentially just a convenience to help eliminate human error as it will pre-fill fields appropriately (it will still let you select price, GTC/day only etc.), so i'd recommend using that if you want to close a position. but even if you hit BUY instead and manually fill in all the fields, if you attempt to buy 20 contracts and it sees you are short 20 contracts of the same options, when you get filled IB will automatically net it off and remove the position from your portfolio view.



So_Cynical said:


> Ok ill give that a try...a different mind set to stocks seems to be needed...so many things to consider.




indeed. and one of those things is that (when doing ASX options at least) the spread will really eat into your profits if you're not careful. this is why when i have covered calls on, i typically just let them run to expiry and take the assignment if i have to, rather than buy back the call or roll up & out, both of which would potentially involve crossing extra spread(s), not to mention paying extra commish. i will have already decided before i sold the call that based on the info available at the time, i am happy to get called away at that strike.


----------



## wayneL

Sharkman said:


> not as easy as it sounds on the ASX though. if you let it get too far ITM or it's too close to expiry, the MMs tend to play hardball with you. i've already gone into a rant in some other thread about how i had NAB 30-28.50 put spreads a couple of months ago, wanted to take the whole spread off when the stock was about 28 a few days to expiry, only to see a bid/ask of 1.98/2.26 when i was trying to sell back the 30 puts, and didn't even get filled at 2.05. if you had something similar in reverse - eg. sold NAB covered calls at 28 and the stock rose to 30. you could be faced with a similar bid/ask, if they really played hardball and made you cross the whole spread, that's 0.85% of the stock price in extrinsic that you'd have to pay - for something that would have to have a delta of over 90! ouch!




Yes, I had forgotten how illiquid ASX options are once you get more than a couple of strikes away from the money. That said, taxation considerations still need to be computed, even if the RTs are going to rip you a new one. 



> OTOH it's not always a reflex decision to close it out as soon as the underlying gets close to your strike, because that's when you start to get decent theta. so it's a bit of a tightrope act as you can't let it get too far ITM (unless you're happy to just take the assignment come what may), but in order to collect good theta you probably do need to be willing to let it get a little bit ITM within the option's lifetime due to the course of normal market fluctuation.




True, but if you've written away from the money, that theta is on extrinsic value that has gained on the wrong side of the ledger. But sans ex div complications, one is not likely to be assigned before expiry giving time to think things through.



> would you be inclined to write WTFOTM covered calls in the first place though wayne? the decay is faster early on in the options life for way OTM contracts, but that decay is still going to be chicken feed seeing as the net premium itself will be chicken feed at such a low delta. plus the IV is usually pathetically low at the high strikes (relative to IVs at the lower strikes for the same underlying and expiry), and commish takes a larger hit % wise out of the premium collected, all of which dissuade me from selling really low delta covered calls.




Well yes, but I was commenting on SC's specific position which is WTFOTM.

When I trade CCs, it's at, or close to the money (and shorter dated), at points I think are statistically advantageous on long term holdings. But SC might have a different game plan, and on a learning curve. He's in a position as outlined, right or wrong, so just tailoring discussion around that.


----------



## freebird54

Glad the thread is active - will read all the posts soon
I have been option trading for many years now with IB last 3
Simply I get my friends to get their head around rules I try to stick to..
1. SELL covered calls and puts only - you are then the bookmaker
2. Never more than 3 months out and roll out and up for credit if you can [Lose use of funds tied up in Calls etc.]
3. Be aware of divs and reporting dates [Rivkin used to say never hold any over those dates but I do]
4. I only do options over shares I am going to buy/sell anyway
5. When I have made c. 90% profit I buy back irrespective
6. REMEMBER WORST CASE SCENARIO [UNLESS WW3 ETC. ;-).......................

IS WHEN EXERCISED SO WHAT - YOU HAVE BOUGHT AT A DISCOUNT
OR SOLD AT A PRE-DETERMINED PROFIT - YOU WERE GOING TO DO IT ANYWAY

PS Keep it simple - forget the greeks. And stick to top 10 [Wish I knew enough about US market - much more action]
Watch out for the market makers - they will screw you on untraded stuff


----------



## So_Cynical

freebird54 said:


> 1. SELL covered calls and puts only - you are then the bookmaker
> 2. Never more than 3 months out and roll out and up for credit if you can [Lose use of funds tied up in Calls etc.]
> 3. Be aware of divs and reporting dates [Rivkin used to say never hold any over those dates but I do]
> 4. I only do options over shares I am going to buy/sell anyway




^ So far im with you 100%



freebird54 said:


> 5. When I have made c. 90% profit I buy back irrespective




Care to elaborate on this? do you mean 0.09% profit?

At the moment im still thinking to let the call/s play out to get maximum bang for buck...what sort of premium you you want to take, % wise of the SP at time of writing?


----------



## wayneL

Just for the sake of discussion:



freebird54 said:


> 1. SELL covered calls and puts only



That's fine, but all you are really doing is reducing volatility. The only way you outperform the underlying is if the underlying is in a moribund state. In  bull markets you are limiting cap gains. It is also very basic and ignores that there are possibilities of adding extra dimensions to positions, depending on your view.


> you are then the bookmaker



A common comment, but not quite true. Bookmaking is the process of arbitrage in some form; simply writing options is not bookmaking



> 2. Never more than 3 months out and roll out and up for credit if you can [Lose use of funds tied up in Calls etc.]



Agree, but with some further nuances for another time.


> 3. Be aware of divs and reporting dates [Rivkin used to say never hold any over those dates but I do]




Yep, depends what your trying to do. Hold thru divs or not, have a plan for it, which may be add odds with Rivkins "maxims"


> 4. I only do options over shares I am going to buy/sell anyway




Also fine, if that is your plan.


> 5. When I have made c. 90% profit I buy back irrespective




Agree in principle


> 6. REMEMBER WORST CASE SCENARIO [UNLESS WW3 ETC. ;-).......................



Agree


> IS WHEN EXERCISED SO WHAT - YOU HAVE BOUGHT AT A DISCOUNT
> OR SOLD AT A PRE-DETERMINED PROFIT - YOU WERE GOING TO DO IT ANYWAY



Not necessarily. This just psychological justification for getting assigned. For eg it may be better to close the option and keep holding the stock (in the case of CCs). 


> PS Keep it simple - forget the greeks. And stick to top 10 [Wish I knew enough about US market - much more action]




I fundamentally and profoundly disagree. How does an investor quantify the risks and rewards of an option position versus just holding (or trading) the stock. Even if just doing the naked put/CC boogie, and understanding of Greeks will inform the investor whether it is actually worth it, versus stock... and also how to augment a position in certain market conditions


> Watch out for the market makers - they will screw you on untraded stuff



They will try to screw you at all times. Low liquidity gives them a licence to rip you a new one. Hence why I don't bother with ASX options... overseas exchanges are a whole 'nuther bowl of wax in terms of possibilities FWIW


----------



## Sharkman

freebird54 said:


> Glad the thread is active - will read all the posts soon




likewise, i'd also be happy to have some options discussion going. my thoughts on a few points raised here - these are just personal opinions that have questionable value of course.



freebird54 said:


> 1. SELL covered calls and puts only - you are then the bookmaker




not really - a bookmaker sits on both sides of the bet. we can't. this would be more akin to laying odds on a betting exchange, rather than becoming a bookie ourselves.



freebird54 said:


> 2. Never more than 3 months out and roll out and up for credit if you can [Lose use of funds tied up in Calls etc.]




not sure if you're referring to ASX ETOs or US options, but if the former, you can hardly get a decent spread even 3 months out, let alone beyond that, unless it's one of the big six optionables (ANZ, BHP, CBA, NAB, RIO, WBC).

also in the ASX (US may be different) rolling up & out can be quite costly because you have to cross 2 potentially nasty spreads. presumably you're rolling up & out because you don't want to get called away and the original covered call is now firmly ITM - see my post above. i was hit with a 1.98/2.26 spread (on one of the big six!) when trying to close my long puts that had 2.00 of intrinsic a couple of months ago. if you let a covered call build up 2.00 of intrinsic or even 1.00 the MMs could easily make you cross a giant spread if you wanted to roll up & out.



freebird54 said:


> 3. Be aware of divs and reporting dates [Rivkin used to say never hold any over those dates but I do]




can get a bit tricky if the div surprises, also need to look out for the early exercise and be ready to close it out if there's any danger of that, especially if you want those franking credits (which i always do). recently i've noticed some european exercise style options being offered (these are the ones with the odd strikes eg. 72.01 on CBA), though they usually don't have very good liquidity or spreads. not sure how long these have been around but i only noticed them a couple of months ago. these may help if you want to sell an ATM or slightly ITM call over the div period, though of course the fact that they cannot be early exercised is factored into the spreads the MMs will show the market. nevertheless they could be useful if you want to ensure that you get the div (and franking credits) but i don't have much experience with them yet. only done a couple so far, in fact.

i think reporting dates can sometimes be excellent to hold option positions over. i like to calendar spread them if i think the underlying is near a key level and the front month IV is high, as when this happens usually my thinking is along the lines that it will need a strong price catalyst, like an earnings event can provide, before it has the strength to punch thru the support/resistance. sell the faster decaying front month option which is not exposed to the earnings event and look to catch that potential price catalyst with the back leg. you'd also be putting on the position far enough in advance of the earnings event that hopefully you'll dodge or at least mostly dodge the vega rush. did this recently with QBE as mentioned in another thread.



So_Cynical said:


> Care to elaborate on this? do you mean 0.09% profit?
> 
> At the moment im still thinking to let the call/s play out to get maximum bang for buck...what sort of premium you you want to take, % wise of the SP at time of writing?




i think he means when a limited reward position has reached 90% of the max profit, close it out. so in the case of a covered call if you can buy it back for 10% of the premium you paid for it, you should do so. this would also apply to things like vertical spreads etc. i use 80% myself, but it's a matter of personal taste i guess. it makes sense though, if you have the opportunity to lock in 80% (or whatever) of the max potential profit, why jeopardise those gains for the sake of trying to squeeze out the last 20%?


----------



## freebird54

Thank you for your input
Yes sharkman you got it right about my profit - I will consider 80%

I will try to learn more about the greeks as I guessed I could do better by being a bit more complicated

I can list all the options I have done ANZ, BHP,TLS,FMG, WBC, WPL, NAB, NCM, RIO -  and if others do likewise I will list my trades

Today I sold BHP oct 34.50 puts for 98c and yesterday bought back  for 2.5c my TLS calls which I got 8c for

I am looking at selling WPL and AMP calls


----------



## Sharkman

freebird54 said:


> Thank you for your input
> Yes sharkman you got it right about my profit - I will consider 80%
> 
> I will try to learn more about the greeks as I guessed I could do better by being a bit more complicated
> 
> I can list all the options I have done ANZ, BHP,TLS,FMG, WBC, WPL, NAB, NCM, RIO -  and if others do likewise I will list my trades
> 
> Today I sold BHP oct 34.50 puts for 98c and yesterday bought back  for 2.5c my TLS calls which I got 8c for
> 
> I am looking at selling WPL and AMP calls




what was your reasoning behind selling the BHP puts?

i like the trade though, BHP seems to have been gravitating back to the 34-35ish area repeatedly over the last 2 years, being well supported at 34 thru the latter half of 2011/first half of 2012. the 180 day EMA is also around about the level of your strike currently.

my BHP position at the moment is an aug-oct 37.50-38 diagonal call spread. put the trade on a few days after it broke thru the 35 level, as in my view the 34.50-35 area is a key level and after it broke thru that i started looking for a rally to 38, as it did earlier in the year, and looking for that to happen with enough time left to oct expiry that i can then sell off the oct 38 calls when they become ATM. it was around 36 at the time so from memory the spread cost about 0.20.

if it falls back to the 34.50-35 level in the next week or two i might look to sell sept ATM puts, obviously a lesser number of contracts than i did on the diagonal spread as i'll do this leg fully cash covered. i'm not inclined to sell puts at the moment as i don't really think it's at a particularly significant level right now. hopefully a fall back to 34.50-35 will also bring slightly higher IVs allowing for better premium collection.


----------



## So_Cynical

Guys, im finding that i have started to have the urge to gamble...thinking that (for example) SUN has no chance in hell of seeing $13.25 any time in the next 4 months, so just write as many calls as i can at $13.25+ strikes and its easy money for next to no risk...as in risk of the calls going ITM.

I know this could go horribly wrong but its just so hard to see that happening.

Comments?


----------



## Sharkman

So_Cynical said:


> Guys, im finding that i have started to have the urge to gamble...thinking that (for example) SUN has no chance in hell of seeing $13.25 any time in the next 4 months, so just write as many calls as i can at $13.25+ strikes and its easy money for next to no risk...as in risk of the calls going ITM.
> 
> I know this could go horribly wrong but its just so hard to see that happening.
> 
> Comments?




i wouldn't recommend it.

on looking at the chart i can sort of see why you might think it can't go beyond 13.25, but selling naked calls is not the right way to do it in my opinion. at least cover your topside risk by buying an equal number of further OTM calls (eg. 14 strike) of the same expiry, ie. call credit spread. this way you'd turn it into something akin to a 1.40 sports bet - you'd probably look to collect 30-40% of the distance between the strikes as net premium. selling naked calls is akin to putting your life savings on a 1.01 bet - sure the chances are you'd increase your net wealth by 1%, but if it doesn't come off, the results will be catastrophic.

you'd almost certainly be paying a lower IV for the high strike calls and it's insurance against disaster. a lot can happen in 4 months. if you make a habit of selling "as many naked calls as you can" every time you see a situation like this, a single takeover offer could blow you out of the water.

plus, you'd probably be able to do even more contracts this way because being long the high strike calls will reduce your collateral requirements big time. i don't use margin though so i can't really quantify this.

the problem is that SUN doesn't have a particularly active options market so the bid/ask is likely to be wide. that makes a multi-legged trade like a bear call spread more expensive due to slippage. personally i'd just avoid SUN options altogether. i must have done several hundred ASX options trades since i started trading options 4 or 5 years ago, and not a single one has been over SUN. but it's your money so you can trade 'em if you want, just be wary of what risks you're opening yourself up to.


----------



## freebird54

Sharkman 
Thanks for your input - I agree on key levels BHP
My View on BHP - dividend play and they with many others will increase after election
Next week I may buy more for the div
then something unusual for me sell sep 36 calls
Use some premium from maybe more PUTS I sell to cover above costs
Critical dates 2&7/9
DYOR  These are my opinions only
SUN I learnt a lesson many years ago on these - paid c $9 and wrote calls c $13 many months out for huge premium [greedy see ;-)
SP went to over 20 so I lost use of the money for many months that's why my 3m out max rule applies


----------



## freebird54

freebird54 said:


> Sharkman
> Thanks for your input - I agree on key levels BHP
> My View on BHP - dividend play and they with many others will increase after election
> Next week I may buy more for the div
> then something unusual for me sell sep 36 calls
> Use some premium from maybe more PUTS I sell to cover above costs
> Critical dates 2&7/9
> DYOR  These are my opinions only
> SUN I learnt a lesson many years ago on these - paid c $9 and wrote calls c $13 many months out for huge premium [greedy see ;-)
> SP went to over 20 so I lost use of the money for many months that's why my 3m out max rule applies




Sorry I meant BUY calls


----------



## Sharkman

freebird54 said:


> My View on BHP - dividend play and they with many others will increase after election
> Next week I may buy more for the div
> then something unusual for me sell sep 36 calls
> Use some premium from maybe more PUTS I sell to cover above costs
> Critical dates 2&7/9




agreed. nothing's ever guaranteed but i also lean towards thinking the risk lies to the upside, markets hate uncertainty so an election result (provided it's not another hung parliament) would bring back a little certainty, in which case going the risk reversal (should you wind up buying the 36 calls and selling the 34.50 puts) would make sense

thinking of doing something sort of similar myself, looking for a pullback to around about 35 level pre-div or 34.50 post-div, and will consider selling the sept 34.50 puts in either case (the market actually gave me the opportunity to do this last thurs but i wasn't paying attention at the time - sometimes one just gets too busy at work!)

i've never really thought of BHP as having much divvy strip potential, the low div yield and above average volatility makes it less appealing to me, as i have to abide by the 45 day rule. if you buy the stock for the div and also put on a risk reversal, are you going to wind up with too many deltas?


----------



## freebird54

I have done quite a few Covered calls and sold puts lately and even a few spreads [buy and sell calls] as I am getting some education
Some trades below

AMC - CALENDAR SPREAD OPTION TRADE LOOKING AT PUTS
BHP -  PUTS
BLD -   PUTS
CSL -  BUY/WRITE AND CALENDAR SPREAD OPTION TRADE
TLS - PUTS
NAB -  COVERED CALLS
RIO -  COVERED CALLS 
CCL -   PUTS
WDC - BOUGHT & SOLD CALLS LOW RISK
There is a free seminar on the gold coast and free trial of their option scanning software

https://elitetradersgrp.infusionsoft.com/go/odwcfe/rw13/ 

https://elitetradersgrp.infusionsoft.com/go/7dgp/rw13/
DYOR


----------



## Sharkman

how did you go with the CSL options? did you get filled at or close to the mid?

CSL is one of my core stockholdings, occasionally it rallies hard for a few days then backs off almost as quickly, many a time after a strong rally i've been tempted to sell covered calls or even buy a vertical put spread but have been turned off by the stupidly wide bid/ask spreads on it, even at a single strike away from ATM


----------



## freebird54

Sharkman said:


> how did you go with the CSL options? did you get filled at or close to the mid?
> 
> CSL is one of my core stockholdings, occasionally it rallies hard for a few days then backs off almost as quickly, many a time after a strong rally i've been tempted to sell covered calls or even buy a vertical put spread but have been turned off by the stupidly wide bid/ask spreads on it, even at a single strike away from ATM




yes went in at market - Both OCT expiry

Also did buy/write OSH


----------



## So_Cynical

Ok so its ASX equity options expiry day and the $4.60 BLD October call options i sold 10 weeks ago expire today and they appear in IB to have not been exercised? they are $220 dollars in the money and still sitting in my portfolio as is the shares i used to cover the options.

I don't understand, can someone enlighten me?


----------



## wayneL

So_Cynical said:


> Ok so its ASX equity options expiry day and the $4.60 BLD October call options i sold 10 weeks ago expire today and they appear in IB to have not been exercised? they are $220 dollars in the money and still sitting in my portfolio as is the shares i used to cover the options.
> 
> I don't understand, can someone enlighten me?




Assignment happens after market close SC. So you'll probably be - shares and + cash this morning.


----------



## So_Cynical

wayneL said:


> Assignment happens after market close SC. So you'll probably be - shares and + cash this morning.




Correct...i just expected it to be there late last night well after the close.


----------



## Valued

I just want to buy puts and calls and then sell to close or exercise them. I don't see how things like delta matter if I can always get my option's intrinsic value if it's ITM by exercising the option. If I have a put option I can just buy at the market and then exercise my option for profit etc. I just want to use them for directional trades or to hedge CFDs. Is there anything technical that's important I should know if I want to do this? I suppose being able to tell if I am getting a good deal or not is beneficial but that being said, if I think a stock can move 10% before an option's expiry, I just factor in the premium to my reward/risk ratio. Interestingly, this whole low volatility = lower premium seems to be quite good for me. If I see a large move coming in a stock that's been stuck in a trading range for ages, I get a better price.


----------



## aarbee

Valued said:


> I just want to buy puts and calls and then sell to close or exercise them. I don't see how things like delta matter if I can always get my option's intrinsic value if it's ITM by exercising the option. If I have a put option I can just buy at the market and then exercise my option for profit etc. I just want to use them for directional trades or to hedge CFDs. Is there anything technical that's important I should know if I want to do this? I suppose being able to tell if I am getting a good deal or not is beneficial but that being said, if I think a stock can move 10% before an option's expiry, I just factor in the premium to my reward/risk ratio. Interestingly, this whole low volatility = lower premium seems to be quite good for me. If I see a large move coming in a stock that's been stuck in a trading range for ages, I get a better price.




I am relatively new to options trading and used to think on the lines of what you've written. However, in the few months that I've been trading US options based on my mean reversion mechanical system, I have come to the realisation that doing anything in options without making an effort at understanding the greeks, IV etc is suboptimal at best, dangerous at worst. I started with long calls and puts for directional trades, then went into debit and credit vertical spreads and enjoying learning about the finer nuances of all these basic strategies. As a beginner taking short term directional trades, I find knowledge of Delta to be the most important with Theta coming second. Knowing about the nuances of IV would be one of the most important factor in doing virtually anything in options. I learnt this after a couple of trades where even though I was directionally spot-on but barely broke even on the option trades. 

Cheers


----------



## Valued

How can you break even though if the underlying moves your way? Sure, maybe due to the premium and cost if the underlying moves just 1% then you might still be at a loss. If the underlying moves 5% there is no way you can't be on a winning trade.

Say, for example, I purchase 4 options contracts in a company which gives me exposure to 400 shares. The current price is $100. I short by taking a put option. I pay $400 for these options that are at the money exactly. If the underlying drops 10% to $90 yet my option only gains 8%, I just buy the underlying asset then immediately exercise my option and then I get the full value. Sure, there might be a little bit more brokerage involved, but given the exposure it's negligible.

Am I missing something? Why don't people just exercise the options and get their full value? IS there some reason for this? Exception would be if your option is worth more on the market. Is it that I might just be getting a bad deal if it's priced too high?


----------



## cbc

Valued said:


> How can you break even though if the underlying moves your way?





Valued they can move around with nothing really setting them off at all.

I entered in a swing trade on XOM using opt and I brought in at 65c near the start of the day.  XOM went down, then swung back up and was at roughly the same level near close and I went to close my option out thinking tis was going to be the same however the spread had moved down to 37c and I suffered quite a loss.


----------



## Valued

cbc said:


> Valued they can move around with nothing really setting them off at all.
> 
> I entered in a swing trade on XOM using opt and I brought in at 65c near the start of the day.  XOM went down, then swung back up and was at roughly the same level near close and I went to close my option out thinking tis was going to be the same however the spread had moved down to 37c and I suffered quite a loss.




There is something I don't understand here though. If the underlying was steady and you were still confident in the trade, why not just keep the option? I assume you were the buyer of the option and not the writer (quite honestly, I am not sure how writing options works and I don't want to do that at this stage anyway). Wouldn't you have saved money just exercising your option or keeping it if the underlying swing trade looks solid still? 

That being said, if I was buying the option I would have much preferred to wait until the end of day and buy it at 37c than 65c in the morning. The 65c would have been factored into my risk and the trade would (imo) still be profitable, but it can only be more profitable if I could see an option dropping in price. Therefore, I see some merit in understanding options value so I know if I should wait until I buy it. That being said, if the premium price fits within my risk profile/cheaper than alternative or slightly more expensive but less risk than alternatives, I am going to be happy purchasing it even if it subsequently falls in value since I will just exercise it if my directional trade proves correct.


----------



## Valued

I am reading Options Pricing and Volatility by Sheldon Natenberg. I understand what the author is saying regarding long directional movements. You not only have to be right about the market direction but also about the market speed and that this is beyond most traders' capabilities. Therefore, I have to assess the costs of the option and various expiration dates with other instruments that might suit that particular trade better.


----------



## minwa

Valued said:


> If the underlying moves 5% there is no way you can't be on a winning trade.



If you have a option with 1 day left and strike is 6% away and underlying moves 5% and expires worthless you will be at a losing trade. 

Play around with volatility and time against price movement you will easily find you can lose with a 5% move in your favor. Reverse could be true also, you can have a 5% price move against you and still be at a winning trade.



Valued said:


> Am I missing something? Why don't people just exercise the options and get their full value? IS there some reason for this? Exception would be if your option is worth more on the market. Is it that I might just be getting a bad deal if it's priced too high?




Exercising means you are giving up the time premium you paid extra for on top of the intrinsic premium. 99% of the time no one will do this, it is just giving away free money. There are only exceptional situations where options will get exercised early. You are missing the premium part. 

Also not everyone has the capital to buy the underlying. If you are trading just 5 contracts of SPY options you will need around $90,000 to buy the shares. 5 contracts can be traded with just a few thousand dollars.



Valued said:


> There is something I don't understand here though. If the underlying was steady and you were still confident in the trade, why not just keep the option? I assume you were the buyer of the option and not the writer (quite honestly, I am not sure how writing options works and I don't want to do that at this stage anyway). Wouldn't you have saved money just exercising your option or keeping it if the underlying swing trade looks solid still?
> 
> That being said, if I was buying the option I would have much preferred to wait until the end of day and buy it at 37c than 65c in the morning. Therefore, I see some merit in understanding options value so I know if I should wait until I buy it. That being said, if the premium price fits within my risk profile/cheaper than alternative or slightly more expensive but less risk than alternatives, I am going to be happy purchasing it even if it subsequently falls in value since I will just exercise it if my directional trade proves correct.




If at the start of the day the option is 67c and you KNOW that the price is going to be sideways and KNOW at the end of the day it is going to be 37c then you have a holy grail that can see into the future ? I doubt it..no one knows without hindsight what the price is going to be later so it is unfair for you to say that, the price could go from 67c to $1.20 and you would be the loser for not buying it at 67c. You are talking hindsight. Also you will almost never save money exercising your option early, arbitrageours will make sure of that.




> (quite honestly, I am not sure how writing options works and I don't want to do that at this stage anyway).




Learn a bit how the writing side of the option works and many of your answers will be answered.


----------



## Valued

Yea, I get that if you pay less for an option far out of the money, there is less chance the underlying can move in your favour. I was thinking about options at the money/close to.

I will look into how time premiums work, thanks. I understand it might be better to sell an option that's in the money then go on to exercise it (unless it's almost expired!). 

With exercising though, you shouldn't need the capital for ASX ETOs (this might be different for overseas markets etc though). I checked with Commsec and they said if you say buy a long put, for example, that if you bought the shares at the market then sold via your option right away, these would offset so you would be returned the difference or only up for the difference. I have an email of them saying this, I am just making them confirm it and asking them if it applies to calls as well (buy under the option then sell same day). For calls, somewhere down the line they would have to front me the money so I am not sure how keen they are on this - since the sale money would not have come in yet and I have to provide funds to the option writer. They might not care though if they can see both transactions.

As for the holy grail, I might think there is a good probability that the underlying will trade sideways for the rest of the day then it makes sense to understand how that might effect the option price e.g. if it is more likely to go up or down. Everything is based on probabilities. The holy grail is positive expected value. The issue is that the math is so complex that at least I can't work it out. Humans don't always need the math though. For example, you can catch a ball without knowing calculus.


----------



## beachlife

Valued said:


> Yea, I get that if you pay less for an option far out of the money, there *is less chance the underlying can move in your favour*. I was thinking about options at the money/close to.




No.  The price of an OTM has no influence on what the underlying will do, its the other way around.  The stock will do what it will do and the options will follow at different rates depending on how far away from the underlying, time, and volatility.  

You also need to understand the difference between the stocks volatility and the options _implied _volatility, as well as time decay rates.  These play a big part in pricing.


----------



## Valued

beachlife said:


> No.  The price of an OTM has no influence on what the underlying will do, its the other way around.  The stock will do what it will do and the options will follow at different rates depending on how far away from the underlying, time, and volatility.
> 
> You also need to understand the difference between the stocks volatility and the options _implied _volatility, as well as time decay rates.  These play a big part in pricing.




Sorry that's what I meant. I meant that if an option is far out of the money, any moves in the underlying won't really make a difference to it. I just read about delta in a book. I thought that before reading the book though. It's obvious - who is going to pay more for an option far OTM even if the underlying goes in the correct direction and therefore the delta will be very low.

I just worded it wrong. It just means the more OTM you are, the less chance the trade will go in your favour. I am not suggesting that options prices have any effect on the underlying! That would be silly. Options are a derivative. Of course a derivative cannot effect the price of an underlying (but I will say that the price of a derivative if marked up or down by market makers may indicate what they believe the underlying will do).

What I need to work on now is factoring in time value since I may be able to sell an option for more money than if I exercised it. I would assume if I wanted to buy an option though that's ATM or ITM I would want to be paying the least time premium possible and selling for the highest time premium possible. I will look into this next.


----------



## cbc

Valued said:


> I may be able to sell an option for more money than if I exercised it.




Yup,

Also, the risk / reward is the same no matter how far out of the money you go.


----------

