# Rolling on expiry day - thoughts?



## Sharkman (31 May 2013)

to use a real life example (please advise if this isn't allowed and i'll edit) - my view on QBE (i could be wrong, form your own opinion first before you trade it!) is that it is likely to break to the upside of $16 in the coming months due to its US exposure and assisted by a deteriorating AUD/USD, but will likely have to test $16 for a while first - from 2009 thru most of 2011 it appeared well supported there so i think that may prove to become a support turned resistance level in the coming months.

to express that view, i bought may-july $16 call calendar spreads on QBE a few days ago, when the stock was sitting right on $16. my plan was to let the front leg go to expiry, then roll it to a june-july calendar spread, either by selling the june $16 calls if the may short calls expired worthless, or selling the june $16 puts if i got assigned and left with a short stock position (same thing anyway).

thru much of today it hovered around $16 - leaving me unsure of whether the may calls will get assigned and therefore whether i should be selling the june calls or the june puts.

of course it wouldn't be a problem if it's quite clear on expiry day whether the front leg is going to expire ITM or OTM, but today i felt it was iffy right up until the close. what do you do?

let the may contracts expire and wait until the next day to re-establish the calendar spread, once you know what you need to do? then you're sweating on dodging a gap down the next day if something happens overnight, though at least being +gamma will help a bit there.

or buy back the may calls on expiry day and simultaeneously sell the june calls? but that means crossing another spread and giving up the insane last day theta - i checked the market with about an hour till the close. the underlying was exactly $16 and the may $16 calls were 4.5/6.5c. you can't assume you'll get a fill at the mid, so you'd have to factor 6.8c as the cost to close out (with IB brokerage - i don't know if there's any better for ASX options?) obviously you won't get anything like that back from one day's theta on the june contracts a whole month out from expiry!

i seem to recall reading articles in the past suggesting that one is generally better off doing the latter. but i think they were based on US options, which would probably have much thinner spreads.

not a life or death situation. i let the may contracts expire (OTM as it turned out). i will sleep easy, and i will look to sell the june $16 calls tomorrow if the conditions suit. but i'm curious to find out, how do others approach this sort of situation, when dealing ASX options?


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## village idiot (31 May 2013)

In the situation you describe my best thought is keep on watching it right up till just before the close, and only take action at the last minute.  That way there is a good chance you wont have to pay a spread and commission and probably not much TV if you do. 

If that's not possible and an hour to go  is the last time you can take action, the most +EV route is to let it expire and see what happens (since  it would be negative EV to pay the TV + spread + commission now , and the EV of being either long or short but not knowing which, however uncomfortable, is close to zero). However that route generally  leaves you with more delta one way or the other than you wanted. If you can tolerate the volatility of the unwanted  position either way overnight , maximise your EV and let it expire, If not, sell (or in this case buy) down to the point you can.   Sounds like you took the former.


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## Sharkman (31 May 2013)

yep, that i did, i'd already decided to let it run to expiry - wasn't intending for this to be a "help what should i do" type thread as that probably isn't allowed, it was more a "what's your thought process in this type of situation", so i didn't post until after the close when my decision was already locked in.

have to admit i've got lucky with this trade so far. the may contracts were a few cents OTM at expiry (having spent a fair bit of the day ITM), and today was able to sell the june 16 calls when the underlying was 16.05 for a tidy premium.

normally i do let it run to expiry for the reason you described - you're coughing up too much theta/spread/commish by closing out, and i reckon over a fair sample size of similar scenarios, you're likely to come out ahead overall by letting the near leg go to expiry - whilst it could gap down, it could also hold firm/rally and you'll do well shorting the near leg the following day. but i suppose given the way the human mind works, you get hit by a single instance of a huge gap down the day after expiry in this situation, and you'll be closing out & rolling on expiry day the next 10 times such circumstances arise!

one problem with what you suggest though is that often the MMs pull their quotes a few minutes before the closing bell. so you can't depend on waiting right up until the bell to take action. (and also for those of us still working full time and trying to combine trading with that - sometimes you get distracted by actual work near the close and can't do that anyway!  )

also sometimes, when the MM doesn't really want to deal that near to expiry, but they have to show the market something as part of their obligations, they will quote you a stupid spread in the final minutes (something akin to say 2.0/7.0c for 16 strike options with underlying at 16) and probably refuse to fill you until you hit the offer (i've never actually tried bidding into such as that to be honest, when i see a stupid spread like that i just say screw it, i'll take my chances with a potential assignment/gap up/gap down and hedge it tomorrow). so i think generally if you haven't decided which way to go by about 3:50, often the decision gets made for you!

for those who trade US options - is that less of a problem there? with minutes to expiry, are you more likely to see, say, something like a 2.0/2.5c spread for 16 strike options where the underlying is smack on 16?


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## sails (1 June 2013)

Sharkman, I doubt the QBE is very liquid and wouldn't be much point in comparing it with the far more liquid US options.  The less liquid it is, the more trouble you will have with MMs widening the spreads especially when they know you are running out of time or are desperate to do a deal - at least that was my experience.

Initially, I traded other stocks, but found I got too ripped off and came back to the likes of BHP and the big four with an occasional trade in WOW.  Another reason why I prefer XJO options now as it takes much of the stress out of expiry being cash settled.


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## Sharkman (1 June 2013)

sails said:


> Sharkman, I doubt the QBE is very liquid and wouldn't be much point in comparing it with the far more liquid US options.  The less liquid it is, the more trouble you will have with MMs widening the spreads especially when they know you are running out of time or are desperate to do a deal - at least that was my experience.




actually QBE has been ok these last few months, at least as far as width of spreads are concerned anyway. the liquidity is sufficient for me, i'm unlikely to deal more than 100 contracts on something like QBE. when i was looking to sell the june 16 calls yest arvo, the spread was 53.5/57.0c. could be a bit better, but not all that bad. i got filled at 55c, and was fine with that.

but yes i can see if someone wanted to deal 200 or 300 contracts, that probably would have required close to 3 levels of depth probably meaning a lower avg fill.



sails said:


> Initially, I traded other stocks, but found I got too ripped off and came back to the likes of BHP and the big four with an occasional trade in WOW.  Another reason why I prefer XJO options now as it takes much of the stress out of expiry being cash settled.




you wouldn't include RIO in that group? my memory might be somewhat slanted as i've done well on RIO options this year relative to options on most of the other majors, but i seem to recall always getting filled near the mid, if not right on it, for RIO options. plus you don't need a whole lot of contracts to get decent sized exposure.

agreed with the others though, the 5 that you mention, plus RIO would be where the bulk of my trades go. definitely need to consider expanding my trading to include XJO options at some point. but sometimes i'll have a view on one of the smaller optionable stocks and enough conviction to want to trade that view, like with QBE here.

when you say you got too ripped off - by that do you mean you found the MMs were making you cross practically the whole spread before they filled you on anything that wasn't BHP or the big 4? or that there wasn't enough liquidity so you only got a partial fill at a decent price then they widened the spread and made it difficult to fill the rest?


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## sails (1 June 2013)

Sharkman said:


> actually QBE has been ok these last few months, at least as far as width of spreads are concerned anyway. the liquidity is sufficient for me, i'm unlikely to deal more than 100 contracts on something like QBE. when i was looking to sell the june 16 calls yest arvo, the spread was 53.5/57.0c. could be a bit better, but not all that bad. i got filled at 55c, and was fine with that.
> 
> but yes i can see if someone wanted to deal 200 or 300 contracts, that probably would have required close to 3 levels of depth probably meaning a lower avg fill.
> 
> ...




I never did try RIO, so don't really know on that one.  I think I looked at it and decided there were not enough retail customers trying to trade so gave it a miss.

And, yes, I have had MMs make me cross the entire spread. It depends who is the most desperate to trade when it comes down to you and the MM.  And they are rarely desperate...lol

After a few of these I actively avoided options when it was down to me and the MM. Entry to the position is OK as I could cancel if they were too greedy, but on the back foot when it's time to exit.

I once did an analysis of how much I would have given away in just giving up 2c on every option trade in a year I had done a lot of trading.  It worked out to be about $50,000.  So, I am very careful to protect that as much as possible.

Glad you have had a good run with the spreads though.  Don't let my experiences put you off...lol


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## Sharkman (2 June 2013)

2c extra spread = $2 a contract so $50k = 25,000 contracts a year? wow - i'd probably only top out at 4,000, maybe 5,000 contracts a year, and that's counting each leg of a spread separately towards the total (as you'd need to do in this sort of calculation). out of curiousity are you a full time trader? would most people here be full time traders as well?

i can see how you might find insufficient liquidity for some of the smaller optionables like QBE and LEI, with the contract sizes you'd probably be doing with that sort of yearly turnover. those two would usually only have 50-100 contracts at the top level of the depth.

still think it's worth revisiting RIO though, even if you're doing large trades (in retail investor terms) i still think it's worthy of being included in the big six optionables. it might be different now than when you last looked at it. especially if you last looked at it in 2011 - it was up around $85 then and we still had 1,000 contract sizes in the early part of 2011, which would have driven off a lot of retail investors. i can't remember exactly what trading RIO options was like 2+ years ago (when i make a trade i do record why i got into it and what i'm looking for in terms of exiting, rolling etc., but not what the spreads were like or how easy it was to get the fill), but from recent memory it has been quite good, on par with BHP and the big 4 in my opinion, and possibly the switch to 100 contract sizes may have had something to do with that.


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## sails (2 June 2013)

Sharkman said:


> 2c extra spread = $2 a contract so $50k = 25,000 contracts a year? wow - i'd probably only top out at 4,000, maybe 5,000 contracts a year, and that's counting each leg of a spread separately towards the total (as you'd need to do in this sort of calculation). out of curiousity are you a full time trader? would most people here be full time traders as well?
> 
> i can see how you might find insufficient liquidity for some of the smaller optionables like QBE and LEI, with the contract sizes you'd probably be doing with that sort of yearly turnover. those two would usually only have 50-100 contracts at the top level of the depth.
> 
> still think it's worth revisiting RIO though, even if you're doing large trades (in retail investor terms) i still think it's worthy of being included in the big six optionables. it might be different now than when you last looked at it. especially if you last looked at it in 2011 - it was up around $85 then and we still had 1,000 contract sizes in the early part of 2011, which would have driven off a lot of retail investors. i can't remember exactly what trading RIO options was like 2+ years ago (when i make a trade i do record why i got into it and what i'm looking for in terms of exiting, rolling etc., but not what the spreads were like or how easy it was to get the fill), but from recent memory it has been quite good, on par with BHP and the big 4 in my opinion, and possibly the switch to 100 contract sizes may have had something to do with that.




lol - at that time it was 1,000 contracts per share instead of the current 100 - so it was $20 for a 2c spread.

The volume added up as I was doing a lot of spread trades (butterflies, condors, multi level calendars, etc) and a lot of adjustments. I did a lot of experimenting that year so it didn't take too long to run up a heap of trades.  But it showed me to be very careful with slippage as it is just giving money away.

Each to their own - I have no desire to go back to Aussie stock options at this stage.  I'm still fairly busy with a difficult family situation, so just monitoring the XJO is good for me at this time and having mobile IB is great when I have to be away from the PC at home.


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## Sharkman (3 June 2013)

sails said:


> lol - at that time it was 1,000 contracts per share instead of the current 100 - so it was $20 for a 2c spread.
> 
> The volume added up as I was doing a lot of spread trades (butterflies, condors, multi level calendars, etc) and a lot of adjustments. I did a lot of experimenting that year so it didn't take too long to run up a heap of trades.  But it showed me to be very careful with slippage as it is just giving money away.
> 
> Each to their own - I have no desire to go back to Aussie stock options at this stage.  I'm still fairly busy with a difficult family situation, so just monitoring the XJO is good for me at this time and having mobile IB is great when I have to be away from the PC at home.




fair enough, family should come first. best of luck & i hope it all works out well for you.
thanks for the discussion. you've given me a few things to think about. i might look into XJO options at some point, plus maybe when i'm recording my trade details i should perhaps try to include, as accurately as i can, how much of the spread i had to cross to get a fill. it could well be that i will get a rude shock when i see the amount lost over a year's trading to crossing spreads, discover that my memory has been horribly subjective and inaccurate, and that trading RIO options is a bad idea after all!


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## sails (6 June 2013)

Sharkman said:


> fair enough, family should come first. best of luck & i hope it all works out well for you.
> thanks for the discussion. you've given me a few things to think about. i might look into XJO options at some point, plus maybe when i'm recording my trade details i should perhaps try to include, as accurately as i can, how much of the spread i had to cross to get a fill. it could well be that i will get a rude shock when i see the amount lost over a year's trading to crossing spreads, discover that my memory has been horribly subjective and inaccurate, and that trading RIO options is a bad idea after all!




I wouldn't write RIO off if it's working for you.  We all trade differently - there is no right and wrong...


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## Sharkman (7 June 2013)

my strategy for RIO over the past 18 months has been rather crude - but surprisingly effective. it's either elegant in its simplicity - or it's just a plain old lucky streak that will soon blow up in my face - i'm not quite sure which. though i suspect (to borrow a phrase from Michael Clarke after he took 6 wickets once) it's more **** than class! :

basically in a nutshell, all i've been doing in that time is - sell front month cash covered puts at 58 or 59 (whichever has better spread) any time it gets near 60. if it expires ITM - take the assignment. sell covered calls at 58 or 59 until called away. rinse and repeat. really simple and crude. like the QBE strategy, i based it around what i saw as a horizontal support turned resistance level, in RIOs case, around about 59'ish.

so at the moment i am long stock after getting assigned on the mar 59.93 puts (btw. i've never figured out why for some months the strikes go all funny in RIO - anyone know why that is?  it's a pain in the butt as the lot size also changes to 126 per contract in those months!) and have switched back to covered call mode again - both the april and may covered calls expired worthless. haven't sold the june 58 calls yet, so i just have a straight long stock position right now. taking a punt on it rallying back to 57 or so - will sell the covered calls then.

so the stock has gone just about nowhere for the last year and a half, it keeps gravitating back to the 59'ish level time and time again. but RIO IV has been consistently decent, higher than the other members of the "big six optionables" for the last 2 years, allowing healthy premiums to be harvested. so i'm not bothering with spreads here - just looking to consistently collect premium. though i really ought to be thinking about what sort of signals i need to be keeping an eye out for that may indicate this strategy is no longer viable...


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## Sharkman (7 June 2013)

ah, there is censorship here. well i'm sure everyone can guess what the missing word was


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## wayneL (7 June 2013)

sails said:


> And, yes, I have had MMs make me cross the entire spread. It depends who is the most desperate to trade when it comes down to you and the MM.  And they are rarely desperate...lol
> 
> After a few of these I actively avoided options when it was down to me and the MM. Entry to the position is OK as I could cancel if they were too greedy, but on the back foot when it's time to exit.




Indeed! About the last person in the world I would want to trade against is an Aussie RT.


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## sails (7 June 2013)

wayneL said:


> Indeed! About the last person in the world I would want to trade against is an Aussie RT.




Yeah they can be mean!  I have closed entry orders on several occasions so they missed out by being too greedy.  I would trade the US markets, but simply can't be up at night.  I'm wearing out with the family situation here and need to get decent sleep at night, if I can.

So, XJO is not too bad and I don't want to lose the skills I have taken so long to learn.  Still no where near as good as trading US options, but I try to time entries to favour a fill due to market conditions.


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## cbc (15 June 2013)

Sharkman said:


> fair enough, family should come first. best of luck & i hope it all works out well for you.
> thanks for the discussion. you've given me a few things to think about. i might look into XJO options at some point, plus maybe when i'm recording my trade details i should perhaps try to include, as accurately as i can, how much of the spread i had to cross to get a fill. it could well be that i will get a rude shock when i see the amount lost over a year's trading to crossing spreads, discover that my memory has been horribly subjective and inaccurate, and that trading RIO options is a bad idea after all!




Ay shark.  I've been trading the Xjo opt for the last 3 months.  Probably placed around 40 trades.  I only had liquidity problems once.  Usually trade options that are above the $0.15 cent mark caus they usually have a midpoint,  I aint like paying to much for my opt.

Qbe was a stock I was looking at straddling for the 2nd half of last year however I couldn't trade it.  I needed a smooth consistent trend like mqg,ncm,wbc or Cba.  Qbe did have that massive drop when the stock went into free fall.  If I ad a position open I would av celebrated Christmas mid-year.  Ahh well.


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## Sharkman (16 June 2013)

cbc said:


> Ay shark.  I've been trading the Xjo opt for the last 3 months.  Probably placed around 40 trades.  I only had liquidity problems once.  Usually trade options that are above the $0.15 cent mark caus they usually have a midpoint,  I aint like paying to much for my opt.
> 
> Qbe was a stock I was looking at straddling for the 2nd half of last year however I couldn't trade it.  I needed a smooth consistent trend like mqg,ncm,wbc or Cba.  Qbe did have that massive drop when the stock went into free fall.  If I ad a position open I would av celebrated Christmas mid-year.  Ahh well.




i actually sold nov $11 ATM straddles on QBE last year. well technically i suppose it was a one winged iron fly, as i did buy some cheap way OTM calls to cover the upside. left the downside uncovered, was willing to take delivery at $11. 2 or 3 days after the bad profit announcement and hurricane sandy impact came out, the IV was still up around 45%, like it was before the announcement. i thought, shouldn't there be a vega crush by now? i got lucky. it closed on nov expiry day at 10.93. collected 40c premium on each leg - for about 2 weeks to expiry.

got lucky again after taking delivery. i was stopping out if it fell below $10. it got within a whisker of that before rallying. eventually i had it called away at $14 a few months ago after repeated covered call selling on the basis that i thought it would run into resistance at $14. and now i'm back on it with these call calendars. tempted to sell june puts at $14 on the recent downswing to potentially buy them back at the same price, but got too busy at work recently and couldn't watch the market properly.

QBE has been surprisingly decent in terms of spreads - IIRC the spreads were 39.5c/41.5c or so when i was selling those straddles. it was crap a couple of years ago but does generally seem to be better now. though liquidity may be an issue for those who want to trade >100 contracts at a time in it.


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## cbc (16 June 2013)

I'm also surprised that you didn't list tls in your stock choices for options,

One of their contracts has over 250,000 open positions 

Sure, the stock is cheaper but still......


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## Sharkman (16 June 2013)

cbc said:


> I'm also surprised that you didn't list tls in your stock choices for options,
> 
> One of their contracts has over 250,000 open positions
> 
> Sure, the stock is cheaper but still......




TLS is too dollar cheap to make options viable IMHO - liquidity won't be a problem but spreads are too wide in a relative sense. for a 1 month ATM you'd typically see something like 9.0c/11.0c on TLS, but on an expensive stock like RIO a typical spread might be something like 1.64/1.72. yet both have a 0.5c tick size. so you pretty much have to get filled at the mid if you're trading TLS otherwise crossing the spread becomes too costly. whereas with RIO, it's usually not as much of an issue - if RIO was trading at a level i'd be willing to take delivery at, i'd probably be ok even if forced to hit the bid on the above spread to sell puts. TLS is even worse if you want to do a multi leg trade. plus, TLS generally has low IV leading to cheaper options that make the spread even more of an issue.

the other thing is commish, IB charge on a per contract basis. you'd need hundreds of contracts in TLS to get big enough exposure meaning the brokerage will add up. with RIO, just 20 is enough to give a decent sized exposure (for me anyway).

as such i prefer to trade options over expensive stocks, preferably with high IV. even QBE at $11 was pushing it, but the high IVs and decent bid/ask at the time made it good enough for me.


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## sails (16 June 2013)

Sharkman - I like your thinking...  I didn't trade the low value stocks for long for the very reasons you outline.  Commissions and slippage are heavily magnified.

It sounds like you have a pretty good system, Sharkman.  You would not be able to do the same with index options, so don't take any notice of me...lol


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## cbc (16 June 2013)

Sharkman said:


> the other thing is commish, IB charge on a per contract basis. you'd need hundreds of contracts in TLS to get big enough exposure meaning the brokerage will add up. with RIO, just 20 is enough to give a decent sized exposure (for me anyway).




Probably one of the only times that Comsec has it over IB in comish, what ur talking about.  U could load right up to the fee cut-off limits and get a much better deal than IB.........    There is obviously a point where comsec  becomes less beneficial then IB. 


Sounds like your a few steps ahead of me,  I was / am with commsec + IB and I was going to transfer the rest of my $ over  to IB next weekend, however I remembered when I signed up that comsec had a "inactive account" fee.  How long had you left your commsec account open for without any $ in it?

Thanks


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## Sharkman (17 June 2013)

sails said:


> Sharkman - I like your thinking...  I didn't trade the low value stocks for long for the very reasons you outline.  Commissions and slippage are heavily magnified.
> 
> It sounds like you have a pretty good system, Sharkman.  You would not be able to do the same with index options, so don't take any notice of me...lol




on the contrary - i now know exactly who to talk to when i one day decide to add index options to my trading repertoire  

if they used a tick size of 0.1c for premiums < 10c, then they might be slightly more tradeable, as you might be able to get a fill at 9.8c or 9.9c. although even then commish would still be an annoyance. but they don't, so no point considering it until they do.



cbc said:


> Probably one of the only times that Comsec has it over IB in comish, what ur talking about.  U could load right up to the fee cut-off limits and get a much better deal than IB.........    There is obviously a point where comsec  becomes less beneficial then IB.
> 
> Sounds like your a few steps ahead of me,  I was / am with commsec + IB and I was going to transfer the rest of my $ over  to IB next weekend, however I remembered when I signed up that comsec had a "inactive account" fee.  How long had you left your commsec account open for without any $ in it?
> 
> Thanks




commsec's percentage based brokerage is seemingly better for large numbers of contracts (the theoretical cutoff where commsec works out better is about 120 contracts at a price of up to about 0.85), but is otherwise inferior to IB on account of the $35 minimum - you'd have to be pretty well capitalised if you're going to be doing 120+ contracts on things like CBA and RIO! whereas IB it only costs $6 to do 20 contracts, which is plenty enough exposure for me in expensive stocks like those two. though i have to admit, commsec seem to have improved in the last few years. a few years ago i think it was $60 minimum / 0.6%.

the main issue however is that if you exercise or get assigned, i'm led to believe you have to pay the *options brokerage rate* (0.35%) on the resulting stock transaction, which is monumentally worse than IB. if i end up getting 2000 RIO put to me, that's $400 in brokerage! as selling cash covered puts over something i'm willing to take delivery of / selling covered calls over something i'm happy to dispose of are basic bread and butter strategies in the playbook that i use quite regularly, that would be a major problem!

i've had zero in my commsec account for 4 or 5 years since switching to IB. never been charged any inactivity fee (there's nothing for them to take anyway! i shut down all my other CBA accounts when i moved to singapore a few years ago). it's IB that has the inactivity fee. have to generate 10 USD per month in commish or you get charged it anyway. won't be an issue for anybody who's an active trader. i don't recall having to pay it even once.


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## cbc (17 June 2013)

Oh yea,  4-5 years... nice.

I'l transfer my $ over. IB is great, especially when trialing a new strategy. I entered into my first US option and only got charged $1.20 or something.  That had of been comsec I would av got charged $70.


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## nardir4 (5 July 2013)

The idea of risking assignment and taking out puts seems to me a messy possible waste of capital unless one actually wanted the stock.
I had an incident in the last options expiry.I had a June put debit spread on BHP.I legged out  on the morning of expiration day hoping the stock would rise during the day.It did and stabilized about 2pm.I waited as BHP often rises towards the close.Alas at 3.20 black full bars started to appear on the one minute tick chart.
At 3.35 a call from my broker."BHP is tanking I think you should close out your short position "OK I replied reluctantly,buy at market".On the second the trade confirmation email arrived BHP started to rise fast.By 3.55 it was back at its previous level.The MM's got an extra $2000 out of me.Yuk.Is it "sour grapes and paranoia" to think I was bluffed by someone.I wonder how many others fell for it.However,the point that is relevant to this discussion is that the final settlement price was significantly higher than the last one minute tick on the live chart,which makes avoiding assignment of at the money options a risky game.
For anyone that is interested,"Trading Options at Expiry" by Jeff Augen has some interesting research he has done on the US market.If anyone interested in this options play who wants a pdf copy(for loan,I have to appear to be legal,on this forum) contact me.


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## Sharkman (5 July 2013)

nardir4 said:


> The idea of risking assignment and taking out puts seems to me a messy possible waste of capital unless one actually wanted the stock.




mostly agree with you there, though i personally take a slightly more relaxed definition, i don't just restrict myself to selling cash covered puts only if i "want" the stock, in my book they also ok if i "do not mind" taking delivery at the strike. especially when IV is consistently high, as it has been for RIO - i've collected some tidy premiums over the last 18 or so months and the stock hasn't really gone anywhere.

when you do want the stock though, cash covered puts can be good if IV is high - just make sure you don't get too carried away and sell so many contracts that your capital base (and margining facility if you use one) can't comfortably absorb a potential assignment.

used this way, a cash covered short put isn't really an "options trade", it's more of an "options investment" as a trader on CNBC said once.



nardir4 said:


> I had an incident in the last options expiry.I had a June put debit spread on BHP.I legged out  on the morning of expiration day hoping the stock would rise during the day.It did and stabilized about 2pm.I waited as BHP often rises towards the close.Alas at 3.20 black full bars started to appear on the one minute tick chart.
> At 3.35 a call from my broker."BHP is tanking I think you should close out your short position "OK I replied reluctantly,buy at market".On the second the trade confirmation email arrived BHP started to rise fast.By 3.55 it was back at its previous level.The MM's got an extra $2000 out of me.Yuk.Is it "sour grapes and paranoia" to think I was bluffed by someone.I wonder how many others fell for it.However,the point that is relevant to this discussion is that the final settlement price was significantly higher than the last one minute tick on the live chart,which makes avoiding assignment of at the money options a risky game.
> For anyone that is interested,"Trading Options at Expiry" by Jeff Augen has some interesting research he has done on the US market.If anyone interested in this options play who wants a pdf copy(for loan,I have to appear to be legal,on this forum) contact me.




i think the problem there is that you tried to get too cute by entering the position as a spread, but exiting it as individual legs, trying to finesse out a quick gain. generally the rule i follow is that if i enter into a position as a spread, i exit it as a spread. by taking off your bought leg and leaving your short leg with a near ATM strike active on expiry day, you left yourself massively short gamma. a short gamma position is not necessarily bad, but a *massively* short gamma one is playing with fire IMHO. except if you do not mind taking the assignment, and have the capital base to absorb it, then massively short gamma can actually be quite good, as it probably also means excellent theta. 

the difference between your situation and my earlier QBE scenario was that i had july calls protecting the short leg, so risking the assignment was not as hazardous - if i got assigned on the may calls, to reload the calendar spread, i simply sell june puts to get a synthetic short call position, instead of selling june calls to get an actual short call position. though as noted i still took a bit of a risk letting it run to expiry, as had the may calls expired OTM, a big gap down overnight would have meant a lower premium on selling the june calls to reload the calendar spread. but being long gamma on the july calls would have mitigated that somewhat.

i avoid trying to leg into spreads as well, if i want to buy a vertical put spread for example, i'll look to buy the high strike and sell the low strike at the same time. i won't buy the high strike first, then wait a bit "to see if the stock falls and i can get a better price on the low strike". i used to do that when i first started trading options but quickly found that it bit me more often than it worked in my favour, so i don't do it anymore. if for some reason you feel as though you must leg into a spread, at least leg into the long gamma position first... if you get into a nasty habit of legging in by shorting gamma first, then waiting a while because "i think XYZ is going to move up/down (strike out where appropriate) in the next few minutes and i can get a better price for the long gamma leg", sooner or later the market will teach you a very painful lesson!

although sometimes i will leg out to transform a position into another type of position - i had to do this recently with my bought 30-28.50 NAB put spread. in hindsight i was a fool to have not closed it out when the stock hit 28 - if a vertical spread has reached 80% of its max payoff as a general rule i will almost always close it out. but the MMs were being idiots that day and the bid/ask for the 30 puts was something like 1.98/2.26. i didn't even get a bite at 2.05. fuming, i stubbornly refused to give in and took my offer off the market, thinking to myself "well it's below the low strike now, there's a good chance they'll both expire OTM and i'll deny the MMs the satisfaction of forcing me to cross such a ridiculous spread".

dumb dumb dumb. it proceeded to rally strongly immediately after. so after a minor pullback to the low 29s, with time running out, i decided to sell off the 30 puts and leave the short 28.50 puts open, to try and pinch some quick time decay. but i had 100 contracts open, and even if i wanted to take delivery of NAB (which i don't right now - i need to stay delta negative on NAB as it's part of a pairs trade where i'm long CBA) i'd only be comfortable with taking delivery of 5000 of them. 10000 - no way. too big for my liking. so i protected it by buying july 28.50 puts to transform it into a put calendar spread and maintain a bearish bias, then once the june 28.50 puts expired OTM, i sold july 27.50 puts to transform the position into a july put spread, at least recouping some premium. partially salvaging a less than ideal situation that i had brought upon myself thru my own stubbornness.

the stupid thing about all of this is that even if i had hit the bid at 1.98 on the june 30 puts AND hit the offer on the june 28.50 puts, i still would have collected about 80% of the max payoff! a somewhat painful lesson to stick to your rules rather than getting mad and making irrational decisions just for the sake of trying to spite the MMs!


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## Thechaser (19 July 2013)

Ah yes the joys of rolling on expiry day, if I'm deep in the money I will roll a few days before to get a better MM price, however if its touch and go I will roll before lunch on expiry, the MMs are vicious towards the close in my experience.


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## Sharkman (22 July 2013)

Thechaser said:


> Ah yes the joys of rolling on expiry day, if I'm deep in the money I will roll a few days before to get a better MM price, however if its touch and go I will roll before lunch on expiry, the MMs are vicious towards the close in my experience.




they can be major idiots even days before expiry for deep ITM options - see above - i tried to sell off my jun $30 NAB puts when the stock was around $28, and they were giving a spread of about 1.98/2.26. didn't even get a bite at 2.05. halfway between the mid and their side of the spread is typically where i draw the line unless i really, really want to get a fill. in hindsight i should have made an exception in this case instead of stubbornly sticking to my habits. i didn't, and it cost me.

in any case it seems there aren't that many ASX options traders on here, presumably most are off trading US options with the superior spreads, liquidity and greater sector variety on offer there. so i'm pondering whether to dip a toe in and set aside a small portion of my trading capital to have a bit of a dabble there. i have been trading ASX options for 4 years or so thru IB, so maybe it's time for something new. but i can't justify paying the IB market data fees for US options (i trade thru a discretionary trust so i'd have to pay the professional fees) when i'm only going to be having a "bit of a dabble", at least at first.

i don't suppose there are any sites where one can get the live quotes (even if they're only NBBO and not lv 2 depth) for free? the nasdaq site has live asset prices but only delayed option chains. though from looking at some of the delayed option chains on there last week when the US market is open, one could probably just hit the bid/offer and still cough up less slippage than if you tried working the spread on the ASX!


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## cbc (23 July 2013)

Ay Shark,

I trade the ASX options.  IB is to cheap.  Took out a call on CBA for 0.17 then sold for 0.25 yesterday.  Am currently in the process of learning to hold longer as I'd only been holding for a 10% Return.  Then I would watch some of my options go onto make a 100%+ so I figured that I should holdem longer.

Sad to hear about NAB,  I only stick to the mid-point or my side.  U should av got a fill.  How long did you leave ur offer on the market? 

Ib have a "US options" bundle which looks like it would be $27 for u and only $1.50 for individuals.  Shame ur a not a non-professional. 

Are you still trading QBE?  Its been forming a nice trend now since last November.


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## Sharkman (23 July 2013)

cbc said:


> Ay Shark,
> 
> I trade the ASX options.  IB is to cheap.  Took out a call on CBA for 0.17 then sold for 0.25 yesterday.  Am currently in the process of learning to hold longer as I'd only been holding for a 10% Return.  Then I would watch some of my options go onto make a 100%+ so I figured that I should holdem longer.
> 
> ...




from what i have read, i believe the MMs typically use an automatic system, whereby the MM traders will set certain parameters in their computer system, then let it hum away and fill orders automatically, adjusting the parameters as appropriate. they won't usually have an operator manning the desk manually filling every trade.

so what i think this means is that if the spread is say 1.68/1.76, if you try to buy at 1.72 and you don't get filled practically straightaway, you aren't going to get filled at that price unless the underlying moves against you (in which case if you haven't changed your limit then you are not really getting the mid as naturally the spread will move with the underlying), or they alter the parameters of the system, which could only happen at the start of the day except if there are any intraday price sensitive events, or a retail trader happens to come along and is more willing to play fair.

if you don't get filled in a few seconds then IMHO you need to adjust your limit or pull your order off the market. if you let it stay there unadjusted for more than a few minutes, i believe the MM systems then flag it as an "unwatched order" or some such. at which point they will simply sit on it, waiting until the underlying moves enough to put your limit almost all the way to their side of the spread, only then they take it out.

in any case if anyone knows how the MM systems actually do work (i'm just hypothesising here!), would be very interested in being enlightened!

given that, i'll usually work the spread, unless the spread is like 1 or 1.5c wide (which does occasionally show in the big six optionables near the money), in which case i can't be bothered and will just hit the bid or offer. so if i was looking to sell say RIO puts and the market is showing 1.68/1.76, i start by offering 1.75. if i don't get filled within about 5 seconds (which would probably happen 99% of the time), i drop my ask to 1.74, wait a few more seconds, and observe. i keep going in this manner until i either get filled or i get to halfway between the mid and their side of the spread, which typically takes under a minute. if i haven't been filled by then i will be forced to decide if i am desperate enough to keep coughing up more and more of the spread, or if i'm fine to leave my position as is and pull my order off the market. obviously i mustn't have felt desperate enough when looking to sell those NAB puts. i let emotion take over the decision making process (emotion of loathing for the MMs that is), and i paid for it.

usually i tend to get a fill at the mid or 1-2 ticks their side of the spread, though of course there are exceptions. and occasionally you'll cop slippage as the underlying might suddenly jump during those few seconds you're waiting for a bite before adjusting your order. so you think you got a fill at the mid but instead the spread had jumped along with the underlying and your order really got filled on their side. although you never know your luck - a couple of weeks ago when i was looking to sell CBA puts the market was showing 1.54/1.60. so as is my usual practice i offered 1.59 and instantly got filled - and this was a true fill not a case of slippage, straight after the fill the spread was still 1.54/1.60. i almost fell off my chair   that happens like once every 100 trades or so. may have been another retail trader rather than an MM, though the fact that it was filled instantly suggests it may have been MM spread overlap eg. MM1 showed the market 1.50/1.60 but MM2 showed 1.54/1.64, so MM2 ended up taking out my ask at their mid. can't remember the exact depth though.

still in QBE. i've had a good run in it since last nov as per earlier posts. only downer was getting called away at 14 a few months ago, then not paying attention and shorting puts at 14 to at least collect more premium if not get the stock position back, but hey sometimes resistance levels get breached and sometimes work gets in the way. i rolled again when the june 16 calls expired OTM. bought aug 16 calls at 0.84 and sold 2x the july 16 calls (ie. closing the long position opened back in may plus opening a new short position) for 1.05 total. my thought process here is that the aug contracts will capture the interim profit announcement, and based on last years calendar, will capture the ex-div date as well, allowing an early exercise to strip the dividend if optimal to do so. the july contracts capture neither of those, so rolling to july-aug calendars seemed the logical trade to me. i didn't see much benefit in rolling the far leg out to sept since aug is sufficient to capture that potential price catalyst. i may have to buy back the july calls on thurs this time around though, since i do want to be long those aug calls to capture the earnings announcement.


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## cbc (25 July 2013)

Ay Shark,

Yea,  Qbe had a nice run in May and would have make some nice change for some1.

I usually get filled at the midpoint of the spread,  I guess that's one of the advantages of the top 10 ere in Auz.  You sound like you like to play with the spread.  You won't be able to do much of that if you trade on the US as they charge cancellation fees  Which can be annoying for me when the spread moves so quickly that by the time you've put your order throu you wouldn't get a fill.

You should start trading on the US,  it can be quite addictive


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## Sharkman (25 July 2013)

yeah i heard about those cancellation fees, but those may end up being a non-factor. last week i was thinking over taking a punt on SPDR gold ETF options, looking at buying a 126-131 aug 17 call spread (to my eyes there is a piercing line around the end of june that appears to have consolidated, plus it was supported at 131 in april and may before breaking thru - possibly making 131 a minor support turned resistance level - that's my reasoning behind the trade idea in a nutshell). when i checked the delayed prices on the nasdaq website, at the time the 126 calls were trading at 2.40/2.42 and the 131 calls were 0.89/0.90. with the spread that thin, i wouldn't have even bothered trying to work the spread there, i'd just hit the offer on the 126s and hit the bid on the 131s simultaeneously.

didn't go thru with it as i didn't have US options permissions at the time, and i was too tired after work last week to read thru the OCC manual like IB tells you to before you tick the box to get your account approved for trading US options. i felt i should at least skim it in case there was something important in there that differs from the way ASX options work. i've gotten my IB account approved for US options now (after having skimmed thru the relevant bits of the OCC manual) but the opportunity on the GLD options may be lost already. have to wait for the next one to come along i guess.

when you say you usually "get the mid" on the ASX, do you mean you check what the bid/ask is, then your *initial* order is at the mid and gets filled straightaway, so if you were (hypothetically) trying to sell RIO puts into a 1.68/1.76 spread, you'd just offer 1.72 straight up? rather than trying to work the spread like i do? it could be that i need to experiment a bit and change things up a little rather than sticking to the same spread tactics every trade. i seriously doubt the MM autoquote systems work like this - but maybe when they see me cheekily shoving an offer of 1.75 into a 1.68/1.76 spread, they think i'm taking the piss and flag the order as one that should be cut no slack whatsoever?


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## cbc (26 July 2013)

Sharkman said:


> didn't go thru with it as i didn't have US options permissions at the time, and i was too tired after work last week to read thru the OCC manual like IB tells you to before you tick the box to get your account approved for trading US options. i felt i should at least skim it in case there was something important in there that differs from the way ASX options work. i've gotten my IB account approved for US options now (after having skimmed thru the relevant bits of the OCC manual) but the opportunity on the GLD options may be lost already. have to wait for the next one to come along i guess.




Yea m8,  welcome home.  Those ETF options seem popular.  I might av to look into them.  I thought ETFs were a small part of the market.  They have lots of weekly options / profit on steroids however I just trade the monthlies.  

Yea I'v always jumped in at the mid on the local ere and always got filled.  I've had trouble once with suncorp, I know suncorp, enough said.

Also do you have any trouble brining up RIO on your TWS option chain?  I keep getting the "no contracts" error?


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## omad (31 July 2013)

Don't worry about cancelation fees with IB on the US market, there's none with spreads, only single options and these have been reduced recently. I'm active, 70+ trades a month and my cancelation fees for last month was 0.06c.


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