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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.
 
Here is the NAB screenshot:
 

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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
 
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.
Click to expand...

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...:)
 
sails said:
to check/change the divvie and see if that solves the problem.
Click to expand...
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.
 
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.
Click to expand...

Yeah - don't remember any problems with TWS divvie dates - only with the amount. Be interesting to see if that's the problem here.
 
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.
Click to expand...
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.
 
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.
Click to expand...

No worries, Fox- glad it's sorted. :)
 
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.
 
Hi Fox,

Actually October was kind to me, pity all the action started on my first day away, minor problem.:D

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 ?
 
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.
Click to expand...
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 ?
Click to expand...
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.
 
Hi Fox,

Yeah i have difficullty understanding my own method :D,

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 :eek:.

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.
 
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. :)
 
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. :)
Click to expand...
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,

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. :)
 
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 :2twocents
 
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 :).
Click to expand...

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... :cautious:

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
 
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.
Click to expand...
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... :)
Click to expand...
It's not old ground for me, and for the newbie lurkers of this forum. You input is much appreciated.
 
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.
Click to expand...

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...:eek::D.
But that was all part of the learning curve!
 
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.:)
 

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