Any option writers out there?

[positivecashflow]

Hey all,

Just wondering if theres any option writers out there?

Cheers,

J.

 

[positivecashflow]

Ok.. so if there aren't any option writers, are there any option traders?

Cheers,

J.

 

[Joe Blow]

Ok.. so if there aren't any option writers, are there any option traders?

Cheers,

J.

PCF, I'm interested in options but since I can't trade them with e-trade I haven't actually done anything about it.

Can you trade them online? Who do you use?

 

[positivecashflow]

PCF, I'm interested in options but since I can't trade them with e-trade I haven't actually done anything about it.

Can you trade them online? Who do you use?

Hi Joe,

Looking at the e-trade website, they have the facility to trade options online. I believe Comsec allow you to trade options online as well. I was browsing another forum and found this interesting post which talks about Rivkin Discount Stockbroking:

If you know what you're doing, I've personally found Rivkin Discount Stockbroking to be absolutely fantastic over the last few years.

Here's why:

1) Very competitive brokerage on Option trades (currently from $44.00).
2) Ability to have naked written positions open with reasonable margin levels (similar to OCH margin requirements).
3) If exercised, brokerage rate on the share buy/sell is at their discounted internet rate (min of $19.80, and as cheap as 0.077% on large dollar amounts (for e.g., buy or sell $100,000 worth of shares for just $77.00 brokerage - a BARGAIN!).
4) Web site includes live option quotes including market depth of option prices, plus ability to create watchlist of particular options of interest.
5) Extremely accurate order placement (always via telephone for option trades, however). The one and only time they made an error with me they corrected it to my satisfaction at their expense.
6) Local call cost from anywhere in Australia to place trades.
7) If you setup a cash management account, they pay reasonable interest EVEN ON YOUR FUNDS WHILE ACTING AS MARGIN COVER! This is pretty much double-dipping I think, but I'm not about to tell them that and spoil it.

They will happily calculate and place multi-legged trades for you based on an overall net credit/debit. In other words, either your whole trade gets filled at the right net price or none of it does. Very handy for rolling written positions, setting up credit/debit spreads, etc...
9) They will Email you immediately upon trades being filled, plus notify you a week before expiry if you have options due to expire, plus Email your open position summaries as often as you like (I get mine daily).

I've used other brokers (both Full Service and Discount), and no-one else that I've tried is as flexible or as good value. Futhermore, I've found that full-service brokers would end up "advising" me in ways which would quite often lose money! I believe it makes much more sense to be completely responsible for your own trades, so overall I'm genuinely delighted with Rivkin Discount Stockbroking. Their website for anyone interested is:
http://www.rivkinstockbroking.com.au

I should point out that I have absolutely nothing to gain by recommending them, other than I would like to see more and more people trading the Australian options market to help keep up the liquidity and reduce bid/ask spreads.

Anyways I am still on the learning curve and havent started trading yet...

Cheers,

J.

 

[positivecashflow]

In all honesty, I would pursue writing options rather than trading them though (to start with).

Cheers,

J.

 

[RodC]

Comsec do allow online trades. (from $34.95 I think).

I've set up the options account but with them but haven't used it yet.

Writing options is my intention also (not trading/buying).

Rod.

 

[Joe Blow]

Hi Joe,

Looking at the e-trade website, they have the facility to trade options online. I believe Comsec allow you to trade options online as well. I was browsing another forum and found this interesting post which talks about Rivkin Discount Stockbroking:

Anyways I am still on the learning curve and havent started trading yet...

Cheers,

J.

I wasn't aware of that PCF. Thanks for letting me know.

I'm a bit like you, I'm still on the learning curve (probably a bit lower down than you) and feel as though I still need to increase my knowledge before jumping into derivatives.

I'm sure I'll learn much from the threads in this forum.

 

[positivecashflow]

I wasn't aware of that PCF. Thanks for letting me know.

I'm a bit like you, I'm still on the learning curve (probably a bit lower down than you) and feel as though I still need to increase my knowledge before jumping into derivatives.

I don't think anyone can beat me at being a newbie at all this... (don't be fooled.. I know nothing!)

Writing options is my intention also (not trading/buying).

Rod,

What will be your option writing strategy?


Cheers,

J.

 

[RodC]

Hi PCF,

I'm just planning on writing a few covered calls to increase my cashflow from my holdings. - Also helps cover the interest on the margin loan. I've just been actively "rejigging" my portfolio so that I have enough holdings of some "optionable" stocks to make it worthwhile after brokerage costs.

I've now got enough of a couple of different stocks to make it worthwhile (I hope), but I'm really treating it as a learning curve at the moment.

regards,

Rod.

 

[positivecashflow]

Hi RodC,

How are the shares you are currently holding which you wish to write the covered calls trending?

Cheers,

J.

 

[still_in_school]

Hi PositiveCashflow,

im an option trader, i dont write options, but i do buy and sell options, as for writing them i see them more as a risk, (i dont know what the market will do next week or so, so i need to be able to turn them over quickly, option market is a very fast game),

but, there are many successful, option writers out there.

but mainly i have sms alerts set + email alerts, but that is mainly because i do my charting the night before, and have only a few selected stock that i will be trading the following day) and watching, on predicted market movement, along with my option trading, i have stop losses that are set and its pretty tight...

just a few other things to note is, before i purchase any options, i talk to my broker first and give my reasoning why i think its a trade, and then having my broker comment, is further confirmation, if so or not to go ahead, (also, my broker will call me through out the day, if there are any options, he suggests or recommends trading)

the broker i use is Tricom, a little more expensive, but i rather pay a little more, in talking to someone, as options is a violitale market

prices are

$55 straight buy and sells
$65 recommending to your broker, and getting feedback
$75 full service

Cheers,
sis

 

[RodC]

Hi Positivecashflow,

The shares I'm holding are trending up or have been and are currently going sideways, I don't hang on to shares that go down - I get rid of them. They aren't particularly volatile so the option premiums aren't that large. My plan is to write out of the money calls with a 1-2 month expiry, all the exercise prices are higher than my purchase price so even if I do get exercised I will still be taking a profit.

regards,

Rod.

 

[Bingo]

I write and trade options and have a turnover of around 10 transactions a month. Basically my rules are:

1. never write and uncovered call;
2. only write uncovered puts if sufficient funds are available to take deliverery.

I have been trading options for about 10 years and I have found that making a profit is difficult. I currently trade with Andrew West and the cost is $55 or 1%. The highest cost for me is being exercised (or as they refer to it as being assigned) where the trade is not treated as an on-line trade and therefore the discount rates don't apply. It can also occur as separate trades if they exercise on different days so that the minimum brokerage can apply to multiple trades. For example I was exercised on NCP on 5 contracts on 4 separate days last week. Regardless of the rules they tend to charge me 1% on all the trades which is not so bad.

I could write a lot as I have been injured (financially) on a number of occasions, but a few of the lessions learned:

1. A number of authors suggest that writing calls against owned shares is a way of making etra income. I have found this to be effective, however, be careful if the stock is a long term hold and you really don't want to sell. It can be a downer if you write an out of the money call and see the price go well past the exercise price and you lose the stock and see that you would have been far better off to simply hold the stock. The argument is well I made money anyway. However in practice the fact is that for out of the money calls for 1 to 3 months the premiums are small relative to the share price and so you make small amounts when you win and miss out on lots when you lose.

2. What I tend to do is write put options and if they are exercised I then write calls options against the stock. I do this with stocks that I would be comfortable to own. A practical example.

* 6 January 04 - Sold 20 Mayne May 04 $3.25 puts at 19.5c Income $3,822.60
* 27 May 04 Exercised - took delivery of 20,000 Mayne at $3.25 Cost $65,082.50
* 28 May 04 - Sold 20 Mayne Aug 04 $3.25 calls at 9.5c. Invome $1,822.60
* 25 June 04 - Sold 20 Mayne Nov 04 $3.25 puts at 16c. Income $3,122.60
* 26 Aug 04 - Call exercised. Delivered 20,000 Mayne at $3.25. Income $64,920

Profit to date $5,482.60 and should get another $3122.60 in November.

3. I will no longer trade Mayne as I think the price has gone high enough, but this is only my judgement. The stocks I am currently in are Coles (which has been excellent) SRP (which I have been exercised both ways on numerous occasions), TLS and NCP.

4. Remember that you can be hurt. In my case AMP which just went to far.

A couple of final comments. Have a look at the ASX web site. From the home page put the cursor on ASX markets and select options. You can enter a stock code and get the option market prices. This has a 20 minute delay and is often unreliable. However, much better, under "calculators and tools" select "theoretical options price calculator". The rest is follow your nose. There is a demo which I suggest you do first. This tool gives you the theoretical option prices for any stock and option series. The tool is interactive and you can change variables and get updated prices. When I first traded these tools were expensive and I now use this facility every day for strategy planning and quoting.

Also there is plenty of other information such as the tax treatment of option trading on the site.

 

[positivecashflow]

Hey all thanks for all your responses...

im an option trader, i dont write options, but i do buy and sell options, as for writing them i see them more as a risk, (i dont know what the market will do next week or so, so i need to be able to turn them over quickly, option market is a very fast game),

As an option writer time is on your side. You have sold a depreciating asset to the option buyer (the effects of time decay). By buying a depreciating asset isn't this more risky? As for exiting the market should the trend go against your view as a writer, there are defensive actions available as well to minimise your losses eg closing out, rolling down or rolling out.

My plan is to write out of the money calls with a 1-2 month expiry, all the exercise prices are higher than my purchase price so even if I do get exercised I will still be taking a profit.

How far from the current share price will you be writing your strike price?

1. never write and uncovered call;

If you were able to locate a downtrending share wouldn't the risk of writing a naked call be minimised?

The highest cost for me is being exercised

How close to the share price are you writing your strike prices? What about the time frame that you are writing your options? From your examples below it is apparent that you are writing 3-4 month options. A lot can happen in that time! Isn't the point of writing options to not be exercised and therefore not pay the extra brokerage?

Thanks for sharing your experiences Bingo. I am on the learning path and I may be wrong in my assumptions. Please correct me where I am wrong. Thanks also for the heads up on the ASX site.

Cheers,

J.

 

[Bingo]

If you were able to locate a downtrending share wouldn't the risk of writing a naked call be minimised?

It would be decreased, however, it is effectively unlimited and this is a risk I am not prepared to take. It could bankrupt you. Shares prices can move very fast and because option price move more then you losses can be high.

Take an example Mayne is currently $4.02 and the Mayne $4.25 calls are worth about 5c. If Mayne goes to $4.30 the calls go to 16c and at $4.55 to 28c. So you could sell for 5c to-day and be up for 28c (nearly a 600% loss) in a matter of days. Is this a likely outcome, probably no, it is possible, definitely yes. Have a look at my example on Mayne posted earlier. If I had not been covered on the calls I would have taken a significant loss. Mayne have risen from $3.30 to $4.02 in the last two months.

Let me give you a real life example that while it will probably never happen again, is food for thought. It also shows how long I've been in the game. The facts are as close as I can remember. The day before the 1987 crash I was very bearish. I rang my trader on the floor and told him I wanted to position for a market fall. I sold short period well in the money calls in NCP and BHP. A good decision.

I spoke to him the next day and he told me that he had failed to mention that the brokers acting for Bond were trying to sell 10,000 Oct $ 9.75 Put option contracts for 1c the day before. Before the crash BHP were about $10.30 and the contracts had two weeks to go - in other words the probability of them ever being worth anything was zero). This was when Bond was having a tilt at BHP.

You could have bought these for $100,000. The next day they were worth around $4 i.e. $40M. This is extreme but can happen.

 

[Bingo]

If you were able to locate a downtrending share wouldn't the risk of writing a naked call be minimised?

It would be decreased, however, it is effectively unlimited and this is a risk I am not prepared to take. It could bankrupt you. Shares prices can move very fast and because option price move more then you losses can be high.

Take an example Mayne is currently $4.02 and the Mayne $4.25 calls are worth about 5c. If Mayne goes to $4.30 the calls go to 16c and at $4.55 to 28c. So you could sell for 5c to-day and be up for 28c (nearly a 600% loss) in a matter of days. Is this a likely outcome, probably no, it is possible, definitely yes. Have a look at my example on Mayne posted earlier. If I had not been covered on the calls I would have taken a significant loss. Mayne have risen from $3.30 to $4.02 in the last two months.

Let me give you a real life example that while it will probably never happen again, is food for thought. It also shows how long I've been in the game. The facts are as close as I can remember. The day before the 1987 crash I was very bearish. I rang my trader on the floor and told him I wanted to position for a market fall. I sold short period well in the money calls in NCP and BHP. A good decision.

I spoke to him the next day and he told me that he had failed to mention that the brokers acting for Bond were trying to sell 10,000 Oct $ 9.75 Put option contracts for 1c the day before. Before the crash BHP were about $10.30 and the contracts had two weeks to go - in other words the probability of them ever being worth anything was zero). This was when Bond was having a tilt at BHP.

You could have bought these for $100,000. The next day they were worth around $4 i.e. $40M. This is extreme but can happen.

Bingo

 

[positivecashflow]

Bingo,

Do you use charting (technical analysis) to help you with your option writing strategies?

Cheers,

J.

 

[Bingo]

J,

Not in the past. I have always used fundamental analysis. What I have done is selected a number of stocks I am comfortable with and focus trades on them. I have now started to look at technical analysis to support my position.

A point from earlier comments. I target $1,000 as my minimum premium on any sale of options (this is to keep the trading costs as a reasonabe % of the premium). As I only sell puts positions where I can take delivery if necessary. I find I need substantial cash on hand for safety. It OK to say you will write short expiry date out of the money options but this requires you to sell a larger number of contracts and tale on a higher risk.

I have found that if you can pick a trend then longer term in the money writing is better.


Bingo

 

[RodC]

Thanks for your insights Bingo.

It's good to hear some first hand experience of option writing, not just theory. It sounds like you've figured out what works for you.

Rod.

 

[GreatPig]

Bingo,

You could have bought these for $100,000. The next day they were worth around $4 i.e. $40M.

What happens in an extreme situation like that if the people who lost all that money go bankrupt and can't pay?

Who then pays all the winners?

Cheers,
GP