Any option writers out there?

[sails]

Totally agree, especially on BHP, suggest using XJO (as a study), its IV has fallen but still not to the levels that IMO would make a short fly viable.

Also the 4 banks - even WOW often have lower IV than BHP. But take care with short calls and dividends - also option pricing alters with divs coming up - NAB, ANZ, WBC are all coming up for divs soon. Also ITM short puts are at higher than normal risk of exercise straight after x-div day.

Glad you found the post helpful, Cutz. I don't consider myself an expert - just happy to share what I know (or think I know!).

One other thing I could have added to that long post is if the market moves away, giving opportunities for adjustments. If expiry is approaching, it often pays to close out any very cheap shorts that are not too far away. I have watched as the market sometimes reverses before expiry and then makes a strong move in the opposite direction into expiry. If the shorts are closed out in addition to the other adjustments discussed in my last post, it can leave a few lotto tickets waiting further OTM...

 

[jackson8]

thanks for all that info sails

when putting different strategys through my excel sheet short flys seem a bit too much of a risk for an amatuer like myself

will continue looking at long flys on xjo or credit spreads with the option of turning into flys if need be

i want to try to get away from stock and concentrate on index if possible

like the idea of cash settlement and no headaches with assignment, exercise and dividends which like you say all needs to be taken into account.

gary

 

[sails]

Gary, I think it's important to find your own niche/s in options trading and definitely agree to stay within your comfort level. Options are so flexible and there are other ways to achieve bi-directional trading, if that is what is wanted.

Iron butterflies were one of the first strategies I really mastered in options trading and because of their narrow profit zone, it was necessary to understand how to make adjustments, etc.

 

[long88]

If you guys noticed, Flies have more smoother line, than calendar and condor.

but brokerage is a killer, and a lot more slippage when enter and exit

is this the same observation here ?

Hi Gary,

If you take the concept of long flies which work best in a high IV environment, the opposite is a good rule of thumb with short flies.

Long flies are cheaper to buy when IV is high and improve with falling IV. Therefore more premium can be taken in on short flies if IV is lower - as Cutz has pointed out and could explain why there isn't much premium at this stage as IVs are still too high for a worthwhile, short fly. It also depends on where you position a fly - whether it is ATM or OTM - this is something worthwhile to play around with as it helps gain a greater understanding of how the greeks affect multi-legged positions placed at different strikes, widths, etc.

It's not only IV that makes for a cheaper butterfly (or little premium for the short fly) - but also theta. So the further out in time, the cheaper it is to buy flies and not worthwhile premium for short flies. As expiry approaches, OTM flies lose their value quickly where ATM’s gain a little more quickly. If there is a vertical IV skew as opposed to a more symmetrical smile (eg otm puts with higher IV than otm calls (NB: different strikes)), it may be more advantageous to place sold flies above the market.

So, if you are taking the opposite side of the long fly holder, you want the opposite conditions. Obviously, it is ideal if the underlying has moved well away from the short fly as expiry approaches. One possible place to consider a short fly as an initial strategy would be on potential high point in the underlying where IV has fallen significantly and a strong move is expected (but not sure which way). A strong move would take the underlying well away from the centre of the strikes. If that happens, it is likely possible to place another spread in the direction of the move.

EG XYZ - market trading at $25. Sell 24.50 / 25 / 25.5 fly for 10c. Market drops to 24. If you think it's made a low point, one can then either add 24 / 24.5 put credit (or call debit (same strikes) if assignment is a concern of doing the same thing with puts). You can even add another short fly if you think there may be more down do come and if there is enough premium in the short fly due to IV increase.

You will see why I won't do these any more in the Oz market as they are too expensive in fees and slippage. They're not a holy grail as there is a risk of the market not moving when you put the first one on and then the fly holders gets all the profits at your expense.

I think there are better ways to trade than short flies as a stand alone strategy - but they can be useful as a starting point and then followed up with adjustments. Strategies like the condor are great if the market is range bound, but they are not easy to adjust if the market moves into the danger area. The short flies are great if the market moves away from the ATM area (where the best premium is to be found for the short fly) and then one can follow up with adjustments as I have described above, thus adding more favourable positions as the market moves. Of course, as mentioned above, the risk lies in the underlying not moving away from your short fly.

Well, I thought I could type up a quick answer – sorry for the long post. Very difficult to condense this stuff! And I am only passing on to the level of my own ability and understanding – there are others out there that are way ahead of me, so I am still learning too! I think it’s all about trying some of these techniques out (on paper!) in an effort to find your niche in options trading. What works for one may not work for another.

Hopefully some food for thought - and hope it makes sense. Have had heaps of interruptions while typing it.

PS - Cutz, I see you have also posted on the effect of time while I was typing up this long speel! Agree that short flies are an interesting subject!

 

[cutz]

It surely is nice to be able to call any time and ask anything (like "XYZ dropped today, was there some news that caused it?")

The only broker i trust is the online platform type . Seriously though, Iress is a good source of company specific breaking news, and the ASF sidebar is a good source of general news.

 

[mazzatelli1000]

thanks for all that info sails

when putting different strategys through my excel sheet short flys seem a bit too much of a risk for an amatuer like myself

will continue looking at long flys on xjo or credit spreads with the option of turning into flys if need be

i want to try to get away from stock and concentrate on index if possible

like the idea of cash settlement and no headaches with assignment, exercise and dividends which like you say all needs to be taken into account.

gary

Best to consider risk:reward and its effect on your LONG TERM expectancy etc.

I think on this thread or another someone mentioned selling bull/bear spreads with one week to go and theta would kick in. The risk taken is huge in proportion to the reward

Gratifying for a while until -/+2 sigma move

And if the premium collected was OTM......

 

[mazzatelli1000]

It is of personal opinion that playing for condor and credit spread risk:reward is not very attractive and usually by the time defensive action is taken, it is too late. Black swans are unpredictable.

Risking 2 to make 1, very rarely - probably better with binary bets and hedge with spot (am still inexperienced in this area despite guidance)
Anything greater than this ratio for vanillas makes me squirm

The only time I saw any good conditions for IC's and credit spreads was after the crash last year.
Vols were abnormally high, market was spooked and overpriced.
Was rewarded for selling the distribution

Think I posted somewhere last year on one of WayneL threads an IC on OIH with some ridiculous range of 30 -110 with spot ~ 70

Discuss

 

[IseMalakas]

Yes I mainly sell options, Covered Calls, Naked Calls & Puts (far out of the money). I mainly trade in the US using optionsXpress, & I think they're by far the best I've used, and I've been thru a few here in Oz. People shy away from US but the fact is there is over 1500 liquid optionable stocks there, so you can always find good trade setups, not just limited to our paltry dozed here! The only difference is different website! and a form every month to pull profits out!

 

[jackson8]

hi all
would like to open up a bit of discussion on one of my trades
21/05/09 sold 4 naked $2.83 puts with aug exp @ .145 for total of aprox $575 after fees on lgl

with sp dropping to around $2.85 over last few days have thought about the prospects of it dropping lower or possibly sitting in the price range for a while

to lesson the overall risk of aprox 12k in the event of the worst have closed position for $100 loss not that i expect the worst and i realise ex is some way off but just not comfortable having 12k on the line, sold strike being threatened and all

next step have sold 1 contract itm put further out in time to recoup the cost of closing position again aprox $593 so now only have 3.5k on line... note. i am still bullish on gold

my reasoning being that have lessoned the overall risk in the event of the worst happening from 12k down to 3.5k.........still have a position in the market and have recouped close to original premium from original sale of 4 x 2.83 strikes. giving myself extra time for my still bullish outlook

but i think overall my main objective was to lessen my commitment to a 12k purchase

very interested to hear feed back and am more than happy to be critiqued


gary

 

[cutz]

Hi Gary,

Personally i don't like being short naked puts even with stocks that i may want to own when i initially set up the position because when strikes are threatened a change of mind happens.

Using your example and considering IV has dropped right off on this one I’d be inclined to purchase some cheap OTM puts so you end up with a position that is more long.

I also note that you’re also bullish on gold but the position now doesn’t seem to have any upside potential, it’s also something you may need to consider.

 

[jackson8]

Hi Gary,

Personally i don't like being short naked puts even with stocks that i may want to own when i initially set up the position because when strikes are threatened a change of mind happens.

Using your example and considering IV has dropped right off on this one I’d be inclined to purchase some cheap OTM puts so you end up with a position that is more long.

I also note that you’re also bullish on gold but the position now doesn’t seem to have any upside potential, it’s also something you may need to consider.

thanks cutz

when i placed the initial trade i stretched my account a bit far as i already had other positions on

so main objective was to retain the premium yet reduce my overall risk

upside would only be if sp closes above strike on ex or there is a healthy rise in sp price in which case would close out position for any percentage profit

worst is that have to take delivery , but at least an amount which is within my budget

 

[cutz]

Hi Gary,

I see your point but rolling out and into the money may not be an ideal situation, with relatively low IV and assuming delta is running close to point 8, time decay on your position may not be that generous, you also have the added worry of assignment, I copped that early this year on WBC puts.

Anyway additional long OTM wings are helpful, buy them cheap, you can even offload some if the underlying makes strong moves but you feel that a reversal is imminent, taking profits but still keeping protection on.

I know you’re playing within limits on this, just tossing up ideas.

 

[Grinder]

Hey Gary,

Have'nt had the chance to look into lgl but just from a quick strategy perspective I'd be inclined to think along the same lines as Cutz & look to give yourself some upside while staying fairly protected. Being short vega with low IV levels could be damaging, rolling would'nt ease much of the pain.