Any option writers out there?

[jackson8]

Id really appreciate it if someone can talk me out writing near OTM naked calls in Australia, using a conditional buy order on the underlying equity near the strike price to cover?

I know the warning is "unlimited risk" but how often do these shares gap up significantly - ie <10 - 15%? Major gaps dont appear that likely, certainly I cant find any examples of extreme gaps of greater than 20% on optionable stocks (remember we're not talking small exploration or biotech startups that can explode up on a new discovery here - these are comparitively lower-beta, highly liquid stocks- CBA, NCM, RIO, AIO, BXB, HVN, FGL, TAH etc etc).....or am I just being blind?

What are the other dangers?

C'mon, scare the pants off me!

in the event of a takeover your conditional order will not save your butt

under present market conditions who knows what could eventuate

have you thought of selling calls over an index

 

[Beenjammin]

Thanks Jack,

True on the takeover risk, good food for thought, Ill have to consider covering by buying a much higher OTM call just in case.....

Looked at writing indexes but the price seems fairly low compared to some of the equities based calls, however I suppose the tradeoff is the gap risk is minimised (......or is it????). Im fairly ignorant on trading index options - any gotchas to look out for writing these? also,I know about the ASX traded options (XJO, XFJ etc) but dont know much about the SFE series - XDH9, XOH9, YDH9 etc. What are they based on? Is there a thread on this stuff I should read, keeping in mind I wanna write as opposed to buy?
Thanks,
B.

 

[jackson8]

Thanks Jack,

True on the takeover risk, good food for thought, Ill have to consider covering by buying a much higher OTM call just in case.....

Looked at writing indexes but the price seems fairly low compared to some of the equities based calls, however I suppose the tradeoff is the gap risk is minimised (......or is it????). Im fairly ignorant on trading index options - any gotchas to look out for writing these? also,I know about the ASX traded options (XJO, XFJ etc) but dont know much about the SFE series - XDH9, XOH9, YDH9 etc. What are they based on? Is there a thread on this stuff I should read, keeping in mind I wanna write as opposed to buy?
Thanks,
B.

by purchasing a higher call will provide a certain amount of insurance by which a defined loss can be calculated and also it will reduce your margin requirements as they can be quite high with naked calls

what strategy are you going to use to choose your strikes is it based on technical analysis or fundamentals

myself am only familiar with xjo index cant help you on the others

this is one of many links to more threads on options

https://www.aussiestockforums.com/forums/showthread.php?t=1366&page=13

 

[Beenjammin]

Thanks Jack,

Ill use TA - IMHO fundamentals tell you is if the stock is over or under valued compared to its book and forecasts (and we know how reliable those can be, so I'd use them for longer term investment decisions. TA can show if the stock is over or under sold based on price and volume (which reflects the attitude of the market) and can indicate the liklihood of it behaving in a certain manner in a given timeframe, so its better suited to dealing with options with a lifespan of a few months or weeks.

Any reason you ask? I'm keen to hear different points of view....

Thanks for the link.

Cheers
B.

 

[cutz]

Id really appreciate it if someone can talk me out writing near OTM naked calls in Australia, using a conditional buy order on the underlying equity near the strike price to cover?

I know the warning is "unlimited risk" but how often do these shares gap up significantly - ie <10 - 15%? Major gaps dont appear that likely, certainly I cant find any examples of extreme gaps of greater than 20% on optionable stocks (remember we're not talking small exploration or biotech startups that can explode up on a new discovery here - these are comparitively lower-beta, highly liquid stocks- CBA, NCM, RIO, AIO, BXB, HVN, FGL, TAH etc etc).....or am I just being blind?

What are the other dangers?

C'mon, scare the pants off me!

Hi

A good example of a decent gap up on an optionable stock would be on MQG 19Sep08, I’m not sure how naked calls would have been handled in this situation, I personally had naked puts on so this gap up helped me out and taught me a valuable lesson.

Setting up a conditional order to buy the stock may not help you out as the stock may drop away below your strike prior expiry so you’ll end up holding a stock you may not have wanted to own. Personally I prefer naked calls on the index, (these days i tend to stick with credit spreads) although at the moment I feel the upside risk could be tremendous.

 

[cutz]

but dont know much about the SFE series - XDH9, XOH9, YDH9 etc. What are they based on? Is there a thread on this stuff I should read, keeping in mind I wanna write as opposed to buy?
Thanks,
B.

Hi Again,

A list of SFE codes is available via the webiress help menu/database codes, an example would be APH9 which is SPI/Mar09. I’m not sure about trading the SPI options, quotes never seem to appear on my platform so I tend to stick with XJO options. BTW SPI options have a point value of $25 as opposed to $10 on the XJO options also liquidity on SPI options seem non existent, XJO options are OK.

 

[Beenjammin]

Hi

A good example of a decent gap up on an optionable stock would be on MQG 19Sep08, I’m not sure how naked calls would have been handled in this situation, I personally had naked puts on so this gap up helped me out and taught me a valuable lesson.

Setting up a conditional order to buy the stock may not help you out as the stock may drop away below your strike prior expiry so you’ll end up holding a stock you may not have wanted to own. Personally I prefer naked calls on the index, (these days i tend to stick with credit spreads) although at the moment I feel the upside risk could be tremendous.

Thanks Cutz - $7 gap = 25% 18Sept 08 - yeah, that looks nasty allright.

This kind of strategy would obviously have to really minimise exposure to the more volatile stocks like MQG- its sounding like Id need many many millions in risk spread over dozens of equities for fairly low returns to avoid getting wiped out.

With the calls - excuse the question, but can't you only ever write a naked put? How would you cover (unless you short the underlying equity at the time you write?)

What kind of time frames are you writing Puts over at the moment?

 

[cutz]

Hi Beenjammin,

Sorry i didn't totally understand your question on covering naked puts, naked puts are naked so there's no cover.

 

[jackson8]

Thanks Cutz - $7 gap = 25% 18Sept 08 - yeah, that looks nasty allright.

This kind of strategy would obviously have to really minimise exposure to the more volatile stocks like MQG- its sounding like Id need many many millions in risk spread over dozens of equities for fairly low returns to avoid getting wiped out.

With the calls - excuse the question, but can't you only ever write a naked put? How would you cover (unless you short the underlying equity at the time you write?)

What kind of time frames are you writing Puts over at the moment?

as a general rule writers will choose a shorter time frame 30-45 days maybe even less depending on their outlook of the underlying hoping for smaller movements

buyers general opt for longer time frames to allow for larger movements

 

[Beenjammin]

Hi Beenjammin,

Sorry i didn't totally understand your question on covering naked puts, naked puts are naked so there's no cover.

Sorry Cutz, I was asking is there a way to cover a sold put, I thought they were all naked by nature and am interested if there is actually a way to cover.

 

[jackson8]

Sorry Cutz, I was asking is there a way to cover a sold put, I thought they were all naked by nature and am interested if there is actually a way to cover.

if you short the stock the sold put would be covered but the risk is the same as having a covered write in that covered write bought stock could go to $0

covered put the short stock could rise dramatically

same risk reward payoff between the two

depends on your veiw of the market which one you wish to use

thats where other stragetys come into play to limit the risk re: spreads

higher the reward = higher the risk

there is no quick fix to make huge returns.......

 

[sails]

Sorry Cutz, I was asking is there a way to cover a sold put, I thought they were all naked by nature and am interested if there is actually a way to cover.

Short options can also be covered with long options. If you have a short put, you can buy a long put further OTM, creating a credit spread. It reduces your returns, but acts as a safety net by putting a ceiling on potential losses should the market fall heavily during the life of your short put. Calendar spreads are also useful, but not generally advisable if there is a risk of IV levels falling.

as a general rule writers will choose a shorter time frame 30-45 days maybe even less depending on their outlook of the underlying hoping for smaller movements

buyers general opt for longer time frames to allow for larger movements

IHMO, not necessarily so. It really is a balancing act between IV and gamma which helps to determine the positioning of both shorts and longs.

 

[Grinder]

continuing on from sails post... & if your shorts are far enough OTM, the negative gamma & vega from long dated ops can end up being a better trade off even with the minimal theta.

 

[cutz]

With the calls - excuse the question, but can't you only ever write a naked put? How would you cover (unless you short the underlying equity at the time you write?)

G’Day,

I think I’ve got what you’re on about; I guess you’re suggesting covering a short put with a short underlying so you end up with a synthetic short call, you’ve got downside protection but massive upside risk.

Personally I prefer to protect short puts just as Sails suggested, setting up a credit spread when the conditions are right.

Check out this thread, https://www.aussiestockforums.com/forums/showthread.php?t=1366 ,its got some excellent contributions from WayneL , Sails and a few others who have good insight in the options biz.

 

[jackson8]

its been a bit quite on the option threads of late so thought i may try to get a few fingers to keyboard by asking the question

........what is your favorite option strategy or to put it another way which strategy has produced the most success for you of late ?

.........this is probably aimed at the option newbies such as myself so i will answer my own question first

i have been selling otm puts on a few of the lower price stocks lgl....osh....sto

my time frame is monthly but if the Sp makes a big move in a short time frame eg 7days and if it shows a 50% return i will buy them back and then look at something else which i think is approaching the bottom of a trading channel , otherwise just hold them till expiry.

have sold a few which are a few months out but find it frustrating with such long time frames

i have not been assigned yet as i tend to sell way otm puts although that could change this month as have sold some atm puts on one of the above

occasionally i have sold a few credit spreads but find that the extra i have paid for insurance could have been better kept in the bank

any feedback would be appreciated as this forum is basically my only contact with others who share my interest in the markets

Gary

 

[cutz]

Hi Gary,

In a nutshell I mainly put on XJO credit spreads/iron condors, no more than 4 to 6 weeks out, sometimes trading in and out of the short positions. I’ve had a crack at the US market with SPY options but ironically I’m finding the ultra high liquidity/fast movements and 100 lot contracts hard to get used to, also being up late is a bit of a drag.

My other scheme is writing calls against my long term stock holdings doing whatever it takes to keep assignment at bay.

 

[jackson8]

Hi Gary,

In a nutshell I mainly put on XJO credit spreads/iron condors, no more than 4 to 6 weeks out, sometimes trading in and out of the short positions. I’ve had a crack at the US market with SPY options but ironically I’m finding the ultra high liquidity/fast movements and 100 lot contracts hard to get used to, also being up late is a bit of a drag.

My other scheme is writing calls against my long term stock holdings doing whatever it takes to keep assignment at bay.

hi cutz
thanks for the reply
i have had bit of a play around with xjo as well with limited success , i find that when looking at more than a month out the otm strikes dont seem to carry a lot of premium plus the mms only seem to quote two or three strikes out

i also like the fact that with the stock ops that if the trade does go against me i can take delivery in the case of a put and then sell calls over or if a sold call strike is threatened i can buy the stock to cover it

am in process of learning how to defend positions which may be threatened before i get too involved with index ops
as i think that in the long term index options may be the way to go.

although a day like today with a 100 point rise may have put the wind up me . i gather thats where knowing the stragetys to defend the position come into play

gary

 

[mazzatelli1000]

Wow, ASF has had some cool discussions --- I like the clash of the titans on the SPI trading thread.

BTW haven't seen any WayneL activity ..... sleeping in his coffin?? :batman:
Im not up to speed on this forum!!

my time frame is monthly but if the Sp makes a big move in a short time frame eg 7days and if it shows a 50% return i will buy them back and then look at something else which i think is approaching the bottom of a trading channel , otherwise just hold them till expiry.

I like your approach, with regards to profit taking

RE: holding til expiration
Try this - ask yourself "Would I sell this put/call/spread at today's prices?"
If the answer is no, maybe it is time to close out and look to short something else for beefier premium
Not to mention evil negative gamma overpowering theta during the run up to expiration

If I remember right, you're with Commsec and the commissions hurt
I hope that doesn't deter you from closing out positions and taking profits/minimizing losses

Because to date I haven't heard/seen traders going out of business due to commissions....

Also, from past experience I have had short options come back from the dead on expiration day --- should have closed out the spread/short option ---not happy Jan

occasionally i have sold a few credit spreads but find that the extra i have paid for insurance could have been better kept in the bank

Personally I like to sleep at night, Ill take the insurance
IMO Like any other business, there can be unforseen circumstances that occur despite all the precautions you take

Why not put on a larger size of credit spreads?

Is it because you are worried about the short strike getting ITM & being assigned?
I ask because when I was newish (not implying you don't know anything) I used to do the calcs
E.g. CBA = $30, 10 contracts would mean 10,000 shares - so total to cover is $300,000 ---- F**K ME!!!

That shouldn't be a worry, if you understand about early exercise and adjusting

have sold a few which are a few months out but find it frustrating with such long time frames

May I ask the reasoning behind selling further out?
Is it just to obtain more premium?

There was a thread started by WayneL about how he would analyse an index write.
Would look at historically how much the underlying moved for a particluar period of time e.g. X% in Y number of days and then select strikes according

 

[mazzatelli1000]

i also like the fact that with the stock ops that if the trade does go against me i can take delivery in the case of a put and then sell calls over or if a sold call strike is threatened i can buy the stock to cover it

In the case of the short put - what if the stock continues to drop after you have been assigned???

 

[mazzatelli1000]

Hi Gary,

In a nutshell I mainly put on XJO credit spreads/iron condors, no more than 4 to 6 weeks out, sometimes trading in and out of the short positions. I’ve had a crack at the US market with SPY options but ironically I’m finding the ultra high liquidity/fast movements and 100 lot contracts hard to get used to, also being up late is a bit of a drag.

I recommend having some red bull and vodka to keep up with it all