ANZ Call Option

[Student of Gann]

Hello I would appreciate some advice on selecting a good at the money call option for ANZ . My Cycle theory indicates Low for 10th July or 13th July so either 18.20 will be the low and price will move higher or we could trade a bit lower than that point and come back but Friday or Monday should be Low with trend up till the 28th July where I will look to exit the trade . yesterday i was watching ANZ to close lower than 18.21 and it did by 1 cent to close at 18.20 but some of the at the money calls had very large spreads and were pretty illiquid . was thinking a three month at the money call might give me a bit a room and I am glad to pay a premium for that advantage as it is a sensible time frame to work with , there is also another call ANZKT9 that has good open interest but expires on the 20th August which is a short window . any advice would be appreciated thanks

 

[cutz]

Hey buddy,

Don't let the spread fool you, it's just the slippery market makers laying it on, you should get a fill near the midpoint.

What sort of equivalent stock position are you looking at ( in terms of delta ) ?

 

[Student of Gann]

thanks . yes say there is a spread between bid at 66 and sell at 80 of 14c maybe it's just a case of incrementally raising the bid towards the midpoint until it gets hit , I may have to go over the midpoint valuation to entice a seller , they can be pretty illiquid at times and difficult to estimate fair price . in terms of Delta I am not entirely sure how far the price of the option is likely to increase but I am expecting the underlying to move from approx 18.20 10th July low up past the 9th June high at 21.22 which equates to a 16 1/2% increase as Top is indicated for the 28th July a period of 18 days .

 

[Sharkman]

i'm sure you're already aware of the situation regarding "advice" around here - none of us are permitted to provide it. so i'll just put down a few "thoughts" on the scenario.

first of all, i never, ever just hit the bid or hit the offer when trading ASX options. unless the spread is like 2 ticks, which it almost never is. as you already noticed, the spreads are hideously wide, trading is simply not viable if you cross the whole thing every time. my personal approach is to start about halfway between the mid and my side of the spread, then move it in a tick or two every few seconds until i either get filled or i'm not prepared to cross any more of the spread. don't give the MMs an inch, you know they won't give you one.

in terms of the options themselves. i'm usually reluctant to buy 3 month ATM options straight up, that's a lot of extrinsic to be outlaying, especially with vols significantly elevated above historic levels. i normally spread it somehow to partially offset the decay. even if you think a 30'ish IV is cheap because you expect the RV to be 60 - think twice before you try to trade that. 30 for ANZ is expensive vs historic norms. i've learnt the hard way over the years that the MM is generally going to be right about vol more often than i am, they have all the complex systems and models to do this sort of thing, we just have to accept the fact that they're going to be smarter than we are at pricing vol.

if i wanted to play for a 3 month rally but i didn't think it would rally immediately, i might look for a call calendar, eg. buy the Sep or Oct 18.50 calls and sell the Jul 18.50 calls against it. the skew is not all that conducive to calendars these days though. it's not negative either, just merely neutral, whereas a few months ago when the crisis first started flaring up, both delta and tenor skew was crazy steep, i was buying 2-3 month 20-30 delta calls for 40-45 IV and selling weekly ATM calls against those at 80-100 IV!

if i wanted to roll the dice a bit i might go for a zero cost diagonal. buy 2-3 month OTM calls, sell nearer dated ATM calls against it for about the same amount. the goal with this strategy is to get those long calls to "on the house" status by punting on the nearer dated short calls expiring worthless. then it's much easier to just let them run, because you've already recouped the premium you paid for them. i am a big fan of this strategy as i find that getting a position to "on the house" status is a very useful psychological tool when options trading. i used this quite a bit earlier in the year when the weekly ATMs were going at 80-100 IVs in most of the majors. worked fairly well, but as noted in another post, with the skews flatter now, the strategy has had its time in the sun, at least for now.

another strategy could be to buy a call vertical spread, which i don't often do because of delta skew, but it might actually be ok at the moment. i didn't check the market too closely last week (too busy with my day job), but from what i saw a few days ago, delta skew has been flatter than normal lately. these are rough guesses as i wasn't really watching the market last week, but one such spread could be to buy Sep 18.50 calls for about 0.85 (~30 IV) and sell the Sep 20.50 calls for about 0.225 (~28 IV/~20 delta). costs 0.625 so breaks even at 19.125, maxes out at 20.50 for a profit of up to 1.375.

that's just how *i* would look at it though, others might approach it differently. there's no black & white way to do it.

 

[cutz]

thanks . yes say there is a spread between bid at 66 and sell at 80 of 14c maybe it's just a case of incrementally raising the bid towards the midpoint until it gets hit , I may have to go over the midpoint valuation to entice a seller , they can be pretty illiquid at times and difficult to estimate fair price . in terms of Delta I am not entirely sure how far the price of the option is likely to increase but I am expecting the underlying to move from approx 18.20 10th July low up past the 9th June high at 21.22 which equates to a 16 1/2% increase as Top is indicated for the 28th July a period of 18 days .

Cool,

Just checking you understand the relationship between the rate of change of the option compared to the rate of change of the stock itself, on top of that there's time decay that needs to be overcome ( theta risk ) , then there's volatility risk that needs to be accounted for, not sure what those ANZs are priced at but the back off in volatility in a market recovery also needs to be overcome, bit of slippage in and out plus broker commish, any reason why you've chosen options for a pure delta play ?

 

[Student of Gann]

thanks for the info very helpful , will have a better look after work.

 

[Student of Gann]

Past cycles indicate an average gain of 15% over roughly the same time period . All three cycles had Minor Tops in August followed by small counter trend reactions before moving significantly higher so if the 10th July turns out to be Low I m looking for the 9th July High to be taken out which would equate to an approx gain of 16% on Fridays Low . Intermediate Top could be indicated for around 28th July which is where I will be looking to sell if we have a decent move up then a possible re entry on pullback if conditions align with the Forecast Model . The midpoint options strategy is a useful piece of information that I will use when entering this trade . The criteria for this trade is for price to move higher off 18.20 and take out the 9th June High within a period of 18 days so I am looking to select a call option that will give me some flexibility to either sell on the 28th July depending on whether price is moving in line with my forecast and minor Top is indicated at that point so as the expectation is for trend to continue up I wouldnt be looking at hedging options positions as Cycle indicates up although I appreciate the complexities and strategies that can be used in this area . I am thinking a three month atm call option might be the best bet as it will provide me with a good amount of time for this forecast to work out even if I have to pay a premium . A one or two month atm call option might deteriorate quickly due to time decay and turn out to be too iliquid making it difficult to sell , so I will look for a three month atm call which has good open interest and volume allowing me a more flexible time frame and improved chance of market liquidity . Thanks

 

[cutz]

thanks for the info very helpful , will have a better look after work.

Hey buddy,

Yeah much to consider,

I'm certainly no expert on share trading and chart analysis, if you want to work with options trading delta we'll start simple, this is not a recommendation, just building a picture starting from basics.

A starting point would be to work out your position size i.e. 500/5000/50000 ANZ shares, to set up an equivalent stock position of 5000 ANZ shares using your method which is buy ATM Calls you need to buy approx. 100 ATM options, this is worked out by 5000 (Position size you're chasing or Equiv. Stock Position. (ESP)) / 100 ( Multiplier ) / 0.5 (approx delta of the ATM option), if the position goes your way delta will increase, you will need to offload contracts to bring you back down to an 5000 ESP, this is why you need a proper options broker (Interactive Brokers), imagine trying to scalp gamma with wespac stockbroking for instance !

The next major consideration is the daily cost of holding (theta), you can use an option modeller to look at the risks graphically, this will help you determine strike selection and and expiry selections, you can see how if you go more into the money and further out in time daily theta risk will decrease, the trade off is higher premiums...

 

[cutz]

@Student of Gann, no worries, just read your last post, slipped it in before mine

 

[Sharkman]

just checked the market. the skew is flatter than i thought, in fact it is almost completely flat. a few mins ago the Sep 19 calls (~48 delta) were 0.70/0.94, Sep 21 calls (~20 delta) were 0.20/0.28. there's less than a vol in it, they're both around the 29-30 level.

assuming mids that's 0.58 before commissions. another way of looking at it is that the premium would be 29% of the distance between the strikes, as a general rule when going for long verticals i like to keep it between 20-30%.

although it might seem that there's not much point to the sold call as it recovers less than a third of the premium of the bought call, its theta is actually about 2/3 of the bought call at the moment, because ATM options decay faster closer to expiry but OTM options decay faster further out. if i was trading the position i'd be going for something like that with the elevated vols and flat skews we're seeing currently. YMMV.

disclosure: i am long ANZ Sep 21 calls. one of those "on the house" positions i was referring to earlier.

 

[Student of Gann]

placed a bid at the midpoint of a three month ATM call option but didn't get filled so took the trade off awaiting possible pullback into Wednesday . increased the bid marginally above the midpoint for a few hours hoping to get filled but no outcome . 10th July Low should hold .

 

[cutz]

placed a bid at the midpoint of a three month ATM call option but didn't get filled so took the trade off awaiting possible pullback into Wednesday . increased the bid marginally above the midpoint for a few hours hoping to get filled but no outcome . 10th July Low should hold .

Yeah, It's frustrating sometimes, often I find the bots to be more motivated with spreads, how many ticks to one side did you hold off ?

( bots with motivation, not sure if it makes sense ?? )

 

[Sharkman]

have to be prepared to go at least 2, maybe even 4 or 5 ticks their side of the spread if you really want a fill on 3 month contracts. ATM front month contracts tend to get the best (usually mid) fills, the further out in time + the further away from ATM you go, the more of the spread they tend to make you cross. even on ATM front month i'll usually be prepared to go up to 2 ticks their side before pulling the order off, unless i really want (or desperately need!) a fill.

 

[cutz]

have to be prepared to go at least 2, maybe even 4 or 5 ticks their side of the spread if you really want a fill on 3 month contracts. ATM front month contracts tend to get the best (usually mid) fills, the further out in time + the further away from ATM you go, the more of the spread they tend to make you cross. even on ATM front month i'll usually be prepared to go up to 2 ticks their side before pulling the order off, unless i really want (or desperately need!) a fill.

Agree, although 5 cents is probably a bit much.

Although I don't always practice this, don't wait till just before expiry when rolling underwater positions, got a messed up position filled yesterday with 1 cent worth of fat for the MM, tomorrow things can get hairy, I reckon the bots are programmed to feel if a retailer needs to get out of a position just before the close on last thursday of the month ( now 2nd last )

 

[Sharkman]

Agree, although 5 cents is probably a bit much.

Although I don't always practice this, don't wait till just before expiry when rolling underwater positions, got a messed up position filled yesterday with 1 cent worth of fat for the MM, tomorrow things can get hairy, I reckon the bots are programmed to feel if a retailer needs to get out of a position just before the close on last thursday of the month ( now 2nd last )

5 ticks (2.5c), not 5 cents. though i probably should've just said 2.5c to begin with as tick size doesn't change (it should though, options over TLS and other dollar cheap underlyings should have a 0.1c tick size IMHO). if it's a 3 month contract (or a <25/>75 delta contract) showing 0.70/0.94, it wouldn't be unusual for them to make you fork out 0.845 or so.

if it's really far ITM or OTM that the outcome is obvious, they only seem to demand 1-1.5c of extrinsic to close out on expiry day. especially when closing as part of a roll out to the next month, usually can get that done within 2 ticks of the mid on the new leg and pay 1-1.5c of extrinsic to close out the old one.

if it's at the strike on expiry day yeah they will charge a crazy amount of extrinsic to close. a lot of open interest in the contract might cause it to exhibit pinning behaviour as well. i tend to prefer rolling the dice a bit with these, there's still a good chance of a narrow OTM expiry or no significant gap the following day, either of which fetches you some nice decay you would've otherwise had to pay to close out. i find the short gamma is manageable if fully cash collateralised, the occasions where it gets assigned then gaps against me the following day i feel gets compensated by all the instances of final day extrinsic i didn't have to pay the MMs to close out. YMMV.

if not fully cash collateralised where one has to avoid taking the assignment with no more IB margin facility, i definitely can see why closing out/rolling well before expiry would be the way to go though.

 

[Student of Gann]

if the 10th July holds at 18.20 we could see trend up till 27th July followed by a minor reaction to the 4th August then up to 17th August to complete Intermediate Top before reaction to either the 26th or 28th August . Picked up some ATM 2 month call options expiring 17th September which should provide enough time for the forecast to play out . if price moves up to the 27th July and takes out the 9th June High I may take the position off and wait for a pullback to the 4th August and re enter or alternatively I could just hold the position till the 17th August where Intermediate Top is due . the issue is if we do experience a pullback to the 4th August I will have to ascertain the amplitude of the reaction based on previous cycles it could be 3.5% or 10% so once this time approaches and the Top price is clear I might be able calculate an estimate . Also if I was to the enter on the 4th -/+1 as there are only 13 days between entry point and projected exit point this would entail trading a very short call options position which might prove tricky to re enter depending on the amplitude of the reaction .

 

[cutz]

Hi Student of Gann

Just trying to follow your trade, I'm not to familiar with the terminology

I'm assuming you picked up some Sep ANZ 18.00 Calls for around 1.125 ? , the daily cost at the moment is bearable ( for now ), why exit if the $21 high is taken out ? The position can probably be morphed into a free plus some bull call spread ( obviously depending on conditions on the day ) , you will still have some positive delta, but watch out if you're holding a American short call through an ex divi.

What do you mean about a very short call being tricky to re-enter ??

 

[Student of Gann]

Two month .075c calls with a strike price of 19.00 a little bit out of the money . Minor Cycle High is indicated for 27th July and depending on how price moves into this point will influence my decision on whether to sell and adopt a re entry strategy or just ride the position out till the projected Intermediate High Date of 17th August -/+1 . My decision will primarily be based upon amplitude and pattern of price into this Date but based upon a composite of past averages price should exceed the 9th June High .

 

[cutz]

Two month .075c calls with a strike price of 19.00 a little bit out of the money . Minor Cycle High is indicated for 27th July and depending on how price moves into this point will influence my decision on whether to sell and adopt a re entry strategy or just ride the position out till the projected Intermediate High Date of 17th August -/+1 . My decision will primarily be based upon amplitude and pattern of price into this Date but based upon a composite of past averages price should exceed the 9th June High .

Cool, just struggling to follow but interested in what you're doing, I'm always learning ( or trying to ) .

The last time those traded as single legs were Tuesday for 67cents and 76cents, Friday's trades were part of TMC's, not to sure what you mean by .075c calls.

$19 strike calls purchased for 75cents maybe ??

 

[Student of Gann]

$19 strike calls purchased for 75cents maybe ?? Yes that's correct . As long as price holds above 10th July 18.20 the position is active .