Can we get real about Options on ASF?

[wayneL]

Disclaimer: I am not an options guru, in fact I have been accused of using long words to sound like I know what I'm talking about (but obviously don't in the mind of the troll) but I have taken the time to educate myself about options over a very long time and so therefore freely offer what I do know, for whatever that's worth. I always stand to be corrected... And I admit to a penchant for sesquipedalianism, guilty, whatevah!!!

It's not the most popular topic here on ASF, many contributors disappearing into the ether. But there are some great contributors who are obviously well educated, Duc, Sharkman and others whom I apologise for not naming... It's that time of night where I am three sheets to the wind and the mycotoxicity is definitely having an effect on my memory for names. Lol

But, can we have a discussion on how to use options in our trading accounts, for actually benefit.

I have my ideas, but others have great (and probably better) ideas.


Lobbing an easy serve for discussion...

 

[ducati916]

Options can provide:

(i) Increased leverage (great for smaller accounts);
(ii) An ability to ride out market volatility without losing your position;
(iii) Defined risk (no need for stop losses which I abhor);
(iv) Provide the ability to take long, short, neutral market positions, which in changing market conditions is a significant advantage;
(v) Can provide hedges and alternative strategies for stock positions already held or placed as new positions.
(vi) Which all combined can remove almost all of the emotional issues encountered in trading positions with real money and turn you profitable.

What you need to know

(i) How the greeks effect your positions held as Option positions;
(ii) How to manage or offset those risks when opening positions;
(iii) When managing those positions;
(iv) When closing those positions.

An issue which seems to confuse newcomers to Options is the additional price contained in Options for volatility. When you trade Options you are trading the stock price, which most grasp and the price of volatility, which is an additional price that is underappreciated by newcomers and often gets them in trouble.

The second issue, which can sometimes cause confusion is that it is very easy to be long or short the Option contract itself, which is a alternative way to be long or short the underlying market.

The third issue is a seeming preference for taking in a credit, rather than paying out a debit. This Scrooge like mentality can get you in trouble unless the better trade is actually the credit and not a debit.

WayneL is a guru on Options and some 15yrs ago odd, educated me on Options via Reefcap.

So if this thread garners interest, I will add it to my list of threads to add content to.

jog on
duc

 

[qldfrog]

Options can provide:

(i) Increased leverage (great for smaller accounts);
(ii) An ability to ride out market volatility without losing your position;
(iii) Defined risk (no need for stop losses which I abhor);
(iv) Provide the ability to take long, short, neutral market positions, which in changing market conditions is a significant advantage;
(v) Can provide hedges and alternative strategies for stock positions already held or placed as new positions.
(vi) Which all combined can remove almost all of the emotional issues encountered in trading positions with real money and turn you profitable.

What you need to know

(i) How the greeks effect your positions held as Option positions;
(ii) How to manage or offset those risks when opening positions;
(iii) When managing those positions;
(iv) When closing those positions.

An issue which seems to confuse newcomers to Options is the additional price contained in Options for volatility. When you trade Options you are trading the stock price, which most grasp and the price of volatility, which is an additional price that is underappreciated by newcomers and often gets them in trouble.

The second issue, which can sometimes cause confusion is that it is very easy to be long or short the Option contract itself, which is a alternative way to be long or short the underlying market.

The third issue is a seeming preference for taking in a credit, rather than paying out a debit. This Scrooge like mentality can get you in trouble unless the better trade is actually the credit and not a debit.

WayneL is a guru on Options and some 15yrs ago odd, educated me on Options via Reefcap.

So if this thread garners interest, I will add it to my list of threads to add content to.

jog on
duc

I believe there are problems dealing with options on the ASX and it is a hard(er) job
I will list what I see as issues here:
Costs are high: brokerages by the majors are very dear , lower flexibility as the small market make it hard to buy sell at proper price...spread I think.. or ever sell at all even when giving away ...
There is also a set of regulations to go thru to be allowed.not a big deal but still an extra step
So commsec a no go...Bell direct ok, Saxo good...but still horrendous cost on the ASX..I hope to be shown wrong

I did a wild play with option a decade ago, I was seeing a downturn coming ..I took option..was right left for holidays in Thailand off grid with a 60k paper win...came back 10 days later with 1k loss.
Newbie mistakes I am sure but options are not a buy and forget, it needs active trading imho..daily minimum
Lastly a personal point: I tend to be a pessimistic guy, half empty glass style..
Options give me too easy a way to indulge in this overall negative trait.
This is actually becoming bypassed by the arrival of negative ETFs..so I can go long now on my darker side wo options..and lose money on bboz etc
But I do value the insurance factor options provide even if I now cover my ass via long neg ETFs and paper PM exposure.
Am keen to learn but as Mr Duc remembers, using options can be expensive to the point of uselessness (english?) when you do not have he right trader and pay too much fees.
So you need proper setup, proper knowledge and state of mind, time availability.
Keen to learn more Mr Wayne

 

[wayneL]

The above responses do highlight the inherent complexity of options. Nobody should get involved with these instruments without having at least a working understanding of how they work, the Greeks, etc etc.

Yet people's introduction to options is invariably with insufficient knowledge; myself being no exception. Yep, I had my ass handed to me too.

My thought was that if I was getting screwed, somebody else was making money and I wanted to figure out how that happened. It was a long road to hoe for someone with a less than an Einstein-esque intellect such as me.

Has it been worth it? Learning how to use options? The answer is yes on two levels.

1/ it has enabled me to understand on a deeper level how our markets work, what I once thought was manipulation was nothing more than options market makers hedging their books (not to say that there isn't manipulation), the so-called max-pain theory and so on.

Even non-option traders can benefit by understanding how this works in the short to medium term.

2/ because of factors mentioned by Duc, above. Pure stock traders have two options, long or short. Pick the right direction and you make money, pick the wrong direction and you'll have your wife on your back quizzing you why she can't afford the extortionately expensive hairdo that month, or why it's Chateau Cardboard rather than Möet & Chandon.

In its base concept, options are an insurance-like product, pricing considerations almost identically mirroring how much you pay for your car insurance.

As such, we should be thinking a little bit like an insurance actuary, balancing revenue versus any and all possible eventualities... from both sides of the equation, ie in terms as both the buyer and seller of insurance... And sometimes both at the same time in the same transaction.

Indeed, spread transactions are roughly the same concept as an on course bookmaker at the races, hedging off his risk via the tote. If a roughy comes in, he makes out like a bandit, but if the favourite wins he has his @ss handed to him, possibly facing near ruin in a major, high turnover race. The bookmaker hedges off his risk of ruin at the cost of an absolute windfall. But he's in this for the long haul. It's about creating a positive mathematical expectancy over many many events.

The bane of pure stock traders, especially with mechanical trend trading systems is drawdown. These are psychologically very difficult periods for any trader, so I would posit that the first use of options is in reducing volatility of returns.

Most investors would be happy to accept lower potential returns in return for lower drawdown. In the Autumn of my life, I am certainly in that category. Intellectually, I can certainly accept the idea of potentially large drawdowns with popular trend trading systems and even buy and hold, in favor of higher returns in the long term.

But when those drawdowns happen, it is bloody difficult to have faith that the system will win out in the end no matter how much back testing you have done.

Options can ameliorate that *somewhat*.

Just some random thoughts (and walked on much more than intended) and setting up further discussion.

Edited: laughable typos and grammatical errors

 

[Gunnerguy]

As I have stated in other posts I started about 3 years ago. I had a large buy and hold international portfolio that has a Beta if about 0.6 with the ASX200. Completed a masters in financial planning and got a taste of options. I generally do buy and hold with ETF’s some but/sell timing based on ‘feelings’ and CGT positions. I wanted to squeeze some more money/income from my portfolio so I use options as a hedge to my portfolio.
99% of the time I sell options.
1. Commonly bear call credit spreads sold 1-3 months before a share XD date. I gain from theta decay (theta gang in Reddit) and hopefully a drop on XD date buy to close fir a gain.
2. Second most common is BRCCS on the index. Sell a delta if maybe 0.15 at 3 months out ( yes picking up pennies in front of a steamroller), however the XO of a 0.15 delta maybe a +8% rise in the market. With my beta at 0.6 my buyhold portfolio will be up +4.8% while my options trade risk is -0.5%.
In short if the market goes up 8% in 2-3 months I loose 0.5% and gain 4.8%, if it’s flat I keep the premium.
I use IBKR for options, commissions are way way better than comsec. Last time I looked at comsec 1 contract was $25, IBKR is max about $3 per contract.

 

[wayneL]

Awesome.

As I have stated in other posts I started about 3 years ago. I had a large buy and hold international portfolio that has a Beta if about 0.6 with the ASX200. Completed a masters in financial planning and got a taste of options. I generally do buy and hold with ETF’s some but/sell timing based on ‘feelings’ and CGT positions. I wanted to squeeze some more money/income from my portfolio so I use options as a hedge to my portfolio.
99% of the time I sell options.
1. Commonly bear call credit spreads sold 1-3 months before a share XD date. I gain from theta decay (theta gang in Reddit) and hopefully a drop on XD date buy to close fir a gain.
2. Second most common is BRCCS on the index. Sell a delta if maybe 0.15 at 3 months out ( yes picking up pennies in front of a steamroller), however the XO of a 0.15 delta maybe a +8% rise in the market. With my beta at 0.6 my buyhold portfolio will be up +4.8% while my options trade risk is -0.5%.
In short if the market goes up 8% in 2-3 months I loose 0.5% and gain 4.8%, if it’s flat I keep the premium.
I use IBKR for options, commissions are way way better than comsec. Last time I looked at comsec 1 contract was $25, IBKR is max about $3 per contract.!

Awesome, great example of options use. A little request... For the benefit of noooobs, maybe spell out what the acronyms mean, at least initially, so they know what they mean?

Dammit, I am struggling knowing what a couple of those are too... BRCCs?

 

[Dona Ferentes]

good thread, @wayneL. And perceptive comments from knowledgeable folk. ✔

Starting out in this investment journey, a while ago and doing a bunch of self education, it was impossible to avoid Options. A fundamental part of curriculum and one that needed to pass exams in, to get to the finishing post.

And oh, how I struggled. They did my head in. Congratulations to those that can master the concepts. So I've never bothered. Key takeouts were that, for retail, the costs ate into returns and a lot of attention would be needed that I couldn't give.

For about 10 years, I held Djerriwarrh, DJW, but then sold in 2017 as I figured I didn't need the extra income.

But you have raised an important point about options being insurance -like. I also think the life-cycle element is also very relevant. Allow me to expound, from my viewpoint.

During accumulation phase, when working, growth is important but, In retirement, income and especially income security comes to the fore. In fact, a pension from Super has to meet certain drawdowns to optimise returns. At present it's 5 per cent of the balance, and we all know that is hard to generate, from interest and dividends/ distributions across a portfolio. Implication being, assets may need to be sold.

Again, using DJW as an example, an option strategy can boost income.

Note these are optimised yields assuming the franking helps (Super; in retirement)

Now to me, diversification smoothes returns, but at a cost (which I'll accept).

One further point is that a rough comparison of returns is available (usual caveats: size, portfolio differences, etc). AFI and DJW operate similar ASX200 focused long term bottom up strategies. Conveniently, annualised returns are provided on their monthly reports. It would appear the vanilla LIC does better than one using options. But you get the income earlier via options.

For DJW:

and for AFI :

 

[wayneL]

good thread, @wayneL. And perceptive comments from knowledgeable folk. ✔

Starting out in this investment journey, a while ago and doing a bunch of self education, it was impossible to avoid Options. A fundamental part of curriculum and one that needed to pass exams in, to get to the finishing post.

And oh, how I struggled. They did my head in. Congratulations to those that can master the concepts. So I've never bothered. Key takeouts were that, for retail, the costs ate into returns and a lot of attention would be needed that I couldn't give.

For about 10 years, I held Djerriwarrh, DJW, but then sold in 2017 as I figured I didn't need the extra income.
View attachment 174963

But you have raised an important point about options being insurance -like. I also think the life-cycle element is also very relevant. Allow me to expound, from my viewpoint.

During accumulation phase, when working, growth is important but, In retirement, income and especially income security comes to the fore. In fact, a pension from Super has to meet certain drawdowns to optimise returns. At present it's 5 per cent of the balance, and we all know that is hard to generate, from interest and dividends/ distributions across a portfolio. Implication being, assets may need to be sold.

Again, using DJW as an example, an option strategy can boost income.
View attachment 174966
Note these are optimised yields assuming the franking helps (Super; in retirement)

Now to me, diversification smoothes returns, but at a cost (which I'll accept).

One further point is that a rough comparison of returns is available (usual caveats: size, portfolio differences, etc). AFI and DJW operate similar ASX200 focused long term bottom up strategies. Conveniently, annualised returns are provided on their monthly reports. It would appear the vanilla LIC does better than one using options.

For DJW:
View attachment 174964
and for AFI :
View attachment 174965

Interesting. At this stage of my life I would dearly love to just be able to hand-ball my funds to an LIC, or whatever, and play with my horses, drink ridiculously overpriced wine, and wallow in all sorts of other self indulges.

While I still have my faculties about me, I just don't trust them, them seeking nothing more than performing the index... Basically an imperative of modern portfolio theory. (Despite what they claim)

@#&& that! Especially in these times where the Black Swan is threatening to making an appearance at any point.

Additionally, I would question the parameters of this analysis, in my experience systematic options etfs seriously underperform what an individual investor can achieve.

It is less than the silliness of option educators claims (circa 3% per month ) and over the long term only very slightly more (but worthwhile) than buy and hold.

However does remain the potential for outsized returns. Consider precisely the right time, with both gamma and Vega working strongly in your favor never mind the initial Delta.

Ant here is the point options offer more than systematic strategies as offered in some of the etfs, the east the opportunity to trade to a particular view also hedging against that view being absolutely wrong.

 

[Garpal Gumnut]

I've tried learning options, I mean really learn to be proficient and failed using a number of courses ( free ) and books in the past. I failed. It is interesting this thread has started. Is it for beginners or the proficient @wayneL ?

Interestingly I had to take a stroll through Investopedia last night and came upon their option course. Just on $300 Aussie. This teaser seemed interesting.

What will I learn?​

• Improve flexibility in your portfolio by adding options
• Approach Calls as down-payments, and Puts as insurance
• Interpret expiration dates, and distinguish intrinsic value from time value
• Calculate breakevens and risk management

Anyways all the best with the thread, I may do the Investopedia course, Options ( and Calculus !! ) are something I've set myself on understanding before I cark it and like you @wayneL on lifestyle, I'm just here now for a good time now.

gg

 

[Dona Ferentes]

Interesting. At this stage of my life I would dearly love to just be able to hand-ball my funds to an LIC, or whatever, and play with my horses, drink ridiculously overpriced wine, and wallow in all sorts of other self indulges.

While I still have my faculties about me, I just don't trust them, them seeking nothing more than performing the index... Basically an imperative of modern portfolio theory. (Despite what they claim)

@#&& that! Especially in these times where the Black Swan is threatening to making an appearance at any point.

Additionally, I would question the parameters of this analysis, in my experience systematic options etfs seriously underperform what an individual investor can achieve.

It is less than the silliness of option educators claims (circa 3% per month ) and over the long term only very slightly more (but worthwhile) than buy and hold.

However does remain the potential for outsized returns. Consider precisely the right time, with both gamma and Vega working strongly in your favor never mind the initial Delta.

Ant here is the point options offer more than systematic strategies as offered in some of the etfs, the east the opportunity to trade to a particular view also hedging against that view being absolutely wrong.

all well and good, Wayne, but if I don't feel comfortable with something, it's not for me. Something about patsies and rooms.

 

[wayneL]

I've tried learning options, I mean really learn to be proficient and failed using a number of courses ( free ) and books in the past. I failed. It is interesting this thread has started. Is it for beginners or the proficient @wayneL ?

Interestingly I had to take a stroll through Investopedia last night and came upon their option course. Just on $300 Aussie. This teaser seemed interesting.



Anyways all the best with the thread, I may do the Investopedia course, Options ( and Calculus !! ) are something I've set myself on understanding before I cark it and like you @wayneL on lifestyle, I'm just here now for a good time now.

gg

GG, I guess there is always an error in these threads in assuming a level of proficiency. This is a mistake and we should be starting at whatever level the questioner desires. If it's the absolute basics, then so be it. There are no dumb questions, except for those never asked.

I have no idea whether the investopedia course is value or not, but I do think that most option courses do present a very idealized view of what can be achieved with options.

What I always hope to present is what I call the "naked truth" (little bit of a play on the term "naked puts", a whole topic in and of itself in which The naked truth is completely at odds with what is presented in most courses).

 

[wayneL]

all well and good, Wayne, but if I don't feel comfortable with something, it's not for me. Something about patsies and rooms.

I think this is actually one of the desired outcomes in options education. If somebody, having gone through finding out about them decide that it is not for them, great, the decision has come from a basis of knowledge.

Nobody says that in learning about options that you "have" to use them. An equally valid conclusion may well be, "yeah nah".

 

[Dona Ferentes]

Wayne, what's wrong with da index, btw?

 

[wayneL]

But Dona, don't forget my comments regarding market structure above. You don't have to be an options trader to understand how the options markets affect market structure, particularly around options expiry. If trading short to medium term swings, understanding where the bulk of open interest is may give you a massive heads up as to the short-term direction of the market. FWIW

 

[wayneL]

Wayne, what's wrong with da index, btw?

Nothing whatsover, I just *hope to substantively outperform it

 

[wayneL]

So where should we start with this, members?

In my first post I've talked about being able to use options to help our returns, or reduce risk/volatility or both.

I have a penchant for going into weeds on the Greeks and volatility and whatnot, but that might not be what might help people, at least initially.

I do think that you ultimately need to be aware of these at least in an abstract way, but baby steps.

 

[wayneL]

Perhaps keeping it simple and what folks might normally use?

1/ long puts or calls

2/ covered calls

 

[qldfrog]

In my initial self talk, I used 1) basic long Put or Call
I buy at X and expect to sell at X+something worth...
I also know the most I can lose if wrong or can not sell my losing "bet"

 

[ducati916]

So Options are able to provide a far more nuanced market position.

I like a market scoring system which illustrates the optimal strategy choice (of course it does not work 100% of the time which is why you balance it out with neutral and opposite positions)

So a market scoring system:

You arrive at your score by scoring the market via technicals:

Obviously you use whatever you want. The net result is that you reach a score that is adjusted on a daily basis.

Which

As the market score dictates, provides some potential trades.

This is where you choose an OPTIONS STRATEGY. There are many to choose from, however, the market score is used to provide 1 or 2 optimal strategies for the score. A +3 or -3 give different strategies than a +1 or -1.

Finally macro factors are considered:

Earnings are obviously a big deal if the stock you have selected has earnings during the life of the placed trade.

So the above is 'big picture'.

Now we need to go back to the basics and understand:

(i) the greeks for single Options
(ii) risk graphs for single Options;
(iii) the greeks for combination Options;
(iv) risk graphs for combination Options.

Once you have a good grasp of this, it is very easy to understand the application of various strategies to a prevailing 'market score'.

Which allows you to weight your market position according to your 'personality'. Options allow for market positioning according to your tolerance to risk/reward.

This is a HUGE advantage over purely trading stocks directionally, where you have to overcome in some instances your personality in relation to the market.

24 yrs ago I was far more risk seeking. Reckless. I got lucky and did not blow myself up. Today I am risk averse. I prefer market neutral. In a raging bull, as we have had for the past few months, sure I'm bullish, but I also cover the downside. This means I give up some upside but when the breaks come, I am covered and make money on the downside. Sure you may lose some on your bullish bets, but as the market scores adjust, you are adjusting along with it.

The net result is you are pretty much always in the green.

Buckle up.

jog on
duc

 

[wayneL]

So Options are able to provide a far more nuanced market position.

I like a market scoring system which illustrates the optimal strategy choice (of course it does not work 100% of the time which is why you balance it out with neutral and opposite positions)

So a market scoring system:

View attachment 175017

You arrive at your score by scoring the market via technicals:

View attachment 175018

Obviously you use whatever you want. The net result is that you reach a score that is adjusted on a daily basis.

Which

View attachment 175016

As the market score dictates, provides some potential trades.

View attachment 175015View attachment 175014View attachment 175013

This is where you choose an OPTIONS STRATEGY. There are many to choose from, however, the market score is used to provide 1 or 2 optimal strategies for the score. A +3 or -3 give different strategies than a +1 or -1.

Finally macro factors are considered:

View attachment 175012

Earnings are obviously a big deal if the stock you have selected has earnings during the life of the placed trade.

So the above is 'big picture'.

Now we need to go back to the basics and understand:

(i) the greeks for single Options
(ii) risk graphs for single Options;
(iii) the greeks for combination Options;
(iv) risk graphs for combination Options.

Once you have a good grasp of this, it is very easy to understand the application of various strategies to a prevailing 'market score'.

Which allows you to weight your market position according to your 'personality'. Options allow for market positioning according to your tolerance to risk/reward.

This is a HUGE advantage over purely trading stocks directionally, where you have to overcome in some instances your personality in relation to the market.

24 yrs ago I was far more risk seeking. Reckless. I got lucky and did not blow myself up. Today I am risk averse. I prefer market neutral. In a raging bull, as we have had for the past few months, sure I'm bullish, but I also cover the downside. This means I give up some upside but when the breaks come, I am covered and make money on the downside. Sure you may lose some on your bullish bets, but as the market scores adjust, you are adjusting along with it.

The net result is you are pretty much always in the green.

Buckle up.

jog on,
duc

I haven't actually seen this before, Duc.

On my own I have been trying to develop a probabilities forecast based on recent market movements. In that regard I have been a little bit like a mule at a new gate. I just know that there is a way to unlatch it but haven't quite been able to figure it out yet.

I will have to acquaint myself with this, might be just but I've been looking for, thanks.