Can we get real about Options on ASF?

[wayneL]

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"

It turns out that such a simple concept is actually quite complex... And all to do with those pesky Greeks.

Yes, risk is defined "at expiry" absolutely by the cost of the option.

Yet there is the time frame in the intermediate, that is the time and price movements of the option between now and expiry.

What is your current Delta?
What is the gamma... Theta... Vega?

How is that affected by the current time *until* expiry? How much time have you got for the trade to play out? How will potential price movements affect these Greeks? (Especially Vega and Theta).

Moneyness dramatically affects these things especially closer to expiry.

Not trying to overcomplicate things here, but these are complexities which we really need to be aware of, because this is how the market snatches money from us, sans such awareness.

These things, just like all of us, I learnt the hard way.

As an aside, one may learn something about a particular long options market approach (primarily OTM puts) from one Nasim Nicholas Taleb (author of fantastic books such as Fooled by Randomness and The Black Swan). A thoroughly objectionable character, nevertheless a very good educator about these things.

When you lose it might just be picking the wrong market direction but it may also be picking the wrong option series to reflect your market view.

 

[VolatilityBlake]

Hoping to provide a unique perspective here on this topic. I was first introduced to options from a company I worked at, had an options trading desk and options research subdivision and immediately took an interest. I was able to see from the other side how people traded, strategies and what the winners did well.

Having traded options for about 5 years, lost a lot, won a little over in the US, I'm fortunate enough to recently secure a position with a group of guys who previously had built risk management systems for the Full-Service derivatives advisors here in AUS, now only this year released a proper retail options offering for ASX ETOs. No question that people get deterred from ASX options due to the terrible infrastructure, high fees and lack of information by big brokers. (By no means am I here to promote this system, just to scratch my options addiction and hopefully provide a different insight. Maybe a topic for another thread if there's interest at all).

Now I have the benefit of interviewing Full-Service Options advisors via our education portal (selfishly that's great for my education and knowledge) and seeing how many of our sophisticated client's trade.

I'll get the bad out of the way first, how most people lose - speculate. Low expiry dates, OTM (out-of-the-money) options, low probabilities (PoP), you have it coming for you and it never ends well; may as well go to Crown (or the local casino). High risk behavior. This is why when you talk with someone about options they say "its a high risk, high leveraged, gambling tools." Maybe you see that post on WSB that made millions, but all very unlikely.

Think about how the institutions use options then I think you're on the right track. They hedge, they manage risk, they adjust their portfolios using the Greeks, they have a plan. Great example is @Gunnerguy above ^ - very similar to how a fund would gain some alpha from the market. @ducati916 your scoring system is new to me but would love to learn more about it, looks very interesting! find something that works for you.

Warren Buffett uses Options at Berkshire Hathaway. They sell cash-secured puts on stocks they want to buy at the valuation they want to buy at. This might not get you that 3% a month but might add 4-5% (or more) a year above what a buy and hold portfolio does. Can turn into some serious $ over the time he's been investing.

Especially if, like me, you don't know which way the market will go tomorrow, you can trade fear (Implied Volatility) and Theta (time decay) which is amazing once you know how options work. Candlesticks are not my friend. Every stock I've ever bought has had a big sell-off the days after I buy. I'm a sucker for catching the falling knife.

What I've seen new traders often miss:
- Implied Volatility - maybe the most important Options factor. significantly affects the premium on options - and usually mean reverting to the underlying's historical volatility average. Buy options when IV is low, sell options when IV is high (as a general rule)
- trying to close positions at 0-3 DTE (days to expiry) - if you're at a loss and you leave it to the last week, the market makers will eat your lunch - they know you'll do anything to avoid assignment and will capitalize on your weakness
-trade options that have good liquidity, ASX top 20 ETO Class have 5 market makers each (on Monthly expiries) - you'll more often than not get a fair price.
- Not having a plan - when to buy, when to sell, manage early (without overtrading and paying too many fees) understanding and managing portfolio risk.

It's good to see some interest on ASX ETO's. No question they're useful instruments for portfolio management - look at US and India. Might be our turn soon.

I'm still working on my own strategies here, but also prefer market neutral, theta positive and optimize with Covered calls when appropriate.

 

[wayneL]

Great

Hoping to provide a unique perspective here on this topic. I was first introduced to options from a company I worked at, had an options trading desk and options research subdivision and immediately took an interest. I was able to see from the other side how people traded, strategies and what the winners did well.

Having traded options for about 5 years, lost a lot, won a little over in the US, I'm fortunate enough to recently secure a position with a group of guys who previously had built risk management systems for the Full-Service derivatives advisors here in AUS, now only this year released a proper retail options offering for ASX ETOs. No question that people get deterred from ASX options due to the terrible infrastructure, high fees and lack of information by big brokers. (By no means am I here to promote this system, just to scratch my options addiction and hopefully provide a different insight. Maybe a topic for another thread if there's interest at all).

Now I have the benefit of interviewing Full-Service Options advisors via our education portal (selfishly that's great for my education and knowledge) and seeing how many of our sophisticated client's trade.

I'll get the bad out of the way first, how most people lose - speculate. Low expiry dates, OTM (out-of-the-money) options, low probabilities (PoP), you have it coming for you and it never ends well; may as well go to Crown (or the local casino). High risk behavior. This is why when you talk with someone about options they say "its a high risk, high leveraged, gambling tools." Maybe you see that post on WSB that made millions, but all very unlikely.

Think about how the institutions use options then I think you're on the right track. They hedge, they manage risk, they adjust their portfolios using the Greeks, they have a plan. Great example is @Gunnerguy above ^ - very similar to how a fund would gain some alpha from the market. @ducati916 your scoring system is new to me but would love to learn more about it, looks very interesting! find something that works for you.

Warren Buffett uses Options at Berkshire Hathaway. They sell cash-secured puts on stocks they want to buy at the valuation they want to buy at. This might not get you that 3% a month but might add 4-5% (or more) a year above what a buy and hold portfolio does. Can turn into some serious $ over the time he's been investing.

Especially if, like me, you don't know which way the market will go tomorrow, you can trade fear (Implied Volatility) and Theta (time decay) which is amazing once you know how options work. Candlesticks are not my friend. Every stock I've ever bought has had a big sell-off the days after I buy. I'm a sucker for catching the falling knife.

What I've seen new traders often miss:
- Implied Volatility - maybe the most important Options factor. significantly affects the premium on options - and usually mean reverting to the underlying's historical volatility average. Buy options when IV is low, sell options when IV is high (as a general rule)
- trying to close positions at 0-3 DTE (days to expiry) - if you're at a loss and you leave it to the last week, the market makers will eat your lunch - they know you'll do anything to avoid assignment and will capitalize on your weakness
-trade options that have good liquidity, ASX top 20 ETO Class have 5 market makers each (on Monthly expiries) - you'll more often than not get a fair price.
- Not having a plan - when to buy, when to sell, manage early (without overtrading and paying too many fees) understanding and managing portfolio risk.

It's good to see some interest on ASX ETO's. No question they're useful instruments for portfolio management - look at US and India. Might be our turn soon.

I'm still working on my own strategies here, but also prefer market neutral, theta positive and optimize with Covered calls when appropriately

Great insight, Blake.

Especially love your point on cash secured puts/covered calls. It's a point I have tried to get across on here for several years. The 3% per month is nothing more that wishful thinking, the 5% *per year* over the underlying based on reality (notwithstanding tax implications).

Those insights from the institutional side of the ledger will be most useful

 

[StockyGuy]

Great

Great insight, Blake.

Especially love your point on cash secured puts/covered calls. It's a point I have tried to get across on here for several years. The 3% per month is nothing more that wishful thinking, the 5% *per year* over the underlying based on reality (notwithstanding tax implications).

Those insights from the institutional side of the ledger will be most useful

5% per year above the underlying, for all the extra stress involved, only seems interesting for a big portfolio - or maybe people with a not SO big portfolio but without a regular job.

 

[ducati916]

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.

Mr WayneL

This is last night's assessment:

So for the market (sectors may differ) we are at a -2

Sectors:

From here it is relatively easy to build a balanced position.

Individual strategies are also built into the model. For example a +3 strategy would be buying a CALL. A +1, 0, -1 could be a BUTTERFLY. I'm sure you get the gist.

A discussion on the merits/demerits of specific strategies to specific market/sector conditions would be very helpful.

jog on
duc

 

[ducati916]

Hoping to provide a unique perspective here on this topic. I was first introduced to options from a company I worked at, had an options trading desk and options research subdivision and immediately took an interest. I was able to see from the other side how people traded, strategies and what the winners did well.

Having traded options for about 5 years, lost a lot, won a little over in the US, I'm fortunate enough to recently secure a position with a group of guys who previously had built risk management systems for the Full-Service derivatives advisors here in AUS, now only this year released a proper retail options offering for ASX ETOs. No question that people get deterred from ASX options due to the terrible infrastructure, high fees and lack of information by big brokers. (By no means am I here to promote this system, just to scratch my options addiction and hopefully provide a different insight. Maybe a topic for another thread if there's interest at all).

Now I have the benefit of interviewing Full-Service Options advisors via our education portal (selfishly that's great for my education and knowledge) and seeing how many of our sophisticated client's trade.

I'll get the bad out of the way first, how most people lose - speculate. Low expiry dates, OTM (out-of-the-money) options, low probabilities (PoP), you have it coming for you and it never ends well; may as well go to Crown (or the local casino). High risk behavior. This is why when you talk with someone about options they say "its a high risk, high leveraged, gambling tools." Maybe you see that post on WSB that made millions, but all very unlikely.

Think about how the institutions use options then I think you're on the right track. They hedge, they manage risk, they adjust their portfolios using the Greeks, they have a plan. Great example is @Gunnerguy above ^ - very similar to how a fund would gain some alpha from the market. @ducati916 your scoring system is new to me but would love to learn more about it, looks very interesting! find something that works for you.

Warren Buffett uses Options at Berkshire Hathaway. They sell cash-secured puts on stocks they want to buy at the valuation they want to buy at. This might not get you that 3% a month but might add 4-5% (or more) a year above what a buy and hold portfolio does. Can turn into some serious $ over the time he's been investing.

Especially if, like me, you don't know which way the market will go tomorrow, you can trade fear (Implied Volatility) and Theta (time decay) which is amazing once you know how options work. Candlesticks are not my friend. Every stock I've ever bought has had a big sell-off the days after I buy. I'm a sucker for catching the falling knife.

What I've seen new traders often miss:
- Implied Volatility - maybe the most important Options factor. significantly affects the premium on options - and usually mean reverting to the underlying's historical volatility average. Buy options when IV is low, sell options when IV is high (as a general rule)
- trying to close positions at 0-3 DTE (days to expiry) - if you're at a loss and you leave it to the last week, the market makers will eat your lunch - they know you'll do anything to avoid assignment and will capitalize on your weakness
-trade options that have good liquidity, ASX top 20 ETO Class have 5 market makers each (on Monthly expiries) - you'll more often than not get a fair price.
- Not having a plan - when to buy, when to sell, manage early (without overtrading and paying too many fees) understanding and managing portfolio risk.

It's good to see some interest on ASX ETO's. No question they're useful instruments for portfolio management - look at US and India. Might be our turn soon.

I'm still working on my own strategies here, but also prefer market neutral, theta positive and optimize with Covered calls when appropriate.

Mr Blake,

You touch on one of the critical factors in Option trading: volatility.

Volatility is at the heart of Options trading and must be fully understood before embarking on a fully fledged Options strategy. You also mention 'Implied Vol' (critical)

Which could preclude certain (for example +3 strategies in this scenario) as IV is (likely) at the high end. So if you wanted to be bullish as per a +3 you would need a vertical rather than an outright call, which would offset (some/most) of the inflated IV.

One frustrating issue with the above chart is the limited history.

I have (tried) to overcome this via

A much longer history of realised vol. Not perfect, but gives you an idea.



I also look forward to your contribution to this thread.

jog on
duc

 

[ducati916]

So today's model:

This is a diagonal as a strategy. Gives you more time and you can close the short leg and let the long leg run if things turnaround in your favour.

For the sideways trade a butterfly: always more difficult in higher vol. environments, target is moving more.

Looking at the last 4 days of candles, all have gaps higher, then trading lower to close at the lows. More sellers than buyers. Friday's are not a great day for a turnaround or bottoming process.

Some of the sectors (XLF, XLE, XLU, XLC are looking 'better'.

jog on
duc

 

[ducati916]

To @wayneL point re. the market makers hedging their book, the Options market will have a significant effect on stock prices:

From: https://www.cboe.com/us/options/market_share/market/

jog on
duc

 

[Gunnerguy]

5% per year above the underlying, for all the extra stress involved, only seems interesting for a big portfolio - or maybe people with a not SO big portfolio but without a regular job.

All depends on one’s level of acceptable risk and the value of one’s time. 3 years in to my journey I am averaging a better return on my options portfolio than my buy and hold portfolio. About 12% on my options portfolio after costs (before tax) for about 15 hours a week of my time managing options trades.

 

[Gunnerguy]

I have traded a few index options and oil ETF in the US.
I was toying with the idea of doing a Bear put credit spread at a delta of maybe 0.05 on Tesla over their earnings. High volatility so reasonable premium. Any thoughts.

 

[ducati916]

I have traded a few index options and oil ETF in the US.
I was toying with the idea of doing a Bear put credit spread at a delta of maybe 0.05 on Tesla over their earnings. High volatility so reasonable premium. Any thoughts.

So:

What strikes are you thinking of using?

IV is pretty good.

TSLA is already in a bear pattern. Bad news could really drop the stock, whereas good news won't make as much headway higher (IMO).

I'd be looking at selling CALLS rather than PUTS

jog on
duc

 

[wayneL]

5% per year above the underlying, for all the extra stress involved, only seems interesting for a big portfolio - or maybe people with a not SO big portfolio but without a regular job.

Bear in mind we talking here about a fairly simple covered call strategy, systematically applied. Not that much time nor stress involved and as I have pointed out many times, it will reduce volatility of returns.

Just a matter of checking extrinsic value status nightly and making adjustments as necessary. They are also tax implications which you can jig to work in your favor sometimes.

A little bit of knowledge will promote an understanding of synthetics.

A covered call is simply a synthetic iinaked (cash covered) put. From this we can create almost any other strategy, synthetically, according to your view of the market.... Or non-view as the case may be.

You can even get yourself flat without ever having to sell your stock. Which again *may have beneficial taxation considerations.

Also think about the compounding effect of 15% per year vs 10% over several years. It suddenly seems worth it to me.

Various strategies can also be used in an effort for stock accumulation over time.

They are a whole world of possibilities if we think a little bit deeper than what the typical thinking is.

If you can find Cottle's book, Options Perceptions and Deceptions online somewhere, it will open up one's thinking to what can actually be achieved.

 

[Gunnerguy]

So:

View attachment 175155View attachment 175156View attachment 175154

What strikes are you thinking of using?

IV is pretty good.

TSLA is already in a bear pattern. Bad news could really drop the stock, whereas good news won't make as much headway higher (IMO).

I'd be looking at selling CALLS rather than PUTS

jog on
duc

IV is higher than HV but,
I don’t know the 13 week IV Rank
STO 120p BTO 117p
Pm +0.08 for Risk 3
Risk/return 0.08/3 = 2.6% in 7 days
Relative Annual return is good.

eg. 1 contract = $8, risk = $300.
(before costs/tax)

Delta is 0.6.

 

[Gunnerguy]

So:

View attachment 175155View attachment 175156View attachment 175154

What strikes are you thinking of using?

IV is pretty good.

TSLA is already in a bear pattern. Bad news could really drop the stock, whereas good news won't make as much headway higher (IMO).

I'd be looking at selling CALLS rather than PUTS

jog on
duc

What strike would you sell a call at ?
Would you sell a spread of naked call ?

 

[ducati916]

What strike would you sell a call at ?
Would you sell a spread of naked call ?

So I would on the 26 April Expiry

Sell Call $172.50 for +/- $0.97
Buy Call $175.00 for +/- $0.77

Credit $0.20
Risk $2.50

The box should provide enough resistance to blunt a positive earnings report. A bad or average and you should be profitable.

However, that being said I would never place this trade. $20 profit for $250 in risk is just not for me.

You could also place both trades as a 'Strangle'. One leg must win and possibly both legs.

jog on
duc

 

[Gunnerguy]

View attachment 175160View attachment 175161

So I would on the 26 April Expiry

Sell Call $172.50 for +/- $0.97
Buy Call $175.00 for +/- $0.77

Credit $0.20
Risk $2.50

The box should provide enough resistance to blunt a positive earnings report. A bad or average and you should be profitable.

However, that being said I would never place this trade. $20 profit for $250 in risk is just not for me.

You could also place both trades as a 'Strangle'. One leg must win and possibly both legs.

jog on
duc

A $20 gain on $250 risk over 7 days on a high IV ? 4% in 7 days ? IV will drop, playing the theta decay no ?

What is the delta in the $172 ?

 

[ducati916]

A $20 gain on $250 risk over 7 days on a high IV ? 4% in 7 days ? IV will drop, playing the theta decay no ?

What is the delta in the $172 ?

delta in $172 is 0.10

With IV at 82%

jog on
duc

 

[Gunnerguy]

delta in $172 is 0.10

View attachment 175170View attachment 175171

With IV at 82%

jog on
duc

Sorry my delta in the previous previous post should have read 0.06 rather than 0.6.

The IV may well be 82% but what is the 13 week IV rank ? Is 82% higher or lower than the common/average IV over the last 13 weeks or over earnings weeks ? I usually use the 13W Rank to guide my decisions.

So yes my 120p delta is 0.06 with 2.6% risk and your 172c delta is 0.1 giving a 4% risk (SP at $149)

A good example to those learning options of the relationship between delta/probability/risk-return.

Great discussion !!

One could always do an iron condor (I’m not too keen on these myself) using my bull put credit and your bear call credit. We get both premiums ….. my $8 and your $20 with a (my) maximum risk of $300. A 7 day risk return of $28/$300, 9.3% (Annualised at 484% pa … lol).

If SP moves less than 19.4% up or less than 15.4% down the iron condor would ‘win’ but in addition at earnings the IV is likely to drop so BTC (buying to close) could also net a profit irrespective of SP movement.

Good discussion.

Gunnerguy

 

[qldfrog]

Sorry my delta in the previous previous post should have read 0.06 rather than 0.6.

The IV may well be 82% but what is the 13 week IV rank ? Is 82% higher or lower than the common/average IV over the last 13 weeks or over earnings weeks ? I usually use the 13W Rank to guide my decisions.

So yes my 120p delta is 0.06 with 2.6% risk and your 172c delta is 0.1 giving a 4% risk (SP at $149)

A good example to those learning options of the relationship between delta/probability/risk-return.

Great discussion !!

One could always do an iron condor (I’m not too keen on these myself) using my bull put credit and your bear call credit. We get both premiums ….. my $8 and your $20 with a (my) maximum risk of $300. A 7 day risk return of $28/$300, 9.3% (Annualised at 484% pa … lol).

If SP moves less than 19.4% up or less than 15.4% down the iron condor would ‘win’ but in addition at earnings the IV is likely to drop so BTC (buying to close) could also net a profit irrespective of SP movement.

Good discussion.

Gunnerguy

a lot of this talk look like sorry greek to me:
what would you remember as website/book to read to get the basics on options?
I am sure many newbies would be keen to know as well

 

[Gunnerguy]

a lot of this talk look like sorry greek to me:
what would you remember as website/book to read to get the basics on options?
I am sure many newbies would be keen to know as well

I mentioned before in this thread and another that I used a website called Option Alpha

Option Alpha | Be a more powerful options trader

Leverage automation to improve returns, find better trades, and transform into a superhuman trader.

optionalpha.com

They have education videos ….

Free Options Education | Option Alpha

Learn how to trade options and use automation with our 100% free courses, handbook, video tutorials, and downloadable guides. Click here to explore all our free education.

optionalpha.com

Beginner intermediate advanced
Something like 30 videos over 30 hours
I watched all of these.
Covers the most basic stuff ‘what is an option’ to thinks like hedging a portfolio, the Greeks, behavioural psychology, personal characteristics, to advanced strategies. I think there are videos on up to 20 or so different strategies.

The Handbook | Option Alpha

The ultimate reference guide and new "go-to" digital encyclopedia for traders seeking clear, non-subjective answers to thousands of investing questions.

optionalpha.com

I’ve read most of this

ALL IS FREE, yes free

They also have paid services for bots and AI to identify prospective strategies. A free podcast use to be monthly/ weekly but doesn’t seem to be up to date now.

US based but I was there to learn. I cannot recommend the website enough. A MUST for a beginner.

The additional advantage for me in this process was/is ….. traded/invested in shares for over 30 years on multiple global exchanges. Completed a Masters in Financial Planning 6 years ago (self funded) … for fun/career transition (which didn’t happen), the very strong desire to continuously learn, and the desire to make more money from the ‘pot’ I already have rather than only buy/hold …… and I have time on my hands.

I am NO WAY an expert, but I know enough to loose money using options, know why I did, but also make a little bit more than I loose to make it worthwhile.

Let’s all keep chatting and exchanging ideas.

Gunnerguy
EDIT: Added screen captures