Controversial Option Discussion Of The Day - Calls and Puts

[cutz]

The 80% bit, definitely false, me personally close the majority of positions prior to expiry, the only positions that expire worthless are the long OTM leftover wings that won't cover brokerage if closed.

Better seller than buyer ?, that's a tricky one, i've always been under the impression that it's better to be taking in credit than the other way round, that question has always been niggling at me, i've never done a debit spread, what do you guys reckon.

 

[wayneL]

Yes the 80% bit is false, despite being repeated almost everywhere you read about options.

According to the Chicago Board Options Exchange:

1. Typically only about 30% of options expire worthless in each monthly cycle.
2. Only about 10% of options are exercised during each monthly cycle, usually in the final week before expiration.
3. In fact, about 60% of all options are traded out in the marketplace.

That leaves the buy versus sell argument.

 

[mazzatelli1000]

Better seller than buyer ?, that's a tricky one, i've always been under the impression that it's better to be taking in credit than the other way round, that question has always been niggling at me, i've never done a debit spread, what do you guys reckon.

I think you are confusing being short gamma with raking in credit.
A long butterfly CAN be a debit spread - don't you like it ??

 

[cutz]

Hi Mazza,

It's OK, i'm always confused,

But i see what you're getting at, a butterfly has a similar payoff to it's credit equivalent, (haven't played around with it much but risk/return may be more attractive in some cases).

The short iron butterfly looks more appealing from the point of view that market swings can be played from the short gamma side, wings acting as natural stops.

What do you guys reckon ?,

 

[mazzatelli1000]

Wayne, I dedicate this to you.
First time I have seen sub leasing analogies!!

1.) The Covered Call - Renting Your Stock

Possibly the most popular options strategy in use by every day investors is the covered call. With this strategy a stock owner may sell someone else the right to their stock. If the stock remains low the original owner maintains ownership. This is an amazingly powerful way to create income on lazy stocks (stocks that just sit around and don’t go anywhere). Depending on exactly which option you sell you can generally create about 10-15% of your stock’s value every month you sell the option. If you manage to do that for 10 months, your original investment would pretty much be recouped and you would be sitting on a stock position with absolutely zero risk and nothing but pure profit (that’s how you get an infinite rate of return!).

2.) The Covered Call Improved - Subleasing a Stock

Okay, so it sounds nice enough that you could rent a stock you own, but what if you’re one of those people who don’t own any stock. Well fortunately we can twist this strategy just a bit to make that possible.

When you don’t own a house how do you get a place to live? You rent. If you don’t own a stock but you want to use it what can you do? Rent. You could rent a stock from somebody and now you are the rightful possessor for a limited time. During that time period you can do anything you want with that stock. So why not rent it? Or shall I say sub-lease it?

When you don’t actually own a stock you can still buy the rights to that stock and then turn around and sell someone rights against your rights. Just like renting and sub-leasing. The spread, or difference in price, is your profit. That profit can vary but if you do it right you should be able to generate at least a 20% profit each month - yea that’s right, I said each MONTH.

3.) The Calendar Call

Now I’m going to show you the most powerful way you can combine these strategies. The benefit of owning a stock is you have it right? It’s paid for, you can do whatever you want with it. Well what if you sign a long term rent agreement for that stock? That means you would have the right to own it for a long time. How long? Let’s be simple and say 2 years. Now that you have secured the future price of this stock you can rent it for the next 2 years - every month! As the value of the property (the stock your renting) goes up, your profits will go up in a huge way. In fact it’s so huge I can’t give you a percentage return that you could expect. Depending on how fast you break even, which could occur in a month, everything after that point is pure profit which ultimately becomes infinite.

 

[mazzatelli1000]

The short iron butterfly looks more appealing from the point of view that market swings can be played from the short gamma side

Sorry, what does this mean??
IMO, it is better to define what bets you want to take in terms of Greek exposures.

 

[wayneL]

Wayne, I dedicate this to you.
First time I have seen sub leasing analogies!!

#### me! It's a losing battle.

Depending on exactly which option you sell you can generally create about 10-15% of your stock’s value every month you sell the option.

Holy ****! 10-15% with CCs eh? Where do I sign?

That profit can vary but if you do it right you should be able to generate at least a 20% profit each month - yea that’s right, I said each MONTH.

In fact it’s so huge I can’t give you a percentage return that you could expect.

I'll see you an infinity and raise you a time warp.

 

[cutz]

Sorry, what does this mean??
IMO, it is better to define what bets you want to take in terms of Greek exposures.

Just a thought,

I sort of prefer to trade in and out of the short legs of an IC or wrangle ( assuming things go according to plan, unlike the last few days ), although a long butterfly looks similar, can't grasp how to do the same.

 

[mazzatelli1000]

Just a thought,

I sort of prefer to trade in and out of the short legs of an IC or wrangle ( assuming things go according to plan, unlike the last few days ), although a long butterfly looks similar, can't grasp how to do the same.

If I am thinking straight, you tend to scalp to the short strikes? E.g. Spot moves away from short call, decent gains, you buy them back. If spot moves up again you short the call again?

Well Wayne's first question in this thread can help you: a call IS a put and a put IS a call - adjust with spot.

Man, I have a tendency to go off topic.
Just a thought - calendar spreads [short fronth month configuration] are usually debits, and touted as "income generating" strategies - better to buy or sell options if taking in credit is the criteria [since there is no credit version]?

 

[wayneL]

Mazza

I found where you got that article from.

Holy Dooley there enough rant material there for months of blog posts.

The site should be call the mythhub.com

I feel a few rants coming on

 

[mazzatelli1000]

The site should be call the mythhub.com

HAHAHA that is awesome, I love it!!
It has the typical snake oil salesman fingerprints all over it.
Can't wait to read your blog!!

 

[cutz]

If I am thinking straight, you tend to scalp to the short strikes? E.g. Spot moves away from short call, decent gains, you buy them back. If spot moves up again you short the call again?

Well Wayne's first question in this thread can help you: a call IS a put and a put IS a call - adjust with spot.

Hi Mazza,

Yep that's what i do with most positions, can't seem to perfect my timing though but at least I'm playing it safe.

With your suggestion about adjusting with spot i'm starting to look at other markets, ASX is getting a little awkward with it's shorting difficulties and lack of suitable XJO hedging instrument (SPI is too big for minor adjustments), swaying more towards europe.

 

[mazzatelli1000]

Yeah, Europe is much better than Aussie Options market.

Replication is a tedious subject, best to DYOR.
Once upon a time I liked to work with backspreads the way you do, but found myself consistently on the back foot.

Reverted to what I had learnt in QF and found it easier to dynamically hedge and consider static hedges at initiation.

Each to their own - Good luck

 

[Grinder]

Reverted to what I had learnt in QF and found it easier to dynamically hedge and consider static hedges at initiation.

Static hedging has proved the difference in my trading, especially in time of high uncertainty (which is just about all the time). Can't seem to get used to dynamic hedging, will need to work on this.

 

[wayneL]

dynamically hedge

THE secret to consistency in returns IMO. The static hedges merely crash insurance.

 

[cutz]

Static hedging has proved the difference in my trading, especially in time of high uncertainty (which is just about all the time). Can't seem to get used to dynamic hedging, will need to work on this.

Yeah same here, although this week i may have a fiddle with SPI contracts, so 1 SPI contact equals 2.5 XJO deltas, i only just figured out that you can adjust the underlying columns in Hoadleys to accept an additional decimal place, ( another derrr moment for me, i assumed it was locked ).

Should be interesting, although i suspect it may not be practical.

I'm eagerly anticipating a book on the subject written by the dude that wrote The black swan so hopefully I don’t do anything silly in the meantime.

BTW Wayne, thanks for the tip on fractional deltas on the other thread.

 

[mazzatelli1000]

I'm eagerly anticipating a book on the subject written by the dude that wrote The black swan so hopefully I don’t do anything silly in the meantime.

LOL, if you're not highly mathematical, Dynamic Hedging for Vanilla and Exotics will be a headache.

The discussion in that book [concerning vanilla options] is more about adjusting the BSM Greeks to make up for some of its shortcomings
e.g. Modifying delta so it is in discrete format as opposed to the continuous delta and included the effect of elasticity of vol. Adjusting Gamma, for multi period positions etc.

It also touches on some of the higher order Greeks [dgamma, vanna, volga].

Enjoy enjoy!!

 

[cutz]

Yeah,

I suspected it may be the case, probably more than i need to know but from the table of contents it looks interesting.

Should make for some good bedtime reading.

Geez mazza, it seems like you've been through every decent options book under the sun, feel free to throw your top 10 picks my way.

 

[wayneL]

LOL, if you're not highly mathematical, Dynamic Hedging for Vanilla and Exotics will be a headache.

The discussion in that book [concerning vanilla options] is more about adjusting the BSM Greeks to make up for some of its shortcomings
e.g. Modifying delta so it is in discrete format as opposed to the continuous delta and included the effect of elasticity of vol. Adjusting Gamma, for multi period positions etc.

It also touches on some of the higher order Greeks [dgamma, vanna, volga].

Enjoy enjoy!!

Doesn't sound like a high priority book for a retail trader.

 

[mazzatelli1000]

LOL cutz

Sometimes I wonder why I chose to be a quant, that book was required reading!!

To be honest, unless you have a view to trade exotics in the future [binary, barriers] Baird and Cottle is all you need IMO. I know you have read them already. Other than that, actually trading will be the best teacher.

What exactly are you having trouble with, maybe I can recommend something more specific?

Doesn't sound like a high priority book for a retail trader.

Yeah I agree