Income strategies using XJO options?

[adamchubb]

i just wonder if anybody here has been trading income strategies (condor, calendar spread, etc) on XJO option????

i have been trading those strategies on US & Korea indices and they work well. I just wonder if it's feasible to do the same on XJO, with major consideration factors being commission and liquidity.

- commission is a bit high, but still acceptable. IB charges A$3/contract versus US$1 for US trades. I believe the fee probably would not kill the trade.

- how about execution?? is there enough liquidity (especially for non-quarterly options) to get in and out easily???

 

[Fox]

I have been trading XJO options for about 4 months now. It is probably the most liquid options in Australia. In terms of volume (ie. no. of contracts traded per day), it is probably the highest. Others can correct me if I'm wrong.

In terms of execution, I am able to get filled at very close to mid prices, sometimes instantaneously but not always. Sometimes, there will be a 5 to 15 minute wait before being filled. If you are prepared to give the market maker more than mid prices, then it should fill almost instantaneously.

I've also traded Australian equity options and found them to be more difficult to execute. The market makers (MM) are not as willing to engage as compared to XJO. Searching this forum, you will find lots of whinging about Aussie MMs.

I notice you trade the Korean index options. What are the trading hours like? I presume you are able to trade during office hours in Australia? What about commissions? Are they less than AUD 3.00 per contract?

 

[adamchubb]

9am-3pm Korean time. IB charges 0.2% of option value (or minimum 1000 KRW). extremely good liquidity and tight bid-ask spread. it's probably the most liquid option contract on earth.....

 

[Trembling Hand]

extremely good liquidity and tight bid-ask spread. it's probably the most liquid option contract on earth.....

Agreed. Here is a screen shot I grabbed last year. look at the volumes.

About 10 mil traded per day in the front month!!! That means super tight spreads, forget the XJO.

 

[Fox]

... forget the XJO.

I'm tempted to go Korean. I already love kim chee and Korean bbqs .

The trading hours are perfect for Oz residents and the commissions are better. Cutz, Sails and others who trade XJO, have you guys looked at Korea for income trades? Are there any down sides to trading Korean index options?

I'll definitely take a closer look re. liquidity. Adam, if you don't mind me asking, why are you interested in XJO when K200 looks superior in all aspects? Thanks for bringing Korea into discussion. It has piqued my interest.

 

[adamchubb]

i just want to do some more trading in Asian time zone (i live in HK). i've been trading kospi200 options for 3-4 months. i'm considering to trade either XJO or HSI, so i'm now weighting the pros and cons. OZ market is less volatile than HK, and closes earlier (~2 hrs earlier than HK). XJO commission seems to be cheaper, but HSI seems to offer better liquidity. i'm just not sure if i should pay for the expensive OZ market data feed to try that out.

the major challenge of trading kospi200 options is that you have to leg into a spread. you will never be sure of the price you can get in and out of the whole spread. what i do is i trade the most expensive (or least liquid) leg first using limit order, and then put on the opposite leg immediately (often using market order) after the first leg is done. this way i can minimize the slippage. the minimum bid/ask spread for option over 3 KRW is 0.05, which is still quite wide.

 

[Fox]

the major challenge of trading kospi200 options is that you have to leg into a spread.

No spread orders? What a shame! I'm definitely enjoying the ability to enter spread orders with XJO. It makes a huge difference in terms of slippage when trading condors and butterflies (for me anyway).

Slippage is even more of an issue with a less liquid market like ASX and I've really had to minimise these type of losses by keeping no. of trades to a minimum and using spread orders.

 

[wayneL]

No spread orders? What a shame!

Yeah! I was nearly interested in Kospi until Adam said no spread orders.

#### that!!

 

[Grinder]

Traded the XJO few years back. If yourv'e been trading the US your not gonna like trading Oz. Shame about the no spreading with the Kospi, have always had it in the back of my mind.

 

[Fox]

Guys,

Is this for real? Take a look at the 0.01 KRW spread between bid and ask. This means that you can only pay at most 0.005 KRW more than mid price. Translated to AUD, that is only 50 cents per contract . Compare that with XJO where minimum 1 point difference in bid/ask is AUD 10.

One thing I haven't figured out is why no IV data is available in the TWS platform. Does anyone know how to get the IV showing? Adam perhaps?

Though, no spread orders are accepted, I'm starting to get excited about KOSPI again. What do you think?

 

[adamchubb]

i saw a thread before on IB forum talking about K200 IV & greeks. the official reply was they don't have that modelled, and don't know if they plan to add that. i just wrote a little VBA program on Excel to derive the IV from the option price using Black-Scholes model. the greeks can then be calculated.

actually legging into a spread is not a big issue on K200, given the tight spread and instantaneous execution..

 

[Fox]

i saw a thread before on IB forum talking about K200 IV & greeks. the official reply was they don't have that modelled, and don't know if they plan to add that.

Thanks for the info, Adam.

actually legging into a spread is not a big issue on K200, given the tight spread and instantaneous execution..

Yes, I'm starting to see that now. With a 0.01 KRW spread for ATM and OTM options, a market order will give you as good a price as you can get. I'll start paper trading K200 soon. Too bad about the IV though. Means a bit more work on my part, but the liquidity and tight spreads should more than compensate for the extra effort.

Thanks for all the info in K200. It has been most interesting and useful. Having looked at K200, I suspect that you will NOT like XJO one bit.

 

[cutz]

Major indices approaching the top of a trading range, volatility plumbing new lows, is anyone out there expecting a volatility explosion.

Being short premium (net positive theta) doesn't seem to cut the mustard these days.

Maybe my thinking has been tainted by one of Taleb's books.

 

[Fox]

... is anyone out there expecting a volatility explosion.

If I recall Sails' old post correctly, XJO IV has gone down as low as 4%. The talk of a vol explosion has been going on since I first joined ASF, and it has not happened yet.

Being short premium (net positive theta) doesn't seem to cut the mustard these days.

Going back to basics, selling overpriced options and good management is the basis of a profitable income trade. Unless we are inundated with a vol tsunami with no time for management, shouldn't the basic assumptions of a profitable income trade still hold true? If not, the term "income trade" will be a misnomer, and we will all have to go back to a 9 to 5 job again .

 

[cutz]

Going back to basics, selling overpriced options and good management is the basis of a profitable income trade.

Hi Fox,

That's where it's becoming a little difficult on the index, the opportunity to sell overpriced options just doesn't seem to be there, equity options are looking a little more attractive ATM.

Actually in my previous post I was trying to sus out who else is long gamma.

 

[Grinder]

Share the same sentiment Cutz, am getting alittle tired of this one way action. Not only is it forcing me to adjust but also has me holding off on slapping on those income trades I love so much.

Can't say I'm expecting a vol explosion but with IV where it is & the way the indexes finished up yesterday could be in for a down day very soon, at least I hope so.

 

[wayneL]

IMO index options are underpriced atm (that's a personal opinion).

I'm not saying they're a buy, just not enough fat to justify short gamma startegies for mine.

 

[Fox]

In this current climate, if you have a view that:

1. IV will remain at these low levels
2. IV is commensurate with HV ie. options are neither over nor underpriced

Would you still consider an income trade based solely on grinding out time decay for a profit? In other words, without the advantage of overpriced options and high but falling IV, are income trades doomed to fail despite time decay working for you?

My initial view on the question above was income trades should still yield a profit. But reading the gloomy comments for you guys, I'm starting to have doubts. I presume that from experience, you guys would stay out of income trades in this climate?

 

[wayneL]

If you think the index may be moribund, normal IC trades will work. However a volatility blast from left field will open up a world of pain.

Theoretically, long vega strategies such as calenders and double diagonals will fair better... in theory.

Another idea in low vol environments with risk if vol explosion is put backspreads... maybe even diagonalized for the better vega. If you're wrong, you still get a small profit as the index grinds upwards, but there is potential to kick a big goal on the downside.

 

[Grinder]

If you think the index may be moribund, normal IC trades will work. However a volatility blast from left field will open up a world of pain.

:iagree:

Theoretically, long vega strategies such as calenders and double diagonals will fair better... in theory.

Another idea in low vol environments with risk if vol explosion is put backspreads... maybe even diagonalized for the better vega. If you're wrong, you still get a small profit as the index grinds upwards, but there is potential to kick a big goal on the downside.

Have found getting on a put backspread for a credit quite elusive on the indexes. Have far out wings strikes are we talking?