LET'S NOT PANIC BUT PROFIT!!

[ducati916]

Re: LETS NOT PANIC BUT PROFIT!!

Could you please expand on this for us beginners please,
ducati
thanks

Pricing models.
The best and easiest one to use and understand is the Black Scholes Option Pricing Model.

Buy long dated option contracts with somewhere between 3mths minimum to 6 months expiry. Based on your analysis, you will have to decide if you are going ATM or ITM [and how deep] In a bear market, or deep correction I would opt for ITM.

With regards to volatility cones, there is an article [today's] on volatility.
Saves me typing twice.

jog on
d998

 

[rederob]

Re: LETS NOT PANIC BUT PROFIT!!

Plea

I find it distressing that nobody has posted their profits on this correction. If I were a daytrader I would have carefully plotted my gains and losses over 28/2 and 1/3.


I don't see or hear any member of ASF who has profitted from this correction.

Lets talk about it.

I'm long term trader but value your guys input, which has been sadly lacking recently,.

Garpal

Garpal
My portfolio is substantially down - 7% this week - but as I sold nothing and added PDN and CWT (gross profit to date of $70 on these 2 additions) the whole affair is not an issue.
If there is a massive correction in coming weeks, I might worry.
But for now, it's a matter of trying to find more "value" for my longer term strategy.
If oil prices had dipped into this correction, I would have added more BPT and/or OSH.
Now waiting to see what next week has to offer.

 

[barney]

Re: LETS NOT PANIC BUT PROFIT!!

barney

Assuming an average capital base of say US $25K it is possible to trade a market neutral or fully hedged position

Utilizing Options trade a *delta-neutral* position.
Long the Options contracts
Short the common stock
Adjust position on an intra-day daily basis.

Risks;
*Overpaying for Implied Volatility
*Realized volatility below paid for Implied volatility

Now what you have seen or heard recently [if you've been listening] is the extremely low levels of volatility as measured by the VIX.

This tends to happen in bull markets, not always, and not quite to these low levels. The time was ripe to buy volatility.

How to overcome the risks;
*Understand the pricing models
*Extend expiry time
*Understand the theory of volatility cones.

Once you position is set, you make money if price rises, or falls, the greater the fluctuations, the greater your profit. No stoplosses required, in the market 24/7............perfect for volatile bear markets.

jog on
d998

Thanks for the reply Duc,

Now I confess to being quite ignorant (as in unaware) of some of the things you mention, but still very interested, so please excuse any obviously dumb questions or apparent lack of knowledge ..............

Simple things first .......... I understand the long the options/short the stock .......... If we are to "adjust" the position intra day, what measures do we take to achieve a continuing suitable setup? ie. Is it possible to keep readjusting our option position (I've never traded options at all so forgive the lack of knowledge) Is there a cost/brokerage factor involved in adjusting option positions? Or, is the adjustment simply done on the shorted stock? ie. Short more if the stock moves in our favour/opposite if moves against??

Does "extending expiry time" if required incur further brokerage fees? .... Approx cost?

"Volatility Cones"? No idea , but if I guessed, volatility would generally follow a graphical pattern eg A parabola, where the maximum volatility would be at the peak, and would tend to diminish (one for Mag!!) at both ends, therefore the most financially rewarding point would be the "top curve" of the parabola?? Totally off the scent or not??

Thanks for your patience in advance

PS Just noticed your reference to volatility cones above.... will follow that up, thanks.

 

[Out Too Soon]

Re: LETS NOT PANIC BUT PROFIT!!

Posting takes up far to much time as it is for me.
There is enough of my stuff on here and Reefcap.
If it interests me I'll read/comment and or post.

Gave up posting analysis due to the peanut factor (Like the Shouting comment made above)---its a headline!!, combined with the time factor last year.

Genarally cant be bothered.
Really am sick of the idiot factor that think trading is gambling,and everyone has to prove how big their Kahuna's are.

And unfortunately its a constant stream.
I'll leave all this to You Ducster,Moggie and others who have more time and inclination.

That's a shame Tech, I'm sure your analysis was greatly valued by many more ppl than you realise. I saw some of the stupid attacks on you that you refer to & it was often by wallys with 5 posts to their name. I did often wonder how you found the time to share so much though as your analysis is obviously pretty time consuming, just don't doubt for a second that for every peanut shouting at you there were 100s of silent owls taking it all in. I'm sure the peanuts have all just been roasted though so it should be quieter for a while, anyway you can always just put them on ignore.

 

[ducati916]

Re: LETS NOT PANIC BUT PROFIT!!

Thanks for the reply Duc,

Now I confess to being quite ignorant (as in unaware) of some of the things you mention, but still very interested, so please excuse any obviously dumb questions or apparent lack of knowledge ..............

Simple things first .......... I understand the long the options/short the stock .......... If we are to "adjust" the position intra day, what measures do we take to achieve a continuing suitable setup? ie. Is it possible to keep readjusting our option position (I've never traded options at all so forgive the lack of knowledge) Is there a cost/brokerage factor involved in adjusting option positions? Or, is the adjustment simply done on the shorted stock? ie. Short more if the stock moves in our favour/opposite if moves against??

Does "extending expiry time" if required incur further brokerage fees? .... Approx cost?

"Volatility Cones"? No idea , but if I guessed, volatility would generally follow a graphical pattern eg A parabola, where the maximum volatility would be at the peak, and would tend to diminish (one for Mag!!) at both ends, therefore the most financially rewarding point would be the "top curve" of the parabola?? Totally off the scent or not??

Thanks for your patience in advance

PS Just noticed your reference to volatility cones above.... will follow that up, thanks.

The easiest way is to walk you through a trade.

Ticker GG
Date January 17 2007 Buy Strike $22.50 Call
Expiry July 21 2007
Price $5.00
Implied Volatility = 35%
Cone [average] volatility = 48%
Fair Value @ 48% = $5.70
Theoretical Profit = $0.70 per contract

Price of common.....delta.........position..........adjustment........date
$26.15...................75.6.........[-22640]...............................1/17
$26.68...................73.7.........[-22110]............+530..............1/18
$25.18...................71.8.........[-21540]............+570..............1/18
$25.68...................73.7.........[-22110]............[-570]............1/19

And so on.

So you adjust as prices change, in my case, I adjust on every $0.50 move in price, recalculating the delta to each new price, and buying or selling to the hedge ratio.

The risk, is that volatility does not equal or exceed your theoretical volatility.
If it falls below the Implied Volatility, the probability is that you will lose money........thus, by taking a long dated Option, I feel the cone effect of volatility has a longer time period to emerge and provide me with a cushion.

If volatility does rise to your theoretical level, or exceeds it, you will make money as long as you adjust on a regular basis.

This is why when the markets started to jump, I was very pleased.

I went deep ITM as I am bearish on Gold, and I wanted quite a large short position, without excessive risk. Of course, if Gold went through the roof immediately I placed the trade, I place the trade under immediate pressure.
However, gold tends to increase in volatility at higher prices [the inverse to equity]

It is a very low stress methodology, when you can buy cheap volatility, which has been on sale recently.

jog on
d998

 

[ducati916]

Re: LETS NOT PANIC BUT PROFIT!!

Sorry chap's can't even copy from my own notes;

Price of common.....delta.........position..........adjustm ent........date
$26.15...................75.4.........[-22620]...............................1/17
$26.68...................77.3.........[-23190].............[-570]..............1/18
$25.18...................71.8.........[-21540].............+1650..............1/18
$25.68...................73.7.........[-22110]............[-570]............1/19

The *correct* figures.

jog on
d998

 

[wayneL]

Re: LETS NOT PANIC BUT PROFIT!!

Sorry chap's can't even copy from my own notes;

Price of common.....delta.........position..........adjustm ent........date
$26.15...................75.4.........[-22620]...............................1/17
$26.68...................77.3.........[-23190].............[-570]..............1/18
$25.18...................71.8.........[-21540].............+1650..............1/18
$25.68...................73.7.........[-22110]............[-570]............1/19

The *correct* figures.

jog on
d998

Not clear here. You are delta neutral with a synthetic straddle and continuously hedging your delta buy trading stock?

and...

Are you constructing your own cone in excel or using software?

 

[ducati916]

Re: LETS NOT PANIC BUT PROFIT!!

Not clear here. You are delta neutral with a synthetic straddle and continuously hedging your delta buy trading stock?

and...

Are you constructing your own cone in excel or using software?

enzo

That is correct I am delta neutral by trading the common stock, adjusting intra-day as many times as possible on a $0.50 move basis. Generally I will get at least one trade/day

On big move days, I might get 4 trades.

On cone calculation, my calculator.
Not too good with excel.

For ease of explanation to the others I have lumped all positions into one position. However, I have a range of Strikes and Expiry dates, to diversify the position slightly.

In essence I want to reduce my risk to the theta decay as closely as possible, while still maintaining a reasonable reward should my volatility projection prove reasonably accurate.

jog on
d998

 

[wayneL]

Re: LETS NOT PANIC BUT PROFIT!!

Duc,

gotcha

I like going out expiries for the vega effect too.

Re the cone.

I've made a makeshift version for amibroker, (which doesn't plot as a cone because of the axes) but I think I might give excel a go.

If successful I'll post.

 

[ducati916]

Re: LETS NOT PANIC BUT PROFIT!!

enzo

Indeed [regard vega] just makes so much more sense to me anyway.

If you have joy with the calculations I'd be interested, my poor braincell is entering meltdown.

jog on
d998

 

[wayneL]

Re: LETS NOT PANIC BUT PROFIT!!

enzo

Indeed [regard vega] just makes so much more sense to me anyway.

If you have joy with the calculations I'd be interested, my poor braincell is entering meltdown.

jog on
d998

It's a tough ask, brain matter oozing from my ears already... I'm not exactly proficient at excel either

 

[barney]

Re: LETS NOT PANIC BUT PROFIT!!

enzo

Indeed [regard vega] just makes so much more sense to me anyway.

If you have joy with the calculations I'd be interested, my poor braincell is entering meltdown.

jog on
d998

Hi Duc, If I were to put the above scenario into laymans terms would this be close to the money?? ...............

We are having an each way bet on a football match, and betting on both teams at the same time ................ we are able to increase/decrease our bets as the match unfolds to increase our exposure to a positive outcome (we are hoping it is a high scoring/wide ranging scoreline) ............. and the best part is we don't have to wait until the game is finished to cash our bets in??

Therefore, the worst case scenario would be to initially pick the wrong team to win (trend changes), or for the game to be a long drawn out affair with very little range in the scoreline??

Am I on the right track, or am I missing something important? Cheers.

 

[Rob_ee]

Re: LETS NOT PANIC BUT PROFIT!!

Agree with you totaly Out To Soon re comments about Tech/a.

Are you a peanut or an owl ??? .... just curious in light of your post about the dumb brigade who execute stop losses.

It was Tech who instilled in me the need to bail at the 1st sign of trouble and be vigilant and firm in stop loss execution.

Watching his many examples of chart analysis is something to behold and embrace.. I greatly appreciate his generosity in sharing and even bothering

Rob

 

[ducati916]

Re: LETS NOT PANIC BUT PROFIT!!

Hi Duc, If I were to put the above scenario into laymans terms would this be close to the money?? ...............

We are having an each way bet on a football match, and betting on both teams at the same time ................ we are able to increase/decrease our bets as the match unfolds to increase our exposure to a positive outcome (we are hoping it is a high scoring/wide ranging scoreline) ............. and the best part is we don't have to wait until the game is finished to cash our bets in??

Therefore, the worst case scenario would be to initially pick the wrong team to win (trend changes), or for the game to be a long drawn out affair with very little range in the scoreline??

Am I on the right track, or am I missing something important? Cheers.

barney

Sure you're pretty much there.

With anything based on statistics, the Law of Large Numbers is key.
So therefore in a similar manner to the card counter in Blackjack, on any given hand we may lose, however, by adjusting our bets, and being allowed to play for as long as we wish [make as many bets as we want] based on probability [statistics] we will win.

That's it.
Simple, market neutral, profit up or down, lose with zero movement.
The key is to calculate an underpriced Option, get a good fill, and hedge correctly.

Charts, stops, etc, toss "em out the window.......redundant.
Remember on selecting Strikes, Bachliers Law.

jog on
d998

 

[barney]

Re: LETS NOT PANIC BUT PROFIT!!

barney

Sure you're pretty much there.

With anything based on statistics, the Law of Large Numbers is key.
So therefore in a similar manner to the card counter in Blackjack, on any given hand we may lose, however, by adjusting our bets, and being allowed to play for as long as we wish [make as many bets as we want] based on probability [statistics] we will win.

That's it.
Simple, market neutral, profit up or down, lose with zero movement.
The key is to calculate an underpriced Option, get a good fill, and hedge correctly.

Charts, stops, etc, toss "em out the window.......redundant.
Remember on selecting Strikes, Bachliers Law.

jog on
d998

Thats good, I've got the laymans part sorted !! ............. Now all I have to do is study options for a year or two (Delta, theta,vega, straddles, etc etc .......... my brain hurts already

Thanks Duc and others ...... good thread with some interesting stuff.

 

[2020hindsight]

Re: LETS NOT PANIC BUT PROFIT!!

Dreamers may build castles in the sky, but schitzophrenics live in them.

to run, where the brave dare not go ...
good luck you brave dudes still buying.
I am prepared to lose a grand to be a spectator. - at least with all this discussion, you get a good view of the game. in the member's "grandstand" so to speak.
trouble is I say that too often - and the grands lost add up. but what the hek.

 

[CanOz]

Re: LETS NOT PANIC BUT PROFIT!!

Thats good, I've got the laymans part sorted !! ............. Now all I have to do is study options for a year or two (Delta, theta,vega, straddles, etc etc .......... my brain hurts already

Thanks Duc and others ...... good thread with some interesting stuff.

I agree too, very interesting stuff. Love your questions Barney, and your answers Duc.

So much to learn and so little time.

Cheers,

 

[ducati916]

Re: LETS NOT PANIC BUT PROFIT!!

I suppose the basic message to take away is that markets have a number of cycles and there are a number of strategies that maximise risk/reward ratios within those cycles.

Recognition that a cycle is becoming mature is all that is required, absolutely accurate timing is not a prerequisite. Accuracy in timing is difficult, and fraught with false positives.

jog on
d998

 

[wayneL]

Re: LETS NOT PANIC BUT PROFIT!!

Thats good, I've got the laymans part sorted !! ............. Now all I have to do is study options for a year or two (Delta, theta,vega, straddles, etc etc .......... my brain hurts already

Thanks Duc and others ...... good thread with some interesting stuff.

Here is a video on gamma trading (similar to what we're talking about here) the only difference is that duc and I prefer to go out in expiry and be longer on vega (betting that volatility will increase)

http://www.options-university.com/Videos/GammaTrading/

It's a marketing video, but gives a good idea of the technique.

 

[wayneL]

Re: LETS NOT PANIC BUT PROFIT!!

enzo

If you have joy with the calculations I'd be interested, my poor braincell is entering meltdown.

jog on
d998

Making progress with this. Should have something next week.

<edit> Finally worked out the excel formula for caclulating historical volatility and have a rudimentary cone working. Lots of tidying up to do, but it will work out well