Re: LETS NOT PANIC BUT PROFIT!!
barney said:
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