Long Term Option Strategies

[wayneL]

Quick question, does anyone here use options for longer term trading (2-5yrs?)?

Well Wayne basically i wanted a better alternative to investing in shares (i.e not having to outlay huge sums of cash etc....) im talking about buying direct call (and puts if opportunity arises) options in the view of a big move (but trying to guess in short term is kinda hard thats why i choose longer term options).

For instance we all know the market will bounce (when will it happen who knows), and some stocks will probably rocket in the next few yrs, so id rather outlay a couple of thousand in premium and know thats my maximum loss (instead of buying the share outright and increasing my risk and profit potential).

Thought I'd open a new thread on this ratehre than take the other thread off topic.

There are some problems with long term calls.

1/ The liquidity is usually sh!te

2/ At the moment, because of the massive volatility, you are going to pay through the nose for them, and sooner or later there will be volatility crush. Vega on long term options is enormous, so it is going to be costly.

3/ You are paying all of the cost of carry up front, that's 2-5 years of interest that can evaporate if the stock is taken out.

But.... I agree with the thought.

I am using the volatility to acquire and pay for shares that I can tuck away for keeps.

I've got a free parcel (paid for with some arsey trading) of Citigroup that I now have calls written over and will just write calls over into perpetuity... and hedge if needed.

Sure it's a crap company at the moment, but the options are now paying me psuedo dividends on a zero cost base holding...(and it just might come good one day)

I'm doing the same with other shares of better companies that will take a bit longer to lower the cost base to free, due not being so tinny with.

How I'm doing it:

Write OTM puts and take in the ludicrous premium on offer. Not silly amounts, just on the face value I want to acquire. I have bee getting anywhere between 8% - 15% of the face value on these near month OTM puts on companies that would normally yield 2-4%.

With C, I didn't let myself be assigned, but used a "virtual" holding via synthetics. Others I have let myself be assigned.

Actively trade the movements with shares or long options, depending on the risk profile I want. This process is described in Cottle's book under "Option Metamorphosis".

Take the profits and convert them to shares. Acquire additional shares as time goes by with written call and hedge profits. This is essentially with simple swing trading analysis that I normally use.

With the volatility as it is, this is a once in a generation opportunity to acquire shares quickly in this way. It can be done in normal times, it just takes a hell of a lot longer.

Risk: You could blow the hedging/metamorphosis process and get the opposite result. It can get frustrating as you put trades on and stock volatility does a whoopy on you. You get paranoid and think the market is out to get you.

Anyway just a couple by no means comprehensive thoughts and there are other ways of achieving long term goals.

Discuss

 

[jackson8]

only fairly new to options trading but have on down days sold a few otm 3-6 month puts when the opportunity has arisen

finding it hard to find far otm puts to sell but the odd one pops up occasionally that seems to be further out of the equation

the premiums are quite good and even though have to sit on them for 3-6 months the premiums provide some fairly good downside protection

have read a lot of your posts WayneL and i don't have your extensive experience and have limited capital but have to start somewhere i suppose

 

[cuttlefish]

I'm inexperienced in options as well and still pretty much only trading long (bought) options positions, still a bit nervous about writing sold positions.


I've found that its far easier to see the various greeks interplay as options get closer to expiry - both because there tends to be an accelarator sort of effect on a lot of the changes as things get towards the expiry date and also because there is better liquidity in the front month options so its easier to get a feel for price across the different strikes. This has been helpful in understanding how IV movements can quite often dwarf delta and theta effects. Its also helped me to start to grasp how gamma behaves a bit though I still find it all complex.

The approach I take depends very much on the underlying stock and my view of the option IV's vs where I see underlying volatility and delta heading.
Overall my strategy has been fairly rough-and-ready but I'm slowly starting to forumulate some general principals that seem to make sense to me (but may in fact be completely illogical!).

So basically my overall strategy with options is that I'm looking to catch delta moves whilst minimising my spend on IV. The way I attempt to achieve this is by balancing a range of strikes and dates.

With overall volatilities currently at the levels they are I tend to limit most of my positions to a combination of current month and one month out and roll over if trying to catch a longer term move, though if I think that there is a significant delta move going to happen compared to the past few months price action and its not priced into the IV's then I will go further out in dates.

The real challenge with a long term position with options is managing the continuous rollover process. The problem is that if you get a good delta shift in your favour on the current month (and thus see the IV and delta component of your positions spike) if you then roll this position over immediately you will blow all of that IV in the IV on the next months strikes, but if you close the position out and wait before you roll over you potentially miss out on the continuing delta move. Some of the ways I deal with this are to:

* grow and shrink my positions size rather than not have a position at all

* buy closer to the money when IV is high and further from the money when its lower. When IV is high, if I buy closer to the money or in the money the delta component is higher and delta can take over more quickly. Its of course important to exercise good trade management around positions with a high delta component and close them out when delta goes against them.

* take profits when delta and IV spike/move in my favour (took me a while to learn the importance of this ) This will ideally happen after being set in the outer months positions closer to the money as these tend to provide the best profits on a favourable delta move. Depending on whats going on I might take partial profit (e.g. if its the middle of the month). But regardless of when I take profit, I will look to spend some of the profit on front month otm's as insurance in case the delta move continues, whilst waiting for IV to collapse or for delta to move the other way (mainly waiting for the IV collapse) before rolling over into a new position.

* If after taking profit, delta moves the other way to the trend I'm trading I'll try to pick a reversal and buy closer to the money (in the next month out) and manage the trade - i.e. cut it and look for another entry if delta continues to move against me because you lose money quickly trying to hold an ITM or ATM position when delta moves against it.

* If the delta move that I took profits on slows down or stops, and the price consolidates, then I'll wait until IV's in the outer month come down a bit and maybe open some positions slightly further away from the money which will have lower gamma if delta reverses giving a little more room for an exit without a price collapse. Alternately I might open some front month positions a bit closer to the money (they will be cheaper because of the IV collapse and theta decay). It depends a bit on how far into the month I have taken the profit and how much position I've already built in the next month out.

* Overall capital allocation across the strikes/dates comes into all of this as well of course - because the ATM's are more expensive for the same leverage vs the OTM's - so when I've taken profits on my larger positions (which will typically be near the money or in the money when I've taken profit on them) I will put a small part of that profit into further otm, shorter dated options as a 'hedge' against not having a position, whilst waiting for an optimum time to rollover into a new entry.

* I've also started to try to use skewed spreads to partially hedge larger, nearer the money positions in case there is a significant delta shift against the position. That would typically be an appropriately sized otm front month in the opposite direction to the direction I'm trading, to hedge against the atm/ntm outer month (though again with the hedge it also depends on IV/delta situation at the time of taking the hedge).


I don't know if any of that makes any sense and I worry that I'm mangling my use of the various terminology. (Its only barely making sense to me ...: ) Though its been a good exercise to try to write it down as its helped me to better understand what I'm trying to do.

 

[Ageo]

Thanks for touching on this subject Wayne,

I guess what scared me off short term option trading was the complexity to understand the greeks (and all the other mathematical calculations involved).

It became a bit too full on for me at the time.....

I spose there's no getting away from fully understanding the greeks and incorporating it into my trading/investing.

Its funny that i have read up/watch video's etc.. on greeks and still dont fully comprehend them. 1 day

 

[Grinder]

only fairly new to options trading but have on down days sold a few otm 3-6 month puts when the opportunity has arisen

finding it hard to find far otm puts to sell but the odd one pops up occasionally that seems to be further out of the equation

the premiums are quite good and even though have to sit on them for 3-6 months the premiums provide some fairly good downside protection

think about buying em back a month or so before expiry. You can still benefit from theta, take in the big vega without such a great risk from gamma.

 

[wayneL]

think about buying em back a month or so before expiry. You can still benefit from theta, take in the big vega without such a great risk from gamma.

I'll take them!

 

[mazzatelli1000]

I'll take them!

Leave some for the rest of us .... please?!?!

 

[Grinder]

think you both have had your fair share.

on another note, still can't find any good info on Kospi options. Do either of you or anyone else trade these?

 

[mazzatelli1000]

think you both have had your fair share.

on another note, still can't find any good info on Kospi options. Do either of you or anyone else trade these?

Hey Grinder
I have had a look at HK and Kospi options - problem is IV data or any data for them is very scarce.

 

[Grinder]

Hey Grinder
I have had a look at HK and Kospi options - problem is IV data or any data for them is very scarce.

Yep. Seems mighty tricky to get any good info.

 

[aleckara]

Thought I'd open a new thread on this ratehre than take the other thread off topic.

There are some problems with long term calls.

1/ The liquidity is usually sh!te

2/ At the moment, because of the massive volatility, you are going to pay through the nose for them, and sooner or later there will be volatility crush. Vega on long term options is enormous, so it is going to be costly.

3/ You are paying all of the cost of carry up front, that's 2-5 years of interest that can evaporate if the stock is taken out.

But.... I agree with the thought.

I am using the volatility to acquire and pay for shares that I can tuck away for keeps.

I've got a free parcel (paid for with some arsey trading) of Citigroup that I now have calls written over and will just write calls over into perpetuity... and hedge if needed.

Sure it's a crap company at the moment, but the options are now paying me psuedo dividends on a zero cost base holding...(and it just might come good one day)

I'm doing the same with other shares of better companies that will take a bit longer to lower the cost base to free, due not being so tinny with.

How I'm doing it:

Write OTM puts and take in the ludicrous premium on offer. Not silly amounts, just on the face value I want to acquire. I have bee getting anywhere between 8% - 15% of the face value on these near month OTM puts on companies that would normally yield 2-4%.

With C, I didn't let myself be assigned, but used a "virtual" holding via synthetics. Others I have let myself be assigned.

Actively trade the movements with shares or long options, depending on the risk profile I want. This process is described in Cottle's book under "Option Metamorphosis".

Take the profits and convert them to shares. Acquire additional shares as time goes by with written call and hedge profits. This is essentially with simple swing trading analysis that I normally use.

With the volatility as it is, this is a once in a generation opportunity to acquire shares quickly in this way. It can be done in normal times, it just takes a hell of a lot longer.

Risk: You could blow the hedging/metamorphosis process and get the opposite result. It can get frustrating as you put trades on and stock volatility does a whoopy on you. You get paranoid and think the market is out to get you.

Anyway just a couple by no means comprehensive thoughts and there are other ways of achieving long term goals.

Discuss

Reading this with interest as I'm just starting off in the options game and want to get a feel for the strategies that i can employ using the greeks.

Are you just doing straight gamma scalping here? Short call, buy Delta stock hedging? I can see that you are writing OTM puts like I've seen a lot of people on the forum do now. I hope you guys have your risk covered on this - things could always fall more (maybe not in the front month but maybe next month when you do it again).

I don't quite understand the risk that you have mentioned either. Maybe it is because I don't quite understand what you are doing as much as I would like to.

 

[wayneL]

Reading this with interest as I'm just starting off in the options game and want to get a feel for the strategies that i can employ using the greeks.

Are you just doing straight gamma scalping here? Short call, buy Delta stock hedging?

No. I do some gamma scalping when the conditions are right, but it is nothing to do with this strategy. Gamma scalping requires you to be long gamma. While IVs are so high, I want to be short gamma as much as possible.

I can see that you are writing OTM puts like I've seen a lot of people on the forum do now. I hope you guys have your risk covered on this - things could always fall more (maybe not in the front month but maybe next month when you do it again).

The idea is to acquire stock at a considerably lower cost base, using fat option premium to pay for it. This is not a trading strategy, it's an investment strategy with some trading components for enhancement. The capital is ring fenced from my trading account and assigned to building up a portfolio.

I only write naked puts on stock I want to own. Ideally, I want the stock to be slightly ITM at expiry so that I am assigned. If not, I just buy a few shares with the premium collected. If I believe there is a strong down move imminent or beginning, I change the risk profile into a vertical, diagonal, or backspread with the greek characteristics I think appropriate, by adding long puts at different strikes and/or expiries.

As mentioned above I have already fully paid for Citigroup shares within the space of 2 expiries. I was lucky and tinny the way things worked out, but I now have risk free shares (synthetically in C's case, for now) I can write calls over into perpetuity (If C survives )

I don't quite understand the risk that you have mentioned either. Maybe it is because I don't quite understand what you are doing as much as I would like to.

The risk is that you keep getting on the wrong side of the delta with the adjustments. eg convert the short put to a bear put spread and the stock starts moving up, then take off the long put to get long deltas again and the stock starts going down, etc.... Murphy's Law - It happens.

 

[Ageo]

So basically Wayne in your longer term view your using options as a side assistance whilst buying the share outright (wether its selling naked puts to purchase the stock at the price your happy to, then perhaps writing covered calls to milk the added premiums on offer? to help cover the cost of more shares perhaps?) only problem with that in Aus is option contracts here are lots of 1000 not 100 like in the U.S and other places.

Have you ever used straight outright bought call options to profit from big moves (in say a 2-5yr move?) i mean i know what your saying in terms of paying for all the interest upfront (especially now as the premiums are crazy) but there is some way OTM options that arent too expensive and could profit from a big move.

Ill give an example later when the prices become available.