Newbie to Options

[alter1217]

I was talking investment with an acquaintance of mine and he told me to look up on options trading. Its very interesting and I've been studying some of the online courses from the ASX website. (ASX website is very good!)

Anyway, so there are PUT and CALL options and you can BUY or SELL them. So I was thinking, what if you wrote a call and bought a put at the same time? If the price isn't right, it seems that you make some guaranteed profit?!

Here is the case.

Initial share price $10

Sell Covered Call - obligated to sell at 10.5 if share price is higher
$10.50
Price $0.5 <-- You get
Expiry 21 days.

Requires an underlying share of $10.

Buy Put - right to sell at 10
$10
Price $0.25 <-- You pay
Expiry 21 days.

Date of expiry share price $15:
net profit/loss = $0.5 - $0.25 = $0.25

Date of expiry share price $11:
net profit/loss = $0.5 - $0.25 = $0.25

Date of expiry share price $10.5:
net profit/loss = $0.5 - $0.25 = $0.25

Date of expiry share price $10:
net profit/loss = $0.5 - $0.25 = $0.25

Date of expiry share price $9:
net profit/loss = $0.5 - $0.25 + $1 -$1 = $0.25

Date of expiry share price $5:
net profit/loss = $0.5 - $0.25 + $5 - $5 = $0.25

Summary: 2.5% profit on $10 over 21 days.

So, since profit is rarely guaranteed in real life... I'm guessing the prices of the options will never be weird enough for you to profit like this? Or did I make a mistake in calculating?

 

[wayneL]

I'm guessing the prices of the options will never be weird enough for you to profit like this?

Correct.

The strategy is called a collar, AKA synthetic bull spread.

It has a limited profit to the upside and a limited risk to the downside.

 

[sinner]

Just the place for us options newbies to hassle the options oldies.

Questions from me:

1. Seems reasonably easy to trade US and Australian options as an Australian citizen. Are there brokers providing access to the KOSPI index options, HKex options, or hell I'd even settle for a broker providing access to the LSE options market, for Australian citizens? Interactive Brokers or bust?

2. Assuming a liquid functioning market, what is the difference exactly between a bear put spread and taking a short on underlying with defined SL/TP, or a bull call spread and taking a long on underlying with a defined SL/TP? Can't seem to figure out what would be the benefit of trading the option rather than the underlying in this case due to exposure to the greeks? The only useful scenario that I can think of is if you wanted to short an unborrowable stock that had a good options market?

3. I'm assuming most options traders have a daily scan to look for extremely low risk or no risk collars. How often do these sort of setups appear if you were say, scanning the NYSE and sorting by options liquidity? With a million options traders running a million scans, this seems the sort of thing that efficient markets would gobble up?

4. I want to see a price chart of the actual option contract sometimes, to see what price the option was trading at N days or weeks ago. IGMarkets provide this for their options, but I have not seen other brokers that do. Considering the rediculous trading costs associated with trading IG options, and the fact that they are all CFD type based, it doesn't seem very attractive to use them. Where can I see a price chart of the actual option? I don't mind paying for reasonably priced data.

5. Are the pros trading their options on margin to gain increased leverage, or just using the implicit leverage built into options?

Thanks. I've only got about a million more questions :

PS: mazza, I tried to PM you quite recently but it said your inbox was full.

 

[cutz]

Just the place for us options newbies to hassle the options oldies.

Hi Sinner,

I'm not really an options oldie but I can offer some thoughts,

1. You need a broker that understands the needs of options traders, IB is nice.

2. Bull Call/Bear Put/Bear Call/Bull Put one to one verticals are not ideal as directionals (if that’s your style), especially in oz. You’re better of using the underlying.

3. I don’t use scanners so I can’t help you there.

4. Webiress and TWS can chart options.

5. I don’t recommend using borrowed money to put up as margin.

 

[alter1217]

A tiny collar seems to exist for QBE at the moment.

Strike price $15.5 CALL price is $1.345
PUT price is $0.07
the profit is $0.005
underlying price is $16.77

which is 0.029% profit to september 23.

Link http://www.asx.com.au/asx/markets/optionPrices.do?by=underlyingCode&underlyingCode=QBE

 

[builder2818]

If you were going to do a collar on QBE. You wouldn't pay $16.77 for the stock and write a $15.50 call over them. Add the cost of the long PUT minus the very small premium you receive from the call and you've lost money.

 

[alter1217]

If you were going to do a collar on QBE. You wouldn't pay $16.77 for the stock and write a $15.50 call over them. Add the cost of the long PUT minus the very small premium you receive from the call and you've lost money.

Yeah, at 0.029% per month without even counting brokerage, you're not going to be earning any money even if you use millions of dollars... better off putting your money in the bank.

Hmm but if you already own some shares with some unrealised gains, apparently a collar can help you delay paying CGT.

 

[mazzatelli]

Just the place for us options newbies to hassle the options oldies.

This reference has got to be directed at WayneL :

1) IB for Kospi and Hkex index and stock options. Oh my, already discouraged with ASX spreads?

2) Generally replication > debit risk, more effective to trade spot if you want the deltas - what cutz said. imo if you wanted to be short - do it via the synthetic or bear risk reversal

3) N/A - Personally don't trade collars

5) Ugh - implicit convexity/concavity suffices. But I wouldn't complain with > favourable margin requirements

PS: mazza, I tried to PM you quite recently but it said your inbox was full.

Apologies, been receiving too many love letters from an ASF stalker - the kavorka!!!

 

[sinner]

This reference has got to be directed at WayneL :

1) IB for Kospi and Hkex index and stock options. Oh my, already discouraged with ASX spreads?

Never bothered really examining ASX ETOs beyond looking at their pages on asx.com.au, doesn't look very liquid and poor OI at many of the strikes? Compared to a MB Trading account opened in the US can play many stock and ETF options all for 95c per option with no minimum and relatively great liquidity even way OTM. The barrier to entry for new traders is obviously miles apart.

Thanks for the info cutz.

 

[mazzatelli]

Never bothered really examining ASX ETOs beyond looking at their pages on asx.com.au, doesn't look very liquid and poor OI at many of the strikes? Compared to a MB Trading account opened in the US can play many stock and ETF options all for 95c per option with no minimum and relatively great liquidity even way OTM. The barrier to entry for new traders is obviously miles apart.

Tongue in cheek. ASX ops don't have much range. Better to be on the sell side.

 

[cutz]

Tongue in cheek. ASX ops don't have much range. Better to be on the sell side.

Agree,

In certain instances lower liquidity/wider spreads can work to my advantage (although not very often ).