Options Mentoring

[cutz]

Thanks Sails,

Yeah, it looks like it may behave like a futures contract, I will be interested to see what the spreads are like.

 

[sails]

Yes, check them out - hopefully they have improved. It was a long time ago since I looked into them and the spreads were pretty wide.

Barrier warrants also move a lot like futures with smaller spreads - especially if the SPC is 1. Worth looking at, but wouldn't rush in until it's properly understood with all the associated risks. Citibank seem to be the main ones providing the barrier warrant series - and I'm not sure about their reputation. If you're interested, I will spell out what I know about them...

 

[Reealjrd]

Well Friends,

Trading in commodities futures market is a very good idea. Well trading in futures and options is risky but good too.

 

[mazzatelli1000]

Well Friends,

Trading in commodities futures market is a very good idea. Well trading in futures and options is risky but good too.

Options were designed to minimize risk.

It's only risky in the hands of the wrong person

 

[cutz]

Well Friends,

Trading in commodities futures market is a very good idea. Well trading in futures and options is risky but good too.

Yeah, i dunno about that, i have found shares to be a lot more risky than options.

 

[cbacamden]

Agree 100% about the risk ! Options, warrents etc are only risky if you get greedy, carless or forget the high leverage and time decay.

I personaly love Warrent Minis - Again, the only time I have got in trouble is when i have been been greedy (ie: not stuck to the rules)

 

[cutz]

Hi all,

I set up a short index strangle last month but recent events has caused the put leg to turn against me , therefore today with 2 days to go I rolled the put into December with a strike 4 levels down.

I thought about letting the losing trade cash settle on Thursday and set up another short put position on the same day but I decided to roll into the next month today, I sort of feel this could be a case of 6 or ½ dozen the other, any thoughts on this, i.e. should I have waited till expiry as this is a cash settled series.

I’m prepared to cop a bit of flak here as it looks like I’m fighting against the market trend but I do feel a minor bounce could be coming and I do want to take advantage of high IV.

BTW, I’m not after advice, just opinion on how the experienced would have handled this.

Thanks in advance.

Cutz.

 

[sails]

Hi Cutz - I have no experience in uncovered short positions, so hopefully someone else can help here. Any short option trades for me are always covered with a long option somewhere - I like to sleep at night

Theoretically though and with IV so high, I am guessing you have sold a reasonably fat premium further OTM in December.

I think you would need a crystal ball to know if it was better to roll now or at expiry as it will depend largely on what the index does between now and then. Hopefully someone else with more experience in this strategy can help...

 

[cutz]

Theoretically though and with IV so high, I am guessing you have sold a reasonably fat premium further OTM in December.

Hi Sails

Yes that's the case, the Nov was trading with intrinsic value only and the Dec had a good serve of time value due to the high IV.

Late Note, Actually Sails i went from Deep ITM to ITM

 

[sails]

...
Late Note, Actually Sails i went from Deep ITM to ITM

Just as well it's an index trade - otherwise the short put would have been high risk for assignment!

Are you rolling your calls down as well to bring in a bit more premium? Even so, would have to take care how far they are rolled down as you don't want to have the call side going against you if the market decides to take a breather.

From what I have read of others doing these types of trades is to roll the short option down & out (for puts - up & out for calls in a rising market) at some point where it can be done for even or a credit. I would imagine this would need to be done well before it is ITM especially for a strangle. Not much help for this situation, but maybe something to backtest for future trades

 

[cutz]

Hi All,

Yeah Sails just as well it was an index option, although I do have protective longs in place on stock options 95% of the time.

Here’s the trade that went pear shaped for whoever is interested, perhaps a lesson on not what to do, feel free to comment or criticise.

Initially when I set up the short strangle in early oct. XJO seemed to have some support at 4000, IV was high, so I set up the short put OTM leg. Over the next few days XJO rallied IV was still high I then set up the short call OTM leg. I’ve done this type of trade many times before with success so I guess I was I bit sloppy.

But as it turned out 4000 didn’t hold so I had to take some defensive action which I left a little late.

A few lessons I will take from this trade are, (1) Have a protective long on the down side in place even though it is an index option, (2) close out the leg that’s showing a profit rather than wait for expiration and risk giving your profits back especially in these volatile conditions, I did have that opportunity on the short put but I chose to hang on, (3) The short call leg will expire worthless but I should have closed it out and rolled down a couple of notches.

 

[mazzatelli1000]

Initially when I set up the short strangle in early oct. XJO seemed to have some support at 4000, IV was high, so I set up the short put OTM leg. Over the next few days XJO rallied IV was still high I then set up the short call OTM leg. I’ve done this type of trade many times before with success so I guess I was I bit sloppy.

But as it turned out 4000 didn’t hold so I had to take some defensive action which I left a little late.

A few lessons I will take from this trade are, (1) Have a protective long on the down side in place even though it is an index option, (2) close out the leg that’s showing a profit rather than wait for expiration and risk giving your profits back especially in these volatile conditions, I did have that opportunity on the short put but I chose to hang on, (3) The short call leg will expire worthless but I should have closed it out and rolled down a couple of notches.

Cutz,
I have had near heart attacks and seizures from putting short strangles on in the past

As sails has outlined you should roll down the call to beef up the premium. I have in the past created a straddle at my break even point, but only because I believe the underlying was stabilising there --- so in this example I am still rolling down a call, but all the way to my short put strike - creating the short straddle. But one must consider collateral requirements and the risk the underlying could reverse.

Better to have the "wings"

The other thing is to tighten your breakevens as it gets closer to expiration and lock in the profits

Theoretically you can try to keep the position delta neutral - but the collateral and commissions might be too much.

That is as far as my experience with short strangles.
Sorry I can't be any more help.

 

[Grinder]

Hey Cutz,

Your fairly brave to initiate anything uncovered in the present market climate, or even anytime. The strangle was'nt a bad idea and it sounds like you had a plan initially, don't know if I would have played it much different. Would have probably adjusted and taken smaller profits earlier when the market was giving them out, but thats just my comfort level. Sounds like you know what you should have done.

 

[cutz]

Thanks for your inputs guys,

Yeah I had a plan to start but I guess in the attempt to squeeze every bit of theta out of the position I got bitten, classic case of greed bias. I agree with you Grinder, in hindsight I would have closed out early, I have done this many times before on stocks options and the index but for some reason I was convinced there was going to be a bounce on the index. Every now and again I try to predict the market with little success so I should really stick to directional neutral strategies.

Mazza, what’s meant by the term “tighten your breakeven” and how would you implement it in a strangle?

 

[sails]

...A few lessons I will take from this trade are, (1) Have a protective long on the down side in place even though it is an index option, (2) close out the leg that’s showing a profit rather than wait for expiration and risk giving your profits back especially in these volatile conditions, I did have that opportunity on the short put but I chose to hang on, (3) The short call leg will expire worthless but I should have closed it out and rolled down a couple of notches.

It's a shame that the best lessons are usually learned painfully where in "hindsight" it is clear what we should have done. I have had many such lessons

I think your idea of adding a protective long in future on the down side makes a lot of sense volatility wise. IV usually rises as the market falls which we know hurts short options, so that protective long would not only hedge downside directionally, but also help to hedge against rising IV. The thing against could be the cost due to IV smile - but probably better to pay up and keep the risk under control. On the upside IV usually declines a bit, and this would help your overall strangle position together with timely defensive action.

You could still manage your short position as if there were no protective long - i.e. still roll down and out diagonally if the market looks like it's got more down to go.

Something else to look at now is the possibility of adding (or rolling) a short December call (but allowing enough room for the market to oscillate on the upside - if it can remember how ). and perhaps using some of that premium to pay for a cheap OTM put. May be too far gone in the down trend to do so, but it might give you a little peace of mind which helps rational thinking (at least for me!).
Eg the 4000 Dec call would bring in around 43c at the moment (you might be happy to sell a lower strike and pick up more premium) and a Dec 2500 is currently bid at 15c (no ask though).

Also, if it keeps moving down, see if it's worthwhile to roll your short put down and out even further. For instance, December 3700 put bid/ask 334/363 - could be rolled to March 3400 for bid/ask 345/389. If these the two legs are ordered as a combo, it often saves a lot of slippage.

Anyway, not advice - just some ideas to think about. All the best with it

 

[cutz]

Hi Sails,

Yes I am in the process of setting up the dec call legs, I have pre-purchased the protective deep OTM calls to be on the ready, but I’m holding off on the shorts calls, I’m feeling a bit gun shy as I don’t want to be caught out in that overdue bounce.

I tell you what; the market markers are being a bit cheeky.

 

[sails]

I tell you what; the market markers are being a bit cheeky.

Yeah, like I said somewhere recently - they're not into charity...

 

[jackson8]

hi guys
a question concerning margins
am writing covered calls over a stock i own osh but wish to now consider the synthetic stragety of selling otm naked puts over osh as well ......will receive premium and if sp falls below strike am quite happy to be assigned

if i sell 1 contract naked call at $4. strike sp now aprox $4.60 will i be required to lodge as cash colateral $4000 (1000x$4) or am i only required to fulfill a margin requirement of a lesser value depending how underlying sp behaves

with thanks gary

 

[sails]

hi guys
a question concerning margins
am writing covered calls over a stock i own osh but wish to now consider the synthetic stragety of selling otm naked puts over osh as well ......will receive premium and if sp falls below strike am quite happy to be assigned

if i sell 1 contract naked call at $4. strike sp now aprox $4.60 will i be required to lodge as cash colateral $4000 (1000x$4) or am i only required to fulfill a margin requirement of a lesser value depending how underlying sp behaves

with thanks gary

I think it varies between brokers - some want 100% cash cover for short puts - others are OK with varying degrees of margin. Best to check with your broker...

 

[cutz]

hi guys
a question concerning margins
am writing covered calls over a stock i own osh but wish to now consider the synthetic stragety of selling otm naked puts over osh as well ......will receive premium and if sp falls below strike am quite happy to be assigned

if i sell 1 contract naked call at $4. strike sp now aprox $4.60 will i be required to lodge as cash colateral $4000 (1000x$4) or am i only required to fulfill a margin requirement of a lesser value depending how underlying sp behaves

with thanks gary

Hello gary,

To work out your margin requirements assuming you’re with comsec go to this site http://www.asx.com.au/opc/OpcStart?Mode=M ,find your underlying then select your contract from the drop down box then hit go, a new screen will come up ,in the no of contracts field select no of positions, because it will be a short put make sure you put a minus on front of the number, when you’re done hit recalculate it will then show you risk margin, premium margin and total margin, to calculate margin that's required by comsec just double the total margin that is shown on the ASX site.

Cheers

cutz