Options Mentoring

cutz · 17 May 2009

jackson8 said:
hi cutz
just out of interest can you acheive the same results by purchasing deep itm calls and buying puts to cover instead of purchasing the stock

Yeah, Gary.

Your correct, so obvious but yet I didn’t see it. Assuming the stock doesn’t correct and it marches up to $35 I can buy a 28 strike call, should have a delta of .92, effectively the same as 920 stocks, also buy a 28 strike put for next to nothing (assuming the MM's come to the party).

Bingo, similar graph as before but done with a 2.7K credit.

Heaps better.

Actually, It's a better looking graph than before, geez i luv options.

EDIT>> Been playing with the strikes on plan "B" (assuming correction doesn't happen) and it's a matter of balancing risk/reward to whatever is optimal.

jackson8 · 17 May 2009

cutz said:
Yeah, Gary.

Your correct, so obvious but yet I didn’t see it. Assuming the stock doesn’t correct and it marches up to $35 I can buy a 28 strike call, should have a delta of .92, effectively the same as 920 stocks, also buy a 28 strike put for next to nothing (assuming the MM's come to the party).

Bingo, similar graph as before but done with a 2.7K credit.

Heaps better.

Actually, It's a better looking graph than before, geez i luv options.

hi cutz
just of the top of my head purchasing the 28 put still puts a risk on the downside of 7k less premium received for shorts= 4.3 k max loss(less cost of put)

could there be a even balance in a higher strike put as insurance will cost a bit more but reduce that 4.3k loss in the event of a sharp fall down to or below 28

cutz · 17 May 2009

Hello again Gary,

I've been playing with strikes and yes a $30 put and call seems to achieve a better outcome (on the defence side), i think it's a matter of fine tuning and seeing what pricing you get on the day. If things start going pear shaped this week defence may not be necessary.

jackson8 · 17 May 2009

cutz said:
Yeah, Gary.

Your correct, so obvious but yet I didn’t see it. Assuming the stock doesn’t correct and it marches up to $35 I can buy a 28 strike call, should have a delta of .92, effectively the same as 920 stocks, also buy a 28 strike put for next to nothing (assuming the MM's come to the party).

Bingo, similar graph as before but done with a 2.7K credit.

Heaps better.

Actually, It's a better looking graph than before, geez i luv options.

EDIT>> Been playing with the strikes on plan "B" (assuming correction doesn't happen) and it's a matter of balancing risk/reward to whatever is optimal.

in retrospect
the positiion you are talking about -1 +2 on mqg is one halve of a short fly -1 +2 -1 without the higher sold strike from my understanding the short fly is a volatility play but as in your case it will require quite a large move upwards direction to make it profitable. to retain profit it will need to trade below its current sp down to 32 for max profit or above 45.80 (aprox)

my point is ? i am not quite sure but wondering if there is another way of acheiveing the same outcome with out the large risk involved should the sp keep rising but not enough to enter profit on the long side.

from the way i see it you are relying of the sp to nose lower from the moment it is put on as your short is already itm any rise will result in a deficit

with your longs being so far away your position looks almost like a itm sold naked call with the insurance being so far away from the strike

just that the earlier posts on the xjo position raised the problems that can occur with these types of trades if they go drastically wrong

jackson8 · 18 May 2009

cutz said:
Yeah, Gary.

Your correct, so obvious but yet I didn’t see it. Assuming the stock doesn’t correct and it marches up to $35 I can buy a 28 strike call, should have a delta of .92, effectively the same as 920 stocks, also buy a 28 strike put for next to nothing (assuming the MM's come to the party).

Bingo, similar graph as before but done with a 2.7K credit.

Heaps better.

Actually, It's a better looking graph than before, geez i luv options.

EDIT>> Been playing with the strikes on plan "B" (assuming correction doesn't happen) and it's a matter of balancing risk/reward to whatever is optimal.

hi cutz

sorry for labouring this out but you have me intrigued now with this speculative trade

with your short over $2 itm it seems to be quite costly to try to defend . if you are looking at buying a 30 call if the sp reaches 35 it quickly changes your whole risk/reward profile but puts you in debit and still will require a decent rise in sp to over 40 to acheive a profit

if this situation were to arise you could at the same time as purchasing your long call sell another higher strike and turn it into a long fly giving yourself a more even profit or loss scenario

it seems a purely directional play and is a bit like lighting a stick of dynamite that has a very short fuse , could easily blow up in your face

but i am only a rookie and as such am probably over cautious.

gary

mazzatelli1000 · 18 May 2009

cutz said:
I’m bearish on this stock I was looking strikes of 32/40, ratio of 1 to 2, if the stock keeps running up from today’s price of $34.60 instead of reversing i'll neutralize delta at $35/36 and buy a couple cheap puts, profits will then come in from the upside and downside is still protected, if the stock collapses the initial credit is kept.

jackson8 said:
it seems a purely directional play and is a bit like lighting a stick of dynamite that has a very short fuse , could easily blow up in your face

I guess this was what was trying to be discussed in an earlier exchange. The vol of the entire strip would not be favourable with the up move.
Pure directional - short deltas.

The risk here is overtrading - overhedging - adding longs when it moves up a tad etc
I think even with option strategys that are not as delta sensitive as being long/short the spot, you still need to have a directional/vol bias.

Like my thoughts before, sometimes when you are wrong it is better to cut losses early, even with limited risk stratgies and especially since this backspread is directional spec and gamma scalping is not an option.

cutz said:
Assuming a ratio of 4 to 8, buy 1000 shares at 35 and a 26 put

jackson8 said:
just out of interest can you acheive the same results by purchasing deep itm calls and buying puts to cover instead of purchasing the stock

long stock + long put = long call
In this case the 26 call

I haven't got up to read the rest in detail, but it sounded like you were considering buying straddles at the 30 strike level?

cutz · 18 May 2009

Thanks guys,

Talked me out of it, I’ve dropped the idea on MQG call backspread and I’ll look at this from the put side, same ratio as before 4 short 8 long, strikes of 34/30, a big bearish move will achieve excellent results, a bullish move will achieve good results, stock stuck between 27 and 34 requires attention but MQG is one of those stocks that can’t sit still.

I guess I was bogged down before with the idea that you can defend the call backspread by buying deltas to steepen up the right side of the graph something you can’t do from the put side because of the difficulty in shorting here but as Gary pointed out that buying ITM calls/(puts) achieves the same thing, a case of tunnel vision on my behalf.

Sorry to be banging on about backspreading but I think it’s become one of my core strategies but I feel I’m not 100% with it, just tossing up ideas, other things to consider is liquidity and pricing I get at those strikes, although those things have been OK lately.

mazzatelli1000 · 18 May 2009

cutz said:
Sorry to be banging on about backspreading but I think it’s become one of my core strategies but I feel I’m not 100% with it, just tossing up ideas, other things to consider is liquidity and pricing I get at those strikes, although those things have been OK lately.

Everyone has their niche
Maybe a suggestion for you to research and explore

Short premium in equity/index components
If you are worried of broad market sigmas - replicate long index gammas via strangles
Ratio will depend on correlation measures you feel comfortable with

cutz · 18 May 2009

mazzatelli1000 said:
Short premium in equity/index components
If you are worried of broad market sigmas - replicate long index gammas via strangles
Ratio will depend on correlation measures you feel comfortable with

Gotcha,

An example would be buy an XJO strangle 1000 points wide, maybe into July, short gamma trades on the front months, perhaps try to identify market turning points and lay on positions as appropriate.

I like it.

(maybe not so wide on the strangle)

mazzatelli1000 · 18 May 2009

Yes that is the basic gist

The fun never stops

mazzatelli1000 · 22 May 2009

mazzatelli1000 said:
Was short vol but now long vol bias. Currently assessing POT 105 Jun/Sep Put Calendar.

Ahhh hindsight

Should have put this one on in more size

cutz · 22 May 2009

Good luck with it mazza,

Interesting vehicle you've got there.

I thought I’ll have a play with MQG as a long vol play into June, hopefully the market action picks up again. Today looked good but not good enough

jackson8 · 23 May 2009

hi all

have been spending some time reading up on
gamma neutral delta neutral trades using the underlying as the hedge for delta

specifically looking at applying to calender spreads
the gamma neutral aspect looks like a ratio spread

would welcome any comments from experienced oppies

gary

as an example .... osh trading at $5.12
-5 june $5 puts
+9 august $4.75 puts
hedge with aprox. 888 of underlying
from my understanding the idea to roll the june puts out to july near exp.

will this sort of setup require constant adjusting ?

mazzatelli1000 · 23 May 2009

jackson8 said:
hi all

have been spending some time reading up on
gamma neutral delta neutral trades using the underlying as the hedge for delta

specifically looking at applying to calender spreads
the gamma neutral aspect looks like a ratio spread

would welcome any comments from experienced oppies

gary

as an example .... osh trading at $5.12
-5 june $5 puts
+9 august $4.75 puts
hedge with aprox. 888 of underlying
from my understanding the idea to roll the june puts out to july near exp.

will this sort of setup require constant adjusting ?

Gary,
This is a question for you
Which Greek are you trying to profit from??

jackson8 · 23 May 2009

mazzatelli1000 said:
Gary,
This is a question for you
Which Greek are you trying to profit from??

thanks mazza for the reply

having a basic understanding of how the greeks work i am still at the point where as you say i am trying to see how the greeks can be used to profit

or to put it another way making the greeks work to my advantage

in this instance i expect that both gamma and delta are intertwined and the other vega would affect the outcome

so the way i see it there would have to be a very large fall for the position to make a large profit via gamma

the delta hedging is there to try to even out any loss on the longs should the sp rise dramatically

rise or fall in vega (vol) will also have effect over the term of the contract

isnt what i am looking at just a diagonal calender spread with extra longs as insurance.

gary

cutz · 23 May 2009

Hi Gary,

Sorry to butt in,

I don't know enough about calendars because i don't put them on and i can't visualize in my head how they behave but as far as neutralizing delta and gamma it looks like you may have an outlook on future volatility.

Am i on the right track here ?

If so you may need to add that into the equation.

mazzatelli1000 · 23 May 2009

jackson8 said:
as an example .... osh trading at $5.12
-5 june $5 puts
+9 august $4.75 puts
hedge with aprox. 888 of underlying
from my understanding the idea to roll the june puts out to july near exp.

will this sort of setup require constant adjusting ?
isnt what i am looking at just a diagonal calender spread with extra longs as insurance.

Dissections:
1) 5x Bull Put Diagonal Jun/Aug 4.75/5p + 4x Aug 4.75p
2) 5x Bull Put Spread Jun 4.75/5p + 5x Jun/Aug 4.75p Calendar + 4x Aug 4.75p
3) -5 by +9 Diagonal put backspread (maybe cutz' eyes will light up lol)

jackson8 said:
gamma neutral delta neutral trades using the underlying as the hedge for delta

jackson8 said:
in this instance i expect that both gamma and delta are intertwined and the other vega would affect the outcome

jackson8 said:
rise or fall in vega (vol) will also have effect over the term of the contract

Gamma is the second derivative of Delta and will always be intertwined.
You discussed that Gamma and Delta will be neutralised at inception. Then the primary exposure the trade implies is to Vega.

The position is net long options in the back month, making the bias long vol.

Dynamic hedging is then utilised to isolate implied vol exposure. Delta hedging intervals will need to be determined wehther ad hoc discrete deltas/time or utility based - so you will expect adjustments with stock.

jackson8 said:
so the way i see it there would have to be a very large fall for the position to make a large profit via gamma

When you observe the structure as a backspread, yes this is correct.
The question boils down to what is the objective you are trying to achieve with this trade?

Apologies if I have raised more questions than answers

EDIT: cutz beat me to it with a much more concise response LOL

cutz · 24 May 2009

mazzatelli1000 said:
EDIT: cutz beat me to it with a much more concise response LOL

Nah,

Your responses are always excellent, gives me something to think about.

BTW what do you mean by " ad hoc discrete deltas/time or utility based "

jackson8 · 25 May 2009

cutz said:
Nah,

Your responses are always excellent, gives me something to think about.

BTW what do you mean by " ad hoc discrete deltas/time or utility based "

thanks for your input mazza and cutz

am trying to broaden my trading from just putting on naked puts

i dont like putting on new types of trades until i have fully investigated and understood the strategy . cash is too hard to come by to throw caution to the wind

i know the naked put is high risk in itself but i only put on small no. of contracts way otm and on a limited choice of stock

has to be within my risk profile.

gary

cutz · 25 May 2009

No worries Gary, keep the options conversation going, it’s all pretty interesting.

Just a small hint with OTM naked puts, it always helps having some WOTM longs in place just in case, you may not need them but if you ever do, you’ll be glad you did.

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