Options Mentoring

[Grinder]

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.

Agree with that. Not a fan of going naked (except at home). Probs would'nt do it on a stock unless i really want to own em, index maybe.. but am a fan of sleep. (which I'm not getting as much as I would like, trading the US at night)

Have been working putting on my positions with extra built in insurance thus minimizing the need for adjustments, came back from vacation with a different outlook Will let you how it goes.

 

[mazzatelli1000]

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

Since you cannot continuously delta-hedge and transaction costs are a hindrance:

Ad hoc discrete deltas/time - IOW you select a certain number of deltas to rebalance at intervals, e.g. position delta absolute value is 200 or every day/week/month one balances deltas.

Utility based - deals with taking into account transaction costs vs. risk tolerance/aversion and developing optimal hedging bands/asymptotes.

 

[mazzatelli1000]

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

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.

Short OTM gamma :hide:

Agree with that. Not a fan of going naked (except at home).

Not a pretty sight when things go bad
In HK some traders are in shorts and T-shirts
LOL

(which I'm not getting as much as I would like, trading the US at night)

Have been working putting on my positions with extra built in insurance thus minimizing the need for adjustments, came back from vacation with a different outlook Will let you how it goes.

How are you finding US markets?
More static hedging added to the arsenal I see. Please keep us posted!!!

BTW, WayneL and sails both gone? I wonder if old age caught up to them?

 

[sails]

...BTW, WayneL and sails both gone? I wonder if old age caught up to them?

Old age... never...

No, not gone - just been more busy than usual and will stay that way for a while. I still try to keep up with reading on ASF - but not a lot of time for posting!

WayneL - he really seems to have disappeared this time.. Hopefully he will return one day...

 

[mazzatelli1000]

Old age... never...

No, not gone - just been more busy than usual and will stay that way for a while. I still try to keep up with reading on ASF - but not a lot of time for posting!

WayneL - he really seems to have disappeared this time.. Hopefully he will return one day...

Ahhhh good news then, you can keep us hotheads in check LOL
Hope all is well!!

WayneL, yes he said he would come back after moving house...maybe they finally slayed him in his coffin, him being Dracula and all :batman:


It would be good to see him back.....

 

[cutz]

Since you cannot continuously delta-hedge and transaction costs are a hindrance:

Ad hoc discrete deltas/time - IOW you select a certain number of deltas to rebalance at intervals, e.g. position delta absolute value is 200 or every day/week/month one balances deltas.

Utility based - deals with taking into account transaction costs vs. risk tolerance/aversion and developing optimal hedging bands/asymptotes.

Thanks mazza, gotcha on that.

Grinder, are you up all night or do you catch the final couple of hours ? I tried it for a couple of months but i closed out the last of my small SPY positions last expiry after coming home from a night out.

I was profitable and i loved the liquidity but being up at night got to me.

 

[Grinder]

Grinder, are you up all night or do you catch the final couple of hours ? I tried it for a couple of months but i closed out the last of my small SPY positions last expiry after coming home from a night out.

I was profitable and i loved the liquidity but being up at night got to me.

I knock off bout 11pm & get up 5am next day to trade the last hour of the US. So im getting 6 hrs shut eye as opposed to my usual 8 hrs.

 

[cutz]

Hi Guys,

I came across an interesting post some time ago which mentioned that a stock can drift towards a strike with a high amount of open interest toward expiry (i haven't been able to trace that thread), I was reminded of this post last week as I had a QBE call backspread on recently with the lower strike at $19, I can’t recall the OI at the time I set it up but i assume that $19 would have been a popular strike.

Anyway to cut a long story short I rolled that position out a couple of weeks ago to avoid trouble and sure enough QBE finished up at around $19 last expiry.

I’ve noticed this happen a few times but I assumed it’s just been coincidence, can anyone shed any light on the dynamics of this phenomena, i haven't read about it anywhere i’ve also ordered a copy of that book Sails mentioned, Options Market Making but any opinions will be appreciated.

 

[mazzatelli1000]

Pinny Friday

I do not know how applicable it is to Oz market, maybe some of the resident MM's can shed light.

But for the US there is research and empirical evidence that there is excess drift generated by delta hedging and rollver arb activities that pushes a stock towards a strike price on expiration most notably on optionable stocks. Hence your observation of pinning.

The effect is most pronounced on expiration day, and models for stock pinning are created for those days, as there is discrepancies with the Black-Scholes Model.

Open Interest is not necessarily causation for Stock Pinning due to if I remember of the top of my head:
1) As above pinning mostly occurs on expiration day nearing the end of the session
2) With OI, it is not clear whether MM's are short or long gamma

BTW Option MM by Baird is a great text, should be in every option traders library IMHO.

 

[cutz]

Thanks for your reply mazza,

Pinny friday i luv it. ( obviously Pinny thursday with us)

Yeah I’ve seen it happen with us on a couple of occasions especially with banks, dunno maybe it’s because I play around with them.

I also notice you’ve read the text i mentioned, wasn’t sure whether to get it or not, sounds like I made the right call, eagerly anticipating its arrival.

 

[mazzatelli1000]

I wouldn't be surprised with any of the large stocks. Im sure I've seen a post by sails on something like this in Oz.

You should probably consider high options turnover along with OI.
My friend runs analysis on this behaviour to trade on expiration day (US).

Baird - you'll like his ideas, he likes long wrangles ( put + call backspread) in the back month + short gamma in the front month.

Will be fun, better than McMillan IMO

 

[Grinder]

I've read some stuff on it awhile back, can't remmember where, if I do I'll post it here. Maybe Mark (ex MM) can tell us if there is any real substance to it.

 

[sails]

Yeah, I have found the pinning theory quite fascinating, although the stock doesn't consistently pin at the highest open interest level - obviously nothing is going to work all the time.

STO for May09 had a large lot of OI showing up very clearly at the $14.14 strike - and the that was the low of the day for STO on Thursday (expiry day). They don't always show up quite so clearly -but that was a good example of one that did hit the highest OI level during trading on expiry day.

I have been running excel spreadsheets for some time now that tracks and retains information for the few stocks I watch, eg. volume, OI levels and changes. From that info I can also run further calculations including put/call ratios, cumulative volumes, etc. It's a bit of work to keep up, but it's something I have found interesting.

Apart from expiry, sometimes high OI levels will act as support or resistance which gives a different source of information other than just from the charts.

I usually try to find potentially good expiry trades where I can set up a low dollar risk trade going into expiry with potential high reward. Prefer that than taking higher dollar risks on condors and the like. These expiry trades don't always work, however with so little risk, it doesn't do much damage to the account. I see it as just another tool for the options tool kit.

 

[cutz]

Excellent Sails,

Sounds like you have a lot of bases covered, something I’ve never really considered but I’ll keep an eye on from now.

QBE is of interest to me, noticed there’s above average OI at $23 and a cluster around $21, so it should be interesting to see how things play out this month (Although small OI compared with the US markets).

Thanks again for the heads up everyone.

 

[jackson8]

hi cutz

will mention this although bit different to what you have talked about

of the top of my head i remember reading an article which spoke about the relationship of large volumes of OI of deep in the money strikes

something along the lines of helping to push the sp up or down leading up to exp and the resulting price day after exp

high volume deep itm calls pushing sp up and ditto for puts
possible to do with positions being covered

 

[mazzatelli1000]

I have been running excel spreadsheets for some time now that tracks and retains information for the few stocks I watch, eg. volume, OI levels and changes. From that info I can also run further calculations including put/call ratios, cumulative volumes, etc. It's a bit of work to keep up, but it's something I have found interesting.

Hey M, I know your busy nowadays, but have you ever considered setting up database infrastructures and queries for this?
Its much more efficient and scalable as I have seen with fellow quants, tracking hundreds of stock, how often they finish close to a strike and running simulations.

Yeah I share the same sentiment about Condors and Credit spreads are
I think the attraction is probability of win over R:R

Anyways my fellow oppies, I will be embarking on a project which will consume my time so will farewell ASF yet again LOL.

Thank you for the dialogue, it has been entertaining and enlightening!!

Le deseo la mejor de las suertes

 

[cutz]

Anyways my fellow oppies, I will be embarking on a project which will consume my time so will farewell ASF yet again LOL.

Thank you for the dialogue, it has been entertaining and enlightening!!

Le deseo la mejor de las suertes

Good luck with it all mazza,

Thank's for putting in the time to help out us newbies.

Hope to hear from you soon.

 

[cutz]

of the top of my head i remember reading an article which spoke about the relationship of large volumes of OI of deep in the money strikes

something along the lines of helping to push the sp up or down leading up to exp and the resulting price day after exp

high volume deep itm calls pushing sp up and ditto for puts
possible to do with positions being covered

Yeah i see what you mean, i guess if there are heaps of traders selling DITM's the hedging requirements of the MM's can influence the price, especially since those types of options are running at close to delta 1.

Good stuff, something else to look into.

 

[Grinder]

How are you finding US markets?
More static hedging added to the arsenal I see. Please keep us posted!!!

I've started to build in smaller positions in my overall position in order to reduce the need for adjustments & manage individual greeks.

btw, on the US markets I'm like a kid in a lolly shop It just feels right.

best of luck mazza.

 

[sails]

Hey M, I know your busy nowadays, but have you ever considered setting up database infrastructures and queries for this?
Its much more efficient and scalable as I have seen with fellow quants, tracking hundreds of stock, how often they finish close to a strike and running simulations.

Yeah I share the same sentiment about Condors and Credit spreads are
I think the attraction is probability of win over R:R

Anyways my fellow oppies, I will be embarking on a project which will consume my time so will farewell ASF yet again LOL.

Thank you for the dialogue, it has been entertaining and enlightening!!

Le deseo la mejor de las suertes

My excel skills are petty basic, so not sure that I have the skills to set up data bases such as you suggest. And still improving on the ability to see where the stock might be headed into expiry. Some months / stocks I can get it spot on and other times it is extremely illusive. I feel there are some gaps in my learning curve in this issue. It is one of the reasons I keep historical information, so that if something new comes to light, I can go and have a look to see how it would have performed on previous months. I have thought it might be more of an art form, but if the quants can get it right, it would have to be strongly mathematical!

And it's about to get busier soon - our unit is under contract (yes-that lovely view is about to belong to someone else), so it's a case of finding somewhere else to live and moving house...

Anyway, all the best with your project, Mazza and look forward to your next visit here at ASF!

I've started to build in smaller positions in my overall position in order to reduce the need for adjustments & manage individual greeks.

btw, on the US markets I'm like a kid in a lolly shop It just feels right.

best of luck mazza.

lol Grinder - and such cheap lollies too! It certainly makes one even more dissatisfied with Oz options and I will probably continue to hold off until I am able to sort out the sleep issues with night trading.