Options Mentoring

[Grinder]

Cutz, there are many ways to look at it and it does'nt have to be one or the other. Once you work out what you want from different investments and the timeframe they sit in I'm sure it will become very clear. I like to diversify with different assests and do what feels most comfortable to me, at this stage thats trading options to generate extra income & holding IPs for future security. It might not be the best way to go but it's the one that makes most sense to me

On a simmilar note, thinking about T-bills or the like instead of fronting up with cash for my margins on my spreads, this way I can gain a smidgen more $$. Anyone do this?

 

[cutz]

Thanks for the insights guys,

It's seems like i should be playing the two (long term/short term) as two separate strategies.

While i'm here i have question regarding option types, i've been watching Estoxx50 for a while now they look good and the hours are great but i've been unable to pull the trigger on a trade due to the fact that i don't fully understand the weekly options, http://www.eurexchange.com/market/quotes/IDX/STX/BLC_en.html.

The options that expire on the 3rd friday are the ones where the action's at but i also notice that some the weeklys also have spreads showing but no action (i.e 1st friday, 2nd friday, 4th friday, and 5th friday )

Can someone please explain the point of those oddball series, i'm a little confused.

 

[Fox]

cash only ?, 50/50 ?, stock only ?, what do ya reckon

My motive in learning about trading options is that I hope to be able to generate a regular income from trading.

I have had success in long term investments as well as systems where I have a very small edge. While both were great, they could not give me the certainty of a monthly paycheck. My hope is that options trading with the appropriate strategy will give me that certainty/regularity of income.

The point I'm trying to make is one that Mazza has already made. Do you want long term income or short term income? Or both? If you have reached the point where you can profit consistently from options trading, then 50/50 or any other ratio will be just a matter of personal choice. After all who needs long term investments if the option market is your personal ATM .

Again

 

[Hyperion]

Sorry if this is a stupid question, but can someone please explain why time value is greatest for an ATM option (compared to ITM and OTM options)?

Thanks

 

[wayneL]

Sorry if this is a stupid question, but can someone please explain why time value is greatest for an ATM option (compared to ITM and OTM options)?

Thanks

That is the point of greatest risk of the option expiring in the money, without actually being in the money.

Think of being a seller of naked options. ATM is where you take the most risk, hence should be paid more for that risk.

 

[freebird54]

Hi fellow option enthusiasts,

Does anyone have any tips on straight out directional plays, for instance buying ATM puts as a strategy, tried one one the other day with XJO but i'm starting to regret it now, i was thinking along the lines if you don't get a big move within 2 days get out or maybe stick with futures.

What da ya reckon, how long do you guys let negative theta run till you decide it's time to get out (assuming the underlying is refusing to move) ?

Graham Dyer in his negative newsletter http://www.depression2007.com/ latest has tipped buying XJO puts for 12/09 and 12/10 around the 2700 - 3000 level - For insurance I jumped in too.
He is so negative its a worry but he is well respected

 

[cutz]

Hi fellow enthusiests,

Is it just me or have the last couple of months been difficult to earn a crust.

I've got a question regarding spreads, do most exchanges only accept simple generic spreads ( 1 to 1 verticals/calenders/butterflys/condors ect )?

Reason i ask is i tried to push through a wrangle, (double ended backspread centered ATM ) but the exchange rejected the order so i legged it, dunno if it was just finger trouble but i was careful setting up the combo and the negative indicative price read correctly, from this info i assumed it was good to go.

Any tips ?

EDIT >> Just to add, with negative indicative prices the bids are quoted high and the asks are quoted low, when buying for credit slip your negative order just under the bid ( on the high side ) and gently work it down towards the ask. Opposite to close the deal.

Is this correct ?

( Only game enough to experiment with the above on the Eurex, €4.5 spread on a 4 leg combo, what a beautiful thing )

 

[mazzatelli]

Maybe try: Anticipate a drop in vols, then execute as fly + strangle

 

[cutz]

Maybe try: Anticipate a drop in vols, then execute as fly + strangle

Thanks for turning the lights on mazza, i've just set it up as a -straddle / + strangle, ready to close.

So i take it the exchange won't accept a wrangle.

 

[mazzatelli]

Thanks for turning the lights on mazza, i've just set it up as a -straddle / + strangle, ready to close.

So i take it the exchange won't accept a wrangle.

For MM's, I'd imagine it be easier to manage and dissect as generic combos. But I've limited experience with Euro market.

 

[wayneL]

Maybe try: Anticipate a drop in vols, then execute as fly + strangle

Another little advantage of being au fait with synthetics

(Not really synthetics... dissection really, but synthetics will lead into dissection)

 

[Fox]

Why does IV for front month options increase just before expiry?

Today is 21 Sept 09. Expiry is on 23 Sept 09. The Sept options for CBA, WOW, WES have higher IVs than the Oct and Nov expiries. CBA Sept IV is around 32% whereas Oct and Nov IV is about 27%. Is it common for IVs to increase for front month options just before expiry?

Could it be due to frantic activity to close positions?

 

[sails]

Why does IV for front month options increase just before expiry?

Today is 21 Sept 09. Expiry is on 23 Sept 09. The Sept options for CBA, WOW, WES have higher IVs than the Oct and Nov expiries. CBA Sept IV is around 32% whereas Oct and Nov IV is about 27%. Is it common for IVs to increase for front month options just before expiry?

Could it be due to frantic activity to close positions?

Yes Fox, I have noticed that on several occasions too. IV tends to fall off more as the strikes go further OTM and ITM, but those closer to the money often still hold a fair bit of extrinsic value. BHP is an interesting one to watch and particularly on expiry day when close to the money premiums are often quite high in the morning and you can watch the premium evaporate as the day progresses.

I don't know what causes it, but I suspect it has something to do with the MMs tactics to make money out of it...

As a safety measure, if IVs look a bit out of whack, always check if there are dividends, earnings or report announcements just before expiry as that can have a significant effect on front month IVs.

 

[wayneL]

Why does IV for front month options increase just before expiry?

Today is 21 Sept 09. Expiry is on 23 Sept 09. The Sept options for CBA, WOW, WES have higher IVs than the Oct and Nov expiries. CBA Sept IV is around 32% whereas Oct and Nov IV is about 27%. Is it common for IVs to increase for front month options just before expiry?

Could it be due to frantic activity to close positions?

IIRC, Black Scholes et al underestimates risk of American options close to expiry so MMs compensate by jacking prices a bit. Not 100% sure on this point, but I recall a discussion on it from somewhere.

 

[Fox]

Hmm... interesting. If this observation is as expected (ie. predictable), then this would be another reason for closing out ATM long flies and ICs early, say a week or so before expiry. The reason being that ATM flies are short vega.

I say this is from practical experience. I was going to exit a fly with a handsome profit today. When the MM refused to give me anywhere near the fair price predicted by Hoadley, I couldn't understand why at first. It was only when I noticed the increased IV that it made sense to me.

 

[mazzatelli]

I say this is from practical experience. I was going to exit a fly with a handsome profit today. When the MM refused to give me anywhere near the fair price predicted by Hoadley.

lol
Flies are most sensitive during the last week. Personally prefer to hold near expiration to book gains.
Watch for theta gain > vega losses.

But its not uncommon to close the straddle and forfeit the sale of the wings.

Plus, Aus MM's are crooks.

 

[cutz]

My take is on the thinly traded series like Sep CBA puts, the spreads are fairly wide to begin with, ( IV results are pretty sensitive going into expiry).
I know if i were short on a just OTM i'd be eager to get out and pay up rather than extract a few cents from the MM's, this of course drives up IV.

Setting up a new spread into Oct not under as much pressure to do a deal so you may not need to pay up. Legging into a spread and slowly working your order, you may be able to extract better prices.

BTW wayneL, thanks for the heads up on the euro market some time back, it's a thing of beauty.

 

[wayneL]

Hmm... interesting. If this observation is as expected (ie. predictable), then this would be another reason for closing out ATM long flies and ICs early, say a week or so before expiry.

lol
Flies are most sensitive during the last week. Personally prefer to hold near expiration to book gains.
Watch for theta gain > vega losses.

This bit is more art than science... plus a bit of luck/tin @rsiness

Depending on the position you end up with, premium remaining and the gamma risk... and how adventurous you feel, there is nothing wrong with trying to go for expiry (or close to. I went to the wednesday before expiry on this last cycle. I could have held and made maximum profit, but at the point it became a gamble and not a proper risk reward scenario, I was out.

It can be a dance with the devil, but not always necessarily so. There is a point where adjustments just aren't worth it, so it becomes a day to day decision process.

But... there is certainly nothing wrong with being a professional coward and cutting it loose early.

I'm more likely to exit the condor early (if that is the position I have ended up with, but play the butterfly for as long as possible, as a comparison.

 

[cutz]

Hi Fox,

Interesting observation if you want to check out those CBA puts that are about to expire. Many of the strikes are lit up with tight spreads and IV has dropped right off, yesterday no spreads were showing and whatever was going through was at inflated IV.

What a difference a day makes.

 

[Tysonboss1]

Hi Guys,

I sold 5 covered call contracts for WDC with a strike of $13.50 for 16c / share.

WDC traded well over $13.50 today but closed at $13.51.

Do you think the options would have been exercised, and if they were how and when will I find out.