Options Mentoring

[cutz]

Hi Freebird54,

WayneL already has pointed out that the two are one, but as far as your returns go to get the full picture you may need to include the losses on the BHP stock in the covered call package, that's something you can't ignore and it may lead you to reassess the whole strategy.

Especially during these types of markets.

 

[freebird54]

BHP holding is still in profit, even today, on my buy figure and if ever I am exercised the profit is locked in on the call [except the lost use of the funds if a long way out]

I would record the loss if that ever happened.

Thanks for your reply.

 

[ftw129]

Firstly, apologies if my question has already been addressed in this thread. It is a 28 page thread full of great info which I intend to read through later today.

1. Has anyone here used IB's TWS for Gamma Scalping? There seems to be a time lag between the Risk Navigator and the live price action which I imagine will become frustrating.

2. Is there a better way of monitoring your position in TWS, specifically your Gamma scalping position/s?

3. What alternative platforms or perhaps plug-ins can anyone recommend that are ideal for Gamma Scalping?

Thanks in advance.

 

[nardir4]

A couple of free resources:

1/ If you click on my website link below, there is a free download for Charles Cottle's book "Coulda Woulda Shoulda".
.

Thanks for the offer,but can't see it anywhere on your website

 

[cutz]

Thanks for the offer,but can't see it anywhere on your website

Hi Bro,

I think Wayne's post is 8 years old, if you really want a copy, amazon may still sell it.

 

[nardir4]

Hi Bro,

I think Wayne's post is 8 years old, if you really want a copy, amazon may still sell it.

Thanks Cutz,I didn't notice the date on the original post.I googled the book and found it free
as a pdf file.

 

[So_Cynical]

This seems to be the only active options thread, i probably need a little Mentoring anyway..just wanted to announce that i sold my first ever option/s today, covered call of course, thinking that everyone starts that way.

Made $34 :bananasmi

 

[Sharkman]

covered call of course, thinking that everyone starts that way.

pretty much... and then we get served an assignment on our first covered call, and come to the realisation that it ain't share rental

 

[So_Cynical]

pretty much... and then we get served an assignment on our first covered call, and come to the realisation that it ain't share rental

Never ever considered it to be a rental of any kind, i consider it a straight out punt..i feel a bit like a bookie, i offered a bet and someone took it, and while i very much doubt i will be assigned on this trade im 100% prepared to do so and accept the 35% profit on the sale of the stock.

Them's the brakes i guess. :dunno:

 

[Sharkman]

Never ever considered it to be a rental of any kind, i consider it a straight out punt..i feel a bit like a bookie, i offered a bet and someone took it, and while i very much doubt i will be assigned on this trade im 100% prepared to do so and accept the 35% profit on the sale of the stock.

Them's the brakes i guess. :dunno:

why do you very much doubt you will be assigned? because it's really way OTM? what are you referring to when you say you've made $34, is that what IB is saying the position PNL is? or are you referring to the premium collected? please don't tell us you sold 20 contracts on something at 0.02, ie. $40 premium - $6 brokerage

now i'm not the most experienced options trader on here, and i only have experience trading ASX ETOs, so i'm happy to be corrected if someone like wayne posts on here and says i'm wrong... but personally i wouldn't make a habit of selling way OTM covered calls. IMHO it just isn't worth it, you're selling premium into the low end of the delta skew curve (ie. you're giving away cheap gamma)... so you might pick up a few bits of change here and there by doing it, but eventually something is going to blow thru the strike and you'll wind up leaving a lot of money on the table - the foregone profit on one position may well dwarf the bits of premium picked up on several other covered calls that expired worthless.

FWIW, if i decide i'm ok with getting something called away at a certain price, i won't sell a covered call until the strike i'm looking at gets to a minimum of 25 delta, and even if it does, if i think the IV being offered is too low (and this can get a bit subjective as you have to weigh up what sort of upcoming price sensitive or macro events might be on the horizon) i won't do a covered call. the IV will generally keep dropping at lower and lower deltas on the call side, so you end up selling cheaper and cheaper gamma the higher you set your strike. not saying this is the only way to do it, but it's just my method as far as covered calls are concerned.

 

[So_Cynical]

why do you very much doubt you will be assigned? because it's really way OTM? what are you referring to when you say you've made $34, is that what IB is saying the position PNL is? or are you referring to the premium collected? please don't tell us you sold 20 contracts on something at 0.02, ie. $40 premium - $6 brokerage

18% OTM Nov expiry is why i doubt i will be assigned, of course anything can happen, dividend on the way etc...but i consider myself to be a pretty good judge of where price action is headed...and like i said i consider it a punt and im the bookie so i set the price and if the punter can see value then well ok.

The good thing i like about covered calls is that i can use a strike price that i would be happy to sell at anyway...and its a $34 premium that IB hasn't taken anything from yet so i suppose i can minus $6 from it, my first time so im not 100% sure.

 

[Sharkman]

fair enough. if it's an ASX ETO then 18% OTM is really far OTM for just about anything on there so yeah very little chance it will be assigned

IB will have taken the commish out before they put the proceeds into your available cash balance. i was kinda assuming you'd done an ASX ETO trade so 20 contracts @ 0.02 would get $40 net premium, commish is 30c / contract = $6 so that would leave $34 of proceeds. not sure what it would be for US options, i'm still umming and ahhing over whether i should branch out and start trading those

i don't know if i'd consider myself a bookie when i sell options - whether you buy or sell, i'd say it's really the MM who's the bookie, not us, both bookies and MMs are the ones who are sitting on both sides of the bet and they'll take a bit of juice each time. if it's ASX ETOs you're trading, there will come a time when you will rage against the MMs soon enough...

 

[So_Cynical]

fair enough. if it's an ASX ETO then 18% OTM is really far OTM for just about anything on there so yeah very little chance it will be assigned

IB will have taken the commish out before they put the proceeds into your available cash balance. i was kinda assuming you'd done an ASX ETO trade so 20 contracts @ 0.02 would get $40 net premium, commish is 30c / contract = $6 so that would leave $34 of proceeds.

Ok good to know

i don't know if i'd consider myself a bookie when i sell options - whether you buy or sell, i'd say it's really the MM who's the bookie, not us, both bookies and MMs are the ones who are sitting on both sides of the bet and they'll take a bit of juice each time. if it's ASX ETOs you're trading, there will come a time when you will rage against the MMs soon enough...

Yes ASX ETO's i hold 3 stocks i plan to write calls over (short term plan) BLD, CPU, SUN. all stocks held over 12 months and all in double figure profit so im ok with having to sell them if it comes to that....i mean don't ride a bike unless your willing to fall off hey.

I think i may have already experienced a bit of MM frustration...i first wrote the calls on Monday at the last quoted price and was surprised to see the order unfilled the next day, i cancelled that and tried an at market order and was again surprised to see that not filled...i thought i must of done something wrong (IB noob) and so cancelled that after it sat there unfilled for an hour or so.

Next day went half a cent under, unfilled and then today i got aggressive and went a full cent under the quote and was filled.

 

[wayneL]

I think i may have already experienced a bit of MM frustration...i first wrote the calls on Monday at the last quoted price and was surprised to see the order unfilled the next day, i cancelled that and tried an at market order and was again surprised to see that not filled...i thought i must of done something wrong (IB noob) and so cancelled that after it sat there unfilled for an hour or so.

Next day went half a cent under, unfilled and then today i got aggressive and went a full cent under the quote and was filled.

Good ol' Aussie RTs eh?... the stingiest SOBs on the planet and not enough competition to keep the bastards honest.

Just a point, you don't have to wait to be assigned. If it goes ITM and you don't want to sell the stock for any reason (say to avoid a CGT event), you can buy the call back.

You'll take a loss on the call, but the sums might work better, depending on what you're trying to achieve.

There are other reasons not to wait til expiry. On WTFOTM calls (and it stays WTFOTM) you'll get most of your decay well before expiry. No point holding a nearly worthless short (risk for no reward) when you can close it out and re-write for more premium.

Just a couple of thoughts.

 

[Sharkman]

Just a point, you don't have to wait to be assigned. If it goes ITM and you don't want to sell the stock for any reason (say to avoid a CGT event), you can buy the call back.

not as easy as it sounds on the ASX though. if you let it get too far ITM or it's too close to expiry, the MMs tend to play hardball with you. i've already gone into a rant in some other thread about how i had NAB 30-28.50 put spreads a couple of months ago, wanted to take the whole spread off when the stock was about 28 a few days to expiry, only to see a bid/ask of 1.98/2.26 when i was trying to sell back the 30 puts, and didn't even get filled at 2.05. if you had something similar in reverse - eg. sold NAB covered calls at 28 and the stock rose to 30. you could be faced with a similar bid/ask, if they really played hardball and made you cross the whole spread, that's 0.85% of the stock price in extrinsic that you'd have to pay - for something that would have to have a delta of over 90! ouch!

OTOH it's not always a reflex decision to close it out as soon as the underlying gets close to your strike, because that's when you start to get decent theta. so it's a bit of a tightrope act as you can't let it get too far ITM (unless you're happy to just take the assignment come what may), but in order to collect good theta you probably do need to be willing to let it get a little bit ITM within the option's lifetime due to the course of normal market fluctuation.

There are other reasons not to wait til expiry. On WTFOTM calls (and it stays WTFOTM) you'll get most of your decay well before expiry. No point holding a nearly worthless short (risk for no reward) when you can close it out and re-write for more premium.

would you be inclined to write WTFOTM covered calls in the first place though wayne? the decay is faster early on in the options life for way OTM contracts, but that decay is still going to be chicken feed seeing as the net premium itself will be chicken feed at such a low delta. plus the IV is usually pathetically low at the high strikes (relative to IVs at the lower strikes for the same underlying and expiry), and commish takes a larger hit % wise out of the premium collected, all of which dissuade me from selling really low delta covered calls.

 

[Sharkman]

I think i may have already experienced a bit of MM frustration...i first wrote the calls on Monday at the last quoted price and was surprised to see the order unfilled the next day, i cancelled that and tried an at market order and was again surprised to see that not filled...i thought i must of done something wrong (IB noob) and so cancelled that after it sat there unfilled for an hour or so.

Next day went half a cent under, unfilled and then today i got aggressive and went a full cent under the quote and was filled.

were you looking at the last quoted bid/ask, or the last traded price?

the last traded price can easily be completely different from what the option would trade at now, particularly for illiquid contracts (like the way OTM calls you've mentioned) because that transaction could have been done days ago and since then the underlying has probably moved.

even the last quoted bid/ask probably won't be an accurate reflection of what the price would be in order to transact now as the underlying will have moved from yesterday to today, there'll be an extra day of decay etc.

you have to look at what the bid/ask is now, not the last traded price or the last quoted spread. eg. the NBBO on a certain call contract may have been 0.24/0.26 at the close yesterday, with a last traded price of 0.25, but if the underlying gapped down overnight the NBBO on the same contracts might be 0.15/0.17 today. no way you'll get filled if you put in an offer at 0.25.

if the contracts you tried to trade did not show any NBBO whatsoever, it means they're so illiquid that the MMs can't even be bothered quoting a spread. in that case i think what you need to do is "express an interest" in the contracts, and you do that by putting in a bid or offer that's way out of market and in your favour, eg. if you estimate the "fair value" of the contracts would be around 0.10, based off the IV that the contracts of the same underlying & expiry that do have an NBBO are trading off, then stick in an offer of 0.20. that way you don't risk getting insta-filled at a suboptimal price (as you don't really know what the spread is at this point), but by sticking in an order, you're signalling that you're interested in trading these contracts, so the MMs are supposed to be obliged (as part of their licence - they're supposed to be providing liquidity after all) to quote a spread for these contracts (it will probably be a stupidly wide spread though). once they do you can then modify your order and start trying to work the spread to get a fill.

 

[So_Cynical]

There are other reasons not to wait til expiry. On WTFOTM calls (and it stays WTFOTM) you'll get most of your decay well before expiry. No point holding a nearly worthless short (risk for no reward) when you can close it out and re-write for more premium.

Good point, i was looking at expiry as the end game but time decay works in the call writers favour i guess, as long as the option stays way OTM.....ok so to close it out i simply buy the same call in the same quantity?

were you looking at the last quoted bid/ask, or the last traded price?

the last traded price can easily be completely different from what the option would trade at now, particularly for illiquid contracts (like the way OTM calls you've mentioned) because that transaction could have been done days ago and since then the underlying has probably moved.

even the last quoted bid/ask probably won't be an accurate reflection of what the price would be in order to transact now as the underlying will have moved from yesterday to today, there'll be an extra day of decay etc.

Ok i didn't really consider all that.

i think what you need to do is "express an interest" in the contracts, and you do that by putting in a bid or offer that's way out of market and in your favour, eg. if you estimate the "fair value" of the contracts would be around 0.10, based off the IV that the contracts of the same underlying & expiry that do have an NBBO are trading off, then stick in an offer of 0.20. that way you don't risk getting insta-filled at a suboptimal price (as you don't really know what the spread is at this point), but by sticking in an order, you're signalling that you're interested in trading these contracts, so the MMs are supposed to be obliged (as part of their licence - they're supposed to be providing liquidity after all) to quote a spread for these contracts (it will probably be a stupidly wide spread though). once they do you can then modify your order and start trying to work the spread to get a fill.

Ok ill give that a try...a different mind set to stocks seems to be needed...so many things to consider.

-------------

Thanks guys much appreciated.

 

[Sharkman]

Good point, i was looking at expiry as the end game but time decay works in the call writers favour i guess, as long as the option stays way OTM.....ok so to close it out i simply buy the same call in the same quantity?

time decay works in your favour if you are an option writer regardless of whether it's ITM, ATM or OTM. whether it will compensate you for the short gamma or not however is a different matter...

if you select your open position, IB will show a BUY, SELL and CLOSE command. the CLOSE command is essentially just a convenience to help eliminate human error as it will pre-fill fields appropriately (it will still let you select price, GTC/day only etc.), so i'd recommend using that if you want to close a position. but even if you hit BUY instead and manually fill in all the fields, if you attempt to buy 20 contracts and it sees you are short 20 contracts of the same options, when you get filled IB will automatically net it off and remove the position from your portfolio view.

Ok ill give that a try...a different mind set to stocks seems to be needed...so many things to consider.

indeed. and one of those things is that (when doing ASX options at least) the spread will really eat into your profits if you're not careful. this is why when i have covered calls on, i typically just let them run to expiry and take the assignment if i have to, rather than buy back the call or roll up & out, both of which would potentially involve crossing extra spread(s), not to mention paying extra commish. i will have already decided before i sold the call that based on the info available at the time, i am happy to get called away at that strike.

 

[wayneL]

not as easy as it sounds on the ASX though. if you let it get too far ITM or it's too close to expiry, the MMs tend to play hardball with you. i've already gone into a rant in some other thread about how i had NAB 30-28.50 put spreads a couple of months ago, wanted to take the whole spread off when the stock was about 28 a few days to expiry, only to see a bid/ask of 1.98/2.26 when i was trying to sell back the 30 puts, and didn't even get filled at 2.05. if you had something similar in reverse - eg. sold NAB covered calls at 28 and the stock rose to 30. you could be faced with a similar bid/ask, if they really played hardball and made you cross the whole spread, that's 0.85% of the stock price in extrinsic that you'd have to pay - for something that would have to have a delta of over 90! ouch!

Yes, I had forgotten how illiquid ASX options are once you get more than a couple of strikes away from the money. That said, taxation considerations still need to be computed, even if the RTs are going to rip you a new one.

OTOH it's not always a reflex decision to close it out as soon as the underlying gets close to your strike, because that's when you start to get decent theta. so it's a bit of a tightrope act as you can't let it get too far ITM (unless you're happy to just take the assignment come what may), but in order to collect good theta you probably do need to be willing to let it get a little bit ITM within the option's lifetime due to the course of normal market fluctuation.

True, but if you've written away from the money, that theta is on extrinsic value that has gained on the wrong side of the ledger. But sans ex div complications, one is not likely to be assigned before expiry giving time to think things through.

would you be inclined to write WTFOTM covered calls in the first place though wayne? the decay is faster early on in the options life for way OTM contracts, but that decay is still going to be chicken feed seeing as the net premium itself will be chicken feed at such a low delta. plus the IV is usually pathetically low at the high strikes (relative to IVs at the lower strikes for the same underlying and expiry), and commish takes a larger hit % wise out of the premium collected, all of which dissuade me from selling really low delta covered calls.

Well yes, but I was commenting on SC's specific position which is WTFOTM.

When I trade CCs, it's at, or close to the money (and shorter dated), at points I think are statistically advantageous on long term holdings. But SC might have a different game plan, and on a learning curve. He's in a position as outlined, right or wrong, so just tailoring discussion around that.

 

[freebird54]

Glad the thread is active - will read all the posts soon
I have been option trading for many years now with IB last 3
Simply I get my friends to get their head around rules I try to stick to..
1. SELL covered calls and puts only - you are then the bookmaker
2. Never more than 3 months out and roll out and up for credit if you can [Lose use of funds tied up in Calls etc.]
3. Be aware of divs and reporting dates [Rivkin used to say never hold any over those dates but I do]
4. I only do options over shares I am going to buy/sell anyway
5. When I have made c. 90% profit I buy back irrespective
6. REMEMBER WORST CASE SCENARIO [UNLESS WW3 ETC. ;-).......................

IS WHEN EXERCISED SO WHAT - YOU HAVE BOUGHT AT A DISCOUNT
OR SOLD AT A PRE-DETERMINED PROFIT - YOU WERE GOING TO DO IT ANYWAY

PS Keep it simple - forget the greeks. And stick to top 10 [Wish I knew enough about US market - much more action]
Watch out for the market makers - they will screw you on untraded stuff