Options Mentoring

[So_Cynical]

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

^ So far im with you 100%

5. When I have made c. 90% profit I buy back irrespective

Care to elaborate on this? do you mean 0.09% profit?

At the moment im still thinking to let the call/s play out to get maximum bang for buck...what sort of premium you you want to take, % wise of the SP at time of writing?

 

[wayneL]

Just for the sake of discussion:

1. SELL covered calls and puts only

That's fine, but all you are really doing is reducing volatility. The only way you outperform the underlying is if the underlying is in a moribund state. In bull markets you are limiting cap gains. It is also very basic and ignores that there are possibilities of adding extra dimensions to positions, depending on your view.

you are then the bookmaker

A common comment, but not quite true. Bookmaking is the process of arbitrage in some form; simply writing options is not bookmaking

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.]

Agree, but with some further nuances for another time.

3. Be aware of divs and reporting dates [Rivkin used to say never hold any over those dates but I do]

Yep, depends what your trying to do. Hold thru divs or not, have a plan for it, which may be add odds with Rivkins "maxims"

4. I only do options over shares I am going to buy/sell anyway

Also fine, if that is your plan.

5. When I have made c. 90% profit I buy back irrespective

Agree in principle

6. REMEMBER WORST CASE SCENARIO [UNLESS WW3 ETC. ;-).......................

Agree

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

Not necessarily. This just psychological justification for getting assigned. For eg it may be better to close the option and keep holding the stock (in the case of CCs).

PS Keep it simple - forget the greeks. And stick to top 10 [Wish I knew enough about US market - much more action]

I fundamentally and profoundly disagree. How does an investor quantify the risks and rewards of an option position versus just holding (or trading) the stock. Even if just doing the naked put/CC boogie, and understanding of Greeks will inform the investor whether it is actually worth it, versus stock... and also how to augment a position in certain market conditions

Watch out for the market makers - they will screw you on untraded stuff

They will try to screw you at all times. Low liquidity gives them a licence to rip you a new one. Hence why I don't bother with ASX options... overseas exchanges are a whole 'nuther bowl of wax in terms of possibilities FWIW

 

[Sharkman]

Glad the thread is active - will read all the posts soon

likewise, i'd also be happy to have some options discussion going. my thoughts on a few points raised here - these are just personal opinions that have questionable value of course.

1. SELL covered calls and puts only - you are then the bookmaker

not really - a bookmaker sits on both sides of the bet. we can't. this would be more akin to laying odds on a betting exchange, rather than becoming a bookie ourselves.

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.]

not sure if you're referring to ASX ETOs or US options, but if the former, you can hardly get a decent spread even 3 months out, let alone beyond that, unless it's one of the big six optionables (ANZ, BHP, CBA, NAB, RIO, WBC).

also in the ASX (US may be different) rolling up & out can be quite costly because you have to cross 2 potentially nasty spreads. presumably you're rolling up & out because you don't want to get called away and the original covered call is now firmly ITM - see my post above. i was hit with a 1.98/2.26 spread (on one of the big six!) when trying to close my long puts that had 2.00 of intrinsic a couple of months ago. if you let a covered call build up 2.00 of intrinsic or even 1.00 the MMs could easily make you cross a giant spread if you wanted to roll up & out.

3. Be aware of divs and reporting dates [Rivkin used to say never hold any over those dates but I do]

can get a bit tricky if the div surprises, also need to look out for the early exercise and be ready to close it out if there's any danger of that, especially if you want those franking credits (which i always do). recently i've noticed some european exercise style options being offered (these are the ones with the odd strikes eg. 72.01 on CBA), though they usually don't have very good liquidity or spreads. not sure how long these have been around but i only noticed them a couple of months ago. these may help if you want to sell an ATM or slightly ITM call over the div period, though of course the fact that they cannot be early exercised is factored into the spreads the MMs will show the market. nevertheless they could be useful if you want to ensure that you get the div (and franking credits) but i don't have much experience with them yet. only done a couple so far, in fact.

i think reporting dates can sometimes be excellent to hold option positions over. i like to calendar spread them if i think the underlying is near a key level and the front month IV is high, as when this happens usually my thinking is along the lines that it will need a strong price catalyst, like an earnings event can provide, before it has the strength to punch thru the support/resistance. sell the faster decaying front month option which is not exposed to the earnings event and look to catch that potential price catalyst with the back leg. you'd also be putting on the position far enough in advance of the earnings event that hopefully you'll dodge or at least mostly dodge the vega rush. did this recently with QBE as mentioned in another thread.

Care to elaborate on this? do you mean 0.09% profit?

At the moment im still thinking to let the call/s play out to get maximum bang for buck...what sort of premium you you want to take, % wise of the SP at time of writing?

i think he means when a limited reward position has reached 90% of the max profit, close it out. so in the case of a covered call if you can buy it back for 10% of the premium you paid for it, you should do so. this would also apply to things like vertical spreads etc. i use 80% myself, but it's a matter of personal taste i guess. it makes sense though, if you have the opportunity to lock in 80% (or whatever) of the max potential profit, why jeopardise those gains for the sake of trying to squeeze out the last 20%?

 

[freebird54]

Thank you for your input
Yes sharkman you got it right about my profit - I will consider 80%

I will try to learn more about the greeks as I guessed I could do better by being a bit more complicated

I can list all the options I have done ANZ, BHP,TLS,FMG, WBC, WPL, NAB, NCM, RIO - and if others do likewise I will list my trades

Today I sold BHP oct 34.50 puts for 98c and yesterday bought back for 2.5c my TLS calls which I got 8c for

I am looking at selling WPL and AMP calls

 

[Sharkman]

Thank you for your input
Yes sharkman you got it right about my profit - I will consider 80%

I will try to learn more about the greeks as I guessed I could do better by being a bit more complicated

I can list all the options I have done ANZ, BHP,TLS,FMG, WBC, WPL, NAB, NCM, RIO - and if others do likewise I will list my trades

Today I sold BHP oct 34.50 puts for 98c and yesterday bought back for 2.5c my TLS calls which I got 8c for

I am looking at selling WPL and AMP calls

what was your reasoning behind selling the BHP puts?

i like the trade though, BHP seems to have been gravitating back to the 34-35ish area repeatedly over the last 2 years, being well supported at 34 thru the latter half of 2011/first half of 2012. the 180 day EMA is also around about the level of your strike currently.

my BHP position at the moment is an aug-oct 37.50-38 diagonal call spread. put the trade on a few days after it broke thru the 35 level, as in my view the 34.50-35 area is a key level and after it broke thru that i started looking for a rally to 38, as it did earlier in the year, and looking for that to happen with enough time left to oct expiry that i can then sell off the oct 38 calls when they become ATM. it was around 36 at the time so from memory the spread cost about 0.20.

if it falls back to the 34.50-35 level in the next week or two i might look to sell sept ATM puts, obviously a lesser number of contracts than i did on the diagonal spread as i'll do this leg fully cash covered. i'm not inclined to sell puts at the moment as i don't really think it's at a particularly significant level right now. hopefully a fall back to 34.50-35 will also bring slightly higher IVs allowing for better premium collection.

 

[So_Cynical]

Guys, im finding that i have started to have the urge to gamble...thinking that (for example) SUN has no chance in hell of seeing $13.25 any time in the next 4 months, so just write as many calls as i can at $13.25+ strikes and its easy money for next to no risk...as in risk of the calls going ITM.

I know this could go horribly wrong but its just so hard to see that happening.

Comments?

 

[Sharkman]

Guys, im finding that i have started to have the urge to gamble...thinking that (for example) SUN has no chance in hell of seeing $13.25 any time in the next 4 months, so just write as many calls as i can at $13.25+ strikes and its easy money for next to no risk...as in risk of the calls going ITM.

I know this could go horribly wrong but its just so hard to see that happening.

Comments?

i wouldn't recommend it.

on looking at the chart i can sort of see why you might think it can't go beyond 13.25, but selling naked calls is not the right way to do it in my opinion. at least cover your topside risk by buying an equal number of further OTM calls (eg. 14 strike) of the same expiry, ie. call credit spread. this way you'd turn it into something akin to a 1.40 sports bet - you'd probably look to collect 30-40% of the distance between the strikes as net premium. selling naked calls is akin to putting your life savings on a 1.01 bet - sure the chances are you'd increase your net wealth by 1%, but if it doesn't come off, the results will be catastrophic.

you'd almost certainly be paying a lower IV for the high strike calls and it's insurance against disaster. a lot can happen in 4 months. if you make a habit of selling "as many naked calls as you can" every time you see a situation like this, a single takeover offer could blow you out of the water.

plus, you'd probably be able to do even more contracts this way because being long the high strike calls will reduce your collateral requirements big time. i don't use margin though so i can't really quantify this.

the problem is that SUN doesn't have a particularly active options market so the bid/ask is likely to be wide. that makes a multi-legged trade like a bear call spread more expensive due to slippage. personally i'd just avoid SUN options altogether. i must have done several hundred ASX options trades since i started trading options 4 or 5 years ago, and not a single one has been over SUN. but it's your money so you can trade 'em if you want, just be wary of what risks you're opening yourself up to.

 

[freebird54]

Sharkman
Thanks for your input - I agree on key levels BHP
My View on BHP - dividend play and they with many others will increase after election
Next week I may buy more for the div
then something unusual for me sell sep 36 calls
Use some premium from maybe more PUTS I sell to cover above costs
Critical dates 2&7/9
DYOR These are my opinions only
SUN I learnt a lesson many years ago on these - paid c $9 and wrote calls c $13 many months out for huge premium [greedy see ;-)
SP went to over 20 so I lost use of the money for many months that's why my 3m out max rule applies

 

[freebird54]

Sharkman
Thanks for your input - I agree on key levels BHP
My View on BHP - dividend play and they with many others will increase after election
Next week I may buy more for the div
then something unusual for me sell sep 36 calls
Use some premium from maybe more PUTS I sell to cover above costs
Critical dates 2&7/9
DYOR These are my opinions only
SUN I learnt a lesson many years ago on these - paid c $9 and wrote calls c $13 many months out for huge premium [greedy see ;-)
SP went to over 20 so I lost use of the money for many months that's why my 3m out max rule applies

Sorry I meant BUY calls

 

[Sharkman]

My View on BHP - dividend play and they with many others will increase after election
Next week I may buy more for the div
then something unusual for me sell sep 36 calls
Use some premium from maybe more PUTS I sell to cover above costs
Critical dates 2&7/9

agreed. nothing's ever guaranteed but i also lean towards thinking the risk lies to the upside, markets hate uncertainty so an election result (provided it's not another hung parliament) would bring back a little certainty, in which case going the risk reversal (should you wind up buying the 36 calls and selling the 34.50 puts) would make sense

thinking of doing something sort of similar myself, looking for a pullback to around about 35 level pre-div or 34.50 post-div, and will consider selling the sept 34.50 puts in either case (the market actually gave me the opportunity to do this last thurs but i wasn't paying attention at the time - sometimes one just gets too busy at work!)

i've never really thought of BHP as having much divvy strip potential, the low div yield and above average volatility makes it less appealing to me, as i have to abide by the 45 day rule. if you buy the stock for the div and also put on a risk reversal, are you going to wind up with too many deltas?

 

[freebird54]

I have done quite a few Covered calls and sold puts lately and even a few spreads [buy and sell calls] as I am getting some education
Some trades below

AMC - CALENDAR SPREAD OPTION TRADE LOOKING AT PUTS
BHP - PUTS
BLD - PUTS
CSL - BUY/WRITE AND CALENDAR SPREAD OPTION TRADE
TLS - PUTS
NAB - COVERED CALLS
RIO - COVERED CALLS
CCL - PUTS
WDC - BOUGHT & SOLD CALLS LOW RISK
There is a free seminar on the gold coast and free trial of their option scanning software

https://elitetradersgrp.infusionsoft.com/go/odwcfe/rw13/

https://elitetradersgrp.infusionsoft.com/go/7dgp/rw13/
DYOR

 

[Sharkman]

how did you go with the CSL options? did you get filled at or close to the mid?

CSL is one of my core stockholdings, occasionally it rallies hard for a few days then backs off almost as quickly, many a time after a strong rally i've been tempted to sell covered calls or even buy a vertical put spread but have been turned off by the stupidly wide bid/ask spreads on it, even at a single strike away from ATM

 

[freebird54]

how did you go with the CSL options? did you get filled at or close to the mid?

CSL is one of my core stockholdings, occasionally it rallies hard for a few days then backs off almost as quickly, many a time after a strong rally i've been tempted to sell covered calls or even buy a vertical put spread but have been turned off by the stupidly wide bid/ask spreads on it, even at a single strike away from ATM

yes went in at market - Both OCT expiry

Also did buy/write OSH

 

[So_Cynical]

Ok so its ASX equity options expiry day and the $4.60 BLD October call options i sold 10 weeks ago expire today and they appear in IB to have not been exercised? they are $220 dollars in the money and still sitting in my portfolio as is the shares i used to cover the options.

I don't understand, can someone enlighten me?

 

[wayneL]

Ok so its ASX equity options expiry day and the $4.60 BLD October call options i sold 10 weeks ago expire today and they appear in IB to have not been exercised? they are $220 dollars in the money and still sitting in my portfolio as is the shares i used to cover the options.

I don't understand, can someone enlighten me?

Assignment happens after market close SC. So you'll probably be - shares and + cash this morning.

 

[So_Cynical]

Assignment happens after market close SC. So you'll probably be - shares and + cash this morning.

Correct...i just expected it to be there late last night well after the close.

 

[Valued]

I just want to buy puts and calls and then sell to close or exercise them. I don't see how things like delta matter if I can always get my option's intrinsic value if it's ITM by exercising the option. If I have a put option I can just buy at the market and then exercise my option for profit etc. I just want to use them for directional trades or to hedge CFDs. Is there anything technical that's important I should know if I want to do this? I suppose being able to tell if I am getting a good deal or not is beneficial but that being said, if I think a stock can move 10% before an option's expiry, I just factor in the premium to my reward/risk ratio. Interestingly, this whole low volatility = lower premium seems to be quite good for me. If I see a large move coming in a stock that's been stuck in a trading range for ages, I get a better price.

 

[aarbee]

I just want to buy puts and calls and then sell to close or exercise them. I don't see how things like delta matter if I can always get my option's intrinsic value if it's ITM by exercising the option. If I have a put option I can just buy at the market and then exercise my option for profit etc. I just want to use them for directional trades or to hedge CFDs. Is there anything technical that's important I should know if I want to do this? I suppose being able to tell if I am getting a good deal or not is beneficial but that being said, if I think a stock can move 10% before an option's expiry, I just factor in the premium to my reward/risk ratio. Interestingly, this whole low volatility = lower premium seems to be quite good for me. If I see a large move coming in a stock that's been stuck in a trading range for ages, I get a better price.

I am relatively new to options trading and used to think on the lines of what you've written. However, in the few months that I've been trading US options based on my mean reversion mechanical system, I have come to the realisation that doing anything in options without making an effort at understanding the greeks, IV etc is suboptimal at best, dangerous at worst. I started with long calls and puts for directional trades, then went into debit and credit vertical spreads and enjoying learning about the finer nuances of all these basic strategies. As a beginner taking short term directional trades, I find knowledge of Delta to be the most important with Theta coming second. Knowing about the nuances of IV would be one of the most important factor in doing virtually anything in options. I learnt this after a couple of trades where even though I was directionally spot-on but barely broke even on the option trades.

Cheers

 

[Valued]

How can you break even though if the underlying moves your way? Sure, maybe due to the premium and cost if the underlying moves just 1% then you might still be at a loss. If the underlying moves 5% there is no way you can't be on a winning trade.

Say, for example, I purchase 4 options contracts in a company which gives me exposure to 400 shares. The current price is $100. I short by taking a put option. I pay $400 for these options that are at the money exactly. If the underlying drops 10% to $90 yet my option only gains 8%, I just buy the underlying asset then immediately exercise my option and then I get the full value. Sure, there might be a little bit more brokerage involved, but given the exposure it's negligible.

Am I missing something? Why don't people just exercise the options and get their full value? IS there some reason for this? Exception would be if your option is worth more on the market. Is it that I might just be getting a bad deal if it's priced too high?

 

[cbc]

How can you break even though if the underlying moves your way?

Valued they can move around with nothing really setting them off at all.

I entered in a swing trade on XOM using opt and I brought in at 65c near the start of the day. XOM went down, then swung back up and was at roughly the same level near close and I went to close my option out thinking tis was going to be the same however the spread had moved down to 37c and I suffered quite a loss.