Options Mentoring

[wayneL]

At some stage I must aquire the aforementioned tomes. Better read what I've been suggesting people read huh?

I've got a couple of Cottles books, which have served as my options bibles.

I've also got a really interesting book - "Trading Options To Win" by Stuart Johnston. This guy thinks out of the square, and is at times, absolutely hilarious... he trades commodity options, and is into statistics, seasonals etc., not one price chart in the whole book. But of great interest even to a techie.

Cheers

 

[sails]

Hello Margaret,

Thanks for the welcome. It is nice to find someone who is on your wavelength isn’t it?

Hmmm, it is a shame that the options are moving to $1 Increments for the higher priced stocks, most annoying really, but the percentages are still better than $5, wouldn’t you agree?

I certainly agree about the non directional and volatility plays being less effective over the past couple of years in the Australian market compared to straight positions on average. You still could have entered a lot of bull puts though, and done very well.

Butterflies work well in sideways market (hence more effective in the US), so I can understand you not using them in such a strongly trending/volatile market in Australia from 2003 onwards.

With the higher volatility now though, maybe it’s time for a few credit positions – I’ve been thinking about ratio spreads recently, but never tried them in practice.

As for theta, agree, not an issue for short term long options. But crucial for longer term plays, both credit and debit. Have a look at my comments to Wayne I will post below for some of my musings, and see what you think.

Once again thanks for the warm welcome.

Regards

Magdoran

Hi Magdoran,

Yes, it is a shame about the strike prices - but seems like that's what we've got to work with now. The retail options trader doesn't seem to get much consideration from the ASX in spite of the fees they happily collect from us!

I have traded quite of lot of bull call spreads (in preference to their bull put counterpart - same strikes) mainly due to the fact they are easier of manage if they go wrong. But the thing I don't like about spreads in general is capping potential profits. They don’t allow for profits to run on a good move. All too often I've seen the short call increasing almost as fast as the lower long call (probably due to volatility smile) only to find the target has been reached in the underlying and practically no profit in the spread. After all, a spread may only have max profit of 10-20c and may have to wait closer to expiry to be achieved, so it’s almost easier to pick this up on a directional move with long premium. However, I’m careful with position sizing as it’s possible to lose the lot especially with overnight gaps we see so frequently in the Aus market. But then, also easy to lose on a spread too – just different greeks doing the damage.

One thing I really like with being long an OTM is if the trade goes the wrong way, delta slows down, however if I'm right, gamma increases and accelerates delta in my favour. The trade-off's here are theta risk and possibly some fall in IV. But as I mentioned before, I'm only in for such a short time that theta is not an issue and being either front month or close to it, the position is not so badly affected by IV changes.

The closer I am to expiry, the closer the OTM strike needs to be. I have been surprised at how well Aus options hold their value even fairly close to expiry. Perhaps there are a lot of sellers out there closing short premium positions.

I’m being a lot more selective at the moment with IV’s running at higher levels, but generally still find the short term trades work OK provided I can find those quick moves together with selecting a suitable strike – and that’s where knowledge of the greeks is a necessity.

Wouldn’t recommend anyone trying this without thorough testing as it’s too easy to lose money with long premium if the position is not actively managed. It’s not a “set and forget” strategy. Also, the way I use it is based on my interpretation of TA and targets, option greeks and probably some intuition thrown into the mix. Of course, not every trade is a winner, so money management is still vitally important for overall success. And like you, this is still a work in progress and still making improvements. But then, I think option trading is always a work in progress!

I did have some success with butterflies on newscorp a couple of years ago – yes it was sideways with quite high IV. I also found the max pain theory worked quite well at the time. But when Murdoch decided to take his company to the US this affected liquidity a bit and IV levels came down. I trialled max pain on other shares, but for some reason they do not seem to pin to the max pain strike with any regularity.

I'm interested in the diagonals you mentioned earlier – sounds like a calendar bear call spread? Have you been trading these for a while and have you had any consistent success with them?

I’ve read a bit about ratioed diagonals on another forum recently and they look quite interesting. Low IV would be essential with more longs in a back month. Looks like directional risk shifts to IV risk with this type of ratio spread so would not be so good in our current IV situation at the moment.

Cheers,
Margaret.

 

[Magdoran]

Hello Margaret,


Sounds like we’re on the same page for a lot of options approaches you’ve covered.

I certainly agree you really need to consider how far OTM to go. The usual rule of thumb I use is to set a target time you expect a movement to happen, and add to it (say 14 days or more), and buy with enough time to ensure there is still at least 30 days to expiry past the most conservative/worst case time projection, this way you can avoid a lot of theta decay. This has to be balanced though with the raw exposure to strong adverse movements, and spread risk exiting when the market makers hit you exiting on weakness/stop.

You are quite right about the delta reducing as an OTM option moves further out of the money. This is an advantage and helps to reduce risk, although the spread in lower volume traded options is the real danger.

Interestingly, I think that you can actually do quite well on longer dated trades in a strongly trending market. My shorter term trades are either counter trend plays, or playing blow off moves after a confirmed breakout – but this is highly T/A oriented.

The counter trend plays I have executed are quite risky - like buying puts against a strong bull market. I’ve done a lot of these successfully taking advantage of the low IV for entry, and the IV rush on exit for fast moves down – you really have to take profits to work these effectively I have found (say half at key prices, exiting on strength), and gingerly winding them out since there is so much upside risk when adverse T/A indicates a good chance of a bullish resumption.

Bull Call spreads:
I have found these are pretty lame in most market conditions, and discarded using them a while ago. When I did these initially, so many times my T/A target would be reached, and like you, the IV would kick up in the sold position, either negating most of the profit, or sometimes resulting in a loss.

The core idea of the Bull Call spread (and Bear Put) is to limit risk through selling a higher strike, but I found you really had to watch the IV since the further OTM call often had a lower IV, which characteristically increased while ATM or more so ITM. They were really designed for mildly bullish markets to avoid theta decay and exposure.

I found that trading these in the US was suicide. I don’t know how many of these I tried (I think about 10 overall) unsuccessfully around 2003-4 for a variety of reasons – adverse IV skews (sold call appreciating more in IV than the bought one), unable to exit either on profit or on stop (since the exit order was often 5 cents short of transacting while I slept since my IV calculations were sometimes fractionally out, or the US market moved against me so violently even the spread couldn’t reduce the loss).

I remember getting my T/A projections spot on with one bull call spread, but I never got to exit it for about 3 nights in a row, until I stayed up one night to force it to fill because of adverse skews, and my orders not filling. By this time I went from a potential 100%+ gain to a substantial loss.

I quickly learned that single option positions were much more effective, especially in strongly trending markets, and that uncapped profits from OTM single series positions greatly outperformed the capped/brokerage riddled Bull Call/Bear Put spreads.

Key disadvantages/dangers are:
• Brokerage: 4 legs – 2 to open, 2 to close
• Adverse IV skews against your position
• Difficulty winding out the position
• Capped profits
• Unfavourable theta decay

Bull Put spreads and Bear Call spreads:
I found that Bull Put spreads and Bear Call spreads are generally much more effective than Bull call/bear put spreads because you only need the market to go sideways or mildly in your favoured direction to make reasonable profits. If you’re lucky you can just let the spread expire worthless and avoid the 2 extra legs in brokerage when the sold strike is OTM at expiry.

Also, you tend to be selling better IV returns ATM or slightly ITM to the OTM bought position on average. For example, theoretically the idea is to aim for a 1:1 Ratio for maximum risk to maximum reward. You can sometimes get 30-40 cents premium for a 50 cent spread if you’re lucky in the day when volatile movements are occurring in the Australian market, and it skews in your favour, leaving only 10-20 cent exposure for the maximum risk.

Theta decay usually works in your favour, especially with ATM/slightly ITM strikes sold with around 25-40 days time value (aiming for 30) – the theta decay over 14 days is usually profitable if you have to wind out the spread on technicals, and if you can hold for longer, the last few days to expiry are vicious on the sold position’s value. I think this is a huge advantage over Bull Call spreads, especially in a higher volatility environment.

But, just like any of these kind of positions, they need to be managed, and wound out either in profit or at a protective stop – I don’t agree you just set them and forget them (although if your T/A’s any good you can sort of do this when there are good moves in your favour in your timeframe).

Key advantages are:
• IV skews tend to be in your favour
• Capped loss
• Favourable theta decay
• Sideways/ favourable movement usually ends up profitable
• Can sometimes let the spread expire worthless for maximum reward

Diagonal Spreads:
These are fun. You are right Margaret, these are combinations of calendar spreads with bear call/bull put elements, but the idea is you want to buy an OTM position, and finance it on the way up/down (usually up since downward moves are usually faster if strong).

The idea is to sell closer to the money for the current/front month if you’re very confident it will expire worthless on a mildly trending underlying. Sell at the same strike if there is some risk of the sold strike expiring ITM. Sell away from the bought strike (if there’s sufficient premium – often not worth doing) when there is a real risk of a move too fast putting the sold position well in ITM at expiry.

The use of ratios gets a bit complex, but you can use ratios of 2:1, 3:2, 5:3 for instance. This could be 5 bought and 3 sold for instance, or the other way around (but quite risky since there is an unlimited risk component involved – but usually good premium if you set it up right), with sold positions in the current month, at the same strike, close to the money, or further away – whatever corresponds to your T/A target, and your skew/hedging objective. These can be morphed too by buying back positions, or selling, or both… this is a whole area of finesse though, and needs more than this cursory description.

The diagonals that work the best tend to be in a mildly trending market, and when there is sufficient premium to sell with 30 days time left, usually not too far from the money, but not too close to it. If worried by the prospect of ITM expiry, you could consider making the position a ratio back spread by selling less contracts than the bought position, but the rules I’ve developed for this are quite involved, and very dependent on my T/A projections.

Fully agree that this is the time to be selective right now – a very volatile and hard to read market – for the shorter term. As for butterflies, I’ve never done one, considered it, and modelled it for other people, but just don’t like the high brokerage, and the limited reward, especially when there’s better pickings to be had, but may use these in a sideways market if it eventuates.

Wow, that’s a lot of page space above, and I still haven’t covered half of what I set out to say… But I’m happy to go into more detail at some point in the future, but I hope this illustrates some of the points you were looking for me to cover.


Regards



Magdoran

Terms:
OTM = Out of the Money
ATM = At the Money
ITM = In the Money
ROI = Return on Investment
T/A Technical Analysis
Skew – where the volatility level/effect is different between different strikes in time or price, or both – where the natural readjustment of this can be advantageous or disadvantageous.

 

[wayneL]

Hey Guys/Gals,

Just a couple of comments

Sound like you guys are basically swing trading with options. You are buying delta with the view of exiting the entire position within a set, short time frame. I agree that straight option buys are the way to go here. Fugget diagonals (as you've discovered). Although they will reduce the purchase price of the bought call, it's not a lot... not worth the profit potential forgone. Plus contest risk doubles (not just commish, but buy/sell spread as well).

I am however puzzled as to the specific problems, re IV skews between the the bought and sold strikes. Although it does occur, I never experienced it to the extent you guys have. I would consider that an anomoly. Mag you were just unlucky... what sort of stocks were you playing?

Verticals should be used if one intends staying with the position and morphing as you go along. As a bread and butter strategy, they are second to none. But it's not a swing trade strategy. They are more a "part" of a string of strategies one can use as ones view changes, setting up advantage. They also have great use in adjusting deta neutral strategies... moving the goal posts so too speak.

Of course this is a different philosophy of trading options.

Re Diagonal spreads

An excellent strategy. But what is a diagonal spread? It's a vertical spread with options of different expiry dates. Not that different is it? They do expose you to more downside risk in the short term, and also, as Margaret pointed out, potential vega risk as the longer dated options will be more vega sensitive. So caution with IV levels there. The flip side of that is we can benefit from vega if we buy low IV.

Folk who like CC's would do well to consider this strategy, particularly using LEAPS (Do you have those in OZ?){Leaps are bsically options with expiry dates > 9 months, up to 3 years...maybe long term warrants could be a substitute if not}

In many ways these have a lot of advantages over bull put spreads (the latest miracle strategy ) if the intention is to use as a stand alone strategy. A slight ratio will correct the tendency to drop a bit of profit the further away from the sold strike you go... I presume thats why you would do that Mag.

Butterflies:

...rock on indecies (not XJO : ). Well I prefer condors (just a stretched out butterfly) This has been my bread and butter trade for a while now. (Legging in with writes and/or credit spreads and adjusting if necessary with verticals) Why? because indicies suffere from chronic overvaluation. It's a tidy little edge and margins on written futures options, because of the SPAN system, are very sensible. Got a thread on this somewhere.

Gawd we option traders can waffle.. thats enough, I'm off for a beer.

Cheers

PS Whats the very best strategy?

All of 'em.

 

[Magdoran]

Hello Adrian/Ageo,


I’m glad you like the discussions so far, and hope they are useful.

Now, I have been meaning to address the points you made earlier, since in a related way they are relevant to option trading.

As for “positive expectancy”, I actually think this is quite an involved topic (probably not suited to this thread), which is bandied about by all sorts of people, many with entirely different definitions (some talk about Van Tharp’s definition, and others seem to put their own spin on this subject).

Firstly, let me make a quick observation about this area – I agree on the whole with Wayne’s comments on other threads about discretionary trading vs mechanical trading. I really think it is up to the individual how they trade, and as Wayne quite rightly states, there are many ways to skin a cat – certainly in this kind of market – the trick is to find your niche, isn’t it?

I’m firmly in the “intuitive” camp, and believe that while you can learn a lot from studying charts and other forms of financial/economic history (and I do think this is very worthwhile), that (ala Mark Douglas) “every moment in the market is unique”, and that “anything can happen”.

My belief (and I really challenge the questionable notion that anything can be proven to be true absolutely, or even subjectively in many cases – I have a real issue with determinism and the idea of inevitability) is that investments are inherently unstable and can fluctuate in value wildly; hence traders need to be flexible in their approach. What was true yesterday may be totally untrue today. Some mechanical adherents argue that you should develop a rigid system based on endless “back testing”, and that this will give you a casino like edge following a systematic formula.

I don’t agree with rigidity in thinking – sure, having a fixed view works for a limited period... and then it doesn’t. I would argue that it is important to maintain a vigilant mind always feeling forward from the brink, aware that change could be just around the corner, and that a rigid system constrains the flexibility to both avoid unfavourable developments and take the appropriate action, and also to not properly orient oneself to take advantage of opportunities.

I subscribe to George Soros’ “Reflexivity” concepts, and follow his approach to “dynamic disequilibrium” (see Soros on Soros – which explains many of his theories in “The Alchemy of Finance”). The key is to look for a divergence in reality from market perception, and take advantage of it decisively. Staying out when conditions are not right makes a lot of sense to me, then striking hard when an opportunity presents itself, rather than plodding along with a stayed old system, and neglecting the big opportunities in the future.


What I’m saying here is that you can choose a Buffet style, or a Soros style, or even your own, and be successful or fail… it’s really up to the individual. So as for my approach, it is constantly changing (hopefully in line with the market), and I believe most of the really successful players are the same. They never stand still, do they?


Regards


Magdoran

 

[hissho]

HI Wayne

Butterflies:
...rock on indecies (not XJO : ). Well I prefer condors (just a stretched out butterfly) This has been my bread and butter trade for a while now.

Why's that? why not XJO?

thanks
hissho

 

[wayneL]

HI Wayne


Why's that? why not XJO?

thanks
hissho

Condors are best in choppy, basically sideways markets, and the XJO has been trending strongly. You can shift the goal posts as you go along, but unless you want to get really agressive, this will reduce profitability. If you keep having to move the goalposts, risk reward starts looking a bit dodgy.

We don't want a trend.

Cheers

 

[Magdoran]

Hello Wayne,


I trade all kinds of strategies. I basically trim my sails to the wind – adapt the most appropriate risk/reward strategy to the situation. Most people have a preference, and mine is certainly directional, and really like to pick up nice capitulation/blow off moves if they’re around.

But my comments were aimed to address Margaret’s post, hence the focus on directional trades. I note you like the non directional side of options trading, and certainly a lot of people do this very successfully in the states.

I’m perfectly happy hedging longer term positions, or adopting sideways or volatility strategies when appropriate. But when you have such a strongly trending market in Australia, why wouldn’t you trade directionally? (How often do sideways strategies make over 1000% ROI in under a month???).

Spreads:
Regarding my experience with Bull Call spreads - the IV skews were one key element, and if you try these, it is a problem if the bought call is closer to the money and the IV is higher, but that’s just one component… the other is winding out a spread when you’re not wanting to stay up all night. Perhaps I was unlucky, but why then did my OTM calls and bull puts make good returns when the bull calls didn’t?

The profit movement in Bull Call spreads is lousy compared with OTM calls – you might just have well bought one strike OTM for a short move and taken the unlimited reward from the OTM call for a sustained greater magnitude movement (or tried going ATM or even slightly ITM). The other thing I found was that bull put spreads really outperform bull calls. Try replaying different conditions using the actual mid price for the spread, and see which yields the better risk to reward profile. My money is on the OTM call (literally) and also bull puts/bear calls. Most of the stocks I was trading were Dow, some NASDAQ and S&P 500 constituents in answer to your question.

LEPO’s
Regarding the Australian market and long term options like the US LEAPS, check out the ASX site for details on LEPO’s – “Low exercise Price Option”, which have about 1 year to maturity, and involve a kind of margin element. They are described as being a forward purchase of shares where you don’t pay the full premium up front, they are European exercise, only calls are available, and there are ongoing margin payments for both buyers and sellers. Interestingly they have a very high delta and move closely in line with the underlying. I’ve never traded these…

Ratio positions:
Re ratio usage – this is quite a detailed area, and probably needs a whole examination on its own at some stage, but the idea is to look to reduce initial outlays while increasing potential rewards for the back spreads, and look at locking in credits for ratio positions, with a chance of making good returns, but also risking unlimited exposure if a catastrophic move happens in the wrong direction.

The use of a ratio for OTM calls for instance is to help to finance the position/generate revenue on the way up, and also to reduce exposure if a major move happens against the position, but without sacrificing the unlimited reward aspect through the use of a ratio back spread approach if a major move occurs in the longer term projected direction, but occurs before the sold positions expiry date.


I hope this answers your questions… and yes, we options buffs can really ramble on, can't we?


Regards,


Magdoran

 

[wayneL]

But when you have such a strongly trending market in Australia, why wouldn’t you trade directionally? (How often do sideways strategies make over 1000% ROI in under a month???).

Indeed! Not withstanding, ROI is only part of the equation.

Regarding my experience with Bull Call spreads - the IV skews were one key element, and if you try these, it is a problem if the bought call is closer to the money and the IV is higher, but that’s just one component… the other is winding out a spread when you’re not wanting to stay up all night. Perhaps I was unlucky, but why then did my OTM calls and bull puts make good returns when the bull calls didn’t?

It's got me stumped. Without knowing the specific stock strikes expiries etc etc I wouldn't even hazard a guess. I've put on hundreds of these and never experienced that..at least not to that extent.

What genarally was time till expiry, distance between strikes etc IV's etc?

… and yes, we options buffs can really ramble on, can't we?

I remember looking at option traders threads before I was into them. Verbose jargonistic twaddle I thought. What have I become?

: Cheers

 

[Magdoran]

Hello Wayne,


Yes, it is scary how much jargon creeps in, isn’t it… and after a while you start to lose your objectivity don’t you? I can really appreciate what it must be like to be a newer player, and have to wade through a torrent of stuff you don’t understand (yet!).

I hope we don’t scare everyone away, so please, if any newer players have any questions, please ask away. And please don’t feel intimidated, this is a really complex area, and if you don’t ask the silly questions, I can assure you, it’s unlikely you will get to ask the hard ones…

Re the Bull call spreads, just go back and see if you could have done better with OTM calls and bear puts, and compare the risk and reward. The conclusion I came to is to ditch the bull calls – but that’s just me.

Regards,


Magdoran

 

[wayneL]

[verbose jargon]

Re the Bull call spreads, just go back and see if you could have done better with OTM calls and bear puts, and compare the risk and reward. The conclusion I came to is to ditch the bull calls – but that’s just me.

For me it depends entirely on my view of price movement and volatility.

OTM short verticals (if left till expiry and no defensive tactics are used) have an inherently poorer risk reward ratio than a long ATM vertical. However they have a higher probability of success. Basic stuff here.

OTM short verticals are more about where the stock won't go(much the same philiosophy as a short put {or synthetic short put AKA Covered Call}) and realated strategies, rather than a speculative directional play. On the other hand ATM verticals have more speculative potential (but not as much as a straight long option).

More importantly from the standpoint of the morph player, ATM verticals have far more defensive and metamorphosis potential. The OTM vertical is a pig to play with in that respect.

In that sense IMO ATM vertical have WAY more risk/reward/probability potentail in the speculative, directional picking, dynamical hedging sense. Also not forgeting that the ATM vertical can be legged into from a long ATM or ITM options. (not practical in most cases from an option entered into when a fair way OTM)

In this way and if things go to plan, a trader work themselves into better than risk free situations, sweeping cash into our account as we go along.

However, I'm not averse to the OTM vertical in the slightest, for what is a condor, but two OTM short verticals (the iron version of anyway)? Along with chronic overvaluation, This is manna from heaven for the premium seller.

Thinking about the ATM vertical problem, I would sure be interested in the time til expiry and IV levels of the spreads you were putting on. This, along with the width of strikes can have a dramatic effect when IV levels start bouncing around. One of the key measurements here is position delta. This tells volumes.

[/verbose jargon]

I hope we don’t scare everyone away, so please, if any newer players have any questions, please ask away. And please don’t feel intimidated, this is a really complex area, and if you don’t ask the silly questions, I can assure you, it’s unlikely you will get to ask the hard ones…

Ditto that.

Cheers

Image from CWS by Charles Cottle \/

 

[RichKid]

At some stage I must aquire the aforementioned tomes. Better read what I've been suggesting people read huh?

I've got a couple of Cottles books, which have served as my options bibles.

I've also got a really interesting book - "Trading Options To Win" by Stuart Johnston. This guy thinks out of the square, and is at times, absolutely hilarious... he trades commodity options, and is into statistics, seasonals etc., not one price chart in the whole book. But of great interest even to a techie.

Cheers

Hi Wayne,
What are those Cottle books? This is the link to the three books I found on Amazon by Cottle, I assume these are the ones ($300 for one of em- sheez!! (latest one at the top). http://www.amazon.com/gp/search/104-1098788-9571936?search-alias=aps&keywords=cottle options

I note that Coulda Woulda Shoulda was on your site- identical to the original? I also saw a new title by him which had come out earlier this year- Options Trading: The Hidden Reality. The latest one appears to be a collection of the previous material (with beautiful 'living' colour) and additions:

This new book is an expanded revision of "Options: Perception and Deception" and "Coulda Woulda Shoulda". OD was published by McGraw Hill in Hardback and I obtained the rights back to self publish the derivative CWS to give away at my brokerage firm from 2001 to 2003. Because they are out of print, OD sells from between $299 and $399 while CWS fetches between $55 and $125 where rare books are sold. "Options Trading: The Hidden Reality" not only printed in color has 100 more pages and features more dissection illustrations on popular wingspread (stretched-out condors, slingshots and skip-strike-flies) and calendarized spread (double diagonals, straddle strangle swaps and double calendars) configurations. I think what made OD in such demand were the 3D graphics and the Skew Library. They are both brought back in color along with the appendix proving Chapter 2's Options Metamorphosis.

 

[Magdoran]

Hello Wayne,


Re Bull Call spreads:
Going back through my notes on Bull Call spreads back in 2003-4, these were mid term trades of about a month projected duration. The problems I identified was using strikes too close together, problems with winding out positions using contingent orders when the IV skewed against my positions, sudden adverse movements, and contingent stop loss orders not getting filled (since the gap against my position was so strong).

(The width of the strikes is important, and I’d agree you need to ensure the width is not too narrow or too wide…).

I was buying bull call spreads with around 65-90 days time value, with a 30 day trading horizon, and incorporated time stops at 30 days till expiry. IV was mixed: some high, some mid range… but none were really low (compared to Australia at the time anyway).

Oddly, all my Australian plays were successful at the time using bull call spreads, but on revision, straight calls/puts and bull puts/bear calls would have yielded better returns, and similar risk. Now this is interesting because I think I never had a successful bull call spread work in the US, but did OK in Australia, what does that tell you? Also interestingly, I had several successful OTM straight calls combined with bull puts in the US at the same time too…

Another element was my T/A was different at the time, and not as time/price accurate as now, and on a couple of occasions bought/sold false breaks – but this was then a T/A problem, not an options performance issue.

So there you have it Wayne…

So, what is your approach/experience? Time frame, strike width, market area, do you stay up to enter/exit? Do you think the risk/reward characteristics of bull call spreads/bear put spreads are better than other alternative options strategies? In essence what are the conditions you look for to select the appropriate strategy?


Regards


Magdoran
P.S. Love the diagrams!

 

[Magdoran]

Hello Wayne,


I’ve been meaning to comment on your chat with Cottle. That was amazing actually getting to talk with Cottle online, what a scoop!

It’s great that you’re relating your experiences here, and I’m sure everyone will find the text recommendations useful. I must go and have a look at some of your recommendations too sometime...

I tend to relate to RichKid’s comment about the price though (but if it’s really good, it’s just an investment, isn’t it? – Just as long as the “investments” don’t outweigh the returns huh? Hahaha).

But this is what the forum's all about isn’t it? Sharing ideas, and developing…


Regards


Magdoran

 

[wayneL]

Hi Wayne,
What are those Cottle books? This is the link to the three books I found on Amazon by Cottle, I assume these are the ones ($300 for one of em- sheez!! (latest one at the top). http://www.amazon.com/gp/search/104-1098788-9571936?search-alias=aps&keywords=cottle options

I note that Coulda Woulda Shoulda was on your site- identical to the original? I also saw a new title by him which had come out earlier this year- Options Trading: The Hidden Reality. The latest one appears to be a collection of the previous material (with beautiful 'living' colour) and additions:

Yep they're the ones Rich,

I've got "perception and deception" (didn't think it was still available) and of course, "coulda woulda shoulda".

Pass on perception and deception. It's more for the professional MM, it'll definately cause brain fission LOL.

CWS is the best for us mug punters. But it's still fairly advanced and pretty much jumps straight into the deep end. Can cause spontaneous combustion of any flammable material within 1.5 mters of your brain.

Haven't got the new one yet. Letting my brain degrade a few half lives first

 

[wayneL]

Hello Wayne,


Re Bull Call spreads:
Going back through my notes on Bull Call spreads back in 2003-4, these were mid term trades of about a month projected duration. The problems I identified was using strikes too close together, problems with winding out positions using contingent orders when the IV skewed against my positions, sudden adverse movements, and contingent stop loss orders not getting filled (since the gap against my position was so strong).

(The width of the strikes is important, and I’d agree you need to ensure the width is not too narrow or too wide…).

I was buying bull call spreads with around 65-90 days time value, with a 30 day trading horizon, and incorporated time stops at 30 days till expiry. IV was mixed: some high, some mid range… but none were really low (compared to Australia at the time anyway).

Oddly, all my Australian plays were successful at the time using bull call spreads, but on revision, straight calls/puts and bull puts/bear calls would have yielded better returns, and similar risk. Now this is interesting because I think I never had a successful bull call spread work in the US, but did OK in Australia, what does that tell you? Also interestingly, I had several successful OTM straight calls combined with bull puts in the US at the same time too…

Another element was my T/A was different at the time, and not as time/price accurate as now, and on a couple of occasions bought/sold false breaks – but this was then a T/A problem, not an options performance issue.

So there you have it Wayne…

So, what is your approach/experience? Time frame, strike width, market area, do you stay up to enter/exit? Do you think the risk/reward characteristics of bull call spreads/bear put spreads are better than other alternative options strategies? In essence what are the conditions you look for to select the appropriate strategy?


Regards


Magdoran
P.S. Love the diagrams!

Hi Mag,

I see a few areas where I do things differently.

1/ Width of strike (as you've already mentioned) If too close together you have to increase the number of contracts do develop any sort of position delta... and the longer til expiry and the higher the IV, the more marked this becomes. Presuming we are on the positive side of the break even point... The longer dated vertical leaves you more suseptable to being short vega, without enough positive theta to develop some profit. The number of contracts also increases contest risk to unacceptable levels... 4 lots of commish plus 2 lots of spread, on a large number of contracts = ouch.

2/ The time stop. Again presuming we're on the right dide of the BEP. By exiting 30 days before expiry, you are not putting to use all that positive theta in the final 30 days. If possible you want the spread to expire, and let assignemnt/execise take you out... cheaper. Any pin risk can be dealt with if necessary.

3/ Using stop losses/contingency orders. MM's just love them, They know where people like to stop out and will widen the spread.. it's just giving them money. It's much better to morph than stop out. One of my most memorable trades was a long call, morphed to an ATM vertical, morphed into a synthetic put backspread on EBAY. Made a fortune on it.

Just my thoughts.


...later

 

[wayneL]

So, what is your approach/experience? Time frame, strike width, market area, do you stay up to enter/exit? Do you think the risk/reward characteristics of bull call spreads/bear put spreads are better than other alternative options strategies? In essence what are the conditions you look for to select the appropriate strategy?


Regards


Magdoran
P.S. Love the diagrams!

Every situation is different. One way of looking at option trading, is selecting a strategy, and finding stocks to use it on

The other way is to find a stock you want to trade, and select strategies according to your view of it's movement/non-movement and IV levels (both relative and absolute).

I fall into the second group. I'm not looking to put on an ATM vertical per se', only if I think it's the best strategy at the time. Depending on how much of a smart-@rse I'm feeling, I may even leg in to the strategy I thinking of..

Every situation is different.

I’ve been meaning to comment on your chat with Cottle. That was amazing actually getting to talk with Cottle online, what a scoop!

Truly, it was an absolute fluke. This one guy had offered to teach us some stuff about options and made a time every week to do it (all for free... just to help out) His knowledge was good but he was very nervous and had a problem with delivery...stage fright basically.

His "associate" takes over to get this guy out of trouble... it was one Mr. C. Cottle. At the time I had no idea of the significance of what was happening, but he did it for several weeks. A very generous guy... very cool!

The first guy was no dumb@rse either and was terrific with text-only chat.

Cheers

 

[RichKid]

Yep they're the ones Rich,

I've got "perception and deception" (didn't think it was still available) and of course, "coulda woulda shoulda".

Pass on perception and deception. It's more for the professional MM, it'll definately cause brain fission LOL.

CWS is the best for us mug punters. But it's still fairly advanced and pretty much jumps straight into the deep end. Can cause spontaneous combustion of any flammable material within 1.5 mters of your brain.

Haven't got the new one yet. Letting my brain degrade a few half lives first

Thanks Wayne, glad CWS is a bit hard too in your view as I couldn't really understand it at first blush. What little is left of my mind must be protected from people like Cottle so thanks for the warning, maybe the cover should have one of those radiation warning signs, red and yellow with a big exclamation mark, skull and crossbones etc.....

Is 'Options as a Strategic Investment' similar to Cottle in terms of depth or does it have additional material which will help in other fields of trading? Although I rarely trade options I find the concepts and observations re price have helped my in my general trading, especially the volatility studies.

 

[wayneL]

Thanks Wayne, glad CWS is a bit hard too in your view as I couldn't really understand it at first blush. What little is left of my mind must be protected from people like Cottle so thanks for the warning, maybe the cover should have one of those radiation warning signs, red and yellow with a big exclamation mark, skull and crossbones etc.....

LOL Perhaps we should lobby parliament for this. Everything else has to have a doggone warning these days.

Is 'Options as a Strategic Investment' similar to Cottle in terms of depth or does it have additional material which will help in other fields of trading? Although I rarely trade options I find the concepts and observations re price have helped my in my general trading, especially the volatility studies.

As I say I have never read it. At ~1,000 pages it must be pretty comprehensive, but allegedly is a comparitively, much easier read.

Cheers

 

[RichKid]

LOL Perhaps we should lobby parliament for this. Everything else has to have a doggone warning these days.

lol, Yes, very true! I still can't believe how easy it is to open an options trading account, I'd encourage people to sue if they make losses, you should see how simple the comsec forms and questionnaires are.

As I say I have never read it. At ~1,000 pages it must be pretty comprehensive, but allegedly is a comparitively, much easier read.
Cheers

Oops, sorry Wayne, I should be asking Magdoran the question.

So do you think Johnston's suitable for beginners Magdoran? I've had a look at Natenberg and the statistical stuff in it is easier to undertand, has some diagrames too. btw, welcome to ASF! Sorry for not chatting earlier, didn't want to butt in on the high level discussions!

Rich