Options Mentoring

[wayneL]

Anyway, you can get exercised with a bull call (less likely, and easier to deal with, but a nuisance just the same).

Mag

Yes you can. but the short call is OTM and would require the underlying travelling past the sold strike. However because the burden cost of carry is upon the call seller, early assignmnent is most unlikely.

However with the ITM bull put, the sold strike is already substantailly ITM and inviting early assignment because of the put holders COC. Even with sufficient time value, alls you need is a few ticks against you to whittle that away. Unwinding in this situation doesn't necessarily prevent assignment, you may still end up with stock if the OCC has already notified your broker of assignment.

It's a shame there weren't more european style options around because of this nuance.

 

[sails]

Hi Magdoran,

No problem with agreeing to disagree - it makes for more interesting discussions when these things are bounced around Oh, and I like chocolate and stick date pudding - in fact made sticky date for our visitors! But we are all different, often see things differently and that's what makes life interesting.

While happy to share my views, I still like to keep an open mind to what is working for other option traders so look forward to further discussions and leave the credit vs debit spread alone.

I do agree that if something is working for you, don't change it. For reasons I mentioned a few posts ago , I'm not too keen on bull calls either - still like to start off with long calls or puts then perhaps morph into something else if necessary.

My own experience is that the further ITM the option is, the MM's seem to widen the bid/ask spread. Just been a general observation, however, as I havent been trading them I may well be incorrect on that one - my apologies if I've got that wrong.

I am genuinely interested in what you have shared and will paper trade some of your ideas including the NAB $35/$36 bull put that you've suggested to get a feel for it.

Thanks again!

Margaret.

 

[Magdoran]

Hello Margaret,


Aha, so we share another passion - CHOCOLATE!

As for discussions, I’m happy to chat to an extent, but since there is so much ground to cover in so little time, I prefer to focus on broad principles, and keep the momentum going. I hope that’s OK with you?

Hey, the bull put strategy displayed for NAB was purely hypothetical; I certainly wouldn’t be trading this strategy right now from a T/A perspective. This kind of spread is good in a trending bull market, not a correcting/consolidating one.

The idea is to enter on the pull backs in a bullish drive looking for a fast move down to get set when the IV kicks up, and there is sufficient action as players push the option prices around while you have an order in with a set credit amount in your favour. The spreads can really move around some days, and this is the trick to getting set with a good ratio. But I wouldn’t be playing this kind of trade in this uncertain choppy market.

There are specific patterns I look for, and the whole approach usually includes some OTM diagonals too. The key conditions are not evident anywhere (and may not be around for a long time). You do want some trend in evidence.

Sorry, but there are so many aspects to trading, and perhaps we could look at how market makers work, and talk about the different players there like optiva and susquana, and timberhill to name a few…. There are all sorts of tricks to getting set at an advantage, and observing the market makers and other players is key to this, but this is a whole topic in itself.

If you really want to get into the nitty gritty sometime, happy to chat about it, but it may be unsuitable for this thread…


Regards,


Magdoran

 

[Magdoran]

Hello Wayne,


Re your post #101: Yeah, didn’t we cover the risk of assignment in posts #90 and #100?

Sure, assignment is more likely to happen to bull put spreads than for bull call spreads, and said this too. Each strategy has a trade off, and this is one of them. That’s why I suggested how to manage this kind of strategy, and made the comment about this pitfall.

Now, if the market moves strongly against you, any directional position is going to suffer, isn’t it? Different strategies will fare differently, but most will take a hit in a strong adverse move. If you decide to enter this strategy you should do so knowing the maximum loss, and how to manage the position.

Re assignment – can’t happen if you’ve closed the position, and you’d know immediately if you were assigned, you’d have the shares in your account and a big red number. It’s happened to me, and it’s no big deal. That’s why you should get set with a good deal of premium, to reduce the risk, and offset any assignment activity if it occurs.

Don’t forget, you still have the open long puts for protection, and they will have a value if you buy the shares on assignment day to fulfil the contract, or you could also exercise the long puts if required.

So, you raised a good point here Wayne, perhaps you would be kind enough to outline the mechanics of how assignment works, and your experiences on either side of it?


Regards


Magdoran

 

[wayneL]

Hello Wayne,


Re your post #101: Yeah, didn’t we cover the risk of assignment in posts #90 and #100?

I hadn't considered that we were speaking of ITM credit spreads. This is something which is not normally considered in my circle of colleagues, precisely because of the assignment risk.

Normally when speaking of credit spreads, OTM is the usual config. Apologies for not picking this up. There must still be a few neutrons richocheting around upstairs.

Sure, assignment is more likely to happen to bull put spreads than for bull call spreads, and said this too. Each strategy has a trade off, and this is one of them. That’s why I suggested how to manage this kind of strategy, and made the comment about this pitfall.

Now, if the market moves strongly against you, any directional position is going to suffer, isn’t it? Different strategies will fare differently, but most will take a hit in a strong adverse move. If you decide to enter this strategy you should do so knowing the maximum loss, and how to manage the position.

Agreed

Re assignment – can’t happen if you’ve closed the position, and you’d know immediately if you were assigned, you’d have the shares in your account and a big red number. It’s happened to me, and it’s no big deal. That’s why you should get set with a good deal of premium, to reduce the risk, and offset any assignment activity if it occurs.

Re asignment: I stand corrected.

Don’t forget, you still have the open long puts for protection, and they will have a value if you buy the shares on assignment day to fulfil the contract, or you could also exercise the long puts if required.

Yes, But a number of things are now possible, depending on capitalization and the broker. We may have very expensive call options, we may have to involuntarily exercise our long puts, we may have to correct the stock position with an offsetting option to avoid coughing up more cash, the long stock may be immediately closed out and we end up with a long put only.

None of which is desirable.

So, you raised a good point here Wayne, perhaps you would be kind enough to outline the mechanics of how assignment works, and your experiences on either side of it?

The mechanics of this is available at any of the options exchanges sites.

 

[sails]

Hi Magdoran,

Sounds good to keep the momentum going on these discussions, but if I'm not clear about something, I like to ask questions until it becomes clearer or understand the other person's viewpoint.

Yes, I realised that the NAB bull put was hypothetical especially under these market conditions. Don't worry - I never trade a new idea live until I've tested it, understand it and have a management plan!

I was only interested in an example of your diagonal to get an idea of where you are positioning the strikes and how you tie it in with your bull puts. Like Wayne, I was wrongly assuming that your bull puts were OTM and the NAB hypothetical showed otherwise. Quite happy with a past example when conditions were right - but agree that this would be a topic on it's own.

...Sorry, but there are so many aspects to trading, and perhaps we could look at how market makers work, and talk about the different players there like optiva and susquana, and timberhill to name a few…. There are all sorts of tricks to getting set at an advantage, and observing the market makers and other players is key to this, but this is a whole topic in itself. ...

This would be really interesting and would certainly like to understand more how they work (especially our local MM's) and would love to hear of any ways you've found to get a better advantage - sounds great!

Cheers,
Margaret.

 

[Magdoran]

Hi Wayne and Margaret,


Sorry guys, was (and am) under a lot of pressure to produce a whole range of documentation (professionally, domestically, comments for this site – I promised hissho an XJO scenario I’ve been doing in bits for example) – add this in with trading imperatives, and a seminar to prepare for… let alone home life… you get the picture. I was feeling frustrated late last night (and very sleepy - I don’t stay up to trade the US market) that you guys didn’t magically know everything I do… hey, why don’t you? Hahahaha…

So, I’m a little bit more objective this morning, and of course you’re going to ask questions and raise issues and try to understand where I’m coming from… I suppose I assumed we were covering all of this at a high level and I wouldn’t have to go into the detail.

On reflection, I can see that is precisely where you’d like to go, right hard into the detail on all levels, the unseen things like how to assess and deal with the actual risks, how to understand and fox the market makers, etc. All important issues.

My focus was on finding time to write more technical comments like on the diagonals for instance (then ratios, compare morphing, compare models, etc) but at a high level, then come back and talk about the nuances. What I might do is to back burn all of this, and adopt a more open discussion format on the detail for a while, and cover the high level areas as the thread dictates at a significantly slower pace. Works for me…

Anyway, it’s “Wayne€™s World” here! Hahaha


Must away!


Magdoran

 

[sails]

Hi Magdoran,

I have a pretty good understanding of options in both theory and practice, so there is no need to go into such detail of option basics. If I ask a question, it is on the assumption that we both have basic options knowledge and if it's over my head, I'll let you know! Obviously there will be different view points from time to time as we've already discovered, but that's what makes a good discussion.

Regarding market maker activities, I do have a basic understanding of how it works and how they hedge. Cottle's book devotes a whole chapter to Market Makers and explains the hedging mechanisms of conversions and reversals. My main interest was piqued when you mentioned our local MM's as I thought you may have had some other interesting information that was more applicable to the local market. So, definately no need to go into the basics - but if you have any practical suggestions in how to improve on order fill, etc - that would be great.

Sounds like you have a lot on your plate at the moment - so please do not feel under any pressure to reply to these topics until you feel you have more time.

Cheers,
Margaret.

 

[wayneL]

Anyway, it’s “Wayne’s World” here! Hahaha


Must away!


Magdoran

Because I have an opinion? hmmmmmmmm!

 

[Magdoran]

Wayne: Meaning: "it's your house (thread) - your'e the moderator - not trying to steal your thunder".

Margaret: I know you are highly proficient at options...

Now we're really getting our wires crossed...

What's going on here - we've gone from cordial to less cordial for some reason. Am I missing something?

Sorry if I've caused offence... none was intended.


Magdoran

 

[sails]

Hi Magdoran,

No offence at all - just trying to spare you time in typing so much detail as you so many other commitments. That's all I was trying to communicate in my post as I know what it's like to be really busy. Quite happy to wait until you have time to share some of your ideas

Cheers,
Margaret.

 

[wayneL]

Wayne: Meaning: "it's your house (thread) - your'e the moderator - not trying to steal your thunder".

I rarely have thunder, and usually only after a high fibre meal

Don't worry about stealing thunder, if you have something to add, go ahead and say it. No problems here.

What's going on here - we've gone from cordial to less cordial for some reason. Am I missing something?

Mag,

It's the lack of body language. We can misread each other on these forums. But most on this forum don't hold grudges at all anyway. Even if the debate becomes "robust" it doesn't mean anything really.

But as traders we are good at offence and parry, it's what we do to survive. Discussion inevitably reflects this. Don't worry about it, we're all friends at the end of the day.

Cheers

 

[cuttlefish]

Great thread people - unfortunately I've got nothing to add since I'm new to options but have really enjoyed reading the commentary so far.

 

[sails]

Here is a link to the free "Options Trader Magazine" for May and June
http://www.optionstradermag.com/v2ads.htm

Edit: Just noticed that it is possible to download all the previous issues by clicking on the "Back Issues" tab on the left hand side of the screen.

 

[Mofra]

Sails,

Thank you very much for posting the link on behalf of all occasional lurkers like myself - finding the credit spread vs debit spread article very interesting

 

[sails]

Here's an interesting article on debit vs. credit spreads by one of the Optionetic's instructors - so obviously they don't all agree on this issue. I believe the author was previously a market maker: http://www.optionetics.com/articles...idNo=14840&intChoice=0&mType=3&mSearch=kramer

 

[Magdoran]

Here's an interesting article on debit vs. credit spreads by one of the Optionetic's instructors - so obviously they don't all agree on this issue. I believe the author was previously a market maker: http://www.optionetics.com/articles...idNo=14840&intChoice=0&mType=3&mSearch=kramer

Aha Margaret, I can see what you were getting at here...

Sure, this Scott chap is quite correct about the theory... Where I’m focused is finessing skews in my favour, and exiting with a beneficial skew, and morphing.

When a trader is contemplating buying a call spread or selling a put spread at the same strike prices he/she is undertaking a major waste of time as they are the same thing – period. Let me clarify before people's diastolic pressure go through the sphygmomanometers. I am stating that the two spreads are accurately priced with no arbitrage potential, of the same month, same underlying, etc. “How can that be, Kramer”? I really don't know, and I am still trying to figure it out, but it is so.”

What he’s talking about is a situation where there is no skew. If the market traded perfectly all the time, then he’d be absolutely correct, there would be no difference in the two strategies as specified above, except perhaps the lack of brokerage for bull puts if they expire worthless.

Where there is a difference is in the way skews come about, and how IV will affect different strikes. I’ve just found that in the market in Australia it was easier to enter bull puts with an advantageous skew over bull calls, and certainly so on exit. Of course it’s possible for bull calls to have excellent skews too, but I just don’t see many here, but then I rarely look for these much anymore...

I did get one part wrong about using the term “exact strikes” in post 98. This is incorrect where you sell a $40 put for 0.85, buy a $41 put for 0.45 yielding a 0.40 credit, and buy a $40 call for 1.35, sell a $41 Call for 0.75 for a debit of 0.60. The risk and reward is the same.

Where this gets messy though is in the actual price you can get set at during normal trading (entry or exit), I have found from experience that you could get set with really good ratios for credit versions over debit. I don’t know why this is, but this has been my experience to date.


Regards


Magdoran

 

[ozambersand]

Hope you don't mind me bumping this thread, but I found it doing a search and it's got lots of stuff I need to check on now and then, so I would prefer it closer to the top!
PS Thanks for all the work that everyone contributed to it.

 

[chops_a_must]

Just a couple of questions. I'm motoring through those options books you recommend Wayne, some great stuff. Read the covered call section in the Mcmillan book twice now, and am a third through the Natenburg book. Should be doing study, but am enjoying them too much.

Just on delta neutral strategies... what happens if you get an early excercise whilst using this strategy? And is this still profitable? If the market thinks there are a lot of people using this, will it start hunting certain levels? A lot of people have claimed they were ruined because agents knew positions and were targeting them, didn't they?

And is this strategy even possible on Oz stocks? Considering in a lot cases, you would need several 100k worth for a lot of stocks.

Is there any way I can write puts, with the intention of being comfortable with being assigned, for a $50 dollar stock in Oz, without needing 50k? Only say, wanting 5k of it?

Also, is there any easy reference to the full list of optionable stocks on the ASX? And which ones only settle every three months, and each month.

What is the full cost in brokerage on IB, from writing and purchase, to excercise/ assignment?

Does the fact that ASX options are in lots of 1000, rather than 100 lead to the illiquidity problems in Oz options? And do you think they would be better off changing that?

Sorry for the questions. Just very enthusiastic atm. Cheers.

 

[wayneL]

My answers in blue.

Just a couple of questions. I'm motoring through those options books you recommend Wayne, some great stuff. Read the covered call section in the Mcmillan book twice now, and am a third through the Natenburg book. Should be doing study, but am enjoying them too much.

Just on delta neutral strategies... what happens if you get an early excercise whilst using this strategy? And is this still profitable? If the market thinks there are a lot of people using this, will it start hunting certain levels? A lot of people have claimed they were ruined because agents knew positions and were targeting them, didn't they?

There are different ways of looking at this, all via synthetic relationships. Realistically there are two instances where you are in danger of early assignment on short . ITM puts and calls where there it is about to go ex-dividend and there is a financial benefit for the call owner.

With euro style options (index) this is not a problem.

Let's say you are constructing an iron condor. You will have a short ITM put which could get exercised early. The answer is to construct an all call condor. People like to do irons for the credit, but at the end of the day there is not much difference, unless there is an issue with the spread. They are synthetically equal.

On the call issue, just watch for the ex div date is the obvious thing.

If you do happen to be assigned. It's a matter of re-evaluating where your at, and adjusting to suit. Lets say your assigned the short put in an iron condor. Now you have a leg of long stock. You can keep the stock and sell a call against it, and you have a synthetic short put again.

Will the market hunt levels? I don't know, but you should have a defence strategy in place.

On stocks, I don't go straight fro the condor. I'll do a credit spread and go delta neutral and start hedging with stock, roll, flip, or whatever if it goes pear shaped.

And is this strategy even possible on Oz stocks? Considering in a lot cases, you would need several 100k worth for a lot of stocks.

Is there any way I can write puts, with the intention of being comfortable with being assigned, for a $50 dollar stock in Oz, without needing 50k? Only say, wanting 5k of it? Not really. Not without the risk of the 50k position that I can think of.

Also, is there any easy reference to the full list of optionable stocks on the ASX? And which ones only settle every three months, and each month.

What is the full cost in brokerage on IB, from writing and purchase, to excercise/ assignment?

I don't know these two as will be different to US. Sails will know.

Does the fact that ASX options are in lots of 1000, rather than 100 lead to the illiquidity problems in Oz options? And do you think they would be better off changing that?

I reckon so. But don't have any evidence to prove it. But a lack of MM competition has a lot to do with it as well.

Sorry for the questions. Just very enthusiastic atm. Cheers.

Cheers, good questions