Options Mentoring

[VolTracker]

Here's a few links to ASX sites that might answer a couple of chops' qn's.

List of Optionable ASX Stocks
http://www.asx.com.au/data/option_securities.pdf

Option codes list
http://www.asx.com.au/data/options_code_list.csv

Excel file of option stocks, volatility estimates from MM's and Div's updated weekly (Note that the divs are not that reliable).
http://www.asx.com.au/data/volatility_and_dividend_parameters.xls

cheers all

 

[wayneL]

Chops,

Just re-read my answers... what a load of poorly phrased rubbish. I don't know how anyone could understand what I was on about. I think I'll have another go after some caffeine.

 

[Nick Radge]

Its after 9am mate...try the one with the RED label...it might be in a different cabinet from the coffee though...

 

[Nick Radge]

Sorry, thats disrespectful for a class act. BLACK label...

 

[wayneL]

Actually, I've always been a fan of German wheat beer. But I now know what to bring if I'm ever looking for a bed in Noosa.

 

[chops_a_must]

Here's a few links to ASX sites that might answer a couple of chops' qn's.

List of Optionable ASX Stocks
http://www.asx.com.au/data/option_securities.pdf

Option codes list
http://www.asx.com.au/data/options_code_list.csv

Excel file of option stocks, volatility estimates from MM's and Div's updated weekly (Note that the divs are not that reliable).
http://www.asx.com.au/data/volatility_and_dividend_parameters.xls

cheers all

Thanks mate. I did find the optionable stocks thing last night.

You wouldn't happen to have any comments on the ease of trade with the flex options would you?

 

[chops_a_must]

I now know what to bring if I'm ever looking for a bed in Noosa.

A pillow?

 

[VolTracker]

The way I understand it, FLEX options can be requested by a financial inst on stocks where regular ETO's are not available. ASX site explains it better.

As far as trading goes, they dont have the usual Market Maker obligations so getting a reasonable spread can be difficult to impossible.

Looking thru the FLEX stocks yesterday there was dribs & drabs volume on quite a few of them so they must be tradeable at least.

ABS (67 contracts), ALL(12), FMG(50), GFF(5), IPL(1), LEI(4) ....

Personally, I have found getting filled very hit and miss so I rarely trade them now.

 

[chops_a_must]

The way I understand it, FLEX options can be requested by a financial inst on stocks where regular ETO's are not available. ASX site explains it better.

As far as trading goes, they dont have the usual Market Maker obligations so getting a reasonable spread can be difficult to impossible.

Looking thru the FLEX stocks yesterday there was dribs & drabs volume on quite a few of them so they must be tradeable at least.

ABS (67 contracts), ALL(12), FMG(50), GFF(5), IPL(1), LEI(4) ....

Personally, I have found getting filled very hit and miss so I rarely trade them now.

Thanks for that. I'd only be interested in writing covered calls, and writing naked puts for them, not actually trading them. Just wanted to make sure that that would be possible.

Thanks.

 

[MRC & Co]

Here is something I have been considering, do any of you guys buy DITM calls (as LEAPS) if you are thinking of going long for some time, as a way to gain leverage whilst negating added risk? And if you use this strategy, do you use it the majority of times in the aforementioned circumstances?

Also, another quick question, on option probability calculators, how come if you set the strike at the current price, and expiration for say 3 months, it gives you a 50/50 probability, when infact the market is prooven to trend up 70% of the time?

Cheers

 

[wayneL]

Here is something I have been considering, do any of you guys buy DITM calls (as LEAPS) if you are thinking of going long for some time, as a way to gain leverage whilst negating added risk? And if you use this strategy, do you use it the majority of times in the aforementioned circumstances?

Valid strategy.

But consider that vega (sensitivity to volatility changes) increases as you go out in time, so it can add risk if you buy at any old price. Best time to buy leaps with this in mind is when IV is cycling low. That way you can be long vega as well as delta.

Other greeks should be taken into consideration too. You will have to leverage 2x just to get the equivalent delta as a stock position and as gamma is also low with long dated options (but better when IVs are lower), the stock has to move in your favour a long way before the option starts to manufacture some extra delta.

You will also be paying up front for all those carrying costs.

There are pros and cons.

Also, another quick question, on option probability calculators, how come if you set the strike at the current price, and expiration for say 3 months, it gives you a 50/50 probability, when infact the market is prooven to trend up 70% of the time?

Cheers

Probability calculators, though definitely an aid, should be taken with a pinch of salt.

 

[MRC & Co]

Thanks Wayne,

Few things to think about there. I will have to get a better understanding of ALL the greeks. Have to keep reading over and over to let them sink in!

Start of this thread is probably a good place to go back too as it explains them better than most books I have found!

Thanks!

 

[stargazer]

Hi Wayne

I am looking to structure my trades so as to have a low exposure to the risk. I would like to ask what is wrong with working with this type of structure. I understand it at least..lol.



Buy 1000 XYZ for $12.00 a share......................cost 12,000
Buy 1 12.50 put option for $1 a share ......................1,000
Total cost ..........................................................13,000

If stock goes against you and goes down potential max loss 3.84%

sell stock 12500
outlay 13000
-500

You can also write a covered call but bit tired to work it all out now.

Why is this type of set up so risky as you have indicated in the past.

Cheers
SG

 

[wayneL]

Hi Wayne

I am looking to structure my trades so as to have a low exposure to the risk. I would like to ask what is wrong with working with this type of structure. I understand it at least..lol.



Buy 1000 XYZ for $12.00 a share......................cost 12,000
Buy 1 12.50 put option for $1 a share ......................1,000
Total cost ..........................................................13,000

If stock goes against you and goes down potential max loss 3.84%

sell stock 12500
outlay 13000
-500

You can also write a covered call but bit tired to work it all out now.

Why is this type of set up so risky as you have indicated in the past.

Cheers
SG

Hi SG,

It's not that it's risky. You have limited your absolute downside risk to $500, that's fine.

But, you are trading other risks for removing that downside risk. You are paying someone else to take them on for you.

If those other risks are acceptable in exchange for limiting downside risk, you go ahead and put the trade on. If not, then don't trade.

Let's have a look:

* Your put option is 50c in the money. That means that *at expiry* you will incur maximum loss at any price up to $12.50 and you won't break even until $13.00. That means your stock could rise a full 8% and you still make a loss after costs.

* You are slightly increasing your contest risk, capital needed and carrying costs. Contest risk is brokerage and spread and you are adding at least one extra commission. You are using $13k for a $12k position and you are carrying that $13k position (loss of risk free bank interest received on cash).

OK here's a couple of things to think about:

* Always consider synthetically equivalent positions. What you in fact have in the above, is a synthetic $12.50 call option which you can buy for ~$600. If you like the above risk profile (the stock plus long put), you can achieve the exact same risk profile (once cost of carry on long stock is considered) with the long call.

* You are using much less capital, contest risk may be less (but certainly not more), and you are achieving exactly the same thing.

* Consider other strikes and expiries, think about which trade offs are best for you.

* There are other considerations, buts that's enough to think about for now.

Options are all about compromise, you are swapping one type of risk for another. That's good, because you get to choose which set of risks are most palatable to what you are trying to achieve.

Cheers

 

[MRC & Co]

Another strategy:

How many of you guys have at anytime consistently used bear call or bull put option credit spreads to eliminate directional bias (and risk) and gain some quick and consistent premiums?

I mean, in a bullmarket, wouldnt it give you a high probability return to trade bull puts due to the already evident probable directional bias, and in this current bear market, vice-versa? (i.e. trade bear calls?).

Especially on a shorter time-frame (no more than 60 days), to eliminate trend reversal and to maximise time decay. Whilst only trading OTM strikes.

Seems simple and like a rather consistent strategy?

Any thoughts?

Thanks

 

[Grinder]

MRC,

I share your sentiments, have been predominantly trading credit spreads of late for all the reasons you have listed. However, I do have some grievances with these types of plays, one being the capital that is tied up and another being insufficient premium that is generated from going OTM. This can be overcome at times by increasing position size or widening the cushion but taking on more exposure, which I don't like doing as I have an aversion to too much risk. Not too mention (which I will) finding an IV skew that won't hurt the spread too much or having to unwind to late in the game.
Nevertheless, it's still my strategy of choice till I learn more about options... but what would I know? been trading for only a few months so I'm sure some of the pros on this forum can provide better analysis as to the pros & cons.... would welcome this.

my

 

[MRC & Co]

Thanks Grinder,

Yeh, the volatilty skew was another thing I was meant to throw in. But as you say, can take longer and more time on the sidelines.

I also agree, premiums would not be the greatest and the credit spread would tie up a bit of capital on margin.

Do they make you maintain your entire potential downside from the go, or only a portion and a margin call if it turns against you (crosses your closest strike)?

Cheers

 

[Grinder]

MRC,

I enter the trade with the total margin required (prem margin on market + risk margin) which they calculate using the asx margin estimator. In addition to this they ask for 100% of the calculated figure as the overall total margin they hold, which means those funds are frozen till the position is closed. Ofcourse, the figure would obviously change as the market does each day, thus adjusting my overall total margin required at the end of each trading day.

If any option traders out there use a provider that requires less margin, let me know.

 

[wayneL]

MRC,

I enter the trade with the total margin required (prem margin on market + risk margin) which they calculate using the asx margin estimator. In addition to this they ask for 100% of the calculated figure as the overall total margin they hold, which means those funds are frozen till the position is closed. Ofcourse, the figure would obviously change as the market does each day, thus adjusting my overall total margin required at the end of each trading day.

If any option traders out there use a provider that requires less margin, let me know.

If you trade US option and have enough capital,or, trade futures option, many brokers will put you on SPAN risk margining.

It's a very cool way of margining as you can even go the synthetic route on the same margin (say a synthetically equivalent collar).

I wrote up some time ago on the topic http://sigmaoptions.blogspot.com/2007/01/new-margin-rules-for-option-positions.html

 

[Grinder]

Thanks Wayne,

Sounds ideal, will check it out when or if I start trading US options.