Options Mentoring

[chops_a_must]

Wayne... I'm seeking some advice on a potential strategy - put bull spread.

Just wanting to know your opinions on them, especially if looking to have stock put to you.

I'm looking at a trade atm that I feel could be set up. Buying a lower put at a strike which if passed, would signal a breakdown and a no no. (The natural gas ETF UNG happens to be what I am looking at.)

But having the written put at a number of strikes higher than the lower put, rather than the next one.

The maximum loss being at the point of lower strike price, correct?

Also... should you leg into this trade if the premiums aren't at acceptable levels at one time or other?

As an aside, what are the full brokerage fees for IB from opening to exercise? And can you hedge somehow so that the actual value of the trade, stays at the value of the opening of the trade in currency terms?

 

[wayneL]

Wayne... I'm seeking some advice on a potential strategy - put bull spread.

Just wanting to know your opinions on them, especially if looking to have stock put to you.

I'm looking at a trade atm that I feel could be set up. Buying a lower put at a strike which if passed, would signal a breakdown and a no no. (The natural gas ETF UNG happens to be what I am looking at.)

But having the written put at a number of strikes higher than the lower put, rather than the next one.

The maximum loss being at the point of lower strike price, correct?

As an aside, what are the full brokerage fees for IB from opening to exercise? And can you hedge somehow so that the actual value of the trade, stays at the value of the opening of the trade in currency terms?

OK what you have is a credit spread. The maximum loss is the width of the spread, minus the credit you received when you opened the strategy.

So for eg if the spread between the strikes is $5.00 and you receive $1.00 credit when you opened it, then the maximum loss is $4.00. Multiply by 100 and your risk is $400 per spread.

You can hedge your currency risk by going into idealpro and buying back the Aussie dollars you used for the trade at a rate of $500 per spread in the above example.

Hmmm, but minimum on idealpro is $25k or something.... maybe another forex broker... buts thats the idea anyway.

Regarding total brokerage. Have only been assigned once, yonks ago and can't remember the total... It's cheap as anyway with IB.

If you're particularly looking to be assigned, why not just short the put straight out?

 

[chops_a_must]

If you're particularly looking to be assigned, why not just short the put straight out?

Because if it goes below the lower strike, I wouldn't want it.

 

[wayneL]

Because if it goes below the lower strike, I wouldn't want it.

Fair enough.

 

[chops_a_must]

Let's say you are constructing an iron condor.

It wasn't you that brought down this bull with your "Iron Condors" was it?

Cotabambas is a poor hamlet isolated in a remote corner of the Peruvian Andes. Each year for centuries the men of the village at their peril have climbed high into the mountains to bait and capture an adult Andean Condor, the world's largest winged predator. The condor and a bull are the centerpieces of an ancient ritual now enshrined as the Fiesta de Yawar. The condor, representing the Incas, overpowers a bull, representing the conquistadors. The condor is strapped to the bull's back and the bull, lacerated by the condor's powerful talons and maddened with pain, races around the barricaded central plaza chased by taunting villagers.

You guys should stop calling yourselves bears, and start calling yourselves condors!

 

[chops_a_must]

Wayne....

Coming into option expiry this week. My protective put is almost no chance to be in the money. What is your philosophy for dealing with this? Do you try and sell that?

My written put will probably finish just out of the money, or on it, for maximum profit, but would like the underlying to finish just below.

I'm considering writing a call above now, to maximise profit, and either way will have a better break even point with bigger maximum profit potential.

Anything I'm missing... or should be aware of?

 

[wayneL]

Wayne....

Coming into option expiry this week. My protective put is almost no chance to be in the money. What is your philosophy for dealing with this? Do you try and sell that?

My written put will probably finish just out of the money, or on it, for maximum profit, but would like the underlying to finish just below.

I'm considering writing a call above now, to maximise profit, and either way will have a better break even point with bigger maximum profit potential.

Anything I'm missing... or should be aware of?

You've got a bull put spread right? i.e. written put, plus bought put at lower price?

Re: selling the long put... anything can still happen - Murphy's law.

As to what to look out for; if you have a short option with the underlying trading at or near the strike price, you have "pin risk".

This means, that you don't know whether you will be assigned or not at expiry. As I recall you want the stock, so that might not be a drama for you.

If you write a call (or take any new trade), you introduce a new potential reward, but also a new risk. That's for you decide whether you like the new risk profile. (the same applies for selling the long put)

Generally speaking though, spread traders have a look at risk/reward on an ongoing basis, If a spread has near 100% profit with time left to expiry, you really only have risk, but not much reward from this point on.

Just a couple of things to think about.

Another theory of mine; Murhpy's Law was probably originally coined by an option trader. :

 

[chops_a_must]

You've got a bull put spread right? i.e. written put, plus bought put at lower price?

Re: selling the long put... anything can still happen - Murphy's law.

As to what to look out for; if you have a short option with the underlying trading at or near the strike price, you have "pin risk".

This means, that you don't know whether you will be assigned or not at expiry. As I recall you want the stock, so that might not be a drama for you.

If you write a call (or take any new trade), you introduce a new potential reward, but also a new risk. That's for you decide whether you like the new risk profile. (the same applies for selling the long put)

Generally speaking though, spread traders have a look at risk/reward on an ongoing basis, If a spread has near 100% profit with time left to expiry, you really only have risk, but not much reward from this point on.

Just a couple of things to think about.

Another theory of mine; Murhpy's Law was probably originally coined by an option trader. :

That's correct.

The risk of being without cover on the downside is perhaps outweighed by the better break even point. Because in my mind, the chances are higher of the underlying falling within my break even point and lower strike, than they would be of clearing the lower strike outright.

What I could set up, is a call bear spread as well, so that there effectively cannot be a loss on that trade when the premium from the put is taken into account.

 

[cutz]

Hi All,

To the active option traders out there, what are you favourite strategies and do you put them on at once or leg in over a few days ?
Also are there any preferences to index over stock options and vice versa.

P.S. please excuse my terminology, i'm pretty new to the scene.

Cheers,

Cutz.

 

[mazzatelli1000]

Hi All,

To the active option traders out there, what are you favourite strategies and do you put them on at once or leg in over a few days ?
Also are there any preferences to index over stock options and vice versa.

P.S. please excuse my terminology, i'm pretty new to the scene.

Cheers,

Cutz.

Hey Cutz,

Welcome to the scene

Your questions will have been answered in other threads --- look in particular for posts by WayneL, Magdoran and sails.

My "favourite" strategy depends on the market conditions at any one time and my projections - i.e. volatility, IV levels, skews, underlying direction, time, what risk I want to expose myself to e.g. vega or delta and gamma.

I prefer not to leg in, but sometimes due to liquidity issues, the only way to get in some positions is to do so.

Indexes are GENERALLY less proned to huge gaps like their equity counterparts, and hence more often are recommended for market neutral strategies.
So in that way index options are preferred over equity options for certain strategies.

Cheers

 

[cutz]

Thanks mazzatelli1000.

Another query i would like to put fwd,

Say you feel that the index has reached a bottom or close to it so you decide to write a couple of sort term index puts just out of the money,
4 weeks till expiry for example.

Would you protect your position with a further OTM bought put or alternatively don't buy a protective put but roll into the next month, next strike if the short puts become ITM due to an error in judging the index.

I am not seeking advice, just opinions as a have tried both methods without getting into trouble and i sometimes feel that i am paying a high price for having the protection of a bought put.


What are peoples thoughts on this.

Cheers,

Cutz.

 

[mazzatelli1000]

Thanks mazzatelli1000.

Another query i would like to put fwd,

Say you feel that the index has reached a bottom or close to it so you decide to write a couple of sort term index puts just out of the money,
4 weeks till expiry for example.

Would you protect your position with a further OTM bought put or alternatively don't buy a protective put but roll into the next month, next strike if the short puts become ITM due to an error in judging the index.

I am not seeking advice, just opinions as a have tried both methods without getting into trouble and i sometimes feel that i am paying a high price for having the protection of a bought put.


What are peoples thoughts on this.

Cheers,

Cutz.

Cutz
It depends on your risk tolerance

With some indexes, the futures are accessible all hours so it can be used to synthetically alter risk profiles, so some are comfortable being short naked premium on indexes whether it be calls or puts.

Others may put on the bull put spread and subscribe to the "insurance" policy school of thought - i.e. better to have losses limited in case that evil black swan decides to appear or as you mentioned - an error in judging the index.

Whatever you are comfortable with.

Me personally I like to keep MOST short premium strategies to the limited loss type.

 

[cutz]

Thanks again mazzatelli1000,

You mentioned synthetically altering risk profiles using futures, would an example of this be going short SPI futures + writing index puts ?

Cheers,

Cutz.

 

[mazzatelli1000]

Thanks again mazzatelli1000,

You mentioned synthetically altering risk profiles using futures, would an example of this be going short SPI futures + writing index puts ?

Cheers,

Cutz.

Cutz

Yes...that would be a synthetic short call, if your after that profile

 

[wayneL]

Just adding a few thoughts to the index short put vs index bull put spread question:

As discussed, the absolute loss is known with the bull put. In the event of a black swan, being naked short puts could be account destroying. However in 24 hour futures markets, you can have contingency orders in place to hedge you out with futures on your naked put if the market goes *poof* while you're sleeping.

But you are at risk of the platform/technology failing at the wrong time.

Advantage => bull put.

However, those long puts come at a price. Index options are skewed to the downside, so you will be paying up for the put hedge. You will need somewhere between 3 to 10 spreads to net the same dollars as a single naked put. Therefore your contest risk (bid/ask spread + commission) is 3 to 10 times higher. Very unpalatable when forced to adjust or close out.

Advantage => naked put

Then we have a look at the payoff diagram:

The maximum loss of the spread at expiry is greater than the naked put until you get past a certain point. Considering that indicies will give you continuity of pricing 99.9% of the time, allowing for timely adjustments and or exits:

Advantage => naked put

Then we have the greeks and volatility.

The naked put is long theta and short vega gamma all the time. The bull put is likewise while OTM. However once the price passes below the breakeven point, these greeks flop over; short theta and long gamma and vega.

As indexes sell off, implied volatility increases. So if the index starts dumping on you, vega is going to hurt you a lot more with the naked put, but it will help you in the bull put once you're ITM.

However this help via vega, turns to hindrance as that short theta will be high, so action will be required if it doesn't look like going back OTM. (Don't hope here)

The long gamma will always be a positive if ITM, thats a plus when your losing.

Advantage => Mixed... depends on exact situation

So looking at the overall picture, there are pros and cons for each in "normal" trading. But what of the 10 sigma black swan event?

Survival is the key requisite for survival and that might resolutely sway the argument one way.

FWIW

 

[peter2]

Excellent post WayneL.

 

[mazzatelli1000]

But you are at risk of the platform/technology failing at the wrong time.
FWIW

WayneL is spot on..one often only thinks of risks relating to market variables and often neglect those relating to execution.

Also, but this should not be the main consideration, there is opportunity cost of leaving your money as margin for collateral, while it could be utilised for other purposes.

 

[wayneL]

WayneL is spot on..one often only thinks of risks relating to market variables and often neglect those relating to execution.

Also, but this should not be the main consideration, there is opportunity cost of leaving your money as margin for collateral, while it could be utilised for other purposes.

Yes, should have mentioned margin too.

This is an advantage of futures options and SPAN margining... none of this 15% of strike price nonsense for naked positions.

 

[cutz]

In light of current events and my level of experience the bull put spread appears to be the preferred strategy out of the two.

I am trying to get my head around what it is to be long/short Greeks.

Using Wayne's example “The naked put is long theta and short vega gamma all the time” I interpret this as an increase in theta and decrease in vega gamma as advantageous to the position, if the position is a bought put would you say that you are short theta and long vega gamma ? , as the opposite is true.

Therefore does being long Greeks mean a positive move in the particular Greek advantageous to the total position and being short Greeks mean a negative move in the particular Greek advantageous to the total position.

Please steer me in the right direction if this is not correct.

Thanks Guys,

Cutz.

 

[mazzatelli1000]

In light of current events and my level of experience the bull put spread appears to be the preferred strategy out of the two.

I am trying to get my head around what it is to be long/short Greeks.

Using Wayne's example “The naked put is long theta and short vega gamma all the time” I interpret this as an increase in theta and decrease in vega gamma as advantageous to the position, if the position is a bought put would you say that you are short theta and long vega gamma ? , as the opposite is true.

Therefore does being long Greeks mean a positive move in the particular Greek advantageous to the total position and being short Greeks mean a negative move in the particular Greek advantageous to the total position.

Please steer me in the right direction if this is not correct.

Thanks Guys,

Cutz.

Im not sure what exactly your saying

But if your saying that say the naked put is short/negative gamma, and a more negative move will make it advantageous would not be accurate