Options trading in OZ - 'Reopening' discussions

[cutz]

The spread across FMG prices currently.

Sell Put	Buy Put
High	Low	PM	Loss	Delta
$22.50	$22.00	$168.00	-$332.00	0.297
$22.00	$21.50	$108.00	-$392.00	0.084
$21.50	$21.00	$125.00	-$432.00	0.057
$21.00	$20.50	$43.00	-$457.00	0.044
$20.50	$20.00	$33.00	-$467.00	0.033

Interesting that as the premium goes up the highest losses goes down. Unusual isn't this ?
Deltas are also interesting.

Gunnerguy
(Amateur options trader)

Hi, The delta on the 22.5/22.0 bull put is closer to 0.107.

 

[wayneL]

The spread across FMG prices currently.

Sell Put	Buy Put
High	Low	PM	Loss	Delta
$22.50	$22.00	$168.00	-$332.00	0.297
$22.00	$21.50	$108.00	-$392.00	0.084
$21.50	$21.00	$125.00	-$432.00	0.057
$21.00	$20.50	$43.00	-$457.00	0.044
$20.50	$20.00	$33.00	-$467.00	0.033

Interesting that as the premium goes up the highest losses goes down. Unusual isn't this ?
Deltas are also interesting.

Gunnerguy
(Amateur options trader)

That is totally within expectations. All of your option Greeks are tied to the probabilities of the trade and are priced (if priced correctly with the benefit of foresight) for a break even outcome less contest risk, ie a negative sum proposition over the long-term.

Therefor every option trade that you undertake either has a directional prediction or volatility prediction.

if you are good at one or the other, or preferably both, you will win at options.

If not, your account will die a death of a thousand cuts, so long as you don't expose your carotid artery, in which case you will bleed out all at once one day.

Risk vs reward, but contrary to ordinary stock trading these things are nonlinear.

FWIW

<ETA> autocorrect has obviously been designed to either make us look stupid or expose those of us who don't proofread properly

 

[Gunnerguy]

..... I am no longer an Options Trading Virgin !! Whoohoo
I finally did it. After weeks of reading, learning I finally dipped my toes in the crystal/murky waters of the 'Options Trading Pool'.

Trade 1. 10th June.
STO 1 contract CBA Jul15 $106 Call. PM +$0.6, Delta 0.219. PM Recieved +$58.90. Share price was at $101.15 at the time of STO.

Trade 2. 29th June. Closed the contract.
BTC 1 contract CBA Jul15 $106 Call. PM -$0.1. PM Paid -$11.10. Share price was at $99.15 at the time of BTC.
I could have let it run longer but I wanted to close the loop and take my first profit in this learning process.

Yes, I know, its only a net gain of $47.80, but its my first & second trades. It was nice to see the option price change over the period and CBA even touched $106 and was not assigned.

Gunnerguy.
(Amateur, learning options trader).

 

[Sharkman]

looks good to me. closing out short options for less than 20% of the premium collected makes a lot of sense, the tricky part is maintaining one's discipline and making sure that you do it when you get the chance, otherwise this can happen

 

[Gunnerguy]

Closed out my second trade yesterday.

Trade 3. 21st. June.
STO 2 contracts CBA Jul15 $102 Call. PM +$0.58, Delta 0.232. PM Recieved +$114.90. Share price was at $98.44 (-3.62% below call price) at the time of STO.

Trade 4. 1st. July. Closed the contract.
BTC 2 contract CBA Jul15 $102 Call. PM -$0.31. PM Paid -$63.10. Share price was at $98.81 at the time of BTC.

Again, I could have let it run longer but I wanted to close the loop and take my profit.

Net gain was $51.80.

Gunnerguy.

 

[Gunnerguy]

I currently have 4 new open option contracts between CBA, FMG, and BHP, split between July and August. All are STO recieving premium.
Lets see how the next few days/weeks go.
Patience, and not being greedy.

Gunnerguy.

 

[Gunnerguy]

Hi All,

My journey in to generating an income from Option Trading continues.
I would welcome any comments or critics on a trade I am considering next week.
Either Trade A or B on ANZ for September expiration. ANZ current price = $28.32.
ANZ Full Year results on 28th October. CBA results in August, if they are good they could bump ANZ up.

Trade A.
1 Bull Put 29/29.5 Credit Spread contract.
Buy 29 Put. PM = -1.52, delta = -0.607. Sell 29.5 Put. PM = +1.87, delta = -0.694.
Net Credit = $32.80 (after commission), Delta = 0.087.
Risk is -$17.20, Max gain is $32.80, Breakeven is $29.17, +3% on current price.

Trade B.
1 Bull Put 30.5/31 Credit Spread contract.
Buy 30.5 Put. PM = -2.67, delta = -0.833. Sell 31 Put. PM = +3.11, delta = -0.888.
Net Credit = $41.8 (after commission), Delta = 0.055.
Risk is -$8.20, Max gain is $41.80, Breakeven is $30.58.17, +8% on current price.

Trade B has a better Risk/Reward, however BE is 8% about current price.
I am, however, leaning towards doing 2 or 3 contracts of Trade A.

Any comments, ideas or critic would be greatfully received.

Gunnerguy.
(Learning, slowly, to generate income from Options Trading)

 

[Sharkman]

TBH i don't really see the point of turning it into a vertical spread when the strikes are that far OTM (yes the puts are technically ITM but typically this sort of thing would be done on the reverse side of the box spread ie. a 29-29.50 call debit spread - it's the same risk reward but probably gets better fills).

at the 29 level it's almost a hail mary type play already (at the 30.50 level it probably IS a hail mary, that's about a 10 delta) so i wouldn't want to cap my upside gains in that situation, that's like swinging for a six but the rules got changed such that the most you can score off one ball is two (i was going to say swinging for a home run as people often use baseball analogies when talking about option plays but this is an Aussie forum so...). Ie. it's already a statistically unlikely event, so on the off chance that you hit, you want it to pay off BIG. so capping upside gains at the outset just doesn't make sense to me.

an alternate strategy (the one i tend to lean towards) is to buy OTM calls straight up, and if i get a strong rally with some time to go until expiry, then see if i can spread it off to get my premium back. Eg. if you want to play for a huge rally, could buy the sep 30 calls straight up for around 0.16. if you get a rally to say 29 in a month or so, you can see whether the market will let you sell say the 31 calls for around the same 0.16. that's sometimes referred to colloquially as having a position "on the house", because now you have a 30-31 bull call spread at effectively zero, giving you a free roll of the dice where you can make up to $1 if it rallies to 31 or higher, and if it ends up below 30 at expiry, it didn't cost you anything.

then again i would say i've only had "mixed" success at long gamma plays, so maybe i'm the one who's been doing it wrong for all these years.

 

[Gunnerguy]

TBH i don't really see the point of turning it into a vertical spread when the strikes are that far OTM (yes the puts are technically ITM but typically this sort of thing would be done on the reverse side of the box spread ie. a 29-29.50 call debit spread - it's the same risk reward but probably gets better fills).

at the 29 level it's almost a hail mary type play already (at the 30.50 level it probably IS a hail mary, that's about a 10 delta) so i wouldn't want to cap my upside gains in that situation, that's like swinging for a six but the rules got changed such that the most you can score off one ball is two (i was going to say swinging for a home run as people often use baseball analogies when talking about option plays but this is an Aussie forum so...). Ie. it's already a statistically unlikely event, so on the off chance that you hit, you want it to pay off BIG. so capping upside gains at the outset just doesn't make sense to me.

an alternate strategy (the one i tend to lean towards) is to buy OTM calls straight up, and if i get a strong rally with some time to go until expiry, then see if i can spread it off to get my premium back. Eg. if you want to play for a huge rally, could buy the sep 30 calls straight up for around 0.16. if you get a rally to say 29 in a month or so, you can see whether the market will let you sell say the 31 calls for around the same 0.16. that's sometimes referred to colloquially as having a position "on the house", because now you have a 30-31 bull call spread at effectively zero, giving you a free roll of the dice where you can make up to $1 if it rallies to 31 or higher, and if it ends up below 30 at expiry, it didn't cost you anything.

then again i would say i've only had "mixed" success at long gamma plays, so maybe i'm the one who's been doing it wrong for all these years.

I played the 29.5/29 spread. SP gone down and haven’t been assigned ... yet.
A bad trade for me. Still learning.
Gunnerguy

 

[wayneL]

I played the 29.5/29 spread. SP gone down and haven’t been assigned ... yet.
A bad trade for me. Still learning.
Gunnerguy

A bad trade is not one which loses money, a bad trade is one which will lose you more money over the longer term than which make you money, *in aggregate*, over the longer term.

With vertical spreads this is 8asuper important concept to grasp.

FWIW

 

[Sharkman]

you are unlikely (i won't say never as stranger things have happened, i remember once getting assigned on some RIO options that were slightly out of the money) to get assigned early. they still have extrinsic left and with risk free rates the way they are these days, the cost of carry probably won't ever exceed the remaining extrinsic by a meaningful margin, so there is very little to be gained by whoever bought your puts if they early exercise.

 

[Gunnerguy]

I continue to grow my experience in Options. I've bee busy over the past couple of weeks.
Currently have 9 open trades. All are premium credit trades. Covered calls on FMG, CBA and BHP, credit spreads on FMG, BHP, and ANZ.

Latest trade was a cheaky 48/46 Bull Put Credit Spread on BHP for August. Break even is 47.7. A reasonable premium with a Delta of 10%. With reporting next month I should be safe at 48.

I have also risked a 47/44 Bull Put credit spread on BHP also getting a premium. BE is 48.3.
Reporting/results in August so I am exposed but should be OK.

I have a 106 CBA covered call open still also. The covers were purchased at 95 so if assigned I still get something.

Also a STO 89 CBA Put and a STO 90 CBA Put for August for premiums.

My STO 29.5/29 Bull Credit Spread in ANZ August, remains ITM but as yet not assigned and I am exposed but hopefully August will provide some nice Bank results.

Gunnerguy.

 

[Gunnerguy]

Latest couple of trades.

Trade 13. 16th July.
- STO October 108 CBA Covered Call(s). Delta = 0.096. PM = +0.36.
Thoughts
- Pretty far out but really don't think CBA will get up to 108 even if August results are good, but also movement on XD day.
- Covered, so already holding, bought at $95, so if I get assigned I'll be happy, but have to manage my CGT for FY.

Then a little bit of a silly trade ......

Trade 14. 19th july.
- STO December ASX200 Bear Call Spread 8200/8500. Delta = 0.111. PM = +9.
Thoughts
- I would be surprised if ASX goes up a further 12% by year end (famous last words).
- If it does then my 'Long' Investement portfolio will do very well, a lot more than the possble losses of this trade.
- If we have a 'market adjustment' sometime in Aug/Sept/Oct, I may be able to BTC with some profit, but I think unlikely as it will be too far away from December.
- If we have a Santa rally I may get a bit scared, but as I said, my 'Long' Investment portfolio would do well.

This is obviously not financial advice, DYOR.

Happy to get any comments or critic's from the pros.

Gunnerguy.
(Wondering if my ASX December trade was a good idea)

 

[wayneL]

Latest couple of trades.

Trade 13. 16th July.
- STO October 108 CBA Covered Call(s). Delta = 0.096. PM = +0.36.
Thoughts
- Pretty far out but really don't think CBA will get up to 108 even if August results are good, but also movement on XD day.
- Covered, so already holding, bought at $95, so if I get assigned I'll be happy, but have to manage my CGT for FY.

Then a little bit of a silly trade ......

Trade 14. 19th july.
- STO December ASX200 Bear Call Spread 8200/8500. Delta = 0.111. PM = +9.
Thoughts
- I would be surprised if ASX goes up a further 12% by year end (famous last words).
- If it does then my 'Long' Investement portfolio will do very well, a lot more than the possble losses of this trade.
- If we have a 'market adjustment' sometime in Aug/Sept/Oct, I may be able to BTC with some profit, but I think unlikely as it will be too far away from December.
- If we have a Santa rally I may get a bit scared, but as I said, my 'Long' Investment portfolio would do well.

This is obviously not financial advice, DYOR.

Happy to get any comments or critic's from the pros.

Gunnerguy.
(Wondering if my ASX December trade was a good idea)

It's kind of a hedge fundy approach, which I personally am not averse to if there is normal price discovery... Not so sure there is normal price Discovery at the moment but anyway...

Nothing wrong with having a view and trading to that, if you get your risk versus reward/expectancy ratio right, you will come out in the long run.

My only b¹tch about otm vertical spreads is that they are difficult to adjust or defend elegantly (well, I find it difficult anyway), so I don't use them much.

Additionally because I've the higher probability the trade it can make one complacent about the actual risk... This (along with inappropriate position sizing) has been the undoing of so many.

Again I note your education and assume you have these risks well in hand, but just for the benefit of other readers.

FWIW

 

[Sharkman]

Latest couple of trades.

Trade 13. 16th July.
- STO October 108 CBA Covered Call(s). Delta = 0.096. PM = +0.36.
Thoughts
- Pretty far out but really don't think CBA will get up to 108 even if August results are good, but also movement on XD day.
- Covered, so already holding, bought at $95, so if I get assigned I'll be happy, but have to manage my CGT for FY.

Then a little bit of a silly trade ......

Trade 14. 19th july.
- STO December ASX200 Bear Call Spread 8200/8500. Delta = 0.111. PM = +9.
Thoughts
- I would be surprised if ASX goes up a further 12% by year end (famous last words).
- If it does then my 'Long' Investement portfolio will do very well, a lot more than the possble losses of this trade.
- If we have a 'market adjustment' sometime in Aug/Sept/Oct, I may be able to BTC with some profit, but I think unlikely as it will be too far away from December.
- If we have a Santa rally I may get a bit scared, but as I said, my 'Long' Investment portfolio would do well.

This is obviously not financial advice, DYOR.

Happy to get any comments or critic's from the pros.

Gunnerguy.
(Wondering if my ASX December trade was a good idea)

no offence intended - as i pretty much did the exact same thing for the first few trades i did - but the phrase "picking pennies in front of a steamroller" springs to mind.

there's no question that these are highly unlikely to be assigned. but whether you are being paid adequate compensation for the small risk that it happens is another matter. because it's so far OTM, that one occasion where there is a blowup could wipe out the profits from 10 or more similar trades that did end up expiring worthless. it's like consistently betting on 1.10 favourites in sports matches (which IMHO is a bad idea, as i don't think 1.10 favourites win 91% of the time) - all it takes is one upset to undo 10 winning bets.

one thing to be aware of (that i didn't learn until a year or two after i started trading) is delta skew - the difference in implied vol when comparing options over the same underlying and expiry at different strikes. in equities it is almost always a vol "smirk" where puts favour calls, ie. as you go further OTM on the put side, implied vols get higher and higher, and as you go further OTM on the call side, implied vols get lower and lower. for some other types of assets (i think FX is one) it is typically more of a vol "smile" where the further OTM you go (in either direction) the higher the implied vols get.

the slope of the skew can vary as market conditions change, but it is almost always there. as such, i often feel i don't get properly compensated relative to the risk i'm taking on if i sell < 25 delta calls, except for those rare occasions where the delta skew flattens out.

i'd rather wait until it gets close to what i think is a resistance level, then sell front month near ATM calls at a strike slightly above that level. obviously it has a much higher chance of getting assigned, but in my view the compensation in terms of both premium and implied vol received justify the risk. YMMV.

 

[Gunnerguy]

It's kind of a hedge fundy approach, which I personally am not averse to if there is normal price discovery... Not so sure there is normal price Discovery at the moment but anyway...

Nothing wrong with having a view and trading to that, if you get your risk versus reward/expectancy ratio right, you will come out in the long run.

My only b¹tch about otm vertical spreads is that they are difficult to adjust or defend elegantly (well, I find it difficult anyway), so I don't use them much.

Additionally because I've the higher probability the trade it can make one complacent about the actual risk... This (along with inappropriate position sizing) has been the undoing of so many.

Again I note your education and assume you have these risks well in hand, but just for the benefit of other readers.

FWIW

Thanks WayneL,
To me, as a beginner, it seems a lot easier and more comfortable having the shares already and sell covered calls. Yes there was a comment earlier that selling naked calls with cash in the bank is the same really. Baby steps for me to get comfortable.
I really appreciate your comments. Thanks.
Gunnerguy.

 

[Gunnerguy]

@wayneL and @Sharkman

Thanks for all your comments and taking the time to give me your thoughts and pass on your experience. Yes, I think I’ve set up my trades as a bit of a ‘Long-Short’ type of fund. I own the shares, as mentioned, to keep me comfortable in selling calls, to start with on my early journey. I hope to, over time, not need to actually have shares to cover my trades. I have cash in the account as collateral also to support my future trading positions.

Your comments on risk/reward are very well taken. I saw the comment ‘picking pennies in front of a steamroller’ a few weeks and it scared the pants off me. I understood it, but now even more following a closer look at my current ‘in play trades’. After your post I spent 3-4 hours taking another thorough closer look to see where I stand. Also spent some ‘nice’ time looking at IB’s risk navigator on my positions wrt ASX200 Beta.

Before I place a trade I use excel to display/understand the full calculations and payoff diagram. I have 4-5 default tabs in excel with Bear/Bull Credit/Debit vertical spreads set up and just put in the strike prices, current SP, and premiums to show the payoff diagram, probabilities, and risk-reward.

The risk rewards I have on my current ‘in play’ trades are …..

Four (4) sold Covered Calls (forced to sell at strike price): If any get assigned I get between 9.3% to 13.7% gains on the original underlying’s after costs. They were all purchased in May/June.

Two (2) Sold puts (forced to buy): Both set way low out of the money (-9%), and in underlying’s that I already have in my ‘Investment portfolio’ and would be happy to be ‘forced’ to buy more of at 9% below current price, and be a long term hold.

This then leaves me 4 current trades …… (G to L)

2.10 to 1, Delta = 10.2% when sold (Aug). Possible gain is more than loss, with a good delta for me.
1.85 to 1, Delta = 9.7% when sold (Aug). Again gain & delta are good.
1 to 5.5, Delta = 10.5% when sold (Aug). BHP to remain > $48 by 19 August, results on 17th August).
1 to 3.2, Delta = 15.2% when sold (Sept). BHP to remain > $47 by 16 Sept, results on 17th August

The last 2 trades (BHP) I am a little uncomfortable with, but do we see a -9.6% drop in BHP by September ?

My last trade is a Dec ASX200 trade which is a bit of fun & a long way away. We'll look at my gains in December when it expires .

As you have seen from my posts I am taking the ‘beginner’ route with low deltas, 10%, 15%, 20%, but as we know low deltas give low premiums, depending how far out you sell/buy the contract.

@Sharkman , as you say if you don’t be careful one trade can blow up all the gains you have made from previous trades and ‘adequate compensation for the risk’. Great thought provoking comments. One I'm now working one, and absolutely no offence taken by your comments ! I am not concerned in any way whether I get good or bad (polite) comments to any of my posts. It is just a pleasure to see people taking the time to read, and then actually make the effort to spend a few minutes writing their ideas/critics.

In closing, this red wine fueled long post ...... Put volatility increases more as you go further OTM, compared to Call volatilty, this would suggest that at some point they are ‘over priced’ which is of benefit to a Put seller, no ?

I know it is difficult to bring all this wonderful information down to a single ‘sound bite’, and I know it is dangerous to, but …..

1. Closer ATM = higher premium = lower probability of success, and lower risk-reward.
2. Further OTM = lower premium = higher probability of success but larger risk-reward.

Thanks again to your comments.

Gunnerguy.
(Note to self: Next job - Read and understand ‘Option skew’. Take a look at Qantas staying below ATM or $5 for an Options trade.)

 

[Sharkman]

The last 2 trades (BHP) I am a little uncomfortable with, but do we see a -9.6% drop in BHP by September ?

the market is pricing such an outcome to be more likely than you probably think it is.

the sept contracts were trading at an ATM vol of about 30 when i checked today, ie. it's implying that the annualised 1 SD variance is +/- 30%. to convert that to the implied variance over the 2 months to sept you interpolate in the vol squared t space: 30 * sqrt(2/12) = 12.2%, ie. assuming the potential outcomes follow a log-normal distribution curve, it implies a ~16% probability that it will drop 12.2% or more by sept expiry!

if there are any quants around here they would probably shudder at such a crude back of the envelope calc, but for retail trading purposes i've never felt the need to delve into hideously complex equations with integrals, logs and what-not for this type of thing. 4 unit maths was a quarter of a century ago for me, absolutely no desire to go back to that stuff ever again.

i don't think such a scenario is all that far fetched TBH. it's unlikely sure, but it's not unheard of - a quick look at the recent price history shows BHP fell ~12% in the space of about 3 weeks back in march, about ~10% in 2 weeks back in may, and about ~15% between aug-oct last year. profit reporting would also be coming up before sept expiry i think, and an earnings surprise could see some big moves though it could go either way. plus it's going to go ex a pretty hefty div in sept as well. could be somewhere around $1.50 which would cause a ~3% drop on its own.

 

[Gunnerguy]

@Sharkman
Thank for your commets and maths.
Maybe buying some $49 or $50 September calls would reduce my risk.
With results and XD soon, I agree there could be some serious movements.
Gunnerguy.

 

[Gunnerguy]

Is it time to sell some heavily OTM calls on QAN ?
Gunnerguy.