Options trading in OZ - 'Reopening' discussions

[wayneL]

@Gunnerguy have you read any of Charles Cottle's work?

Pretty hard to get hold of these days, but well worth the search... and you have the intelligence to "get it".

FWIW

 

[Gunnerguy]

@Gunnerguy have you read any of Charles Cottle's work?

Pretty hard to get hold of these days, but well worth the search... and you have the intelligence to "get it".

FWIW

@wayneL thanks.
Already found some stuff online.
Gunnerguy.

 

[Gunnerguy]

I havn’t posted for a while but I thought a quick update on my amateur options trading. Remember, I have a ‘relatively’ large investment portfolio (IP) so some of the bullish trades (STO AXJO Naked Calls) I make do not have protection as loosing a couple of option trades due to a rising market are a lot less than the gains that would be experienced in my IP.

So far since my start in June ….. 71 trades opened, 55 trades closed, 43 expired/BTC/STC for a profit, 12 ‘failed’.

‘Failures’ included

Z1P BTO $8 call in August expired 18/11 & Z1P STO Bull Put Credit Spread opened in August, STC with a loss in early November. Z1P has just continued to fall.

FMG STO Bear Call Credit Spread in August assigned/STC in October. FMG didn’t fall quick enough for me.

CBA Bear Call Credit Spread in August STC in October. CBA, at that time, just continued to rise more and more.

BHP, STO naked Put in August, and they decided to announce they were going to delist from UK Stockmarket, leaving me holding the bag of a number of shares at a price that is higher than current market price. 'Black Swan event'

…. And 4 trades that ‘failed’ due to ‘learners’ errors, but not expensive failures.

My most recent 27 trades have had only 3 ‘failures’ so my POP is improving, 89%.

So far ……. My Options trading profits covers my Annual tennis club membership fees, plus all golf rounds for the year, plus ‘expected’ Annual alcohol consumption, plus an extra 55 cases of bears for visitors …….Hopefully this will increase in time to cover the kids schooling .

I’m still nervous, selling low Deltas, but slowly getting confident and managing my risks.

Current in play trades include ….

STO AXJO 7800C, 7825C, 7850C, 8000C (Dec), STO CBA 88P (Dec) , BTO FMG 13P (Apr), STO IGO 9P (Dec), and QBE 11P (Dec).

Gunnerguy.

(Learning, trying, patiently, risk managed)

 

[KevinBB]

It was really lucky for the big boys who trade ASX options that the main index closed a fraction below 7300. It will make the settling of today's options expiry so much easier for them!
KH

 

[wayneL]

It was really lucky for the big boys who trade ASX options that the main index closed a fraction below 7300. It will make the settling of today's options expiry so much easier for them!
KH

Max pain I assume?

 

[KevinBB]

Max pain I assume?

No... I haven't traded an option, ever. I do own IOZ and some overseas index futures, though.

I just get really cynical when I see the Aussie market open strongly, then close down to a figure just below what I would imagine is an option strike price. Especially when it happens on options settlement day. And, especially when overseas markets are going up in the same time frame.

I'm guessing that Santa will start his journey tomorrow.

KH

 

[KevinBB]

Sorry for a second post ...

The clincher for me was that, just now when I was reviewing the day's share price movements, many of the larger cap stocks (I own just a couple), those that will have a largish effect on the index level, were down, whereas many of the medium cap stocks (I own more than just a couple) had good share price rises . ... and then I see the US futures (I am long here) are going up ...

Oh, well, that's my rant for the month. Sorry it had to be in this thread.
KH

 

[wayneL]

No... I haven't traded an option, ever. I do own IOZ and some overseas index futures, though.

I just get really cynical when I see the Aussie market open strongly, then close down to a figure just below what I would imagine is an option strike price. Especially when it happens on options settlement day. And, especially when overseas markets are going up in the same time frame.

I'm guessing that Santa will start his journey tomorrow.

KH

It is most often nothing more sinister than option market makers delta-hedging their book when gamma is at it's maximum.

Therefore max pain is not a conspiracy, just a function of market dynamics. FWIW

 

[KevinBB]

It is most often nothing more sinister than option market makers delta-hedging their book when gamma is at it's maximum.

And, that's exactly why I steer clear of options. I don't understand the Greeks.
KH

 

[wayneL]

And, that's exactly why I steer clear of options. I don't understand the Greeks.
KH

It's not easy to learn, but it's worth learning in my opinion.

 

[KevinBB]

Agree with you, @wayneL - I've held IOZ long term, on and off, for many years. There have been many times when I would have liked to have kept them, and used a hedge at times of market turmoil, instead of just selling them outright.
Maybe one day ..
KH

 

[Sharkman]

it's fairly normal behaviour known as pinning, happens quite a lot in the more liquid names, you just learn to deal with it as there isn't much you can do about it, the instos will do as they will.

i've lost count of the number of times i've been short gamma and the stock pins to my strike on expiry day. when it's right on the strike on expiry day it gets insanely expensive to close out, you can sometimes see stuff like 0.5% of the stock price for literally an hour of decay (this is in normal times not in say mar-jun 2020 when vols were thru the roof), and they WILL make you cross a lot of the spread if you want to close out.

however i find overall that pinning tends to be more of a help than a hindrance when it happens to a position that i don't particularly care whether it gets assigned or not. eg. i strip the CBA div and sell covered calls struck at $100. if pinning pushes it up from $99.50 to $100, that's helped me get what i wanted out of the position, since i was looking to sell at $100 after the 45 days are up anyway. if pinning pushes it down from $100.50 to $100, my stock would've been called away at $100 and i wouldn't have got the extra 50c of cap gains anyway. depending on the person it might even be a minor psychological aid in this situation if it ends up pushing the price back below (or above in the case of puts) the regret point.

some people deal with it by closing out their short options a week or two before expiry, which is one way to do it. if you're greedy for that quick final week decay like me but don't really want the deltas from a potential assignment, another way to deal with it is by buying longer dated contracts on expiry day once you see the stock hovering right around your short strike, forming a temporary calendar spread, then figure out what to do with the longer dated stuff next day once the outcome is known. a day's theta on a 1-2 month option is peanuts compared to final day theta, gapping might be an issue, but on balance it should work out better than paying crazy prices to close out an ATM short option on expiry day.

 

[Rowdy.13]

Happy New Year All!

I've been lurking for a little and gone over a number of old threads in an effort to absorb knowledge and previous experiences, but I now turn to you as I've come to a cross-road - whether to continue with the Aus option market to switch to the US for liquidity.

I was aware the spreads can be quite large before I opened an account with Interactive Brokers, but I was thinking I should be able to have orders filled around the mid if I go for the underlyings with higher open interests/option volume. However, as I build experience using the paper trading account this doesn't seem to be the case (maybe this was ignorant of me).

Is the simulated trading environment representative of the actual Aus options market? Or do you generally find you're able to have orders filled around the mid more often than not?

The Aus market is preferable (for familiarity and time-zone reasons) and I'd like to stick with it, but I'm considering switching to the US.

Aside: which market data subscriptions are you currently subscribed to for Aus options?

Bit of background, I've recently decided to add options to my repertoire in an effort to generate additional income and hopefully reach retirement a little sooner (I finished Uni a few years ago and I'm only in the beginning my professional career, but another 40ish years just doesn't appeal to me).

Any response will be greatly appreciated!

Thanks in advance

Rowds

 

[Sharkman]

I was aware the spreads can be quite large before I opened an account with Interactive Brokers, but I was thinking I should be able to have orders filled around the mid if I go for the underlyings with higher open interests/option volume. However, as I build experience using the paper trading account this doesn't seem to be the case (maybe this was ignorant of me).

Is the simulated trading environment representative of the actual Aus options market? Or do you generally find you're able to have orders filled around the mid more often than not?

i'm not a big believer in paper trading, the main reason being that with no skin in the game it fails to capture one of the most important aspects of trading - one's emotional responses to events. better to make actual trades with small amounts (ie. that you can afford to lose) of real money in my opinion - though with options make sure you have a firm understanding of how to work out your max risk before doing so. i started out trading 1 contract at a time (and back then the lot size was 1000, now it's only 100 so it's even easier these days to try it out with small amounts).

this would be another reason. presumably the paper trading account is simply hitting the bid/offer every time, which is unrealistic and would be an extremely bad idea trading Aust options. you're not forced to do that when trading for real.

generally in the liquid names you do get the mid or close to it for near the money strikes (25-75 delta is usually close enough) and 3 months or less to expiry. i've mused in other posts why the MMs show rubbish spreads like 0.80/1.20 only to insta-fill me the moment i chuck in an offer at 1.00. i guess it's to catch people out who don't know any better. it's not guaranteed though, in some situations they won't fill you until you've crossed most of the spread.

Aside: which market data subscriptions are you currently subscribed to for Aus options?

none. i get the live prices for free thru my account with a CHESS broker, so i put that up on one screen and the IB app (which i actually trade the options thru) on the other.

 

[cutz]

@Rowdy.13

Should get your fills around the mid with the more liquid series.

For ASX data, ASX total at $25 a month, this will give you data for equities / options / cfd's.

 

[Gunnerguy]

Hi all,

I thought it was about time that I updated my progress on my OZ options trading experiences.

Background.

For those who have not followed my intermittent posts, I have swing traded, Buy and Hold, shares for over 25 years or so and decided to try to get some additional income whilst holding a reasonably large portfolio of International and OZ shares. After 3-4 months of avidly reading, watching videos and learning I commenced trading options in May last year with setting up an account with IB, and funding it. I current only trade OZ options. I have geology background, but with a lot of finance and a Masters in Financial Planning I wanted to try to use my knowledge in the options area to get some extra income.

Progress.
Since May 2021 I have completed 109 option trades and currently have 20 trades open.
Of the 109 trades ‘closed’, 95 were STO, 14 were BTO. I generally try to gain from Theta decay.

95/109 trades were ‘closed/expired’ for a profit (premium), 87% ‘success rate’.

14 trades ‘failed’, of which 4 were assigned (and then received dividends &/or sold covered calls with), 1 trade was called away (at a loss unfortunately) , 5 were STC/BTC at a loss and 4 trades were simply beginner/user error, in the early months.

A ‘success rate’ of 87%. Yes there were a few pennies picked up in front of the steam roller by not that many.

Where I am now.

Well after 9 months at this ‘game’ I’m starting to feel comfortable with what I am doing. Selling covered calls, cash secured puts on shares I would be happy to own. Selling CC’s is quite nice, owning the share and then selling for a premium and occasionally getting assigned at a higher price than my cost based. Not making millions, however it does feel a bit like making money from nothing. Not necessarily easy but enjoyable. Bull Put spreads and Bear Call spreads also. I’m still a bit chicken and generally selling at deltas of .10 or .15. Yes premiums are lower but I am trying to build a solid base of experience and laddering up and down on my trades as the share prices move.

Latest revelation.

So with generating some reasonable income from STO’s on various companies I have increased my STO’s on ASX200 Index options significantly. Sell high calls and selling low puts. Yes some risk but the low puts are actually spreads to limit my potential losses if there is a fall. Even bought some ASX200 puts.

In a previous post I mentioned CC’s on my holdings and occasionally buying Puts to hedge my holdings, however I am starting to take my options trading to the next level.

This will be obvious to the experienced options traders here, however to those who are not this is what I am currently developing. This is probably very common, boring, or moronic ….. however I didn’t read about it, it just started to develop for me in my Index option trades over the past 3-4 months. It just became obvious over time as a strategy worthwhile experimenting with.

Current Strategy.

[Dollar values are purely for example, for those employed by the ATO should they read this post]

1. Current Investment Portfolio (IP) is $1,000,000. IP contains OZ and International shares.

2. Through analysis the IP has a Beta value of 0.6 w.r.t to ASX200.

3. ASX200 (AP) Index options are ‘European’, only exercise on XP date. Cash options, multiples of 10.

4. Today 23rd Feb ASX200 closed at 7,205.

5. 21/4 expiration (57 DTE) , AP 7600C : PM = $18, Delta = 0.124, 25 Contracts = $4,500 Premium.

Note, a delta that is a bit higher that I am usually comfortable with.

6. Potential results that may occur on 21.4.

ASX200​	ASX200​	PM​	IP Gain (B=0.6)​	PM + IP​	Option​	Net​
Closes at​	Gain​	Received​	$ 1,000,000​	​	‘losses’​	​
7200​	+ 0 .0 %​	$4,500​	$ 0​	$ 4,500​	$ 0​	$ 4,500​
7300​	+ 1.4 %​	$4,500​	$ 7,900​	$ 12,400​	$ 0​	$ 12,400​
7400​	+ 2.8 %​	$4,500​	$ 16,000​	$ 20,500​	$ 0​	$ 20,500​
7500​	+ 4.2 %​	$4,500​	$ 24,000​	$ 28,500​	$ 0​	$ 28,500​
7600​	+ 5.6 %​	$4,500​	$ 33,000​	$ 37,500​	$ 0​	$ 37,500​
7650​	+ 6.3 %​	$4,500​	$ 37,000​	$ 41,500​	-$ 12,500​	$ 29,000​
7700​	+ 6.9%​	$4,500​	$ 41,000​	$ 45,500​	-$ 25,000​	$ 25,500​
7800​	+ 8.3 %​	$4,500​	$ 49,000​	$ 53,500​	-$ 50,000​	$ 3,500​
7900​	+ 9.7%​	$4,500​	$ 58,000​	$ 62,500​	-$ 75,000​	-$ 12,500​
8000​	+ 11.1%​	$4,500​	$ 66,000​	$ 70,500​	-$ 100,000​	-$ 29,500​

So ……… my ‘profit’ starts to reduce when ASX200 rises more than 6.3% in 57 days (10% percentile from the past 54 week analysis). With Ukraine, Inflation, Interest Rates, Fed & RBA, I personally think that the ASX200 rising 6.3% in the next 57 days is unlikely. Delta is 0.124 percentile is 0.106.

Is this a ‘Golden Goose’ ? What am I missing ? If I sell 25 contracts of the 7600C 21/4, I get a premium of $4,500, I don’t start loosing money until the ASX200 rises to 7650, +6.3%, which is actually above the ATH for the ASX200. Again ….. what am I missing ?

What do I want to achieve.

Yes an interesting one. I’ve mentioned in other boards that percentages are more important that $ Dollars. Wealth levels vary across ASF. I still believe that percentages are more important in the overall picture when discussing amongst fellow ‘profit seekers’ (I don’t really like the term ‘traders’, it’s a bit …….. well its OK if your trading beaver furs in the 1800’s in Canada as its for profit and survival, however trading shares (as oppose to Buy and Hold) I find is a bit …… dare I say it ….. Capitalistic, but anyway I digress …..

In my case, just for this options discussion, and to bring us down from our ‘trading ivory towers’ and remember that we are trading/risking real money, I am focussing on a dollar value for my options trading, just for this post ….

I want to achieve $50,000 from options trading on a portfolio of $1,000,000.

So based on the example above, 21/4 options on AP, giving a PM of $4,500, if I could do this every 6 or 4 weeks, it would get me close to my target. Gong for a high delta, and thus higher PM could get me there, however ………….. this post is just saying …….. I may have just ‘got it’ and understand how to fully use my IP to get income …… safely ……

Critics and comments greatly received.

If anyone is trading US options through IB I would welcome a DM and an opportunity to discuss as I am considering extending my options trading in to the US.

Gunnerguy.
(Learning,, patient, not over extending, cautious with Risk Management).

 

[Sharkman]

Is this a ‘Golden Goose’ ? What am I missing ? If I sell 25 contracts of the 7600C 21/4, I get a premium of $4,500, I don’t start loosing money until the ASX200 rises to 7650, +6.3%, which is actually above the ATH for the ASX200. Again ….. what am I missing ?

your breakeven should be 7618, not 7650. for index options the premium isn't really $18, it's 18 points. XJO options are $10 a point, so 25 contracts means each point above 7600 loses $250 ie. 18 points will cost $4500. 7650 at expiry means you're down 8K (32 points * $250).

7600 seems a reasonable strike to me, it bounced off there last aug and again this jan, so there could be a bit of resistance at that level.

normally i don't like to sell low delta calls myself, because it's selling cheap gamma most of the time. but i haven't been watching the market too closely recently, apart from trying to get my CBA position called away having just stripped the div for franking credits, so possibly the IV is decent for low delta calls at the moment given the turmoil. though i'd imagine the delta skew is also quite steep as usually tends to happen in times of uncertainty.

do you remember where the IV was when you placed the trade?

So based on the example above, 21/4 options on AP, giving a PM of $4,500, if I could do this every 6 or 4 weeks, it would get me close to my target. Gong for a high delta, and thus higher PM could get me there, however ………….. this post is just saying …….. I may have just ‘got it’ and understand how to fully use my IP to get income …… safely ……

in my eyes there are a few problems with this statement. though i'm not as experienced with index options as some of the others on here, i've only dabbled with them on occasion, so others will probably have a more educated view than mine.

first is that you're not doing it every 6 or 4 weeks, given that it's 8 weeks to apr expiry. this makes a big difference when you're talking about 10 delta calls, as for way OTM options the theta is actually higher further out from expiry - the underlying needs time to make such a big move, ie. if you sell 1 month 7600 strike calls to try and cycle thru these every 4 weeks, i'd guess the premium will be far, far less than $4500 or even $2250. at that point tick size starts becoming a headache, and the MMs might not even fill it at all.

second is that i would imagine (though as i said, haven't been watching the market too closely of late) that IVs are substantially elevated at the moment, due to what's going on in the world. once it mean reverts, the premiums on sold options will drop, so making the assumption that these can consistently be sold for $4500 a pop over the longer term doesn't seem realistic to me.

lastly i don't think safety in the stock market exists. a 10 delta is most definitely NOT safe. i hate to bring this up - i'm not having a go or anything, everybody gets things wrong from time to time and i certainly have on many occasions - but remember when you said "do we really think BHP is going to fall 10% by sep expiry"? what happened to BHP afterwards? theoretically about 1 in 10 of these is going to lose. if that one happens to blow right past the strike big time, it could easily wipe out the gains from the other 9.

 

[Gunnerguy]

@Sharkman

thanks for your reply. Too much wine tonight to reply sanely. I will reply tomorrow.
However
1. I haven’t placed the trade, just considering.
2. yes PM ‘s are not consistent on a monthly basis. My example is a ‘simple’ example’.
3. BHP is an individual stock, the delisting from London was a black swan. Non systematic risk for the index, but now a high proportion.
4. I am just looking at the concept. My Beta is actually closer to 0.7. The example is to give me some breathing space..
5. You don’t like a beta of 10 ? My last few trades have had a delta all around 7,8,9. Very conservative. If the market moves then I cover. Unfortunately I DO WATCH THE Matket. My MO is 4 hours every morning.....sat in front of live data.

I really do thank you for your effort to reply @Sharkman. I will further look in detail tomorrow you comments.

Just trying to develop a non discretionary , regular, trading strategy with options to get me $50K per year...... as a start.

Gunnerguy
(Showing appreciation to those with experience.)

 

[Sharkman]

3. BHP is an individual stock, the delisting from London was a black swan. Non systematic risk for the index, but now a high proportion.

there were other non-stock specific factors as well IIRC - didn't the iron ore price get hammered around that time? macro events can impact an index in a similar fashion.

5. You don’t like a beta of 10 ? My last few trades have had a delta all around 7,8,9. Very conservative. If the market moves then I cover. Unfortunately I DO WATCH THE Matket. My MO is 4 hours every morning.....sat in front of live data.

a delta of 10 you mean? i don't like selling 10 delta CALLS, but i will occasionally sell 10 delta PUTS, because of delta skew. eg. if the ATM IV of something is say 20, it's not beyond the realms of possibility to see a 10 delta call IV of 12.5 and a 10 delta put IV of 30. 99%+ of the time the skew will be puts over calls. of the very few times i have seen calls over puts, i think a takeover rumour of some sort was involved.

if that 10 delta put happens to be a strike that i would like to take delivery at (i see some support there, i want to strip the div for franking credits, or whatever) i might just go ahead and sell the puts to get the decay going. if i'm ok with the +delta, i generally feel i'm getting more adequately compensated for the risk by the significantly higher IV, as compared to the 10 delta calls.

to clarify - i'm not saying that selling 10 delta calls is bad. i'm just saying that i don't like to trade them for the above reasons - feels like picking pennies in front of a steamroller to me. but if you've thought it thru and think it's the right trade for you, then go for it, don't let some random dudes on the internet stop you!

 

[wayneL]

I don't really like the snatching pennies front in front of a steamroller allegory. Implies a slow moving behemoth that can be easily avoided so long as you don't freaking fall asleep in front of it.

When you get run over, it's not the steamroller that gets you, unless you're slow and old <cough>, it's more like blind crows picking at carrion on a rural highway frequented by road trains doing 130 km an hour.

And let's not forget that as you try to move out of the way, leaving aside allegories for the moment, you are going to experience volatility rush. Exiting is still going to hurt.

That is the game, bell curves, standard deviations, and leptokurtosis/fat tails.

it is my opinion that options do not reduce risk whatsoever given a notional underlying value, but merely reshape risk.

Success relies on and off and subjective analysis of risk reward ratios... with the added complexity of those risk and reward ratios being nonlinear.

FWIW