Playing bubbles with OTM oppies: Q's for the Option Alchemist

[Trembling Hand]

Inspired by the Exceptional Wealth Accumulation Thread I was looking through my record of good calls that I didn't take (!!! !!!!) And getting ready for the next time.

One of the ideas I posted on my blog two years ago was playing bubbles with out of the money oppies. In this case I was copying an idea to purchase long dated OTM options, both puts & calls, on an Shanghai Index linked ETF.

Theory being its easyish to see a bubble but almost impossible to pick the top. They tend be 50% higher or 50% lower once you start seeing them as bubbles.

Anyone played this game? Or have an idea as to how possible it would be? Would it be better to play closer to the current price and roll them as time goes on?

As you can see the idea from the time was both 50% up and 50% down from when I posted about it. No doubt a hard game to play.

 

[wayneL]

This is a tough one TH... in my opinion anyway. It can be a tough gig to watch premium continuously digging a hole in your account for extending periods.

My opinion would be to actively manage the position. Perhaps using closer to the money puts at inflection points and taking them off if market doesn't want to go in the tank yet... risks missing the move if you get it wrong however.

If it were me with this idea, I would use spreads, depending on the volatility at the time, but requires some expertise in adjusting etc.

The strategy I kicked a bit of a goal with last year was a calenderized put back spread. A very small loss if wrong, but a big payoff in term of both direction and +vega if it tanks hard enough.

Might be interesting to develop this idea here and follow it live.

 

[Trembling Hand]

Yes that's what I figured. In fact that's one of the reasons I have not put on a hedged play for well.... ever. They cost. But yeah would be good to play around with some ideas to have a go.

 

[mazzatelli1000]

Perhaps a calendarised long wrangle?
Short premium during the front months while waiting for the large move to negate theta. Gamma scalp if Greeks flip to [+gamma, -theta].

It would have to be actively managed as Wayne mentioned.

I guess the other issue is if the ETF options bid/ask spreads are not a barrier to entry.

 

[skyQuake]

Not sure about the EFT but warrants on the HSI are very liquid. Huge amounts of volume goes thru on that for daily warrants.

As for timing.. well if you get that wrong you can average :