Synthetic Swing Trading with Option Spreads

[sails]

lol - what an entertaining thread... this is fun catching up on missed time!

 

[emilov]

well, wayne and I discussed the strategy of mine on my blog. and, well we agreed that neither of us was really wrong, we were talking about different things. my strategy, when dissected does NOT equal an ITM call. it just equals what it is, a bull put spread plus an added call. just like with the synthetic long stock, the reason for doing it (at least for me) is so that the sold put finances the bought call. only in my case I'm financing the bought call with a bull put spread. for sure, I get less credit with the bull put spread (compared to a sold put) but my risk on the down side is limited.

ah, and just fyi, the trade in question ended up being profitable

 

[wayneL]

well, wayne and I discussed the strategy of mine on my blog. and, well we agreed that neither of us was really wrong, we were talking about different things. my strategy, when dissected does NOT equal an ITM call. it just equals what it is, a bull put spread plus an added call. just like with the synthetic long stock, the reason for doing it (at least for me) is so that the sold put finances the bought call. only in my case I'm financing the bought call with a bull put spread. for sure, I get less credit with the bull put spread (compared to a sold put) but my risk on the down side is limited.

ah, and just fyi, the trade in question ended up being profitable

Eh? What nonsense is this?

*That* trade was not a synthetic call.

The trade Mazza and I said IS a synthetic call, as discussed in this thread, IS INDEED a synthetic call.

To quote what I said on your blog:

That will teach me to check details. Here's me thinking you have a synthetic ITM long call like you said, and like we discussed at ASF; but you don't have that at all.

This doesn't dissect out to anything but exactly what it is, a credit spread with an OTM call superimposed on top. It's nothing close to a synthetic ITM call.

It was you who wrongly said *that* trade was a synthetic call:

While mathematically this kind of trade's payoff is close to a straight in the money call...

Stop arguing, start listening, you might learn something

PS - Glad the trade worked out for you, but every trade has the capacity to profit. The sticking point is understanding the risks. This is discussed in the video I did on credit spreads. Most do indeed profit, it's the magnitude of the losses that make a difference.

 

[emilov]

Why did I even bother to post back only to get hammered on again? Yes I agreed, only to set an end of the argument. You see, it might be as you say, I never cared if it were. I discussed the strategy I applied the way I use it. If you are smarter, you can obviously do better, good on you. All I know is that I can explain this thing to myself, I have a way of understanding it so that it works as I expect it (which btw. has nothing to do whether it was profitable trade or not, that was because the direction of the stock happened to go my way).

Learn something?! Learn what? That you have a way of understanding (and explaining) of options I cannot follow? Yes I got that, many many times thank you very much.

It is sad that the majority of people seem to believe that that being smart equals making profits. See, I'm smart to know that it is not true. If it were, all Nobel price winners would be millionaires. I know a 70 year old guy, and the age is starting to show, and he does not get options too well. Still he trades them and makes money. So, yes I admit it, I got confused by your way of dissecting the strategy and was too quick to settle. Does it mean it does not work or it won't make me money? Nope. And I'm in this game to make money, I don't know your agenda.

BTW, Wayne, I just saw your videos. Where did you get those idiotic statements (90% success for option sellers, mate, hilarious ), please tell me the website.

 

[mazzatelli]

lol - what an entertaining thread... this is fun catching up on missed time!

LOL
I got called a "self righteous, arrogant bastard" in the process

Hope all is well M!!! Have you got your beautiful view back??

 

[wayneL]

Why did I even bother to post back only to get hammered on again? Yes I agreed, only to set an end of the argument. You see, it might be as you say, I never cared if it were. I discussed the strategy I applied the way I use it. If you are smarter, you can obviously do better, good on you. All I know is that I can explain this thing to myself, I have a way of understanding it so that it works as I expect it (which btw. has nothing to do whether it was profitable trade or not, that was because the direction of the stock happened to go my way).

Learn something?! Learn what? That you have a way of understanding (and explaining) of options I cannot follow? Yes I got that, many many times thank you very much.

It is sad that the majority of people seem to believe that that being smart equals making profits. See, I'm smart to know that it is not true. If it were, all Nobel price winners would be millionaires. I know a 70 year old guy, and the age is starting to show, and he does not get options too well. Still he trades them and makes money. So, yes I admit it, I got confused by your way of dissecting the strategy and was too quick to settle. Does it mean it does not work or it won't make me money? Nope. And I'm in this game to make money, I don't know your agenda.

Position dissection/synthetics is not my way, it's the correct way. My agenda here is to help people understand options. It can be confusing and discussion helps. I do this for free. I like discussing them and it also helps me.

The problem is that ersatz experts confuse the issue. Arguing that a synthetic long call is not a synthetic long call, even when it is proven mathematically, is straight out muppetry... as is arguing that a vertical with a OTM call superimposed at a different strike IS a synthetic long call.

It confuses people.

If your goal is to make money, perhaps you should be more open to said discussions, as some simple maths extrapolated from your own words show that you haven't done so overall.

If you really want to get hammered, go and discuss your views at elitetrader where a few ex MMs and insto traders hang out.

 

[emilov]

Ah Wayne,
We should so get together for a beer or something , do you live in Australia? You certainly sound Australian.

See, I'm doing this for free too (I don't sell a course or promote one). The sole reason I have that blog (and/or post here) is because a few traders I know asked me what I do and how, constantly. I wouldn't have even done it and continued to trade privately (as opposed to publicly). I used to sort my trades elsewhere but I do find the blog convenient. It is absolutely not my intention to educate, merely to report my activities, your goal there seems higher and, I must say a little futile.

There is no doubt in my mind that I could learn a lot from you about options (next to the few books I have read on the subject). The reason I don't go there is because I prefer to keep things simple, complicated in trading does not equal better, you should know this: too much info and distractions ruins your mojo.

Analogy: I don't need to be a mechanic to be able to drive a car, a basic knowledge will get me from A to B safely. I got burned in the past because, to continue the analogy, I was driving at too high speeds without wearing my seat belt.

I agree with almost everything you said in your videos except for one thing: IV, strikes and calculating the chance of success. Yes, mathematically you are correct (I trust you are, I didn't do the numbers). But in my humble opinion intangible things like trend/support/resistance (which should determine the strikes and thus the risk profile) add to the chance of success. Maybe I don't have your experience but mine, as a person who has traded actively for almost 2 years tells me so.

 

[sails]

...
Analogy: I don't need to be a mechanic to be able to drive a car, a basic knowledge will get me from A to B safely. I got burned in the past because, to continue the analogy, I was driving at too high speeds without wearing my seat belt...

Agree you don't need to be a mechanic to drive a car, but you absolutely do need to know the road rules. Trading options without knowing the rules (aka greeks, synthetics, etc) is risky business.

I seem to remember you complaining some time ago about your STO call when the premium plumeted ex rights (I think that was the corporate event). That was a prime example of trading options without understanding how options are priced.

 

[emilov]

Sails, that trade was an ITM call. The fact that I lost on it had nothing to do with me not understanding option pricing. And who says I don't, if I ever get a minute free of my sweet but very demanding 2 month old daughter I'll finish coding my options calculator (with pricing projections based on any greek variation). FYI, that was my one and only losing month since November last year and the loss was about 1k.

And the fact that the event happened which dropped the stock (+trading halt) would have wrecked any bullish strategy (although I know people who had a bull put spread on it and rolled it out and ended up breaking even on the next month). What you don't mention is that I risked very little on that trade, so the loss was small: which is in line with Wayne's statements about proper money management & risk of ruin.

Again I'll disagree that knowing things like rho will help me much in my trading. Delta, gamma and theta do, for sure. Still, I understand how time decay works without calculating the theta to the 5th digit, I understand what delta of 1 means as opposed to .5 (ATM) and, would you believe it, I understand even gamma neutral trading strategies (McMillan).

I don't believe that the latter is something that will improve on my trading though. I use strategies that have worked for me many times over.

 

[wayneL]

Emil,

I don't think anyone gives a **** what strategies you use or don't use, whether directional or neutral, or even whether you win or lose.

What is important for discussion here, is theory and process; that what is presented here is correct, so that people can go away and trade their own way, but fully cognizant of the mathematical relationship between stock and options and risks as measured by the Greeks.

That's why we considered the earlier discussion on synthetics so important.

Again I'll disagree that knowing things like rho will help me much in my trading.

Ignoring Rho is luxury we've had for some years, though I think anyone loaded to the gills with LEAPS calls might disagree, what with the collapse in interest rates etc.

However, who knows what happens in the future. When interest rates eventually become more volatile, Rho might be a major consideration with some strategies.

 

[emilov]

So, what about that beer Wayne ?

In school I learned differential equations, and yet I live my day to day live without them just fine. I don't remember much of it anyway.

I'm sorry should I have appeared to sound rejectful of the math side of options. I definitely don't think it's wrong, please don't make it look that I do. Greeks most certainly have their place and if people want to use them as their basis for trading, they should (I absolutely agree that it is a very objective way to trade).

To me trading is more of an art, you can know all the math and still lose. Traders that don't do options would agree. I don't use greeks (so much, I do look at delta for ratio call spreads) and it works for me. I have a feel about options (which surely can be quantified with greeks) and it works for me. And in any book I read and every trader I spoke with it (and I know a few who are quite experienced and successful) say to find a way of trading that does that.

(I don't trade LEAPs (I think they're called LEPOs here in Oz), my trades are very seldoml longer than a month, so yeah interest rates usually remain the same during that time)

 

[sails]

With only one or two contracts, Rho isn't going to have as much $ effect, especially if the position is close in time. However, the combination of larger positions and going further out in time, Rho can make more difference than you might think. While not as significant as some of the other greeks, but IMO every dollar counts if you are running trading as a business.

 

[wayneL]

So, what about that beer Wayne ?

I'm up for it if you can make it to the Rose and Crown on the Wimbledon Village High Street

http://maps.google.co.uk/maps?f=q&s...d=SZUttoQH1eqBSPEbny3sSg&cbp=12,337.4,,0,4.17

 

[sails]

...To me trading is more of an art, you can know all the math and still lose. Traders that don't do options would agree. I don't use greeks (so much, I do look at delta for ratio call spreads) and it works for me. I have a feel about options (which surely can be quantified with greeks) and it works for me. And in any book I read and every trader I spoke with it (and I know a few who are quite experienced and successful) say to find a way of trading that does that.

While understanding the greeks that fuel fluctuations in option pricing doesn't guarantee profits, it sure can help prevent unnecessary losses. It also helps to hunt out the opportunities which would otherwise go unnoticed.

(I don't trade LEAPs (I think they're called LEPOs here in Oz), my trades are very seldoml longer than a month, so yeah interest rates usually remain the same during that time)

Oh dear... LEAPS AND LEPOS are absolutely NOT the same thing.

 

[wayneL]

With only one or two contracts, Rho isn't going to have as much $ effect, especially if the position is close in time. However, the combination of larger positions and going further out in time, Rho can make more difference than you might think. While not as significant as some of the other greeks, but IMO every dollar counts if you are running trading as a business.

Yep, exactly.

I'm thinking of strategies like calenders or diagonals where you may have quite a few contracts on. Rho is going to have a vega-like effect if % rates start moving around.

Emil,

A LEAPS is different to a LEPO. A LEAPS is just a long term ordinary option. <SNAP>

 

[emilov]

sails, for sure. if I was to trade longer term options I'd need to learn more about the pitfalls (only one of them being interest rate changes, and a few of them at that

(sails they are not? well I've no idea about these, although I could have googled it . anyway, I don't trade them, just like I don't trade CFDs and other vehicles I haven't read enough about)

agree on the opportunities, surely I miss a lot of them. but hey, a famous real estate investor, Dolf de Roos says that the deal of a century comes every week and I find that this is even more true for the stock market.

wayne, mate, next time I'm in Europe, most definitely . Right now I live in Brisbane, Australia (and trading the US market would mean me getting up at 12pm at night, that is one of the reasons I stick with the Australian market).

 

[village idiot]

I'm up for it if you can make it to the Rose and Crown on the Wimbledon Village High Street

http://maps.google.co.uk/maps?f=q&s...d=SZUttoQH1eqBSPEbny3sSg&cbp=12,337.4,,0,4.17

holy ****, I used to drink there back in the eighties and early nineties. I had a girlfriend who lived right round the corner, and then a few years later I worked for a while down in wimbledon (girlfriend by now gone) and we used to get up the hill to the rose and crown on many an occasion after work.

In other SW London highlights, once had a curry in the Rawalpindi and Martina Navratilova was eating at the next table.

Making me all nostalgic, small world

 

[mazzatelli]

village idiot = Necromancy! Funny thread to read.

 

[village idiot]

now I've had to look up necromancy;


Necromancy (pronounced /ˈnɛkrɵmænsi/; Greek νεκρομαντεία nekromanteia, via Latin necromantia) is a form of magic in which the practitioner seeks to summon the spirit of a deceased person, either as an apparition or ghost, or to raise them bodily, for the purpose of divination.


but I still dont get it ......

 

[cutz]

but I still dont get it ......

If you like options have a read of the thread from the beginning, it's quite good.