Trading options in Australia

[cutz]

But be aware that Oz registered traders (market makers) are some of the most cunning and ruthless traders on the planet. If your strategy involves trading out of spreads and whatnot, like sometimes when you really *need to, you will be rorted like never before.

Yeah, I've been caught out in the past on expiry day before the close, for this reason I'm normally squared up min a week out.

 

[Sharkman]

Yeah, I've been caught out in the past on expiry day before the close, for this reason I'm normally squared up min a week out.

the tradeoff is by doing that you miss out on that sweet final week decay. this is why i'm finding the loss of IB margin quite annoying. i try to set my cash covered put strikes at where i think there's a decent support level - provided the strike is at least a 25 delta (maybe 35-40 delta in lower vol underlyings such as the banks).

so ideally i want them to expire 1c OTM, then i can sell ATM puts at the same strike the next day. if i did in fact pick the strike well and the stock falls close to that level and proceeds to test the support level over a period of a few days, then it's quite possible it will be hovering around the strike on expiry day and i don't know which way it's going to go.

in the past i'd be stoked if that happened, i could collect that insane final day theta (in the past i have seen high vol options eg. RIO, WPL, especially QBE back when they were lurching from crisis to crisis being offered at nearly 0.5% of the stock price on expiry day) and if i get assigned, i just take delivery using margin then turn around and sell covered calls over it soon after.

but now if i don't have the cash available to take the assignment, i have to close out on expiry day if there's a chance it will be assigned, otherwise IB now triggers a margin call and liquidates some of your holdings at random to get your cash balance back above zero. thus not only losing out on the final day theta, but having to potentially cross a nasty spread to close out. and i'm a bit hesitant to throw more funds into my IB account because we don't get SIPC protection anymore. so i fully cash collateralise now just to make things easier to manage.

interested to hear how you (and WayneL) are dealing with the loss of margining. did it affect your strategy and did you need to adjust your strategy to account for it? am kinda assuming you're both trading thru IB and were also forced to migrate to IB Aust thus losing your margin facility, but maybe that's incorrect?

as for my own adjustments, since the loss of IB margin earlier this year, i find myself sometimes going for zero cost/small credit 1 by 2 ratio put spreads (with the lower strike at where i think support is) instead. given that i can't collateralise as many short gamma positions these days, the 1 by 2 ratio put spread has more potential upside than a straight cash covered put at the lower strike (but with lower probability).

 

[cutz]

Hi Sharkman.

In my case I only spread, don't do naked puts with IB, since the changeover my margining has improved, especially with the XJO's. It is tempting to wait till expiry before closing/rolling but the gamma risk far outweighs the benefits, no chance to salvage if things suddenly turn, I have an iron condor on ( morphed previously from an iron fly ) underlying smack bang in the middle, will be closing this one out with a couple of weeks till expiry.

 

[Sharkman]

interesting. and you're still getting decent fills near the mid with those strategies?

i've pretty much given up on condors, christmas trees, call spread risk reversals and the like these last few years and returned to the very basics - cash covered puts and covered calls. similar to WayneL by the looks of it. otherwise too much of a hassle to calculate various scenarios & what i'll do in each one, especially when one is still working full time, and too many legs to pay commission on. the 1 by 2 ratio put spread is about as adventurous as i get these days, but i think sometimes those make more sense with limited collateral when the delta skew gets a bit steeper and i generally hold to expiry anyway.

you're right, it is a bit of a risk being short so much gamma, but i'm prioritising theta these days since i'm primarily after premium collection, rather than "threading the needle" or punting on blowups. it's manageable if you're fully collateralised and can opt to simply take the assignment. though on a clean break of support, sometimes i just have to close out at a loss and move on.

what about buying 2 or 3 month slightly-moderately OTM (say 25-40 delta) options to guard the topside and/or bottom when you're heavily short gamma and in danger of getting assigned in the final week? i used to do this a fair bit before i decided to go back to basics, you usually get time skew on your side and can always spread it off into a vertical/calendar after the front month rolls off to recoup premium and reduce decay. that way i get to ride those near the money short options right up til expiry with some moderate protection. of course, this could also be a symptom that i've gotten way too addicted to chasing theta!

can't see myself going back to executing lots of multi legged strategies any time soon though. maybe when i retire in another 2-3 years. but good on you if you've managed to make them work in this sort of market.

 

[cutz]

Hi Sharkman.

Only get decent fills on the big stocks / XJO.Got talking with a friend recently and decided to go long using a bull put spread with some volume on a smaller cap, I got fried closing out but luckily still managed to turn a small profit, filled way off the mid.

I kinda like your idea re. diagonals in the final week, in my case a back month long strangle over my nov iron fly then a short straddle on the back month on front expiry with some adjustment would have done the the business, dunno just thinking out aloud, all depends what the underlying is doing.

 

[Sharkman]

I kinda like your idea re. diagonals in the final week, in my case a back month long strangle over my nov iron fly then a short straddle on the back month on front expiry with some adjustment would have done the the business, dunno just thinking out aloud, all depends what the underlying is doing.

yep pretty much, although i was a bit of a gambler when i used to do this, and often i'd only guard the topside even if i was short a front month near the money straddle, occasionally buying 3 month strangles if delta skew was flattish. i'd never buy a 3 month ATM straddle though, costs way too much premium for my liking.

i've always been somewhat reluctant to buy OTM puts due to the expensive IV, and i figured i could use margin to just take delivery if the short put got assigned (can't do this anymore), then use the resulting stock position as part of something else the next month, eg. sell 2x ATM front month calls for premium collection where 1 is a covered call and the other forms a new diagonal with the cheap IV 3 month OTM call. but as you say, has to be discretionary based on what's happening, hard to go rules based with this sort of thing.

 

[renjer]

Hi all, now that Optionsxpress (aka Schwab) has decided to close their doors in Australia, which broker would you recommend to trade options spreads?

 

[Sharkman]

Hi all, now that Optionsxpress (aka Schwab) has decided to close their doors in Australia, which broker would you recommend to trade options spreads?

IB (Interactive Brokers) would be my recommendation. been using them for over 10 years now. excellent commission rates and i haven't found them all that difficult to use, although some people have complained about ease of use, so be warned they may not suit everyone. they're also not what they used to be before the forced migration from IB LLC to IB Aust, due to loss of SIPC protection and margining, but still the best i have found for ASX options trading.

 

[ghoool]

$1 a side for contracts + $2-6 for a share trade.

 

[ghoool]

Hello guys! I am from the UK, have a peek here, but I am considering to migrate to Australia. So this topic will be also useful for me to read. Looking at the most responses, it looks like the US trading platform is the most reasonable solutions. I think I will need to make more research to take the correct decision. If you have links to similar resources, please let me know.

 

[cutz]

If you have links to similar resources, please let me know.

G'Day,

Which links in particular ?

Here is the IB one. https://www.interactivebrokers.com.au/en/index.php?f=40071

 

[MickStanciu]

Hi, let me refresh this topic.
My trading activity consists 90% in selling options.

I use different strategies, depending on stock, premium ...

for example:

• I usually don't sell covered calls on stock that I own.
• I do lots of buy-writes (buy stock, sell mostly ATM/ITM covered call) for a week if possible (or month if weeklies are not available).
• I sell puts
• and short strangles (sometimes)

I am doing this successfully for the last 3 years

 

[Gunnerguy]

Hi all,
I spent some time on ASF a few years ago, left for a while, but am back now.
I am intending to move into options trading.

I have traded shares/stocks for over 30 years but now want to move in to options as I now have a lot more time on my hands.
I have a grown a large portfolio of Oz Shares/ETF's over the years successfully but want to look at generating some income from the holdings I already have (if possible) and develop some holdings specifically tuned to options trading.

I have spent the last couple of weeks re-reading and re-learning about options and initially want to start slowly and conservatively.

1. I am looking at selling (writing) covered calls on currently held shares that have Capital gains already to start with. My MTR is now at a (very)/insignificant) rate so I am happy to 'risk' the option being executed/closed out. If they don't get executed I'm happy with some form of income.

Once I am comfortable with the above I then may move on to ...

2. Cash covered puts.

I am still (swing) trading shares/ETF's basically on a quarterly basis, and will continue to.

I see that the options boards are rather quiet and not many recent posts, however I hope that there are some out there who have an interest in options and/or trading them, and are willing to have some discussions, ideas exchanges, around Options.

Gunnerguy.

 

[sanjiSez]

Just a bump up to say a Hi,

I am mostly a buy and hold of broad based low cost index ETF”s for last several years. I have also some Aussie Lic’s and some Direct shares.
Outside of the above I have occasionally started mixing it with options.

most of my nightmares in options is dealing with tax I am not a trader for tax purposes.

 

[wayneL]

most of my nightmares in options is dealing with tax I am not a trader for tax purposes.

Taxation is a huge part of options trading as there are often a large number of offsetting tax losses and profits, and very much depends on how you wind up your trades and treatment of the underlying.

Closing out any trade of course consider profit and loss but should also consider the tax implications.

...As if the options themselves aren't complex enough... Consciousness and competence and all that.

IOW, sometimes the most profitable decision isn't the most profitable decision.

 

[sanjiSez]

Taxation is a huge part of options trading as there are often a large number of offsetting tax losses and profits, and very much depends on how you wind up your trades and treatment of the underlying.

Closing out any trade of course consider profit and loss but should also consider the tax implications.

...As if the options themselves aren't complex enough... Consciousness and competence and all that.

IOW, sometimes the most profitable decision isn't the most profitable decision.

Yeah, so true. I have extensively searched all across internet and I see how under rated these tax issues are. People post their trades and make it more complex than it should be that I often wonder how are they going explain when tax office is about question them.

It is fairly easier atleast for traders to net things out I guess where it is often more harder for newbies who are also mostly speculators.

 

[Sharkman]

which specific aspects of it do you find a nightmare? the recordkeeping aspect?

i can't say i've ever found it to be much of a problem, and i used to do 200-400 option trades a year (Aust only though, i've never traded foreign options) when i was younger. i've dialled it back since then and am mostly a long term buy & hold guy too these days, though i'll still do several dozen option trades a year. TBH my ETFs have probably caused me more headaches at tax time than my option trades, i always struggle with figuring out what goes where in terms of stuff like primary vs non-primary production, NTAP discounted capital gains, withholding tax etc.

i do get accountants to submit my tax returns since i trade options thru a corporate trust, however i also work everything out myself independently and check that my figures match theirs as an extra verification safeguard, and i don't recall having too many issues there.

my best suggestion would be to custom build an excel spreadsheet to handle it instead of waiting for tax time before digging out 12 months' worth of broker statements (which i don't find particularly useful for tax purposes) and trying to figure everything out from those. get familiar with how to use pivot tables and aggregation functions like DSUM - those are the best tools for working this sort of stuff out.

keep that sheet open whenever you're watching the market (having a 2nd screen helps as you can have your spreadsheet open on one screen and TWS or whatever trading app you use open on the other), religiously enter every single trade into that sheet as soon as it gets filled, and triple check that all the numbers have been entered correctly before you do anything else.

this gives you an almost real time picture of your tax situation for the year, and that really helps with making trading decisions in my experience.

 

[wayneL]

which specific aspects of it do you find a nightmare? the recordkeeping aspect?

i can't say i've ever found it to be much of a problem, and i used to do 200-400 option trades a year (Aust only though, i've never traded foreign options) when i was younger. i've dialled it back since then and am mostly a long term buy & hold guy too these days, though i'll still do several dozen option trades a year. TBH my ETFs have probably caused me more headaches at tax time than my option trades, i always struggle with figuring out what goes where in terms of stuff like primary vs non-primary production, NTAP discounted capital gains, withholding tax etc.

i do get accountants to submit my tax returns since i trade options thru a corporate trust, however i also work everything out myself independently and check that my figures match theirs as an extra verification safeguard, and i don't recall having too many issues there.

my best suggestion would be to custom build an excel spreadsheet to handle it instead of waiting for tax time before digging out 12 months' worth of broker statements (which i don't find particularly useful for tax purposes) and trying to figure everything out from those. get familiar with how to use pivot tables and aggregation functions like DSUM - those are the best tools for working this sort of stuff out.

keep that sheet open whenever you're watching the market (having a 2nd screen helps as you can have your spreadsheet open on one screen and TWS or whatever trading app you use open on the other), religiously enter every single trade into that sheet as soon as it gets filled, and triple check that all the numbers have been entered correctly before you do anything else.

this gives you an almost real time picture of your tax situation for the year, and that really helps with making trading decisions in my experience.

Let's take something as simple as a covered call which goes well into the money at some time before expiry.

Overall the strategy is in profit since Inception. But your short call will be in, perhaps a substantive loss.

How about the underlying though? When, and out what price did you buy it? is the underlying in a loss situation,
a profit situation, or perhaps even a massive profit situation due to long term holding.

Should you sit on your hands and allow assignment, or should you wind up the short call, take your tax loss and keep the underlying?

Over the years that can make quite a difference to your net worth.

IOW minimising your tax liability is crucial to your ability to be able to compound optionable investments.

FWIW

 

[Sharkman]

Let's take something as simple as a covered call which goes well into the money at some time before expiry.

Overall the strategy is in profit since Inception. But your short call will be in, perhaps a substantive loss.

How about the underlying though? When, and out what price did you buy it? is the underlying in a loss situation,
a profit situation, or perhaps even a massive profit situation due to long term holding.

Should you sit on your hands and allow assignment, or should you wind up the short call, take your tax loss and keep the underlying?

Over the years that can make quite a difference to your net worth.

IOW minimising your tax liability is crucial to your ability to be able to compound optionable investments.

FWIW

sorry Wayne, my comment was more of a response to sanjiSez (i probably should've hit reply to their comment instead of simply typing in the box down the bottom). i understand the situations you describe, and agree tax consequences are a vitally important part of trading.

but with a custom built spreadsheet and a deeply ingrained habit of entering every trade into it as soon as the order gets filled, i just can't remember ever having any problems with that sort of thing myself, all the data i need is readily available at the click of a button.

i don't have access to an API that can auto-feed live market data into my sheet (things like Reuters/Bloomberg APIs can be quite costly, thousands of $ per month i think, if anyone knows of any free ones that might exist, would def be interested) but it only takes a few seconds to key in the prices manually. once the formulas update i can see at a glance all of my open positions, what unrealised cap gain/loss each is carrying, discounted/undiscounted cap gains crystallised so far in the current FY, cap losses available to offset them, total premium received/paid for the FY, divs, franking credits, foreign withholding tax, it's all there. as close to real time as it can be without a live feed API.

in my view excel fluency is quite important to have when frequently trading. really handy having a sheet customised to suit one's specific needs and usage preferences, it ensures all the info you need is constantly available and easily accessible. i can't imagine being able to make decisions properly if i didn't know what my CGT liability etc for the year was.

 

[wayneL]

sorry Wayne, my comment was more of a response to sanjiSez (i probably should've hit reply to their comment instead of simply typing in the box down the bottom). i understand the situations you describe, and agree tax consequences are a vitally important part of trading.

but with a custom built spreadsheet and a deeply ingrained habit of entering every trade into it as soon as the order gets filled, i just can't remember ever having any problems with that sort of thing myself, all the data i need is readily available at the click of a button.

i don't have access to an API that can auto-feed live market data into my sheet (things like Reuters/Bloomberg APIs can be quite costly, thousands of $ per month i think, if anyone knows of any free ones that might exist, would def be interested) but it only takes a few seconds to key in the prices manually. once the formulas update i can see at a glance all of my open positions, what unrealised cap gain/loss each is carrying, discounted/undiscounted cap gains crystallised so far in the current FY, cap losses available to offset them, total premium received/paid for the FY, divs, franking credits, foreign withholding tax, it's all there. as close to real time as it can be without a live feed API.

in my view excel fluency is quite important to have when frequently trading. really handy having a sheet customised to suit one's specific needs and usage preferences, it ensures all the info you need is constantly available and easily accessible. i can't imagine being able to make decisions properly if i didn't know what my CGT liability etc for the year was.

Yeah didn't quote your post as a go at you my friend, just for continuity of conversation.

The overarching point as has been excellently made by you, is effective record keeping, but also tax considerations, which I hope I have got people thinking about.