"Wings Insurance"

[chops_a_must]

Hi chops

Sorry missed your reply

The option value is currently $0.15c which I bought at $0.50cent - hey dont laugh im learning options so im starting small - anyway the probability of this finishing in the money is very small

cheers!

Hey, I'm not laughing at all.

Like I've said elsewhere, I'm only one step ahead of you.

You still have a third of your potential profit on the table, so it maybe worth looking at some protection, and play it like you would if you had multiple contracts.

Someone can correct me on this, but time decay seems to accelerate faster the closer you get to expiry on deep OTM options. So if Monday opens down, you may be able to get cheap protection.

But yeah, I have never, and especially in this market, wouldn't ever write naked options. You just never know when a takeover gets announced etc.

 

[cutz]

Someone can correct me on this, but time decay seems to accelerate faster the closer you get to expiry on deep OTM options. So if Monday opens down, you may be able to get cheap protection.

Yeah time decay accelerates toward expiry but only on ATM or close to the money, deep ITM or OTM hardly have any time premium left therefore time decay would be minimal.

 

[mazzatelli1000]

The point of option writing is to capture as much theta as possible. With 5 days left to go, and as cutz and chops have pointed out there is hardly any time premium left in that option. You might as well close it now instead of capping it.

Why? You incur commissions for both actions, but closing it takes all risk of the table, whereas insurance leaves you with a possible maximum loss if there is an adverse move (sounds unlikely in your case).

The risk as at now far outweighs the reward.

It would be better to close out and start initiating other positions to capture more theta.
Also it will release any cash/stock that is collateral for other trades. This way you are utilising your capital more efficiently.

I highly agree with the others to pursue limited risk short strategies - it is very painful financially and psychologically when just one big move will wipe out months of profit.
Writing naked calls on equities is very risky!!! If you want to pursue it, do it on indices.

 

[Seneca60BC]

ok thanks guys - I will close this position immediately.

 

[sails]

Sounds like a good move, Seneca. All things being equal, this sold call is relatively "safe" with only five days to go, however, one of the worst nightmares to upset that equilibrium would have to be a take-over bid close to expiry.

A few years ago, WMC/WMR (can't remember which code it was trading under at the time) had a take-over bid on expiry morning I know of someone who had taken in approx. $40 per contract of short call premium and no protective wing. The take-over bid price was well above that short call strike - leaving them with losses of around $1,000 per contract. The day before expiry, that same short call was looking relatively "safe"...

Agree with Mazz - naked call selling is a bit safer on the indicies, however if things do go wrong, it can still put an unacceptably large hole in the trading account. I believe that money/risk management are paramount in options trading. IMO, a good working knowledge of the greeks is also a must-have in order to understand where the risks have been shifted, but all the options knowledge under the sun won't help without a solid money/risk management plan.

I have listened to quite a few of the Wednesday chat archives on TOS - and they strongly support the idea of closing out call credit spreads well before expiration, and then opening up a new position in next month early.There are often some fat premiums on the incoming month and it is possible of actually gain more than holding on for that last $15 as in the case of this call.

Here is the link to TOS archives. The sessions before US expiration are the most likely to have hints on how to manage expiring positions - and lots of other interesting stuff

 

[mazzatelli1000]

The TOS folk are great!!!

I remember Don Kauffman on one of his chats saying that retail traders are usually excellent at finding trades, but absolutely terrible when managing the trades, whereas market makers and pit traders like him and the sos arent great at finding trades, but know how to manage risk well.

The sos and Preston dont sound like they use minimal fundamental or technical analysis to trade, but are real good at getting in and out

 

[Seneca60BC]

Sounds like a good move, Seneca. All things being equal, this sold call is relatively "safe" with only five days to go, however, one of the worst nightmares to upset that equilibrium would have to be a take-over bid close to expiry.

A few years ago, WMC/WMR (can't remember which code it was trading under at the time) had a take-over bid on expiry morning I know of someone who had taken in approx. $40 per contract of short call premium and no protective wing. The take-over bid price was well above that short call strike - leaving them with losses of around $1,000 per contract. The day before expiry, that same short call was looking relatively "safe"...

Agree with Mazz - naked call selling is a bit safer on the indicies, however if things do go wrong, it can still put an unacceptably large hole in the trading account. I believe that money/risk management are paramount in options trading. IMO, a good working knowledge of the greeks is also a must-have in order to understand where the risks have been shifted, but all the options knowledge under the sun won't help without a solid money/risk management plan.

I have listened to quite a few of the Wednesday chat archives on TOS - and they strongly support the idea of closing out call credit spreads well before expiration, and then opening up a new position in next month early.There are often some fat premiums on the incoming month and it is possible of actually gain more than holding on for that last $15 as in the case of this call.

Here is the link to TOS archives. The sessions before US expiration are the most likely to have hints on how to manage expiring positions - and lots of other interesting stuff

Yes a takeover is a scary thought when your naked - Sails - I cannot seem to open that link - i am using opera and it says its a illegal link.

Cheers!

 

[mazzatelli1000]

Yes a takeover is a scary thought when your naked - Sails - I cannot seem to open that link - i am using opera and it says its a illegal link.

Cheers!

www.thinkorswim.com
Go to Support - option school - chat archives

 

[Grinder]

back to wings insurance.. otm wings protection can be substituted for smaller number of cons atm. Eg: Had a 10 con spread on otm with 2 atm con picked up at the same time, my short strike was under threat and would have to close for a small loss. However, my 2 atm cons came into play & turned a losing position into a nice little earner.

 

[sails]

Yes a takeover is a scary thought when your naked - Sails - I cannot seem to open that link - i am using opera and it says its a illegal link.

Cheers!

sorry Seneca - didn't check the link before posting. Mazz has pointed you in the right direction. Actually heaps of options educational material on the TOS site.

 

[cutz]

Hi Guys,

Today towards the close I went about putting on a call credit spread and made an error in the process, first I shorted the lower strike calls, then went about buying the wings but I was rushing around a little and I sold to open instead buying to open , as the ask was 71 with no bids I entered what I thought was buy to open as a sell to open at 45, the order went through at 60, then I had to reverse that position which was a bit of a hassle but I got out with a partial hedge.

My question is why did I get 60 for the wings sold in error when I punched in 45, i’m not complaining but I am a little curious on how the order gets to the market, this is the second time this has happened to me, the first time I promised myself to be a bit more careful but I got bitten again today.

 

[jackson8]

Hi Guys,

Today towards the close I went about putting on a call credit spread and made an error in the process, first I shorted the lower strike calls, then went about buying the wings but I was rushing around a little and I sold to open instead buying to open , as the ask was 71 with no bids I entered what I thought was buy to open as a sell to open at 45, the order went through at 60, then I had to reverse that position which was a bit of a hassle but I got out with a partial hedge.

My question is why did I get 60 for the wings sold in error when I punched in 45, i’m not complaining but I am a little curious on how the order gets to the market, this is the second time this has happened to me, the first time I promised myself to be a bit more careful but I got bitten again today.

i cant answer your question but have noticed the same sort of thing myself, when i place a limit order i always seem to get it filled at a little bit more than the limit that i placed ........yet the price i have received is never allocated on the seats screen

so when i sell a call or put i receive bit extra than what i thought and when i buy to open seem to pay a bit less.

not complaining just would like to understand how this works.

 

[cutz]

Hi jackson8,

If what you're describing is happening regularly something is not right, in my case I put the sell order through at way below market price and there were no market makers on the scene just a small odd number on the ask, the market makers came on and bought above what I offered but this was a mistake on my part, i’m not sure how this happens.

Normally the way I do it if there are no bid/offers on I check the theoretical price and put the order in way above/below theoretical price as required, wait for the market makers then adjust the order slowly as required till it gets filled and the price is always what I punched in.

If you don’t have a live platform and because the market maker spreads move around the price you see when you check the quotes may not be the same price the time you punch your trade through, so you may get a slightly unexpected result, perhaps someone else could comment on this.

 

[sails]

Hi Cutz,

I'm not sure either how this happens. Would need to hear from a broker or MM to find out. Has only happened to me on very rare occasions and certainly not recently - would be a pleasant surprise though!

Perhaps there are combo orders where the MM is not displaying that particular leg in the market depth screen - and your order hits it. I quite often find the MM only displays one leg of my combos and on rare occasions nothing is displayed at all. However, that order is still there - just invisible.

Anyway, that's only a guess at it!

If it's not a highly liquid stock for options, then the idea of a combo order is probably unlikely. And the MM is not likely to give away free money - so there would have to be a reason.

Anyone else know ? Any brokers or MMs lurking - care to explain?

 

[elbee]

When submitting an order you can elect for it to be not visible.

This option is not available in many of the retail trading platforms but is available through IB.

 

[Grinder]

Never happened to me, doh..

Here's a theory though, maybe theres a big order in the pipe or just on 1 side of the trade & the MM wants to stretch the spread to catch bigger fish. So to do that, the MM might just fill your smaller order to get you outta the way.

Would also like to hear from a MM.

 

[Grinder]

didnt know that elbee, nice to know.

 

[cutz]

When submitting an order you can elect for it to be not visible.

This option is not available in many of the retail trading platforms but is available through IB.

Hi elbee

With the invisible order, can i assume that only the market makers see it and not retail traders like myself, so if i'm looking at the series with no spreads showing, there could actually be something there, but i just can't see it.

 

[jackson8]

Hi jackson8,

If what you're describing is happening regularly something is not right, in my case I put the sell order through at way below market price and there were no market makers on the scene just a small odd number on the ask, the market makers came on and bought above what I offered but this was a mistake on my part, i’m not sure how this happens.

Normally the way I do it if there are no bid/offers on I check the theoretical price and put the order in way above/below theoretical price as required, wait for the market makers then adjust the order slowly as required till it gets filled and the price is always what I punched in.

further comment to this
whenever i place a bid to buy at market price i always seem to get couple cents cheaper and also on flip side when sell a premium seem to get couple cents more than the market quote..............talking options in 40c-50c spreads and no underlying sp movement. so i always know that spread is little bit closer than shows on screen............ am using basic commsec platform i don't do enough to warrant webiress fees or qualify for free access

have read in American article that mm's could place buy and sell prices as ghosts which do not show up on trading screen to what effect i don't quite understand

also bit weird, placed a limit order on otm buy side in a series where there were no other bid or asks ..........within seconds there were prices on offer both side and with 2 or 3 depth as soon as i adjusted my price to market and order went thru they all disappeared
there were orders either side 15 20 contracts mine was only for 2 so thought it was bit of overkill

anyone with a similar experiences or is it one of those things you just don't question

 

[cutz]

Hi jackson8,

I’m not sure exactly how the process works but when you put an order through a request for a spread is initiated so the market makers shows a spread (normally), I have no idea how it works whether its the broker manually requesting or maybe its an automatic process, I suspect it may be a broker request as once I had to put a phone order through and the broker was able to get a spread to appear then he put my order on.