Options Trading

1st Aug '12 by Isaac

17 comments 10258 reads

I've never traded Options before, I started for the first time today having done a bit of reading.

I think the markets have had a good run the last few weeks with the expectation of more easing etc etc with the FED downgrading the growth forecasts and not pumping anymore money I think the markets will be disappointed.

As such I have sold an out of the money August Call option at a strike price of 13.350 at 19.

Time will tell whether I am setting myself up to look silly here, but I don't think the markets are likely to rally 400 points in the next 2 weeks when the option expires.

With the Olympics and the Summer holidays I think the markets are at best likely to move sideways.

Therefore I hope to collect the decay on the option.

What is interesting is had I sold Dow futures instead of the call option I would be in the money, but I am still yet to cover the spread on my option despite a 50 or so point move since I opened my position.But conversely with the DOW trading around 12,968 there needs to be a 382 point move higher before I lose. Whereas a 50 point move up from here will put me at a loss on a DOW Future.

I think selling out of the money Call options when the market has had a decent run and selling put options after a significant decline is the best way to make money from options.

Simply be collecting the premium.

I think 8/10 times one will make money, but will get hit the other two times, I guess the trick is to know when the avoid the trade.

I may try the strangles/straddles at somepoint as I learn more about options.

I am sure there are more experienced and knowledgeable posters on these boards, feel free to share your views.

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Isaac

15th Aug '12

I think the DOW was around 13,050 when I sold my call option. The DOW is a 13,165 at the moment. I would be at a loss had I traded the DOW.

Instead my option's well in the money.

Two more days till expiry, plenty of time to reverse the gains easily, DOW could easily rally 200 points from here.

I will take it to expity and see what happens.

Today I sold Sept FTSE call options at 6050 @ a 22 premium, aiming to collect decay over the next month.
September/Oct usually one of the worst months.

Let's see how it goes.

loglorry

Picking up pennies in front of a steamroller maybe?

Maybe.

I think 8/10 times I will collect and 2/10 I will pay out, The trick is to know when to stay away.

Time will tell if this pays off.

emptyend

16th Aug '12

Sigh. Why do people do this?

This looks a decent site for the basics but take a careful look at your position and then consider it in the context of this article about the VIX being at record lows.

I've got 30 years of option theory knowledge but have rarely been tempted to consider trading P/A....only once, over 20 years ago.

ee,

Thanks for sharing the link, It is a very good site.

The DOW closed at 13,250 - What is the liklihood of the DOW futures rallying 119 points by the market open tommorow?

Anything can happen ofcourse, but if it opens below 13,369 then I will collect. I think there is a high chance I will collect the +19 premium tommorow.

I am less confidence about my short FTSE call at 6050 - A 200 point rally in the FTSE in the next month will put me OTM. Very possible.

The markets have had a good run on light volume, good data is supporting the markets. Good data means QE less likely so encouraging for the bulls the market is holding up.

I can't see QE if the DOW is above 13,000 - Why should they stimulate the markets at these levels?

The FTSE is up 500 points from early June, 10 weeks of rises. Can it continue ? Yes.

Volatility increases the most during down markets, so I appreciate Vega may rally hard but at the same time if the option stays out of the money at expiry I will collect the premium.

September historically tends to be the worst month of the year for markest, time will tell how next month turns out.

The DOW closed at 13,250 - What is the liklihood of the DOW futures rallying 119 points by the market open tommorow?

Anything can happen ofcourse, but if it opens below 13,369 then I will collect. I think there is a high chance I will collect the +19 premium tommorow.

Dunno. But then I don't know what is going to happen during Friday trading in China or Japan - nor whether Friday morning in UK/Europe will bring news.

Fangorn

17th Aug '12

Tend to agree with EE as well. I'd only consider Options/Derivatives "PA" positions from a purely hedging point of view, either to safeguard my portfolio as a whole , or an exposure that formed a significantly large percentage of it.

Wouldn't dream of trading such instruments for my own account. A mug's game imo. But each to their own. Good luck to you in your endeavours Isaac.

Issac you seem to be trying to game the options a bit by using historical factors like "september is usually a weak month" and surely the DOW can't extend its gains once it has run up so far.

Unfortunately, and perhaps quite obviously, it has been shown (at least in theory) that none of this stuff matters on average. You may choose to think you know better but if such a simple strategy was possible billions of dollars would follow it and consequently the opportunities would evaporate.

Stock prices follow a stochastic process at least once aggregated in an index. This means that there is no history built into their direction. They won't necessarily go down just because they have gone up (no mean reversion). Options price using black scholes and other models fundamentally assume this to be the case.

My rather curt reply earlier was trying to get to this. You might think by writing naked options out of the money and collecting premia you have a money making scheme but statistically along will come an event where you'll loose all you have made if you do it long enough.

There are some situations where you can make money out of optionality but not many available to private investors. For example sometimes convertible bonds are issued where the implied volatility in the embedded call option is much lower than the volatility of the underlying stock. This is usually to get issue away at a lower coupon. In these cases you can buy the CB and write calls against it. This is an institutional game though and you'd likely be stuck with the credit risk still unless you can swap it away.

I'm afraid there really is no short cut here. Your options trading will only likely make your broker well off and not you. You can obviously get very lucky but don't forget your upside is limited to the premia you receive but your downside is very large should the position go against you quickly.

Log

I've just lost my reply which is very annoying!

I collected +19 n my DOW option and closed my FTSE call for +2. Hd aI shorted DOW at 13,050 I would be out of the money byt 200 points, so by selling Dow calls I made + 19.

WTI Call option with $120/bbl strike is trading at +13 premium expiring 21st Sept. What is the liklihood of WTI rallying another $25 after the recent $15 rise in the next month?

If Iran blows up possible, but unlikely.

WTI Call option with $120/bbl strike is trading at +13 premium expiring 21st Sept. What is the liklihood of WTI rallying another $25 after the recent $15 rise in the next month?

If Iran blows up possible, but unlikely.

Yes - unlikely....but not a particularly remote possibility given the way the rhetoric is being ratcheted up.

Where would the oil price go to in the immediate aftermath? $150, $180, $200?

That is why the call premium is where it is.....

I'd put the chance of something major happening in that timeframe at around 5%...but then I know nothing, and insiders might take a different view (and be keener to buy protection?).

19th Aug '12

David Schwartz points outs the up's and downs in the FTSe over the past year :

Interesting graph, basically he thinks the next down turn will be related to something coming out of Greece.

Maybe - I have no idea, Markets have had a good run & nothing goes up or down forever, it would be good to get a 100+ point up move in the FTSE or a 200+ point up move in the DOW from here to sell some Sept call options - I plan to be patient in the interim.

MadDutch

20th Aug '12

This thread is about gambling with the odds stacked against the punter.

Gazing at a glowing screen is a sad and lonely way to lose money, but there is a much more fun filled way;

Go to a casino. They will treat you like royalty while they strip your wallet and you enjoy the luxurious surroundings.

Well the FTSE call option traded at 13 today meaning I could have collected +8 had I held on.

One thing to note though is these small moves are causing big swings in the option price.

It would be interesting to watch how it pans out if it goes the other way.

30th Aug '12

I think it is fair to say the above post is a load of rubbish - It is clear that it made perfoect sense to have downside protection 10 days ago.

1st Sep '12

It is fair to say that the gift of hindsight is as flawed as the belief that everyone is motivated by greed.

extrader

Hi all,

I'm with MadDutch on this one : a casino's more fun !

I still remember with fondness an evening at the Cairo Marriottd during the course of a business trip with a Bahraini colleague.

The star attraction ( a 50+ belly dancer btw) kept delaying the 'around midnight' start of her performance, so we went to the tables to kill time.

I showed my colleague the rudiments of vingt-et-un and we started playing, discovering to our delight that the casino had a refreshingly generous comping policy re 'beverages'.' After several hours' play, interrupted by breaks to check on the star's 'progress' and alternating periods of profit and loss, we ended 'up' about $80......and the better for about 6 G 'n T's. My colleague, whose first visit this was, was suitably impressed at management's 'hospitality'.

And we never did get round to seeing the belly dancer do her stuff......

My only regret, extrader, is that I was not with you and your Bahraini friend on that evening.

I have fond memories of entertaining evenings like that, in several of the world's flesh pots! ;-)

The most important thing is having good mates present, adding to the laughs.

Options Trading

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Isaac

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