Trading Options

This is a discussion on Trading Options within the Futures & Options forums, part of the Markets category; Hi to all, does anyone trade Options?...

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Old Apr 7, 2003, 11:56pm   #1
 
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Trading Options

Hi to all, does anyone trade Options?
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Old Apr 8, 2003, 8:25am   #2
 
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I used to write covered calls but find it hard to make a profit in the bear market. Now, I sometimes buy out of the money calls if I think the stock or index is going to make a large rise.

At first I used Options Direct but now I use IG Index spread bets on index options. I have been looking at the more complex options strategies but haven't started trading them yet.

This website explains some of the strategies:-
http://www.mrstock.com/resourceCenter/strategy.msp
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Old Apr 8, 2003, 9:19am   #3
 
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Yep - have a look at the "bear market intact" thread (01.12.2002) to see the type of strategy I use.

http://www.trade2win.co.uk/boards/sh...&threadid=4326

Typically I'm looking at short strangles, ratio put and call spreads, and synthetics (straight and split strike).
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Old Apr 9, 2003, 1:28pm   #4
 
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Late yesterday afternoon I took the view that the ftse was likely to head down and I wanted to benefit. I didn't like the idea of going short the ftse future and holding overnight. If the ftse moved against me, then it would be an instant loss. So instead look at Options.

IMHO it appeared unlikely that the ftse was going to break thru the 4000 level anytime soon. I could have bought puts, but if the index didn't move, or only fell by a small amount I would be in loss. So instead I sold April ftse 4025 calls for 17. This means that provided the ftse 100 does not exceed 4025 by expiry (next Thursday - Friday being a bank holiday) I get to keep the premium of 17 (£170 per contract). Seemed like a reasonable bet.

If the ftse exceeds 4025, then the short calls will acquire intrinsic value and I lose £10 per point per contract for every point in excess of 4025.

If the ftse rises, but does not exceed 4025, then I still get to keep the premium of 17. As the ftse 100 rises, it will be more than offset by the fall in time value.

If the ftse stagnates at current levels, I get to keep the premium as time value erodes and the option expires worthless at all levels below 4025 next Thursday.

If the ftse falls, the value of the option collapses (that's good) as both time value erosion and fall in the ftse 100 does its stuff.

If the ftse looks like its going to breach 4025 before expiry, I can buy back the calls at a loss, but pay for them by selling May Calls higher up - probably at around the 4175 or 4225 level. This is known as rolling out into the next month. This gives the strategy more space to come good, although more time to carry the risk.

In practise, the ftse fell this morning, and I was able to buy back the calls for 9 (£90 per contract) giving a profit before dealing of £80 per contract. I regard this as a low risk play as the index would have to have risen by 150 points (thru 4025) before I lost money, yet I was able to profit nicely from a fall of 50 points. I still think the chance of the ftse being above 4025 by next Thursday morning is low, but the maximum profit from this strategy is £170 per contract if the calls expire worthless. With £80 per contract on the table after only 4 trading hours, that's 47% of the potential profit in 7% of the time, so best take it. No drama, low stress, time for a cuppa before making any decisions!

By taking a short position by selling calls rather than buying puts, time value erosion is working for me rather than against me, and I can be relaxed at modest moves against me. That's one reason I like options.
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Last edited by RogerM; Apr 9, 2003 at 2:07pm.
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Old Apr 9, 2003, 11:09pm   #5
 
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aacharya started this thread Hi Roger M, htanks for replying to the thread. Your reply is very informative. I am thinking of buying June ftse 3300 put. Any comments? Where does one get options EOD data for MetaStock?
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Old Apr 10, 2003, 12:12am   #6
 
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I only ever buy or write European options rather than American style options because you can only be assigned at expiry with Europeans, whereas you can be assigned at anytime with American options. Therefore I would ignore the 3250/3300/3350 series and only look at (say) 3275/3325 etc.

The 3325 puts are 49 at todays expiry. You could pay for them by selling the 4225 calls for 42, for a net 7 debit. Or sell 2 x 4225's, bringing in 86, which would enable you to buy the 3575 puts. Depends how far you see the ftse falling. Clearly you will profit earlier with the 3525's whereas you have to carry the risk that the ftse may never get to 3325, in which case the 3325 puts expire worthless, whilst the 3525's would have an intrinsic value of 200.

If you don't like the idea of 2 x naked calls that close, you could sell sinlge calls, and make up the extra premium by selling puts at a lower strike to turn your long puts into a vertical put spread. e.g. buy the 3525 put for 86, and sell the 3325 put for 43, and the 4225 call for 43. This would put you into the strategy for free (you've sold calls and puts for 43 each, bringing in 86, and spent 86 on the long 3525 put). At expiry you break even at any level below 4225, and go into profit below 3525, with profit maxed out at 3325 (the level of the short put).

Or you could sell twice the number of calls (say the 4325 calls at 24.5) and still sell the 3325 puts. This would bring in a premium of (2 x 24.5) + 43 = 92, whilst spending 86 on the 3525 long put, leaving you with a credit of 6 for the strategy.

Lots of ways to tackle this one! I am just allergic to paying for long options - I prefer to pay for them by selling others at levels which I feel are unlikely to be reached.

Why do you need end of day data for Metastock for options? Prices can be obtained from the LIFFE website, or if you use ODL Securities (formerly Options direct) you get MyTrack r/t for free so long as you place at least one order per month on-line.
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Old Apr 10, 2003, 12:59am   #7
 
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aacharya started this thread Thanks Roger(m), i like the idea.It's new to me but very interersting.
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Old Apr 10, 2003, 7:43am   #8
 
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aacharya started this thread Hi Roger M, For a new comer to start off in options.what is the route one should take? In terms of software books, brokers,collecting information,tipsters options authorities etc...
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