An option strategy

[one2watch]

I've been doing some paper trading lately in options and I found writing far out call or put options have become more profitable for me except you always have to deal with high margin calls.What I want to know from you guys although writing options can be very dangerous it can be turned to one's advantage if controlled with strict discipline with stoploss etc is this sort of trading common in the industry?
Many thanks for replies

 

[gooseman]

it's generally vol dependent. in low vol environments (like europe 18 months ago) being short gamma and writing teenies was a fairly safe way to make money. when vol is exploding (like now) the premiums are more so you take in more, extreme moves such as in bund/bobl/schatz/sterling/euribor can cause big margin calls and can sometimes fly into the money. personally doing that in these environments is not the best way forward.

do you hedge your options exposure?

 

[A Dashing Blade]

Stoploss on an overnight 20% market gap . . . . ?

 

[one2watch]

it's generally vol dependent. in low vol environments (like europe 18 months ago) being short gamma and writing teenies was a fairly safe way to make money. when vol is exploding (like now) the premiums are more so you take in more, extreme moves such as in bund/bobl/schatz/sterling/euribor can cause big margin calls and can sometimes fly into the money. personally doing that in these environments is not the best way forward.

do you hedge your options exposure?

I don't hedge my positions(not that pro yet) I just right calls or puts teenies and watch them expire worthless. I deal in ftse index options only. I work on stop losses normally 3 times my intake and at the moment I am constantly returning 7 trades out of 10 right.

 

[gooseman]

you could return 9 trades out of 10, the big factor is how much you lose on your one.....

it;s a ballsy strategy to be fair....

 

[one2watch]

you could return 9 trades out of 10, the big factor is how much you lose on your one.....

it;s a ballsy strategy to be fair....

well it's 600 for each trade times 10 so £6000 losses on the losing trades £3600 so cash positive £2400 if I had the resources to play big money this could be 10 times over. Any suggestions for better strategies? that's why I am here disscussing with you pros
Regards

 

[one2watch]

Stoploss on an overnight 20% market gap . . . . ?

how do you mean? so i am writing a put index option for say 6p how much is my stoploss to buy it back?

 

[gooseman]

depends what you're basing your strategy on. do ou have a volatility model? are you using an options pricing model, or are you just writing them because they're miles away from the money?

 

[one2watch]

depends what you're basing your strategy on. do ou have a volatility model? are you using an options pricing model, or are you just writing them because they're miles away from the money?

because they are miles from money basicly. I choose to go in when I think market's bottomed out or peaked and write appropriate option then. I don't normally touch it when it's sidelined unsure where it's going.

 

[gooseman]

for me if you're trading options then you need a model. even if you use implied vols from the market then at least you know what you're dealing with. otherwise at some point, such as the last couple of days in the govvie, interest rate markets you will get your a*se handed to you on a plate.

i can see the logic in what you're doing in a low vol environment but i could give you more than a handful of examples of people carrying out the same strategy and getting carted.

to set your stoploss you need to know the delta of the option whihc again comes back to vol....

 

[fibonelli]

works 99 times out of 100 until ..........:arrowd:

 

[abottoml]

You could go on and write nice & safe OTM naked options for years and generate loads of little profits, but then, when you least expect it, there will be a completely unexpected move in the underlying which wipes out your account and sends you back to day one. This sort of thing has happened an untold number of times I have been led to believe.

Perhaps you could try doing some defined risk vertical spreads with 2:1 Reward:Risk ratios? If you limit your risk, your broker lowers the margin requirement.

Vertical spread - Wikipedia, the free encyclopedia

So mathematically, if you assume that you're only going to be successful in judging the movement of the underlying instrument 50% of the time, and your payout on an option spread is +2 beans when you're right and -1 bean when you're wrong, then over time you make positive returns. The margin requirements are not high, so you can enter quite a number of simultaneous vertical spreads if you like/dare.

So it's easy money! Well, in theory at least ...

 

[A Dashing Blade]

how do you mean? so i am writing a put index option for say 6p how much is my stoploss to buy it back?

You don't have a stop-loss overnight, it is only valid during trading hours.