BUY or SELL Options - Vote

[TheBramble]

As an ex-options buyer I came across a piece in Piper's book (Way To Trade) about the relatively low probability of making money buying options. In that there is a much higher probability of profit in selling them.

My lack of success in options in the past was more likely to due to faulty trading techniques and incorrect risk/money management than any inherent probabilistic bias.

But do the majority of options traders on t2w mostly buy or mostly sell options?

 

[bonsai]

most options expire worthless, whether you buy or sell.

the profitable route is to write options.

but you had better know what you are about.

 

[RogerM]

This is a very sweeping generalisation, but when Implied Volatility (IV) is high, then I'm a net seller, and when IV is low AND RISING I'm a net buyer. But it's not as easy as that! If you insist on selling options naked - especially large numbers of "puts" you will eventually get taken to the cleaners by a major news event to the extent that several years profits will be wiped out in one go, and maybe more. So I prefer to be a seller of expensive options and cover them by buying cheaper options. That way I get to sleep at night.

 

[TheBramble]

RogM - how do you do that (if it's not a trading secret of course!).

Sell expensive means deep in-the-money far month (I'm guessing). But how can you 'cover' these with cheaper (out-of-the-money, near month???) options?

 

[osho67]

I would like to learn more about IV and how to interpret it. Is there some site whre I can get these figures for US stocks and Indices? Thanks

 

[Marc100]

"But do the majority of options traders on t2w mostly buy or mostly sell options?"


I would be happier if you added a third category as the strategies I employ use equal amounts of bought and sold options, collars, bull spreads, bear spreads & horizontal spreads.

If I had to lean one way then it would be the buy side as I would rarely entertain going naked on the sell side. Only time I would entertain selling naked would be if I was willing to own the stock so, short put.

Rgds

Marc.

 

[johnk49]

Naked Options

There seems to be a lot of confusion about naked options(even by brokers).In the US one of the safest strategies allowed in your IRA is the writing of covered calls,yet it is almost identical to selling naked puts!!!

Work it out!!

 

[volatileN]

My own options strategy involves being long one option against an equivalent short of a different expiry (and sometimes strike). It is a systematised calendar spread strategy.

These days I only trade the S&P 100 and 500 contracts or the QQQs due to the liquidity and relative ease of entry and exit.

What I do is I receive live prices for the options in question, extrapolate the implied volatilities for each strike and expiry and store them in an sql database. Then I plot an implied volatility surface (using a spline smoothing function between the data points).

Collecting all of the historic data allows me to visualise when the vols are high and low at different points on the surface relative to the historic values. I then go short the high, long the low and await convergence whilst hedging my delta in the cash market. The ratios are important as one wants to start out with matching vegas (so the + and - are 0).

This has made me an average of around 300% a year for 4 years with the worst year at 46%.

The attached is a sample surface I did for some currency options I was playing with... they didn't work out so well in the trials so I never adopted it but the principle is the same.

 

[johnk49]

Naked Options

There seems to be a lot of confusion about naked options(even by brokers).In the US one of the safest strategies allowed in your IRA is the writing of covered calls,yet it is almost identical to selling naked puts!!!

Work it out!!

 

[TBS]

Re: Naked Options

There seems to be a lot of confusion about naked options(even by brokers).In the US one of the safest strategies allowed in your IRA is the writing of covered calls,yet it is almost identical to selling naked puts!!!

Work it out!!

.. ermm, no it isn't - naked means you do not own any of the underlying stock, the strategy of selling a covered call applies if you own the underlying stock and are capable of delivering it to whomever you sold the option to buy - you are limiting your downside by virtue of the fact you own the stock.

 

[osho67]

Dear VolatileN

Your post is very encouraging, though technical for me to understand . I would be much obliged if you can give details of actual or hypothetical trade with profit outcome and I might understand it a bit more. Thanks

 

[RogerM]

Hey! This is becoming a great thread.

volatileN - I like your calendar spread strategy. How are you interpolating the IV? Is the sql database one you have programmed yourself or is it a proprietory one? Does it enable you to set an alert for when (say) the IV skew between near and far months exceeds a certain level?

TBS - at the risk of indulging in semantics, wouldn't you say that the positions were near enough the same PROVIDED that you held sufficient funds to buy the shares that the short put makes you liable for, and ignoring dividends?

marc100 - I don't disagree with your sentiment. I am not allergic to holding short calls on indices (NOT shares) on the basis that a spike up should always revert to the mean and won't continue for ever, so you can maybe roll out into a later month. Just pray that your margin will stand it tho'.

 

[johnk49]

Re: Re: Naked Options

.. ermm, no it isn't - naked means you do not own any of the underlying stock, the strategy of selling a covered call applies if you own the underlying stock and are capable of delivering it to whomever you sold the option to buy - you are limiting your down
side by virtue of the fact you own the stock.

No you are wrong!!

This is what I mean when I say people get confused.

Look,buy stock at 50 sell a CC at 50 for 1 stock drops to 40 you are 9 down.

Sell a naked put at 50 for 1 stock drops to 40 stock will be put to you at 50 minus the 1 you received you are 9 down.Exactly the same!

If,at expiration,stock is above 50,1 point will be gained in both instances!

It does not matter how low or how high the stock goes the results for both are the same.You could say the naked put has the advantage in that the margin requirement is a lot less than buying the stock!!

 

[Robertral]

Re: Re: Re: Naked Options

No you are wrong!!

This is what I mean when I say people get confused.

Look,buy stock at 50 sell a CC at 50 for 1 stock drops to 40 you are 9 down.

Sell a naked put at 50 for 1 stock drops to 40 stock will be put to you at 50 minus the 1 you received you are 9 down.Exactly the same!

If,at expiration,stock is above 50,1 point will be gained in both instances!

It does not matter how low or how high the stock goes the results for both are the same.You could say the naked put has the advantage in that the margin requirement is a lot less than buying the stock!!

TBS is correct. Naked call/put means that you sell the option without being hedged with the underlying. Delta hedging ring any bells?

Covered call loss aproximatly zero with correct hedging
Naked put loss is K-S

 

[TBS]

Hey! This is becoming a great thread.


TBS - at the risk of indulging in semantics, wouldn't you say that the positions were near enough the same PROVIDED that you held sufficient funds to buy the shares that the short put makes you liable for, and ignoring dividends?

No :cheesy: Completely different risk profile - if you already own the stock, then you are covered.

If you 'intend' to buy the stock if things go against you then you are not covered and are open to some really nasty surprises. (like some idiot at SHEL can't count)

Plus, if you own the stock you may be more willing to trade closer to the money - if you are agressive - or to the other extreme, waaaaaaaaaaay out of the money because you see it as an enhancement to a position rather than a separate position in its own right.

The strategy and the psychology of a covered call - and its affect on the trader and the margin affects on accounts etc... are very different to straight nakeds.

BTW bought SHEL 420 dec calls for 5p today for a giggle

 

[bonsai]

johnk

you should look to write calls when at the top of a range.

you should look to sell puts at the bottom of the range.

it is not the intention of either that you should be exercised.

 

[johnk49]

Re: Re: Re: Re: Naked Options

TBS is correct. Naked call/put means that you sell the option without being hedged with the underlying. Delta hedging ring any bells?

Covered call loss aproximatly zero with correct hedging
Naked put loss is K-S

It's obvious you people aren't very familiar with options.

THE RISK REWARD IS EXACTLY THE SAME!!!

Read the examples in my last post and then give me an example of why it is different!!

 

[volatileN]

RogerM - In answer to you question, I extrapolate the vols using Newton-Raphson and interpolate between the points using 2 methods. I am still undecided on which I prefer. The first is a cubic spline the other a straight line interpolation (take the vols down to the variance, interpolate across and raise back to the standard deviation / implied vol). As neither are 100% it doesn't really matter but I think the smoothing feature helps a bit and it is what a lot of the guys in the OTC market use so it makes it a bit closer to the prices you would theoretically get.

The alerts system and other automation features are being written at the moment. I want to turn it into a complete black box.

I did not personally program much of the sql database, nor do I do much of my own programming as I have a highly experienced programmer in my employment. In fact we are toying with releasing some of our programs for sale to the public in Q4 this year. If you keep in touch / remind me nearer the time I will put you down for beta testing if you would be interested. That way we get free feedback and you get free software. Let me know if you are interested


osho67 – In answer to yours. It is really not technical at the functional level. At its most basic consider the following theoretical example:

Spot is at 1000, divs and rates are =

The June ATM vol is 28%
The Sept ATM vol is 35%

Your model tells you that there is an 80% chance of a convergence between the two as the historic mean over x period is a spread of 2%. You buy straddles on the Junes and sell them on the septs in such ratios that you are vega neutral. You then flatten out any residual delta in the spot market. When the spread converges you have made a profit of the % convergence multiplied by a vega figure calculated as a function of the individual straddle vegas. (This is not 100% predictable as it depends to an extent on which rises and which falls. There are obviously limits either side).

If you are long the nearer expiry then you are paying theta so need to monitor the negative impact of this (obviously this cuts both ways though).

In my experience the longer dated spreads are better as there is less of a theta consideration, obviously this also means that gamma is less of an issue so you pay less commission in doing your delta.

My stop loss is a function of time and price. If I wait more than x days (the value of x depends on how far out each expiry is) then I would close if heta was working against me, not otherwise. If I lose more than 50% of my target profit then I stop out.

It is really just like pairs trading equities but with far less risk and a greater probability of profit.

Hope this helps…

VN

 

[Robertral]

Re: Re: Re: Naked Options

No you are wrong!!

This is what I mean when I say people get confused.

Look,buy stock at 50 sell a CC at 50 for 1 stock drops to 40 you are 9 down.

Sell a naked put at 50 for 1 stock drops to 40 stock will be put to you at 50 minus the 1 you received you are 9 down.Exactly the same!

If,at expiration,stock is above 50,1 point will be gained in both instances!

It does not matter how low or how high the stock goes the results for both are the same.You could say the naked put has the advantage in that the margin requirement is a lot less than buying the stock!!

I wouldn't be 9 down with my covered call as my delta would be approximatley zero if S is down to 40, hence no underlying for me

 

[johnk49]

Re: Re: Re: Re: Naked Options

I wouldn't be 9 down with my covered call as my delta would be approximatley zero if S is down to 40, hence no underlying for me

What ARE you on about????