BUY or SELL Options - Vote

Do you mostly BUY or mostly SELL options?

  • I SELL more often than BUY

    Votes: 23 63.9%
  • I BUY more often than SELL

    Votes: 13 36.1%

  • Total voters
    36

volatileN

Member
93 0
TheBramble said:


So you're effectively pair trading.

But are the pairs options for different underlying instruments or more often for the same, but with different strike/expiry?

Hi,

It is like pairs trading the implied volatilities of different expiries for the same underlying. Sometimes the strike also varies, if I see a wide discrepancy between the 25 delta and the 45 delta relative to its historic average then trade the straddles and hedge out any delta as time/spot move.
 

RogerM

Established member
752 6
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?


TheBramble - my apologies - I've not yet responded to your request for more info.

Actually you do the exact reverse of what you have suggested! Expensive doesn't mean how much the premium is, but what you are paying (or receiving) for "time" which is normally a function of Implied Volatility (IV).

Time decay accelerates as you approach expiry, so you pay/receive more for a "week of time" close to expiry than you do 2 or 3 months out. So ideally you want to sell an option with high IV in the near month and buy an option with low IV in a far month.

Take the US stock SEPR as an example. Today you could sell the March 22.5 calls for 6.3 with an IV of 99.6% (very close to the 12 month high for IV on this stock) and buy the July 30 calls for 4.2 with an IV of 69%, which is very close to the average for the last 12 months. This means that you could sell 2 x March 22.5 calls and use the premium collected to buy the 3 x July 30 calls. If SEPR pulls back to 22.5 then the 2 x Mar calls will expire worthless and you'll be left with the 3 x Jul calls for free. If Price rises then the Mar calls will expire in the money (ITM), but the greater number of Jul 30 calls will partially offset this. Perfection would be for SEPR to pull back to 22.5 for expiry in March so that they expire worthless, and then rocket away whilst you still hold the free July 30 calls. But that's just a pipe-dream. :)

In the meantime, if the stock tanks, both options expire worthless, but as the longs were paid for by the short premium, I breakeven (less dealing costs).

In the diagram below, the worst that can happen would be for the stock to rise to 30, and then stagnate there until expiry in July and for me to sit there and do nothing about it, in which case the July calls expire worthless as well and I lose 15! In practice this is a trade for the March expiry and I'll review it then. This is shown by the pink line, which provided IV doesn't collapse, barely drops below the zero line at any point. This is a trade where I can sleep at night because whatever happens I'm unlikely to get burned badly. This is why I say that options can be lower risk than trading shares directly.

Many traders will sell premium in a front month (maybe a short iron butterfly ( sell 1x100 call, sell 1x 100 put, buy 1 x 95 call, buy 1 x 105 put)) and use the premium to buy cheaper options (i.e. with a lower IV) in the far month.

HTH.
 

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Robertral

Well-known member
446 4
bonsai said:
Robert

in order to hedge an option,just cover with a future.

You mean keep the number of futures fixed for a changing underlying price, i.e dDelta/dS = 0 ????????
 

bonsai

Veteren member
4,106 10
why would you do that ?

sort out an arrangement that suits you.

but if you are going to write naked then you need cover which you can execute quickly or some spare underpants.

assuming you get the direction right.

hedging is the easy bit.
legging out is another matter.
 

ubi

Newbie
9 0
If you don't know anything about synthetics, or even call-put parity you really shouldn't touch options.
 

fildi101

Junior member
16 1
Robertral said:
When you guys write an option how do YOU personally hedge it? What technique do you use?

I write both calls and puts, so one partially hedges the other. I occasionally hedge by buying/selling the underlying to cover.Sometimes I use stops if I'm not going to be in front of my screen. In the event of very low volatilty whilst I'm in a short options postition, I might buy the next strike out to form a credit spread.

mainly though I "hedge" through very conservative money mangement.. If the market makes a wild swing, I fade it by selling more options into the volatility spike.

As a rule.. keep it simple. Cut losses. Plan ahead. and above all... don't get greedy.

btw.. John49 is right.. short put = stock plus short call.

you can hedge both in the same way by selling the stock.
 
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sachuc

Junior member
19 0
I read about this strategy in newspaper[a long 2700put 3000call laid off with short 3200call and short2500put (a combi of bull spread and bear spread)this debit strategy how does it work what is it called when do losses start and when max gains when should this strategy be used and adjustment should be made how does it differ from iron condor which is credit sinflow
Sachuc
 

slik

Junior member
34 2
mainly though I "hedge" through very conservative money mangement.. If the market makes a wild swing, I fade it by selling more options into the volatility spike.

As a rule.. keep it simple. Cut losses. Plan ahead. and above all... don't get greedy.

btw.. John49 is right.. short put = stock plus short call.

you can hedge both in the same way by selling the stock.

Agreed, you always have an exit plan and a stop but to sell vol into a vol spike is dangerous and not for the faint hearted. Imagine selling equity puts in the last 18 months? Dow trades down to 8800 from 9300, short 8500 puts, damm, better sell the 8300 puts at a good premium and a vol spike, the thing shanks through 7800 in 2 days- then what, vol probably bid to the stratosphere. What do you do?

absolutely nothing because you have already blown up and the clearers have already gone to market and liquidated your position.
 
 
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