Delta Neutral Trading
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Roger,
Thanx for your intervention on this thread. There are some people here [beeryboy] that needs to be taught a serius lesson in life. I did NOT plan to come back to this thread at all!!
The reason i came back was to put a stop to this guy's offensive behaviour and FALSE accusations of others. He INSULTS people without realising it or he does it on purpose.
Beeryboy,
We all know, youve made it very clear to all that you are a genius at Maths,spellings, Options, english etc... We all give you a BIG round of applause, a standing ovation perhaps?
So big boy, get it through your head DONT make comments about me or personal attacks in this forum or any other place and i'll keep out of your FACE!!
Get some sleep! You did not have to post that early in the morning.
Bull
People in glass houses should not throw stones
Happy trading and good luck in your life.
Thanx for your intervention on this thread. There are some people here [beeryboy] that needs to be taught a serius lesson in life. I did NOT plan to come back to this thread at all!!
The reason i came back was to put a stop to this guy's offensive behaviour and FALSE accusations of others. He INSULTS people without realising it or he does it on purpose.
Beeryboy,
We all know, youve made it very clear to all that you are a genius at Maths,spellings, Options, english etc... We all give you a BIG round of applause, a standing ovation perhaps?
So big boy, get it through your head DONT make comments about me or personal attacks in this forum or any other place and i'll keep out of your FACE!!
Get some sleep! You did not have to post that early in the morning.
Bull
People in glass houses should not throw stones
Happy trading and good luck in your life.
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Sorry admin, point noted.
I have just been talking to some options brokers I know (who deal with people on this thread). I just wanted to know how everyone who sells OTM options how they fared in the late 80s? There was some fair volatility, and anybody without proper risk management would not have done too well! Now that's an example of a time when someone may have been doing very well prior to it, but probably went bankrupt due to it.
I have just been talking to some options brokers I know (who deal with people on this thread). I just wanted to know how everyone who sells OTM options how they fared in the late 80s? There was some fair volatility, and anybody without proper risk management would not have done too well! Now that's an example of a time when someone may have been doing very well prior to it, but probably went bankrupt due to it.
beeryboy. Whilst I agree that normally the profit is on the side of the option seller because time value is ALWAYS on the side of the seller, there are times when it becomes very difficult. I think "now" is one of those times. For the last couple of years, for much of the time, taking in premium was deceptively easy as IV fell steadily from high to low to even lower levels. But with IV now near all time lows it is inevitable that at some stage sellers will be confronted with steadily rising IV, and that is when selling premium will seem really hard to do profitably. I think those that leave themselves exposed to a naked position will find it turning and biting them on the bum before long.
Maybe the time has come to consider other strategies. For instance, 1 x 2 ratio backspreads (either calls or puts) enable you to fund a long position by selling ATM. e.g. Sell 1 x ATM 100 call for 8 and buy 2 x 105 calls for 4. This gives complete protection on the downside, unlimited profit potential to the upside (you are net long 1 call), but leaves limited downside exposure if the share/index stagnates around the 105 level. This type of position is vulnerable to a collapse in IV (hardly likely from current levels) and benefits in the event of an increase in IV. If the position stagnates, then close out early whilst there is still some time value left in the longs.
Maybe the time has come to move away from the single strategy "sell options" trade and do something that will benefit from an IV spike.
From a personal perspective, I have been a FTSE 100 index trader (i.e ESX), but now find the premiums available unacceptably low for my usual short strangle or straddle position. I don't like the surprises that may come from single share options, but think there could be some mileage in shares on sectors - e.g. the SPDRs and ETFs on the NYSE, many of which are optionable. Any thoughts anyone? Maybe a topic for a separate thread?
Maybe the time has come to consider other strategies. For instance, 1 x 2 ratio backspreads (either calls or puts) enable you to fund a long position by selling ATM. e.g. Sell 1 x ATM 100 call for 8 and buy 2 x 105 calls for 4. This gives complete protection on the downside, unlimited profit potential to the upside (you are net long 1 call), but leaves limited downside exposure if the share/index stagnates around the 105 level. This type of position is vulnerable to a collapse in IV (hardly likely from current levels) and benefits in the event of an increase in IV. If the position stagnates, then close out early whilst there is still some time value left in the longs.
Maybe the time has come to move away from the single strategy "sell options" trade and do something that will benefit from an IV spike.
From a personal perspective, I have been a FTSE 100 index trader (i.e ESX), but now find the premiums available unacceptably low for my usual short strangle or straddle position. I don't like the surprises that may come from single share options, but think there could be some mileage in shares on sectors - e.g. the SPDRs and ETFs on the NYSE, many of which are optionable. Any thoughts anyone? Maybe a topic for a separate thread?
Airthrey Capital
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RogerM said:
Good post, Roger.....
I, like many others I am sure, have also adopted a strategy of selling strangles and straddles which has served me well over the last 12 months. IV has dropped considerably, and there are many different explanations as to why this has happened, not least that the MPC and the Fed have learnt to manage and communicate with the markets in a much more orderly fashion, providing us with no surprises anymore.Corporates are also managing to do the same. It could also be argued that market pricing is more and more efficient, giving the increased amount of arb activity from the hedge funds.As a result, there are fewer opportunities to find assets which are either under or over-priced.
Your view that IV must start to rise again is one I share, it is simply a matter of when and how fast. With an election approaching, I suspect that in itself may add some spice to IV. Strong oil prices and the weak dollar seem to already be discounted in the marketplace (I'm talking about FTSE here). Many commentators still regard FTSE to be farly valued, and with the likes of shell and HSBC breaking profit records, we may see more of a move to the upside. Those who are short OTM calls may find themselves unstuck soon.
Your suggested strategy makes sense, as I too believe that selling IV has now run its course. It is time to buy.
Beery Boy, Bulldozer, Wisest Guy et al......
I have followed this thread with some amusement. Trading options is all about finding a suitable strategy that suits your style as well as the prevailing market conditions. The objective, of course, is to make money, be profitable, and ensure that you are managing your risk-reward ratio in a way that is acceptable to what you can bear.
But in order to do so, you must of course understand the market and instrument you trade. I am sure we all agree with that.
Trading options is not about who knows best, who is smart or who is stupid. If it was, I would have left this game a long time ago.
Nice posts guys,
I agree completely with both of you, as I said there are some on this thread who have said that selling OTM is the only consistent way to make money.
I think this has worked well in the past and some people maybe feeling a bit invincible due to it, but I think it's going to wipe out a lot of traders soon (just as it did in the late 80s).
Only a matter of when not if.
I agree completely with both of you, as I said there are some on this thread who have said that selling OTM is the only consistent way to make money.
I think this has worked well in the past and some people maybe feeling a bit invincible due to it, but I think it's going to wipe out a lot of traders soon (just as it did in the late 80s).
Only a matter of when not if.
Roger, AC,
"Trading options is not about who knows best, who is smart or who is stupid. If it was, I would have left this game a long time ago."
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I'm sure we all totally agree with your comments. Selling naked PUTS is NOT the correct thing to do, [without protection]
I for one do not advocate that it should be done. Unfortunatly some times people get the idea that your/I'm advocating this, because they read something that it is not said and they get the wrong picture and then it gets nasty and insulting, as it was the case in this thread.
However, I do sell many contracts that are OTM and not ATM or ITM. [all protected] i never at any stage in my post said they were naked. If people misunderstand things in the post thats their problem.
Bulldozer
You dont need to be a genius to have common sense, but you need some common sense to be a genius.
"Trading options is not about who knows best, who is smart or who is stupid. If it was, I would have left this game a long time ago."
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I'm sure we all totally agree with your comments. Selling naked PUTS is NOT the correct thing to do, [without protection]
I for one do not advocate that it should be done. Unfortunatly some times people get the idea that your/I'm advocating this, because they read something that it is not said and they get the wrong picture and then it gets nasty and insulting, as it was the case in this thread.
However, I do sell many contracts that are OTM and not ATM or ITM. [all protected] i never at any stage in my post said they were naked. If people misunderstand things in the post thats their problem.
Bulldozer
You dont need to be a genius to have common sense, but you need some common sense to be a genius.
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Windlesham1
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Of course IV may always be at this level as programme trades(and ******** hedge funds) dominate the market and the fact that IV is low 'means' that the market has less risk. I've heard the argument that IV returns to the norm over time-well define the norm,I say. I am currently short some naked otm puts,but last month I bought some and watched them evaporate.Seeing the writing on the wall I was able to sell against them,and mitigate the loss. I only buy options as part of a spread normally,so my message is NEVER EVER BUY NAKED!
PS Historical 12month vol for ftse cash is about 15.4% I'm looking back at the last 10 years to compare-if it means anything. Don't ya just love the nuts and bolts of options trading? Who could get involved with boring old shares!
PS Historical 12month vol for ftse cash is about 15.4% I'm looking back at the last 10 years to compare-if it means anything. Don't ya just love the nuts and bolts of options trading? Who could get involved with boring old shares!
Profitaker
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At last some interesting points !
I see nothing wrong in selling naked options. The problems arise through leverage, which seems to be rarely discussed. For example, which is more risky for a £ 30k account - selling 5 x BARC 600 Puts naked or buying 5,000 BARC shares at £ 6. In this example with no leverage, I suggest the risks are exactly the same. So why then do people bang on about the dangers of writing naked ? Now, if we instead sell 10 x BARC 600 puts naked the leverage has gone from zero to 200%, and with any adverse movement in the underlying now hitting the account twice as hard, it’s easy to see how wipe-outs occur. Naked is not dangerous, leverage is dangerous.
As for leverage in the options themselves, the further OTM we sell the more the leveraged options become and I can only assume that this was the risk that Beeryboy alluded to – whereby if we get carried away writing OTM, what at first seems like money for old rope can wipe you out in a single day, given a large adverse move. But again, I see nothing wrong with this strategy providing one watches total exposure and actively manages risk.
Interesting views from Airthrey as to the cause of low IV. But I’m not so sure it’s about to rise, Why should it ? What will be the catalyst ? The market has 1 year ESX IV at 11.3%, and barring a major terrorist attack, I’m inclined to agree with that consensus view.
Windlesham - I have FTSE100 1 year HV at 10.09%.
I see nothing wrong in selling naked options. The problems arise through leverage, which seems to be rarely discussed. For example, which is more risky for a £ 30k account - selling 5 x BARC 600 Puts naked or buying 5,000 BARC shares at £ 6. In this example with no leverage, I suggest the risks are exactly the same. So why then do people bang on about the dangers of writing naked ? Now, if we instead sell 10 x BARC 600 puts naked the leverage has gone from zero to 200%, and with any adverse movement in the underlying now hitting the account twice as hard, it’s easy to see how wipe-outs occur. Naked is not dangerous, leverage is dangerous.
As for leverage in the options themselves, the further OTM we sell the more the leveraged options become and I can only assume that this was the risk that Beeryboy alluded to – whereby if we get carried away writing OTM, what at first seems like money for old rope can wipe you out in a single day, given a large adverse move. But again, I see nothing wrong with this strategy providing one watches total exposure and actively manages risk.
Interesting views from Airthrey as to the cause of low IV. But I’m not so sure it’s about to rise, Why should it ? What will be the catalyst ? The market has 1 year ESX IV at 11.3%, and barring a major terrorist attack, I’m inclined to agree with that consensus view.
Windlesham - I have FTSE100 1 year HV at 10.09%.
Profitaker - a belated welcome to T2W. Your input here will be most welcome, as it is on the other BB's where we have met.
So would you advocate that someone with a £30,000 account uses it to buy £30,000 worth of shares in one company? One profit warning could wipe out 50% of your account requiring the next deal to put on 100% to get back to breakeven.
Profitaker said:
So would you advocate that someone with a £30,000 account uses it to buy £30,000 worth of shares in one company? One profit warning could wipe out 50% of your account requiring the next deal to put on 100% to get back to breakeven.
Agreed!
What about a 300 point move in the Dow after the LSE and LIFFE closes? Gap up/down the following morning before you have chance to hedge?
But the lower it goes, the less it can fall. The point I was making is that as recently as March last year the VXO was 22.6 - which at the time was regarded as low, and now it's 11.27. So one thing is certain - IV won't fall in the sellers favour over the next 12 months as far as it has in the last 12, unless IV goes negative of course - a mind boggling concept!
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"So would you advocate that someone with a £30,000 account uses it to buy £30,000 worth of shares in one company? One profit warning could wipe out 50% of your account requiring the next deal to put on 100% to get back to breakeven."
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Roger,
Hence>>> The mrkts go down quicker than it goes up, but the general movement is upwards.
The mrkts tend to over react on bad news and not tend to react on good news. In orther words its quicker to lose 50% of account than it is to make back that loss! Like you rightly said you would now need a 100% to b-even. :cheesy:
bull
Stay hedged and be lucky
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Roger,
Hence>>> The mrkts go down quicker than it goes up, but the general movement is upwards.
The mrkts tend to over react on bad news and not tend to react on good news. In orther words its quicker to lose 50% of account than it is to make back that loss!
Like you rightly said you would now need a 100% to b-even. :cheesy: bull
Stay hedged and be lucky
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Profitaker
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Hi Roger
Thanks for the welcome. I’m always interested in serious option discussion – some good people here - glad you sorted this thread !
Certainly not. But there is no more downside risk in doing the above Vs selling 5 naked 600 Puts. The “anti-naked writers” often forget this obvious point.
But surely if you monitor total exposure (you could also be short other index and equity options too) and are happy with / can survive the consequences of large moves, I can’t see a problem. The problems arise for those that don’t fully appreciate the risks of selling naked and OTM. As you said some posts ago, we only get paid for the risk we take on.
Absolutely ! But we could still be hovering around the 10% (ESX) mark this time next year. Market concensus is 11.3%. Who said never argue with the market ? Dunno – can’t remember LOL
Thanks for the welcome. I’m always interested in serious option discussion – some good people here - glad you sorted this thread !
Certainly not. But there is no more downside risk in doing the above Vs selling 5 naked 600 Puts. The “anti-naked writers” often forget this obvious point.
But surely if you monitor total exposure (you could also be short other index and equity options too) and are happy with / can survive the consequences of large moves, I can’t see a problem. The problems arise for those that don’t fully appreciate the risks of selling naked and OTM. As you said some posts ago, we only get paid for the risk we take on.
Absolutely ! But we could still be hovering around the 10% (ESX) mark this time next year. Market concensus is 11.3%. Who said never argue with the market ? Dunno – can’t remember LOL
irishpaddypc
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Profitaker,
So applying good money management and risk control and keeping an eye on the situation and not over trading. You would have to agree that if you decide to write naked on the ftse the best choice would have to be OTM? cause the otm has a higher or better chance of finishing worthless than the ITM or the ATM. The whole object of writing naked is to keep all the premium taken and pay nothing back at expiry.
paddy
So applying good money management and risk control and keeping an eye on the situation and not over trading. You would have to agree that if you decide to write naked on the ftse the best choice would have to be OTM? cause the otm has a higher or better chance of finishing worthless than the ITM or the ATM. The whole object of writing naked is to keep all the premium taken and pay nothing back at expiry.
paddy
paddyboy,
I go along with your way of thinking, its only logical to do so.
The same thing applies if you chose to do a "strangle" you would ONLY do it at OTM!! and NOT > ATM or ITM cause this way you have the odds in your favour. Agree?
Your fast becoming a genius! your wisdom is showing thru!! :cheesy: Good luck with your paper trading.
Take a look at this one below:
STOCK on the NASDAQ confused ? send me an PM
Last Trade: 37.05 $
Trade Time: 6:50PM
Change: -30.23 (44.93%) lost in 1 hour
Prev Close: 67.28
Open: 37.70
Bid: 37.04 x 100
Ask: 37.05 x 1000
1y Target Est: 71.38
Day's Range: 35.44 - 41.56
52wk Range: 50.87 - 70.00
Volume: 91,527,196
Avg Vol (3m): 3,767,545
Market Cap: 12.36 B
P/E (ttm): 285.00
EPS (ttm): N/A
Div & Yield: N/A (N/A)
I go along with your way of thinking, its only logical to do so.
The same thing applies if you chose to do a "strangle" you would ONLY do it at OTM!! and NOT > ATM or ITM cause this way you have the odds in your favour. Agree?
Your fast becoming a genius! your wisdom is showing thru!!
:cheesy: Good luck with your paper trading.Take a look at this one below:
STOCK on the NASDAQ confused ? send me an PM
Last Trade: 37.05 $
Trade Time: 6:50PM
Change: -30.23 (44.93%) lost in 1 hour
Prev Close: 67.28
Open: 37.70
Bid: 37.04 x 100
Ask: 37.05 x 1000
1y Target Est: 71.38
Day's Range: 35.44 - 41.56
52wk Range: 50.87 - 70.00
Volume: 91,527,196
Avg Vol (3m): 3,767,545
Market Cap: 12.36 B
P/E (ttm): 285.00
EPS (ttm): N/A
Div & Yield: N/A (N/A)
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irishpaddypc
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By the way guys I come on this after school and after I have done all my homework. I come on this during my free time. I just wanted to boost my knowledge for trading options so i thought i would come to you guys.
Paddy
Paddy
irishpaddypc said:
Paddy,
A bit of homework for you. We can do some of the teaching, but only you can do the learning! Hopefully you are familiar with pay-off diagrams? If not you need to be.
The FTSE is at 4956. Which would you feel most comfortable with of the following?
1. Sell 5 x FTSE100 May 4675 puts @ 18
2. sell 10 x FTSE 100 May 4475 Puts @ 9
3. sell 20 x FTSE 100 May 4675 Puts @ 18 and buy 20 x FTSE 100 May 4575 Puts @ 13.5
What do these strategies have in common?
Which would you feel happiest with and why?
There is no right or wrong answer - just interested to hear your view!
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irishpaddypc
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I would choose option 2. This is because it has les margin then the ova ones therefore it will have a beta chance of fininshing worhtless cos its got lower strike aswell.
I wouldnt choose 1 because its too risky for me as it has a higher strike price and there is less chance to finish at zero on expiry. and also cause of the risk i would have to pay more on margin.
I wouldnt choose 3 because it is not for me cause there are to many contracts and higher strike than No2 and also i can lose 95 points if ftse drops to No2 level on expiry day. 100 with a take in of 5 points= 95 loss.
95=9500times 20 =£ 19,500 risk and also heavy margin.not for me.
So i will go with No2 Guy's . I would only do one contract at a time untill my account grows bigger.
I also feel confident that the market wont go below number 2 strike price.
Cheers everyone for teaching me and giving me all your tips. I am going to bed now so i will come back on here 2morow after i finish school and all my homework.
Paddy
I wouldnt choose 1 because its too risky for me as it has a higher strike price and there is less chance to finish at zero on expiry. and also cause of the risk i would have to pay more on margin.
I wouldnt choose 3 because it is not for me cause there are to many contracts and higher strike than No2 and also i can lose 95 points if ftse drops to No2 level on expiry day. 100 with a take in of 5 points= 95 loss.
95=9500times 20 =£ 19,500 risk and also heavy margin.not for me.
So i will go with No2 Guy's . I would only do one contract at a time untill my account grows bigger.
I also feel confident that the market wont go below number 2 strike price.
Cheers everyone for teaching me and giving me all your tips. I am going to bed now so i will come back on here 2morow after i finish school and all my homework.
Paddy
OK. Interesting.
The payoff diagrams for all 3 positions are shown. 1 in red, 2 in Green and 3 in Blue..
What do they all have in common? Well, all bring in £900 in premium, before dealing costs etc.
According to London SPAN, strategy 1 requires margin of £3125, strategy 2 requires £3800 and strategy 3 requires £2900. In practice most brokers will require at least 125% of this figure, and it would be sensible to carry considerably more. But not much difference between them. Of course the margin requirement can change radically if the position moves against you. These are just the margin requirements at the outset.
The red strategy starts losing first as the strike is 200 points closer than the the green, where you have to sell twice as many contracts to bring in the same premium.
If you want to protect the downside against an all out crash, then the blue puts a floor below which the value will not fall. But at a horrendous cost - This will show a max loss below 4575, a level at which the Green strategy is still in profit.
Red and Green have potentially unlimited losses. Below around 4275 the green shows the greatest loss potential. But in terms of what is likely, would anyone really say that the blue strategy, with its long put protection, is the lowest risk of these?
Personally, I think the risk is unacceptable for all 3. A couple of years ago these strategies would have bought in over £3,000 in premium, but is it really worth it for just £900?
The payoff diagrams for all 3 positions are shown. 1 in red, 2 in Green and 3 in Blue..
What do they all have in common? Well, all bring in £900 in premium, before dealing costs etc.
According to London SPAN, strategy 1 requires margin of £3125, strategy 2 requires £3800 and strategy 3 requires £2900. In practice most brokers will require at least 125% of this figure, and it would be sensible to carry considerably more. But not much difference between them. Of course the margin requirement can change radically if the position moves against you. These are just the margin requirements at the outset.
The red strategy starts losing first as the strike is 200 points closer than the the green, where you have to sell twice as many contracts to bring in the same premium.
If you want to protect the downside against an all out crash, then the blue puts a floor below which the value will not fall. But at a horrendous cost - This will show a max loss below 4575, a level at which the Green strategy is still in profit.
Red and Green have potentially unlimited losses. Below around 4275 the green shows the greatest loss potential. But in terms of what is likely, would anyone really say that the blue strategy, with its long put protection, is the lowest risk of these?
Personally, I think the risk is unacceptable for all 3. A couple of years ago these strategies would have bought in over £3,000 in premium, but is it really worth it for just £900?
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Profitaker
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Irishpaddy
For me the best choice is to write ATM. Why ? Because I want to sell as much time value as possible, and maximum time value is always found ATM. As you say, OTM has a better chance of finishing worthless, but the flip side is that OTM has higher leverage when compared to ATM i.e. FTSE drops 200 points in a day, ATM options (ATM prior to fall) may increase by 3 times, whilst OTM may increase by 20 times (exact numbers obviously depending on many variables, but you get the picture). Selling OTM may seem like money for old rope, and for most of the time it probably is, but if you actively manage risk such that you could withstand a large adverse move, then you wouldn’t be selling many OTM contracts and so your return on account capital would be fairly poor. If you don’t manage risk, and sell as much OTM as margin requirements allow, then a large adverse move could wipe you out – game over.
It’s interesting that you chose scenario 2 above. It has the best probability of expiring worthless (obviously since it has the lowest strike) but also has the highest downside of all three. If I had to choose any it would be scenario 1 because the downside loss point (4657) is 14 points lower than scenario 3 (slightly better prob profit) but the losses are £ 50 per point as opposed to £ 200 per point in scenario 3. Only below 4575 does scenario 3 fair better than 1. However, like Roger, I wouldn't touch any of them with a barge pole.
Indeed. But it doesn’t always work that way. Just like an insurance company, you have to pay out occasionally, and sometimes the payouts are massive !
For me the best choice is to write ATM. Why ? Because I want to sell as much time value as possible, and maximum time value is always found ATM. As you say, OTM has a better chance of finishing worthless, but the flip side is that OTM has higher leverage when compared to ATM i.e. FTSE drops 200 points in a day, ATM options (ATM prior to fall) may increase by 3 times, whilst OTM may increase by 20 times (exact numbers obviously depending on many variables, but you get the picture). Selling OTM may seem like money for old rope, and for most of the time it probably is, but if you actively manage risk such that you could withstand a large adverse move, then you wouldn’t be selling many OTM contracts and so your return on account capital would be fairly poor. If you don’t manage risk, and sell as much OTM as margin requirements allow, then a large adverse move could wipe you out – game over.
It’s interesting that you chose scenario 2 above. It has the best probability of expiring worthless (obviously since it has the lowest strike) but also has the highest downside of all three. If I had to choose any it would be scenario 1 because the downside loss point (4657) is 14 points lower than scenario 3 (slightly better prob profit) but the losses are £ 50 per point as opposed to £ 200 per point in scenario 3. Only below 4575 does scenario 3 fair better than 1. However, like Roger, I wouldn't touch any of them with a barge pole.
Indeed. But it doesn’t always work that way. Just like an insurance company, you have to pay out occasionally, and sometimes the payouts are massive !
