Options Trading - Anyone doing it ?

S

stevespray

Experienced member
Messages
1,289
Likes
156
I just thought I'd ask if anyone on these boards actively trades options, either in stocks or indecies. In my opinion some good value is to be had in options trading. If folk are interested then I'm happy to share some of my thoughts.

Steve.
 
Okay, first up, I've been doing some experiments with writing out of the money Puts and Calls on FTSE.
A simple strategy is wait until next months expiry is about 4 weeks away, then write a Call for 75 points above current FTSE and also write a Put for 75 points below current FTSE. For these two options you'll get paid a premium of about 80 points. This means that in order to lose money FTSE has to either climb or fall more than155 points in that 4 week period leading into expiry. In order to make the maximum 80 points profit FTSE obviously has to expire inside your 150 point range between the Put and the Call. If in worst case the FTSE rallies / falls sharply you simply cover with futures.

Any views ?

Steve.
 
Last edited:
Steve,

Is this theoretical or have you actually done it ?

BTW .........its called writing strangles
 
I spent a year or two writing strangles around the ftse when it was rangebound; normally 400-500 points on either side. depending on TA and prices
It produced a few percent return per month on average.
 
Qaza - I have actually done it. I have been studying the situation for 6 months or so and last month I decided to dip my toe using a spreadbet which seemed to offer reasonable value based on where the actual options market was. Two days later they caught Saddam and the markets have climbed pretty relentlessly. Afterall that it's still made me a nice little sum although I have had to manage the position once or twice. My early observations are that the positions seem much easier to manage than naked futures exposure. The fact that you are making money by the simple of passage of time seems to push the position into profit right from the outset.

Steve.
 
The only thing I'd say about writing options right now is that volatility is at historical lows meaning the risk/reward is starting to get somewhat skewed, not in the writers favour.

Having said that one could have made the same argument 2 months ago with volatility at higher levels than today.

Personally I think that we're now in the environment that makes buying options seem a pretty good trade, but I wouldn't buy near term (3 months or less) because as anyone whose bought options in the past you know that the time will evaporate a lot quicker than you could imagine. Perhaps 9 month options would be the ones, but only if you've got a view and only if that view is an explosive one, up or down.

If I was an options trader I'd be scaling back my selling and sort of going into semi-hibernation.
 
Anley - So far as I can work out it seems that writing Options stands a far greater chance of making regular money over an extended period of time. The reason being that markets seem to spend far longer periods of time in ranges than they do in steep trends. Obviously as an Options writer you would do well to avoid markets that look like they maybe capitulating (bull or bear) with this type of strategy. If on average we say that the FTSE rises about 12% per year then this equates to about 45 points per month, well inside the 155 points we have to play with before we suffer loss.

Steve.
 
Last edited:
The only risk is the odd crazy event like 9/11 that will send
volatility through the roof and your strangle out of the money
before you can hedge yourself.
Then you lose everything you have made up to that point
plus some more.
 
Last edited:
Generally speaking you've got to allow for being stuffed once a year. But that's what the premiums are for. :cheesy:
 
It depends what you call "stuffed". Many spreadbet companies now quote FTSE on a 24 hour basis. With someone like CMC you can set stops which stay live whenever the FTSE is open. No great drama in setting up some crash stops when you write (sell) the options. That way these 'one off' events are covered at minimal expense.

Steve.
 
That's the good news. I meant you should expect the unexpected once a year. If you see what I mean. It's not all free money.
 
Oh indeed. Free money it is not. We get paid to take risks. I was just pointing out one method of protection should the worst happen. My guess is if you had that sort of stop (to open your hedge) with CMC and there was a bad news event then you'd have an advantage over the market as a whole - its just the nature of dealing with a company offering a parallel market. They would find it hard to justify gapping you through it unless there was an incident that caused a market suspension (or a weekend of course). In some of Livermores books he points out potential weakness of business offering parallel markets - their weakness can be our gain if it is played right.

Steve.
 
Last edited:
Stevespray - welcome to the options forum. I regularly write ftse strangles for bread and butter income, but I couldn't stomach the risk of writing them as close as 75 points above and below. Hedging with futures is all very well, but it gets very hairy even if you delta hedge rather than cover contract for contract. For example, in December I sold 4525 calls and 3975 puts for the Jan expiry for 22, and even then I began to sweat over the calls last week. I normally buy some puts 200 points below the short puts strike to ensure I keep my house if there is a repetition of 911.

IV is now so low that I question whether just selling for premium is worth the risk - but I've been saying that since IV fell below about 18. Last months short calls had an IV of just 13% - last year I was selling calls with IV of 30% and the difference in premium taken is just huge. For example today with the FTSE100 future at 4430 the IV of the Feb 4625 calls is just 11.2% and gives a pathetic premium of 13. If IV was nearer the norm for calls at about 25%, then that would imply a premium of 76 for the Feb 4625 calls. Some difference!

A sharp correction from here would increase IV significantly and you'd be stuffed if you wanted to buy back a position under threat. And I'm not sure that getting it right 11 months out of 12 would be enough to compensate. I agree with donaldduke that losses in these circumstances may be more than your entire gains to date. I was not in the market on 911 and can only imagine how I'd have been feeling if I hade been short naked Dow puts and had to wait a week for the market to re-open.

I think until IV gets back to more realistic levels we either need to take a directional stance, as in the separate thread "Trade Market direction with options" thread,
http://www.trade2win.co.uk/boards/showthread.php?s=&threadid=7972 or with some sort of strategy that will take advantage of an increase in IV.
 
Last edited:
Afternoon Roger - I see what you mean with FTSE. The premium has certainly been dropping. Have you considered Dax Options ?
Currently a 100 point out of the money Call on FTSE for Feb is selling at 35 while a 100 point out of the money on Dax is 54 bid ?

Steve.
 
Not looked at Dax. Been looking at US stock positions that are in a consolidation with a view to catching b/o's and catching the increase in IV that follows. Maybe use a Ratio back spread in the far month, and hedge it with a short iron Butterfly in the near month to pay for it?
 
Roger M,

With IV currently so low, do you think now might be the time to consider buying a straddle, perhaps with a minimum 3 month expiry? (I'm particularly referring to FTSE)

Interested to know your thoughts
 
steve

I dont follow the example with CMC. You say that the stops are live while ftse is open but also point out that they quote ftse 24 hours ?

Have you considered the following;

mkt at 4525, sell 1 x 4625/4425 strangle for 100 [vol is higher than now]

mkt explodes to the upside and your hedge kicks in at 4725 which means that any further upside move is no problem. Next day mkt drops 100 points ...........at this pt you have lost your entire premium due to the future moving 100 pts against you.

What do you now ?
 
You must log in or register to reply here.

Similar threads

M
Options Trading Thread
2 3 4
Replies
60
Views
19K
Client
Client
J
Options Trading Strategies - Approach
Replies
16
Views
6K
kvhutch
K
C
Anyone Tried Digital Options?
Replies
17
Views
4K
reactor
reactor
S
Options UK
Replies
6
Views
1K
eaccountants
E
I
Anyone trading forex options?
Replies
1
Views
2K
Whale Song
W
Top