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random12345

Established member
793 280
Hull if you are happy to get into the maths

Natenberg if you want amore easily readable book

Out of interest Shakone, how long did it take you to reach profitability with options from day 0?

I've been thinking about investing some time in options to give me more to do when I'm at home.
 

Shakone

Senior member
2,458 665
Out of interest Shakone, how long did it take you to reach profitability with options from day 0?

I've been thinking about investing some time in options to give me more to do when I'm at home.

I don't trade them random12345, and I don't think I would be profitable with them at all. I know the theory, I worked on pricing them in industry, and my experience influenced me to think:

1) Going long options led to overpaying,
2) Selling for premia was not option for me because of the picking up pennies in front of a steamroller principle,
3) Transaction costs were too high, and I'm much more comfortable trading short term (2-3 day holding time max, more typically, much less).

My boss where I worked recommended both those books I mentioned and I found them a pretty good intro.
 
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random12345

Established member
793 280
I don't trade them random12345, and I don't think I would be profitable with them at all. I know the theory, I worked on pricing them in industry, and my experience influenced me to think:

1) Going long options led to overpaying,
2) Selling for premia was not option for me because of the picking up pennies in front of a steamroller principle,
3) Transaction costs were too high, and I'm much more comfortable trading short term (2-3 day holding time max, more typically, much less).

My boss where I worked recommended both those books I mentioned and I found them a pretty good intro.

Ah ok, you trade spot FX mainly right? Do you use any of the knowledge you picked up for hedging bias or is it just not applicable?

I'm trying to come up with a basket model that has no losing days despite the fact it requires about a kabillion in margin... it's gotten a bit tricky, maybe a bit of quant knowledge will help!
 
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robster970

Veteren member
4,566 1,390
Are they directionally tradeable in the same sense as FX/Commodities/Index Futures are?

I always got the feeling that there was something a little more sinister about them although I expect this to be an emotional bias I have based upon nothing more than tittle-tattle and a genuine lack of understanding.

Would be interested in this too for the record.
 

VielGeld

Experienced member
1,421 179
Shakone has it right on the money. Hull and Natenberg are good books, and his bullet points about options have mirrored my experiences.

Common knowledge has it that selling options is superior on the basis of time decay. I find this false as you may have to hold on to the option longer to realize a profit. If price reverses against you, that's it. You're also capping your profits.

Commissions and fees also remain exorbitant despite record-high options volume these days. The spread is the largest I've seen anywhere, even in SPY where you'll witness the highest options volumes. In truth, I find that options strategies have very slim profit margins after all expenses.

That's not to say they can't be awesome sometimes. If you expect a big move, a large change in volatility, or wish to hedge your stocks, options, I've found, are excellent. Purchasing an option intrinsically provides an asymmetric trade whereby you have the potential for unlimited profits and limited downside. Coupled to their non-linear movement, this makes them a good bet for hedging.

But time-decay more or less devalues many options strats. It works against both sellers and buyers alike. So if you're going to play options, I would highly suggest you demo-trade them extensively before going live. They take a lot more experience to be effective with, imo.
 

random12345

Established member
793 280
Shakone has it right on the money. Hull and Natenberg are good books, and his bullet points about options have mirrored my experiences.

Common knowledge has it that selling options is superior on the basis of time decay. I find this false as you may have to hold on to the option longer to realize a profit. If price reverses against you, that's it. You're also capping your profits.

Commissions and fees also remain exorbitant despite record-high options volume these days. The spread is the largest I've seen anywhere, even in SPY where you'll witness the highest options volumes. In truth, I find that options strategies have very slim profit margins after all expenses.

That's not to say they can't be awesome sometimes. If you expect a big move, a large change in volatility, or wish to hedge your stocks, options, I've found, are excellent. Purchasing an option intrinsically provides an asymmetric trade whereby you have the potential for unlimited profits and limited downside. Coupled to their non-linear movement, this makes them a good bet for hedging.

But time-decay more or less devalues many options strats. It works against both sellers and buyers alike. So if you're going to play options, I would highly suggest you demo-trade them extensively before going live. They take a lot more experience to be effective with, imo.

Thanks v much for the summary. Unfortunately I am terribly impatient, hate wide spreads and dislike irregular equity curves.

I'm thinking options aren't for me.
 

VielGeld

Experienced member
1,421 179
No shame in that. I think their application to speculation is fairly narrow. As I said, they only really shine in specific instances (which you may wish to know just in case).

But that said, I'm no expert. Martinghoul in the Options section might be better consulted for wider (and more profitable) applications I don't know about.
 

rawrschach

Experienced member
1,223 277
So, this might be an ignorant question but do you have to buy a short butterfly straddling the current price?

If you buy an out of the money short butterfly and price doesn't close in your wings will it still pay?

What's stopping people buying short butterflies a ridiculously out of the money prices? Fees?


edit: just realised that my tos platform is ****ing awesome for options and backtesting
 
Last edited:

VielGeld

Experienced member
1,421 179
Irregular equity curves are great.

Especially the exponential kind.

Hopefully upwards...

Now if only you had no time limit... :whistling

So, this might be an ignorant question but do you have to buy a short butterfly straddling the current price?

If you buy an out of the money short butterfly and price doesn't close in your wings will it still pay?

What's stopping people buying short butterflies a ridiculously out of the money prices? Fees?


edit: just realised that my tos platform is ****ing awesome for options and backtesting

Yes, a traditional butterfly would profit if price ends right in the middle at expiry. No, it doesn't pay if price ends outside the wings (in fact, that's your max-loss scenario).

Nothing stops you from setting one up OTM (or ITM). You'll be paying the wider spread, though. You also receive a lot less premium once you go O/I TM with a higher potential loss.
 

VielGeld

Experienced member
1,421 179
Oooh, I see what you mean. You mean to say that if price ends up outside the wings, then why not just implement a butterfly at strike values that price will never reach?

Sadly, it doesn't work that way otherwise everyone would be doing it. In this case, by selling the two middle options, you collect more premium than you pay for the wings. But by being short, price cannot move either way or else you lose money, right?

The same applies with the opposite: by purchasing the middle two options, you pay more than you collect. But if you think about it, price needs to remain in the middle as it would be right between an ITM debit spread, and an OTM credit spread. In other words, a max-profit situation for either. As you can see, the butterfly spread requires price to remain at the middle strike price to be profitable.

I'll add that you'll find many situations like this with options -- where it seems like if you do X, then it's free money. All I can say is really do your research because it's never the case. There is no free lunch in options. I can tell you I've learned the hard way that they have slim profits and high costs. :(
 
 
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