Plain Vanilla Options Trades.

[andycan]

Yes, or buy them, as the case may be.

Andy

I've no idea what Soc said. But I thought that the general gist of this thread was to prove that there is some inherent edge in writing rather than buying options. So far, I've not heard any logical argument to support this opinion, never mind proof positive.

If your assertion that Put sellers have an edge over Call buyers in a bullish market holds any truth, then it must logically follow that Call sellers have an edge over Put buyers in a bearish market. From those two statements it must logically follow that Put sellers and Call sellers always have an edge over buyers in any market.

#


Profitaker

indeed they do DOM gives them that advantage not always but most of the time it will
i did an analysis of options in grains many years ago and what amazed me even when direction was in the favour of the buyer somehow they almost always managed to expire in favour of the writers, and when it did hit the strike and technically were in the money it was not sufficient to compensate for the premium, thats why i believe the writers have the edge only by seeing my contract expire worthless when i first started has convinced me of it
i now when i do buy them utilise a completely different approach, thats is when a sharp move is coming i capitalize

 

[Profitaker]

Andy

Ah, if you're saying that option writers move the market away from the most heavily written strikes, it may well happen in some markets. But doesn't happen in the FTSE100 market.

 

[andycan]

I don't think that anything has been said today that could be construed badly and we are not engaged in the usual insults mainly because he is not being drawn into them. Good for him! Criticism is on the cards. After all, he is the star of the show! What he is doing is being watched by lots of lurkers who might be lured into thinking that this is easy. It is, also, very risky. That's why his acts should be questioned. Perhaps, if he answered the pertinent questions he might have an easier life.

Split

i totally agree it is risky and it should be undertaken by a pro
anyone can write or buy but to cover you backside when things go wrong is the true art of trading

 

[Profitaker]

anyone can write or buy but to cover you backside when things go wrong is the true art of trading

Agreed.

 

[Profitaker]

As a follow up to margin. I wonder if the Soc could tell his "audience" which position has the biggest margin, and therfore which is the riskiest position ?

 

[andycan]

Andy

Ah, if you're saying that option writers move the market away from the most heavily written strikes, it may well happen in some markets. But doesn't happen in the FTSE100 market.

fair enough i have never traded professionaly the ftse100
im strictly US for now
but then i will be happy to see the end result of this excercise
once its concluded then i think its fair to ask all the questions under the sun
for now im happy to sit and watch and see if it agrees with the way i see it or be educated either way its very interesting

 

[A Dashing Blade]

DB

The total margin requirment on those positions you posted up #335 is £ 65,990 plus broker surcharge (minimum 25%) so call it £ 82,000.

That margin could easily quadruple, or more. The main exposure is vega, so a serious IV spike would blow anybody short naked those positions sky high.

Thought I was being conservative on the margin!

The second point goes to the heart of the matter . . . of course a short position that has gone wrong can always be rolled back into a further month (ie the put can be bought to close, this purchse being funded by writing another put of a longer expiry ) . . . the question is, can the writer fund the margin.

Note that as deep in the money european puts can trade at discount to intrinsic value (they are, after all analagous to a zero-coupon bond in that they represent the net present value), brokers may well prevent a client attempting to do this after the brown stuff has hit the aircon . . . ie you have to fund the purchase of a 500 point ditm put that's about to expire with the sale of a 3 month 550 ditm put.



Hang on I hear you all cry, how come an option can trade at a discount to intrinsic value?

The point is these are European options, they can't be exercised early, therefore having intrinsic value of say 500 points actually means "at expiry the intrinsic value will be 500 points".

That option will be priced at the net present value of 500

ie 500 + dividends to come before expiry - cost of funding + a very very small amount of time value.

This is a rare situation (ie a high interest rate environment) but can and has happened.

 

[Profitaker]

deep in the money european puts can trade at discount to intrinsic value.

Only equity option Puts, and only when a dividend is due prior to expiry. Index Put options will never trade at less than intrinsic.

The margin requirements for writing naked cannot be overstated. The writer needs some serious capital to stay in the game following an adverse move. It's rather like 2 players flipping a coin and paying £ 1 to the other if the flip goes against them. If one player has £ 100 capital and the other has £ 5, who do you think will win the game ?

 

[Profitaker]

Only equity option Puts, and only when a dividend is due prior to expiry. Index Put options will never trade at less than intrinsic.

Having said that, in theory they could trade at less than intrinsic. But in practice the dividend stream from the 100 constituents will never be more than the cost of carry, so in practice they won't trade at less than intrinsic.

 

[A Dashing Blade]

Having said that, in theory they could trade at less than intrinsic. But in practice the dividend stream from the 100 constituents will never be more than the cost of carry, so in practice they won't trade at less than intrinsic.

And interest rates in the early 90's were . . . . ?
This situation did occur and continued for (if memory serves) about a year.

Given that the US style FTSE were trading then on different strikes, you were able to do some pretty funky stuff back then.

 

[Profitaker]

And interest rates in the early 90's were . . . . ?
This situation did occur and continued for (if memory serves) about a year.

Ah yes, quite right.

 

[A Dashing Blade]

Just remembered this one . . .

Pete Thingy comes back to the old LTOM floor on the Stock Exchange after a liquid lunch and makes the mistake of saying "Your Size" to an enquiry from (I think) Hoare Govett.

Result is that Pete is suddenly long 10,000 in-the-money puts with the market heading South in a big way.

No problem I hear you cry, long puts and market going down, what could possible go wrong.

The problem was that the puts quickly went deep in the money, there was no demand for them and Pete couldn't exercise them thus tying up a hefty chunk of Warburgs LTOM trading capital.

 

[Profitaker]

DB

Don't follow why he couldn't exercise them ? It's his right as a holder.

 

[Ras1974]

Just remembered this one . . .

Pete Thingy comes back to the old LTOM floor on the Stock Exchange after a liquid lunch and makes the mistake of saying "Your Size" to an enquiry from (I think) Hoare Govett.

Result is that Pete is suddenly long 10,000 in-the-money puts with the market heading South in a big way.

No problem I hear you cry, long puts and market going down, what could possible go wrong.

The problem was that the puts quickly went deep in the money, there was no demand for them and Pete couldn't exercise them thus tying up a hefty chunk of Warburgs LTOM trading capital.

Could he not have locked in profit by buying ATM 10,000 calls with same maturity?

 

[A Dashing Blade]

DB

Don't follow why he couldn't exercise them ? It's his right as a holder.

They were European style! (only recently introduced)

 

[A Dashing Blade]

Could he not have locked in profit by buying ATM 10,000 calls with same maturity?

Thus tying up even more capital (these were 6 or even 9 month expiries) + (obviously) the market knew which way he was + in those days, 10,000 was seriously big size

All he could do was dramtically underprice them (to theoretic), as people took him up on this, this underpricing began to trickle into other series.

 

[SOCRATES]

Contrary to popular legend...I am not an octopus...I only have two hands and I am very bizzi today...so I have no objection if anyone wants to post option prices to track the progres that is ok by me.

 

[grantx]

Dashing Blade,

“I write 100 puts which have a delta of 0.25. To make myself delta-neutral (ie unconcerned with moves in the market) I buy 25 Futures (which obviously have a delta of 1).”

Isn’t your risk here to the downside, and therefore you would hedge by selling the futures? If so, simple mistake - I’d be happy with a fraction of your knowledge. If I’m incorrect, just an illustration of my lack of knowledge and I’ll stfu.

Addressed to anyone:

Is it inconsistent (or impossible) with regards to put-call parity for a deep itm call to be priced at or close to intrinsic value only, ie little or no time-value, but for the same strike put – which will be otm and therefore with time value - to be priced higher, ie time-value = implied volatility?

Can calls (with time value/above intrinsic value) have different implieds from their corresponding (same strike) puts without violating put-call parity? From my own observations they can but I would like a second opinion.

This thread is becoming educational in the absence of fatuous comments from the resident loony.

Grant.

 

[A Dashing Blade]

Dashing Blade,

“I write 100 puts which have a delta of 0.25. To make myself delta-neutral (ie unconcerned with moves in the market) I buy 25 Futures (which obviously have a delta of 1).”

Isn’t your risk here to the downside, and therefore you would hedge by selling the futures? If

DOH!
Egg on face

you are, of course correct Sir.

I have edited the post accordingly.

My only excuse is a stonking hangover!

 

[A Dashing Blade]

Can calls (with time value/above intrinsic value) have different implieds from their corresponding (same strike) puts without violating put-call parity? From my own observations they can but I would like a second opinion.

Well, it's observable that this is usually the case (FTSE Options) ie June 6425 calls are 11.68-12.12 (bid/ask iv) while puts are 12.28-13.59

As to why, I'd hazard a guess that it's to do with those options being priced against the futures rather than the underlying. Obviously the future may not be trading at fair value.

(Apols for being unable to provide a definative but it's been over 15 years since I was involved in these instruments)