Trading Options

I used to write covered calls but find it hard to make a profit in the bear market. Now, I sometimes buy out of the money calls if I think the stock or index is going to make a large rise.

At first I used Options Direct but now I use IG Index spread bets on index options. I have been looking at the more complex options strategies but haven't started trading them yet.

This website explains some of the strategies:-
Late yesterday afternoon I took the view that the ftse was likely to head down and I wanted to benefit. I didn't like the idea of going short the ftse future and holding overnight. If the ftse moved against me, then it would be an instant loss. So instead look at Options.

IMHO it appeared unlikely that the ftse was going to break thru the 4000 level anytime soon. I could have bought puts, but if the index didn't move, or only fell by a small amount I would be in loss. So instead I sold April ftse 4025 calls for 17. This means that provided the ftse 100 does not exceed 4025 by expiry (next Thursday - Friday being a bank holiday) I get to keep the premium of 17 (£170 per contract). Seemed like a reasonable bet.

If the ftse exceeds 4025, then the short calls will acquire intrinsic value and I lose £10 per point per contract for every point in excess of 4025.

If the ftse rises, but does not exceed 4025, then I still get to keep the premium of 17. As the ftse 100 rises, it will be more than offset by the fall in time value.

If the ftse stagnates at current levels, I get to keep the premium as time value erodes and the option expires worthless at all levels below 4025 next Thursday.

If the ftse falls, the value of the option collapses (that's good) as both time value erosion and fall in the ftse 100 does its stuff.

If the ftse looks like its going to breach 4025 before expiry, I can buy back the calls at a loss, but pay for them by selling May Calls higher up - probably at around the 4175 or 4225 level. This is known as rolling out into the next month. This gives the strategy more space to come good, although more time to carry the risk.

In practise, the ftse fell this morning, and I was able to buy back the calls for 9 (£90 per contract) giving a profit before dealing of £80 per contract. I regard this as a low risk play as the index would have to have risen by 150 points (thru 4025) before I lost money, yet I was able to profit nicely from a fall of 50 points. I still think the chance of the ftse being above 4025 by next Thursday morning is low, but the maximum profit from this strategy is £170 per contract if the calls expire worthless. With £80 per contract on the table after only 4 trading hours, that's 47% of the potential profit in 7% of the time, so best take it. No drama, low stress, time for a cuppa before making any decisions! :)

By taking a short position by selling calls rather than buying puts, time value erosion is working for me rather than against me, and I can be relaxed at modest moves against me. That's one reason I like options.
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Hi Roger M, htanks for replying to the thread. Your reply is very informative. I am thinking of buying June ftse 3300 put. Any comments? Where does one get options EOD data for MetaStock?
I only ever buy or write European options rather than American style options because you can only be assigned at expiry with Europeans, whereas you can be assigned at anytime with American options. Therefore I would ignore the 3250/3300/3350 series and only look at (say) 3275/3325 etc.

The 3325 puts are 49 at todays expiry. You could pay for them by selling the 4225 calls for 42, for a net 7 debit. Or sell 2 x 4225's, bringing in 86, which would enable you to buy the 3575 puts. Depends how far you see the ftse falling. Clearly you will profit earlier with the 3525's whereas you have to carry the risk that the ftse may never get to 3325, in which case the 3325 puts expire worthless, whilst the 3525's would have an intrinsic value of 200.

If you don't like the idea of 2 x naked calls that close, you could sell sinlge calls, and make up the extra premium by selling puts at a lower strike to turn your long puts into a vertical put spread. e.g. buy the 3525 put for 86, and sell the 3325 put for 43, and the 4225 call for 43. This would put you into the strategy for free (you've sold calls and puts for 43 each, bringing in 86, and spent 86 on the long 3525 put). At expiry you break even at any level below 4225, and go into profit below 3525, with profit maxed out at 3325 (the level of the short put).

Or you could sell twice the number of calls (say the 4325 calls at 24.5) and still sell the 3325 puts. This would bring in a premium of (2 x 24.5) + 43 = 92, whilst spending 86 on the 3525 long put, leaving you with a credit of 6 for the strategy.

Lots of ways to tackle this one! I am just allergic to paying for long options - I prefer to pay for them by selling others at levels which I feel are unlikely to be reached.

Why do you need end of day data for Metastock for options? Prices can be obtained from the LIFFE website, or if you use ODL Securities (formerly Options direct) you get MyTrack r/t for free so long as you place at least one order per month on-line.
Hi Roger M, For a new comer to start off in options.what is the route one should take? In terms of software books, brokers,collecting information,tipsters options authorities etc...
This is an updated version of a similar posting placed on this site about a year ago. I think the best place to start would be a good primer book. This one is as good as any, and better than most.

Options Plain and Simple by Lenny Jordan. Published Prentice Hall ISBN 0 27363878 5

Available from this site at :-

The London International Financial Futures Exchange (LIFFE) site is a mine of information, and gives 15 minute delayed prices on all UK equity and index options for free - which is quite adequate for most purposes.

Most option traders cut their teeth in the UK on the 76 (or so) optionable shares before moving onto the US, where there are over 2200 optionable shares! The equivalent to LIFFE is the Chicago Board Options Exchange (CBOE) which also gives 15 minute delayed prices. The main difference is the contract size (1000 shares in the UK, 100 shares in the US). Lots of useful
educational material here.

I rarely trade equity options, confining most of my activities to ftse 100 index options, European style, which are usually less volatile.

and also :-

It is useful to have a good payoff diagram calculator. The one I use can be downloaded for free from :-

You will need a reasonably up to date version of Excel to run it - I use Excel 2000. It does not run properly on pre-1997 versions.
There is an excellent series of online tutorials to use this calculator :-

The basic position calculator is free, and although I say "basic", it is in fact incredibly sophisticated - esp for a freebie. I had a look at the additional programming you get for the princely sum of about £11, and it takes it on another quantum leap - probably more than most people will ever need, unless their style of trading is very frenetic.

One observation is that when you are choosing the graph increment, it must be in a denomination that allows the strike prices you are charting to coincide with the increments on the chart. Turns on the chart can only take place on an increment, and not between them. e.g if you have strikes at 180, 200 and 220 - do not have increments of 15, as not all the strikes can fall
on an increment. Instead choose (say) 10 or 20 as the increment, and then check on the graph that the strikes selected are shown on the increment lines.

It is absolutely essential to understand (and to be able to draw) these from first principles on a piece of paper rather than rely on software. If the software shows that you have designed a strategy that looks too good to be true, then it probably is and you need to check the accuracy of your work!

Play with these pay-off diagrams until you can stand it no more. Very useful for getting to understand the practicalities of spreads, ratio spreads, strangles and synthetics which should be your main tools.

There are a number of brokers that will deal in options. The one I use is ODL Securities. They are very helpful, the dealing costs are reasonable, and they will either take orders on an execution only basis, or on an advisory basis for those new to options (highly advisable unless you have an experienced hand to hold). You can either place your long orders online or by telephone. Short positions can only be opened by telephone, although you can close them online.

You should consider the need to cover all positions to avoid the risk of unlimited loss. I would never have an uncovered position on a share option - a profit warning or a takeover bid can cause the price to spike down or up by 40 or 50% immediately (remember Marconi). The same is not necessarily the case for Index options. I will regularly have an uncovered call position on the FTSE 100 (about 300 points above) on the basis that
entire markets tend not to spike up hugely, and if there is a spike up, it tends to be containable and will pull back later. Or the position can be rolled out into the next month. I cannot think of anything that would cause the market to open up (say) 500 points. But I can think of plenty of causes for a potential instant fall of 500 points - earthquake in Silicon Valley, a US Presidential Assassination, or just a plain old fashioned financial crisis - remember that in 1987 the FTSE dropped 12% on 2 consecutive days, and nothing had happened! It was the Kobe earthquake
that finally destroyed Nick Leeson's uncovered Nikkei Index put positions. Incidently, his book, RogueTrader - is quite an interesting read when you understand the positions he had placed.

I hope you find this helpful. I find that options allow you to profit from any market scenario. It is less frenetic than day-trading, and for me at least, less stressful. The days of just buying a share in the hope that it will rise in value are over for the time being. Options enable you to profit from sideways and falling markets, as well as rising ones.

That should keep you busy for a while. :D
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I trade options, however I only sell them, but rarely UK stock options - as Roger mentions they are few and far between plus they have 3 monthly expiry periods rather than monthly.

I much prefer index options, for these I have found the FTSE options to be the best of the bunch, especially in terms of margin requirement. Dow and SP options are quite expensive to hold versus FTSE.

I don't bother with all the technical guff about 'greeks' etc, as a trader I'm really not interested in how it works, only what my buy and sell price are and that I am trading within the direction of the market.

I tend to work well out of the money (say 500 points either side of the current price) and place positions 4-6 weeks before expiry - so at the moment I am selling May options to get some premium whilst there is still time value in the price.

For quite a while I have been selling short strangles (selling calls in the 4200 area and selling puts c 3200, which has worked quite well. Recently I have only been placing the short put leg (expecting the market to rise). Now that the shennanigans of 'The War' seem to be drawing to a close I suspect i'll be back sellng the strangles.

*** Please note that selling options opens you up to unlimited losses, so you really do have to 'trade' rather than sit on your hands ***

The major required 'understanding' of the market stems from TA - so long as you are working within parameters that you understand - the same as any other form of trading position, then getting into the nuts and bolts of how the price is made up is a waste of time ( I can drive a car, but don't need to know 'how' it works).

Some great links from Roger, here a re a few pages I put together on the TBS site cos I got hacked off charging about trying to get all the data in one place!

Index Options

UK Options

A selection of European Options

A selection of Nasdaq stock options

A selection of mainstream US Options

TBS said:

I don't bother with all the technical guff about 'greeks' etc,

TBS - I agree that some of the more esoteric stuff on "the Greeks" maybe superfluous for all but the most hardcore options traders, but I think a working knowledge of Delta (the rate at which an option changes in value with a move in the price of the underlying instrument) is vital, esp for option writers. An understanding of Gamma (the rate of change in Delta for any given move in the price of the underlying) is also useful, especially if you hold a short ATM option close to expiry. An understanding of Delta will help a trader to understand when the easy money has been made, and also to recognise the dangers when a short option starts to move against you. An understanding of Gamma will help keep you out of trouble, or to identify profitable trades, close to expiry.

Your strategy seems to be remarkably similar to my own, with the possible exception that I invariably use European Style rather than American style options. And having read your other posts I think you are probably doing yourself a disservice by claiming that you don't bother understanding the Greeks. My guess, based on the quality of your offerings, is that you do - but you do so in an instinctive way rather than as an academic! :D
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Your strategy seems to be remarkably similar to my own, with the possible exception that I invariably use European Style rather than American style options. And having read your other posts I think you are probably doing yourself a disservice by claiming that you don't bother understanding the Greeks. My guess, based on the quality of your offerings, is that you do - but you do so in an instinctive way rather than as an academic!

ROFLMAO - I know a few people who would agree with you there!

Sorry, I didn't make it plain - I use the 'European' style of FTSE options, rather than the 'American' - basically for the reasons that you mentioned (not getting exercised until expiry), although you do lose a little in premium.

Thanks to Roger M and TSB for your informative threads.What are your opinions on " Tradind Options" publication by Fleet St. Publications?
Hi aacharya,

Sorry, never read it. However, if you want basic details and some examples, have a look at the Liffe site under the 'private investors' link there is a good section on futures and options.
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Hi,to Roger,TSB and othersl.I have bought June 03 3325 put option @ 44.5p on FTSE.Plse can i have your advise.Thanks
aacharya - what you are really asking is, do we think that either the ftse is about to fall in the short term, giving an immediate profit on your 3325 put, or will it in the longer term get below 3280.5 by 20.06.2003 (June expiry), this being the level below which you will profit on expiry. This is a question I cannot answer objectively, but you clearly support one (or both) of these views. Your potential loss is limited to the premium you have paid. Implied volatility on your put is 35% (assuming you bought this morning with the ftse future at 3820). This is quite high, and indicates that "down" is where the market thinks the index is heading.

If you think the market will fall, you need to take a view as to "how much by when?". If the market moves sideways in a range, at what level will you cut your loss, because a long option is a wasting asset - value at any set level will reduce over time as time value decays. And what are the chances of the market rising, and if so, what is the max extent of any rise?

If you do not think there is much chance of the ftse rising significantly above 4000 in the short term, you could also sell the June 4125 call for 45, which would pay for your put, with the remaining 0.5 paying for dealing. This is a split strike synthetic, and puts the strategy at breakeven at all levels below 4125 at expiry. The downside is that losses rise without limit above 4125, although you can always cover it by buying back and selling another call for a similar premium further out.

The attached payoff diagram shows the position for both strategies. The heavy blue line shows the position at expiry, and the thin blue the position at any price reached today. Over time the thin blue will merge with the heavy blue by expiry.

The heavy red line shows the split strike synthetic at expiry, and the thin red line the position today.

As I write the market is moving in your favour, and the June 3325 puts are 40 - 45.5


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Hi ayrahcaa,

1. You must be feeling overtly negative towards the markets at the moment. From memory, FTSE has closed below 3325 only once.

2. There is still quite a large time value in the price - which will hold it reasonably steady unless we move more than c 200 points in either direction - as the time value erodes and June becomes more into 'play' then the option value will fluctuate more.

Personally, I wouldn't have made the trade - but that is just me! You have bought a lot of time, which will be eroded further due to the plethora of 'pain in the backside' Bank Holidays and seem to be expecting a large move in the market to the downside.

To get a move of the magnitude that you need to get a good return, something reasonably drastic is going to have to happen in the next 10 weeks - very poor earnings, chemical attacks in Iraq etc - all of which are a possibility.

A couple of questions for you:

1. Why did you select 3325 as a level?

2. What sort of return are you expecting to get out of the deal?

3. Do you intend to hold this to expiry?
TBS said:
There is still quite a large time value in the price - which will hold it reasonably steady unless we move more than c 200 points in either direction

Some great questions posed by TBS for you to answer.

The Delta of the put is 0.14 (calculated on the pay-off diagram posted above). This means that you can expect the put to change in value by 14% of any move in the index. Therefore, with a spread of about 5, the index will need to move by about 37 today to cover the spread.

As a rule of thumb, an ATM (At The Money) option has a delta of 0.5 - meaning that the option will change in value by 50% of any underlying move in the index. So a 50 point move in the index thru 3325 would result in a change in the value of the put of 25 - or more than 50% of the premium paid (44.5). By this time of course, because the index will have moved substantially down, the value of the put will be much higher than the premium paid. If that were to happen today, I would expect the price to be 162 rather than the 44.5 paid. How do I know? Well, the price of the June 3825 puts (the current ATM puts) is 162 - 172. Likewise, if it happens in mid May, about a month from expiry, I would expect the price to be 112. Why? Because the price of the May 3825 puts (which have a month to run) is currently 112 - 122. These estimates are just that - estimates - because they are based on current volatility which may change. Never-the-less it is a useful way to get a handle on likely values at future price levels and dates.

If the index stagnates at current levels, as expiry approaches, the chances of the strike price (3325) being reached will reduce, and the Delta will fall further, because a week from expiry even a move of (say) 200 points will make it unlikely that there will be any value in the option by expiry. This change in the value of Delta is measured by Gamma - which is the rate of change of Delta for any given move in the value of the index. Gamma increases dramatically as expiry approaches, particularly for ATM options.

Thought I would add this for the benefit of TBS who "claims" he doesn't bother with "the Greeks" :D :D :D
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Thought I would add this for the benefit of TBS who "claims" he doesn't bother with "the Greeks"

It's all English to me......
Hi to Roger, TBS n others, thanks for giving you time and informed comments.I bought the 3325 put because I am bearish on FTSE. When the put option price 70-77 ish i will trade to close the position. Plse keep sending your comments as i do value them.