US Index and Dow Jones Wall street Options

dowsp

Member
61 3
This is my 2nd post after rejoining after I lost my previous password when I was a member some years ago.

Is anyone familiar with US Index options on the likes of the S&P 500 or in my case I trade Dow Jones Wall Street options with Spread bet companies.

If there are any Option experts out there I wonder if they may be able to advise...


I have had some recent issues with a certain Spread bet company that I am looking into and IG index .... On August 25th I had bought some Wall st ? Dow Sept 17000 call options (and some weekly call options thru IG index)...and the market rallied over 500 points in 2 days..
I expected a reasonable gain of at least to double my money ...(on the Sept calls) (I closed out the weekly calls too early to recall the true valuations on a 500 pt move during that 2 day rally)

to my dismay.. these Sept 17000 Call options had hardly gained at all...and made just about 50% on what Id paid.

Many a time in the past Id easily doubled my money on a 500 point move..

Yet this was during the what seemed very volitile period over a few days and they were offering very little gain on these call options.

upon querying this.. they said sometimes option volitily is what determines an options value.
and in this case this is one of those instances.and they were not valuing call options very favourably.. I suspect that
still had a bearish sentiment...but the increaes in value of the call options seemed VERY undervalued after seeing such huge market moves..

I felt rather cheated and I had this happen in the 2007 to 2009 crash..where I was overpaying for options .. seeing HUGE moves and then getting little gains... basically they can alter the Vol so much that when a market has rallied say in a few hours to a day..then they devalue the volitility..
and the value of those options show NO gain..

As this very rarely happens.. its very hard to really know the realities of what such options may be worth under such conditions.. they could be telling me anything... or maybe the market makers are just creating unrealistic valuations.

I feel I need a real expert to be able to investigate this for me..and wondered if one had such querys is there any sort of service or company/organisation that could investigate such complex issues..

also so many times have I seen my account values when holding options just litterlly disappear.. on what seem rather small moves in the market of a couple of days..and when the market comes back to simlar levels.. the values of the account has halved.

to me its all so easy for them to get away with it.. and I don't believe that are valuing these options correctly.. in such times they can make any excuse.

They also have been making huge wide spreads on the options.buy and sell prices. as much as 4 to 5 time more..on daily options and 2 or 3 times on monthly Sept options...

Yes the market has had days of huge moves.. but some days in between were more normal yet they still had such wide spreads...and well over priced options..

As I am not a trader with an account to sell options and take any advantage of that.. which is still high risk...and I think few people in spread bet companies would look to do... I think it seems rather manipulated and more or less makes it very unappealing to want to risk trading with them when they are so overpriced..
 

tar

Legendary member
10,441 1,309
Who said you will double your investment every time the index moves 500 points ? The devil is in the details , there is time decay and lost premium you have to consider . I would sell them rather than buying , so if you are looking for a bullish Dow for example , you may consider selling some puts , small size with a stop .
 
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dowsp

Member
61 3
I was trying to describe an example of when I purchased a Wall Street Dow Jones Sept 17000 call Option after the market had that huge decline into the recent August 24th Low...to a level of about 15300... it then rallied about a 1000 points upto about 16400..

I had been expecting this decline, but not so sudden as it occurred.
when the market had been at about 16500 I had bought Wall St 17500 calls that were a 1000 points out of the money...thinking we would see a pull back before the big decline occurred... but the market went on to continue its decline..and it went on to fall about a further 1200 points or more.

When the Dow Bottomed on the 24th August.. within a few minutes if I recall it rallied about 800 points....(I dont think I have ever seen anything like that before..)

The 17500 calls at that low were at that time of the low had been over 2500 points out of the money...after at the top of the rally of that day after that main low...they were back to about 1200 points out of the money...
and at one point those 17500 calls became worth MORE than I had paid for.
IF I recall I may have paid about 130 points at the buy price with maybe a spread between the buy and sell price of 14 to 30 points..(I cannot recall exact)

BUT at the high of that quick one day rally the SELL price went to over 180 points...and was still worth what I paid even as the market had pulled back a few hundred points for a hour or two after its 800 to a 1000 points rally.

During and just After that main low / Rally .. the Volatility had been very high

A day or so later on the 25th or 26th... the market declined again to about 15600.. then At a level of about 15700.. I I then bought a Wall St Sept 17000 calls... that were 1300 points out of the money.

I did think maybe that a Low could be in at least a few days and that we would see a rally back upto the 16600 level...in a couple of days..

and I thought if we did that the Volatility would rise again and that the 17000 calls would at least be worth double my what I paid.

Again I may have paid about 130 points for the Call Options.

When the market did rally over 500 points... Those calls hardly gained anything..

I thought that as the market re--rallied that the option Volatility would rise again... but it didnt...

There had only been a few days in terms of lost time value..

and in the past I am sure that I have easily doubled my money on past 500 point moves... especially those made in 1 to 2 days..

So to make a 500 point move in 2 days yes Id expect to double my money..
especially in what had been a volatile period..

I am just trying to explain what I recall and how my view had been on them.

and was asking any one who may be knowledgeable about options if they could advise or give me their opinions.

I did NOT want to sell such options as I do not have a big enough account to risk doing so.. as I understand selling options is highly risky.. even though it is usually more profitable and in ones favour in general.

what I should have done was sell a further out of money option.. say a 17200 or 17400 call to make it as a spread..

but at that time I did think those 17000 calls would have made better gains in 2 days on a 500 point rally..

Hope this explains my point..

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=djia&insttype=&freq=1&show=&time=4

I'm kind of confused...so what exactly are your question(s), if any? :|
 

dowsp

Member
61 3
Thanks for your comments..

In this case, personally I did not think much time value was lost or was an issue on Sept call options at that time..only a few days were in between.

Hopefully my eg above will compare how I had earlier held Dow 17500 calls
that I thought would have lost well over 50% or more in value after that huge decline, but at the time of the bounce on Aug 24th... they actually became worth more than what I had paid when the market had maybe been 500 points higher..prior to the decline..

This admittedly was due to huge volatility.. and sentiment..
such extreme is a rare event and my guess maybe only Professional traders would know best how to deal with this...but their rewards could be extreme..
if they acted correctly.

There have been some quite amazing and incredible changes in the Volatility the week before the decline around the August option expiry and in the week of the decline...the biggest being that on the 24th August.

I think if we see the August 24th Low broke...in the next week or so.. that
We may be in for some further / similar extreme conditions in the next 2 to 4 weeks ...

I have a feeling that we could see or be back to the Oct 2007 highs(14196 ) and maybe see 14200 to 13800 on the Dow between Sept 21st and December with some bounces in between.


Who said you will double your investment every time the index moves 500 points ? The devil is in the details , there is time decay and lost premium you have to consider . I would sell them rather than buying , so if you are looking for a bullish Dow for example , you may consider selling some puts , small size with a stop .
 

tar

Legendary member
10,441 1,309
"I thought that as the market re--rallied that the option Volatility would rise again... but it didnt..."

When markets rally volatility drops .

So :

Wide spreads + 2 days time decay in short term options + Drop in volatility .
 

dowsp

Member
61 3
When you say.." When Markets rally Volatility drops"

Do you mean generally during upward moves or after large declines ?
I assume you mean after a market has severely declined.

Yet on the 24th Aug when the market had made such a huge decline.. and it bounced for a very quick reasonable rally... Bullish Volatility did increase quite severely.


(How do you see this if it had been in a severe rally and you bought similar out of money & priced PUT Options ...(instead of a large declining market) . and how they would then react if there was then a 500 point decline in a quick 2 day falling market)... Would the Puts also show little gain or do you see Puts as generally obtaining more Volatility than call options ? Maybe it depends on the longer term or present overall trend..

This was just after August Options expired and the Sept calls had almost a full month.. Usually I don't think they loose that much value over 2 days as long as there is no weekend in between and dependent upon the size of the move.

What I think is unfair in options is seeing them reduce over weekends if you chance holding on to them hoping for a overnight move on the Sunday evening open... I think time value should only apply to the actual trading days, not weekends..

"I thought that as the market re--rallied that the option Volatility would rise again... but it didnt..."

When markets rally volatility drops .

So :

Wide spreads + 2 days time decay in short term options + Drop in volatility .
 

dowsp

Member
61 3
I tend to stick with the Spread bet companies as their options are more affordable compared with normal trading companies/brokerages on the real exchanges.


I mean this more in terms as you can trade spread bet options as low as a £1 a point..and not in terms of they are cheaper than what the real exchanges may quote in the actual options value...With the Main exchanged you have to buy a MINIMUM of $5 worth of options on the Dow or SPX mini markets..if I recall compared to IG only wanting as low as a min of £1 a point..

I am not aware you can do that elsewhere..

I also trade the Dow as I have analysed that more than any other market for some years especially with its timing cycles and price levels ... thats why I stick with it..

Sometimes IG s options don't seem too bad..But lately they have not been reasonably priced IMO...as I am sure you have made that conclusion some time ago even when I thought they had not been too bad..

IGs Platform service is quite good and more reliable than other Spread bet companies.. I have not found IGs overall customer service very good at all in the last 6 to 12 months. Many a time you cannot even get them to answer the phone within a reasonable time. I am not sure if they have cut down their staff levels... and you can no longer talk with the option desk direct...

The other VERY Good thing with IG is that you can trade the options almost 24 hrs..
where as Finspreads you can only trade them in trading hours on the exchanges.

IG also offer weekly options that can be good and again you have access 24 hrs. with the mid week.

The BIG issue is you cannot trade them as options come Sunday evening to Monday at 14.30 hrs UK time....sometimes they do offer options from maybe between 8 am for daily options and sometimes they offer weekly options before 14.30 hrs...

that can be a good benefit at times..

Sometime Finspreads can be better but there spreads are usually worse.

their options should in theory be cheaper as you don't have 24 hr access.
and you can trade them on a margin..which can leave you more money to obtain more positions on what capital you have..in theory !

with IG index you have to pay in FULL when you buy..

When we see what seem very bearish views on the markets the PUT Options have become quite ridiculously expensive, so much so they have often priced me out of being able to afford to buy reasonably closer ..out of money options... even the very far out ones are too much many at time... its only when we get into the last 2 to 3 weeks that they become more affordable.

One has to try to become VERY good at analysing price support / resistance levels or timing the market to have much chance of success.

IF one had say bought some far out of money Sept puts, say back in Late July early August..when the Dow was back at 18000...if they thought that the market was going to have a large decline... they could have say obtained 15000 puts when the market (Dow) was between 18000 to 17000 level. maybe for under £50 an option..

but as the market declined below 17000 even the far out of money puts started to became worth too much to want to buy....

sometimes traders await a level or time frame to show a break down/out...before deciding upon the market trend...

but this is sometimes when the options then increase too much to be able to afford them....

then it seems a lost opportunity if the market then goes on to make a huge decline as basically the puts are too highly priced and the risk seems too great.. it just spoils the opportunity to make a potential killing..when the signs of a decline seem more obvious.

which is very upsetting for anyone who was doing good analysis on the market to determine its timing and trend and possible price Support / resistance levels.. the the costs of the options increased too much to afford in comparison to earlier on and it spoils the plan when looking for a crash to be able to get the best prices with chance of best gains...

When the Market declined from its July Highs at a level of about 18000...
anyone who bought August Options in that months final week to its last day had the chance to make a absolute fortune... I seen some AUGUST out of money puts make HUGE gains in the last 2 days...on a relatively LOW risk.. if not chancing buying too many positions..

but in general , admittedly such things are rare to occur...

so anyone who would have chanced holding Aug put options say 1000 points out of the money from say the highs a month prior (in July 30 days before) to their expiry.... they could have become quite rich within 30 days

THEN the opportunity disappears once those Aug options expired and we were left with the Highly valued Sept puts....

IF one had timed that low well with confidence... yes they could have sold those expensive puts for a few days on that rally..but at quite a high risk.

.
It seemed the best opportunity on the August expiry that I have seen for some time and certainly this year so far..


I had wrote another message in the Spread bet section about some of my issues that I have had with them... that have been frustrating and costly..

Forget IG options , open a stocks account and trade SPY etf options ...

http://finance.yahoo.com/q/op?s=SPY+Options
 
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