Vanishing Options (?)

[Schopen]

As I understand it only so many option strikes are available either side of the market price. What happens when the underlying moves so far that the outlying options in an option series 'fall off' ? If you have positions in these options, are they still good?
If the market then moves back to its previous range, does your position come back to life?
Can you have options positions that during the above scenario, no longer actually appear as a quote or a tradable option (no pun meant) ?

 

[traderum]

As I understand it only so many option strikes are available either side of the market price. What happens when the underlying moves so far that the outlying options in an option series 'fall off' ? If you have positions in these options, are they still good?
If the market then moves back to its previous range, does your position come back to life?
Can you have options positions that during the above scenario, no longer actually appear as a quote or a tradable option (no pun meant) ?

The options are tradable until the expiration date.
Of course they could be nearly worthless if the underlying moves so far against your options, but still tradable.
But at the same time options of the other side gain that much in value of course...
Yes, if the market then moves back to its previous range, your position gains in value minus the decay in time value...
You can check this using an options calculator...

 

[Martinghoul]

Options that are very far ITM or OTM don't vanish and are always tradeable, as pointed out by traderum. They just sorta become pointless. Why trade an option with a delta of 1, for example? You might as well use the underlying. In practice, a position that consists of only very far OTM/ITM options will have negligible greeks, apart from delta (it's like being long/short the underlying or being flat).

Your positions will stay alive until expiration. If a quote for a strike doesn't appear in the chain by default, it doesn't mean the option isn't tradeable. It is and you can ask a mkt-maker to show you their bid/ask (might wokr with an RFQ).

 

[Benton D Struckcheon]

Options that are very far ITM or OTM don't vanish and are always tradeable, as pointed out by traderum. They just sorta become pointless. Why trade an option with a delta of 1, for example? You might as well use the underlying. In practice, a position that consists of only very far OTM/ITM options will have negligible greeks, apart from delta (it's like being long/short the underlying or being flat).

Your positions will stay alive until expiration. If a quote for a strike doesn't appear in the chain by default, it doesn't mean the option isn't tradeable. It is and you can ask a mkt-maker to show you their bid/ask (might wokr with an RFQ).

I have a backspread on IWM right now, a small position involving two 65 puts that are, as I write this, at 1.00 on the delta, or as close as you can get. The other side of this involves four 63 puts that still have some ways to go until they get to 1 delta each. Needless to say, I'm rooting for that to happen.
Regardless, I'd be either closing this out or rolling it forward soon, as these are all Jan puts that will expire in a couple of weeks. Obviously, those 65 puts with a 1 delta are tradeable.

 

[Schopen]

Hope this trade is a winner for you.

Can I ask, are your short the 63's or long, and does your trading software show you the greek totals for this trade?

 

[Benton D Struckcheon]

Backspreads are interesting. Price went against me bigtime yesterday, but I wound up making money through a bit of nimble trading. Not something that's possible with a straight spread.
Idea here is to be short the 65's and long the 63's. The price of IWM was between these two, so the gamma on the 63's was much higher, and the deltas were higher too. It's a trade for when you think volatility is going to be high enough to make it worthwhile, as the net gamma and vega are both pretty high (which also means theta is high and dangerous, unfortunately). There was nice volatility yesterday, which is why I was able to trade my way into a profit. Today's not looking that way so far.
Stick to straight spreads until you have a good understanding of volatility.

 

[GammaJammer]

Stick to straight spreads until you have a good understanding of volatility.

Countless hedge fund managers were wishing they'd done exactly that in 2008, instead of being short the wings and having a red hot poker inserted somewhere suitably 'convex'

 

[Benton D Struckcheon]

I've been hurt by selling more options than I should have. It's always a temptation that has to be strongly resisted.
Thinking red hot pokers in unsuitable orifices is probably a good way to stay away from it.

 

[GammaJammer]

That's why all these correlation / relative value / simplex type funds grew so popular imho. Buying opts kills you with decay, selling them can eat you alive with short gamma, so many people see the attraction of the nickel and dime, find the sweet spot in the vol surface approach. But it's very systems and people intensive. Plus it's also not 100% scaleable as you have to trade in pretty chunky size to make sure your P+L metrics stack up ok (as the fixed cost base is, as I said, large for this approach).

 

[Martinghoul]

True dat, GJ. I agree, being a 'nickel and dime' man meself.

 

[gooseman]

sell the teenies, buy dose lamborghinis.

 

[Key Equity Hedge]

Hey Guys, I might be able to show you something that may help. Been developing it for about 7 years now available. Happy to chat about it. www.keyequityhedge.com

 

[gooseman]

help with what?

 

[Key Equity Hedge]

Sorry mate I put this in the wrong thread, I guy sent me a Link but it linked to here.... Will chase it up and see where it was suppose to go...Cheers