Any option writers out there?

Hey long88 ,

long88 said:

emil: also with credit spread, i think it is very slow to realise the profit (depends on the position, but theta is seems to be very small all the time), and you have to hang on to it very long (35 days or more), better if you go where there is speed and momentum in market, and market can give you faster profit realization (like in the us).

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Not true. I have done multiple bear call / bull put spreads with only one week till expiry in the past. Check this WOW trade for example. All of these were constructed out of the money so sideways movement would have been ok too. Yes, you don't get the huge premiums there but if I can make 25-35% in a week, relatively safely, I'll take it.

Of course, a moving market will get you more profits (and losses). Our market in Australia is more sideways than trending, that is why I use the relatively conservative spreads. Once our market breaks out of 3800 on the upside and maybe start trending decently I'll apply synthetics to get much higher returns.

Got fwd this blog by da boyz
Thought i'd pop in and throw this up
Since alot of the new questions in the options threads are usually about naked premium whether natural or synthetic

Blog

Full marks to this individual for baring all on the net - in no way am I bagging them
While this is nothing new or groundbreaking,I think the blog typifies the life of a short OTM curvature trader before he/she is destroyed by the market and can serve as a good real life case study to learn from

The main points:

1) Numerous reference to the Greeks but not actually trading them
Shorting IV based on feel. Shorting premium going into expiration week when negative gamma is running wild.

2) Playing for OTM curvature can be gratifying in the short term, but painful when the swan arrives.

a) Didn't close shorts early
b) Played for so little e.g. short a VIX strangle for $0.50. Also shorted CROX strangle which lost $25k - blowing up the account.
c) Scalped stocks for very little
d) In 08 the problems begin

3) Unrealistic expectations leading to issues with position size
He had a $25k account and expected to shoot for a $100k/yr salary
That is a 400% return, and only those really skilled and experienced would be considering that.
Plus the fact the individual was at a prop firm, trading with risk-based margin only gave them a chance to overleverage - deadly

4) Risk management
Believing that negative gamma scalps will save their ass. Truth is some moves are large and unexpected and it is difficult to dynamcially hedge (not withstanding the numerous adjustments to the Greeks to make the hedges more "accurate" e.g. incorporating jumps into BSM model)

5) TH on this forum suggests that one not only practise but review.
This individual blew 3 x $25k accounts and then proceeded to borrow $16k from a family member.

Refusal to accept mistakes - blaming it on stock quotes and data vendors
There was a slight review of methodology by switching to shorting ATM curvature, but I think position sizing was an issue.

Please add or discuss if you like.
Good trading
Later

hi emil, i seems like your brokerage is a bit too high, which broker are you using ?

emilov said:

Hey long88 ,



Not true. I have done multiple bear call / bull put spreads with only one week till expiry in the past. Check this WOW trade for example. All of these were constructed out of the money so sideways movement would have been ok too. Yes, you don't get the huge premiums there but if I can make 25-35% in a week, relatively safely, I'll take it.

Of course, a moving market will get you more profits (and losses). Our market in Australia is more sideways than trending, that is why I use the relatively conservative spreads. Once our market breaks out of 3800 on the upside and maybe start trending decently I'll apply synthetics to get much higher returns.

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Hi long88,
I'm using circle securities / trader's circle. They are a full service broker and they charge 75$ or .5% (which ever is bigger) per leg (plus gst) and the ASH charges 1.07$ or something per contract (plus gst). How much cheaper can I get it?

emilov said:

Hi long88,
I'm using circle securities / trader's circle. They are a full service broker and they charge 75$ or .5% (which ever is bigger) per leg (plus gst) and the ASH charges 1.07$ or something per contract (plus gst). How much cheaper can I get it?

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i am with spectrum live, and currently paying $25 or $30 per leg (not sure here, i forgot)

i know that i have to pay $15USD for US, and as long as i trade minimum 2/month. live data feed is free

aussie data feed is $35/month

there is also standard 1.xx for per contract from ACH(no one can get away from that).

and all of this is online, although there is number you can call and talk to, but they always want you place everything on the platform (if it is working).

This broker give me access to fx, cfd, futures, options all over the world. and what i need now is good thinking, working strategy, and money.

Cheers

Interesting, do these guys do ASX ETOs? How can they afford to be so cheap? Is it just a computer platform, yes? That is, you enter orders online, not with a live person?

Also, how about slippage? How good are your fills?

yes, i trade asx through them as well.

yes computer platform. but they can place it for you their system down.

fills is as what market offers, not much difference with etrade (i used to use them), if i want to get executed straight away, i usually place it in the middle. unless i wait for price movement.

emilov said:

Interesting, do these guys do ASX ETOs? How can they afford to be so cheap? Is it just a computer platform, yes? That is, you enter orders online, not with a live person?

Also, how about slippage? How good are your fills?

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Hi Grinder,

Thanks for the tip, I may have a play with that idea next month.

Mazza,

Interesting blog excerpt, I must admit I’m guilty of making some of those errors, i.e not closing out shorts attempting to squeeze every last bit out / putting on short gamma positions close to expiry, I can’t remember if it was yourself or grinder saying “would you put that position on at that price” (or something along those lines) when determining whether to pull profits off the table.

I’m still not sure what a “a short OTM curvature trader” is, I assume a OTM naked option seller?

Emilov, $75 a leg, I thought the big 4 were expensive

etrade is already $45 and i am screaming at that already (for oz market).

i think emilov loves to talk to his broker ?

cutz said:

Hi Grinder,

Thanks for the tip, I may have a play with that idea next month.

Mazza,

Interesting blog excerpt, I must admit I’m guilty of making some of those errors, i.e not closing out shorts attempting to squeeze every last bit out / putting on short gamma positions close to expiry, I can’t remember if it was yourself or grinder saying “would you put that position on at that price” (or something along those lines) when determining whether to pull profits off the table.

I’m still not sure what a “a short OTM curvature trader” is, I assume a OTM naked option seller?

Emilov, $75 a leg, I thought the big 4 were expensive

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It surely is nice to be able to call any time and ask anything (like "XYZ dropped today, was there some news that caused it?"). Say guys, for options where there are no bid/ask spread quotes, what do you do?

Because I call my broker and they request these for me.

emilov said:

It surely is nice to be able to call any time and ask anything (like "XYZ dropped today, was there some news that caused it?"). Say guys, for options where there are no bid/ask spread quotes, what do you do?

Because I call my broker and they request these for me.

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with no bid/ask quotes

i use hoadley tools, (make sure the interest rate are correct, and date of expiry, volatility), all of those data are available on your broker, and that will give you rough estimation on how much you should be paying for, no need those phone call.

and with aussie market, you will get more slippage on the bid/ask, as after you priced in the expected price, usually you will not be able to get execution, and have to wait for price movement for the market maker to be able to make profit out of position that you want to be in. (been there and done that). especially when market goes against you, and you want to get out quick, that is the worst thing, and always end up with big losses.



with news, i always threat it as catalyst, and dont follow news, you will get slaugtered, as usually news is already priced in the volatility. (GE put, a lot of people buying it on jan, feb) and turns out the other way around.

hi all
have a question concerning short butterflys

eg. -1 +2 -1

have been mucking around with priceing on excel and such and have come to the conclusion that there is no premium in them what so ever, i cannot see why they would be employed at all.

am i missing something as the risk/reward ratio seems to be horrific

would welcome any comments from experienced players.

gary

Hey Gary,
Hell yeah you can make money. Here is a quick example (prices simplified):
buy bhp 32 calls @ 180c
sell bhp 32.50 calls x2 @ 150c
buy bhp 33 calls @ 120c
0 $debit/credit (most times you'll end up with a small debit and there is margin involved but there are offsetting bought calls so not so much)

Perfect scenario, bhp expires at 32.50. In that case sold calls and the 33 bought one expire worthless. The 32 call is worth 50c. So you make the premium of the sold calls plus the 50c: 2x1.50$ + 50c = 3.50$ (minus wretched brokerage). I'd say that is a pretty handsome profit (given the fact that the maximum you can lose in any direction is the difference i.e. 50c). Of course in order to profit BHP does need to be very close to the price of the sold calls otherwise you end up in the losing zone pretty quickly.

Of course doing the above on BHP itself would not be the best idea as it tends to gap a lot and do whatever the hell it wants. But there are stocks that are more flat or have stable trends so a trend line would tell you where they are likely to finish. And funny things happen on expiry day some stocks finish miraculously directly at some strike price, I wonder why that is ?

If there is a descent resistance you could do a ratio call spread instead (basically a butterfly without an upper bought call protection and hell of a lot more margin because of that).

The butterfly you'd do about 4-5 days prior to expiry so time decay would really hit the sold calls. Also you don't have to hold till expiry and get rid of the spread during the last day.

Cheers, Emil

jackson8 said:

hi all
have a question concerning short butterflys

eg. -1 +2 -1

have been mucking around with priceing on excel and such and have come to the conclusion that there is no premium in them what so ever, i cannot see why they would be employed at all.

am i missing something as the risk/reward ratio seems to be horrific

would welcome any comments from experienced players.

gary

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Hi Gary,

My take on the short butterfly is that it seems to have a higher probability of success as the loss zone is narrower when the conditions are right, i.e. it seems to favor low IV situations, just my guess. I’ll also be interested to hear from experience.

BTW, have a play with XJO 3700/3800/3900 and you'll see what i mean, especially when IV is moved to the lower ranges.

emilov said:

Hey Gary,
Hell yeah you can make money. Here is a quick example (prices simplified):
buy bhp 32 calls @ 180c
sell bhp 32.50 calls x2 @ 150c
buy bhp 33 calls @ 120c
0 $debit/credit (most times you'll end up with a small debit and there is margin involved but there are offsetting bought calls so not so much)

Perfect scenario, bhp expires at 32.50. In that case sold calls and the 33 bought one expire worthless. The 32 call is worth 50c. So you make the premium of the sold calls plus the 50c: 2x1.50$ + 50c = 3.50$ (minus wretched brokerage). I'd say that is a pretty handsome profit (given the fact that the maximum you can lose in any direction is the difference i.e. 50c). Of course in order to profit BHP does need to be very close to the price of the sold calls otherwise you end up in the losing zone pretty quickly.

Of course doing the above on BHP itself would not be the best idea as it tends to gap a lot and do whatever the hell it wants. But there are stocks that are more flat or have stable trends so a trend line would tell you where they are likely to finish. And funny things happen on expiry day some stocks finish miraculously directly at some strike price, I wonder why that is ?

If there is a descent resistance you could do a ratio call spread instead (basically a butterfly without an upper bought call protection and hell of a lot more margin because of that).

The butterfly you'd do about 4-5 days prior to expiry so time decay would really hit the sold calls. Also you don't have to hold till expiry and get rid of the spread during the last day.

Cheers, Emil

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hi emilov

thanks for the reply

am actually talking about short butterflys


instead of your example of bhp which is long
buy bhp 32 calls @ 180c
sell bhp 32.50 calls x2 @ 150c
buy bhp 33 calls @ 120c


a short would consist of
sell bhp 32 call @ 180c
buy bhp 32.50 calls x2 @ 150c
sell bhp 33 call @ 120c

so would be relying on sp to finish either above the 33 short or below the 32 short
but i am finding that premium received is very little to the risk taken on.

gary

ps. also the price equations that you have posted dont quite work out . as i see it the maximum profit on your long position is 50c plus premium received.

you dont retain all of the premium on your shorts as you have had to purchase the longs.

cutz said:

Hi Gary,

My take on the short butterfly is that it seems to have a higher probability of success as the loss zone is narrower when the conditions are right, i.e. it seems to favor low IV situations, just my guess. I’ll also be interested to hear from experience.

BTW, have a play with XJO 3700/3800/3900 and you'll see what i mean, especially when IV is moved to the lower ranges.

Click to expand...

Hi Gary, i just want to add.

Another interesting observation about the short butterfly is that the risk graph gets really attractive as time is removed, so with a pretend IV of 10%, 7 days out, XJO at 3800, on 10/20/10 contracts max risk is 4K, max profit is 6k, loss zone is about 40points either side of 3800.

The trade off is with such a low IV, getting out of the loss zone seems unlikely in 7 days, when you add time the risk/reward starts spreading out, i.e at 4 weeks it becomes ~2.5K max rofit/7.5K max loss, but of course there’s more time to get out of the loss zone (~3725-3875).

Interesting subject short flys Gary, I think you’re onto something.

hi cutz
this is my understanding of the two positions that i am talking about. taken from asx pdf.

LONG BUTTERFLY
Construction:
Buy 1 Call at A and Sell 2 Calls at B and Buy 1 Call at C.
Your Market Outlook: Neutral. The share price will expire around the
strike price B. This strategy is also used if your view is that volatility
will decrease, the bought options at A and C provide protection for
the strategy.
Profit: The maximum profit will occur at the strike price B.
Loss: The maximum loss for this trade is limited. The break-evens are
at A plus the cost of the spread and at C less the cost of the spread.
Volatility: The option value will decrease as volatility decreases which
is generally good for the strategy. Alternatively an increase in volatility
will be generally bad for the strategy.
Time Decay: As each day passes the value of the option erodes
(good). Most of the decay will occur in the final month before expiry.


SHORT BUTTERFLY
Construction:
Sell 1 Call at A and Buy 2 Calls at B and Sell 1 Call at C.
Your Market Outlook: Volatile/Event Driven. Volatility will increase. If it
does both bought options will increase in value. You are unsure of the
direction of the stock but you think it will make a large move.
Profit: The maximum profit for this trade is limited. The break-evens
are at B plus or minus the cost of the spread.
Loss: The maximum loss will occur at the strike price B.
Volatility: The option value will increase as volatility increases which is
generally good for the strategy. Alternatively a decrease in volatility will
be generally bad for the strategy.
Time Decay: As each day passes the value of the option erodes (bad).
Most of the decay will occur in the final month before expiry


when i price the short fly it seems a very small premium received for the large risk involved
maybe as you have stated and from the asx doc, it is more of a volatility play

gary

Hi Gary,

If you take the concept of long flies which work best in a high IV environment, the opposite is a good rule of thumb with short flies.

Long flies are cheaper to buy when IV is high and improve with falling IV. Therefore more premium can be taken in on short flies if IV is lower - as Cutz has pointed out and could explain why there isn't much premium at this stage as IVs are still too high for a worthwhile, short fly. It also depends on where you position a fly - whether it is ATM or OTM - this is something worthwhile to play around with as it helps gain a greater understanding of how the greeks affect multi-legged positions placed at different strikes, widths, etc.

It's not only IV that makes for a cheaper butterfly (or little premium for the short fly) - but also theta. So the further out in time, the cheaper it is to buy flies and not worthwhile premium for short flies. As expiry approaches, OTM flies lose their value quickly where ATM’s gain a little more quickly. If there is a vertical IV skew as opposed to a more symmetrical smile (eg otm puts with higher IV than otm calls (NB: different strikes)), it may be more advantageous to place sold flies above the market.

So, if you are taking the opposite side of the long fly holder, you want the opposite conditions. Obviously, it is ideal if the underlying has moved well away from the short fly as expiry approaches. One possible place to consider a short fly as an initial strategy would be on potential high point in the underlying where IV has fallen significantly and a strong move is expected (but not sure which way). A strong move would take the underlying well away from the centre of the strikes. If that happens, it is likely possible to place another spread in the direction of the move.

EG XYZ - market trading at $25. Sell 24.50 / 25 / 25.5 fly for 10c. Market drops to 24. If you think it's made a low point, one can then either add 24 / 24.5 put credit (or call debit (same strikes) if assignment is a concern of doing the same thing with puts). You can even add another short fly if you think there may be more down do come and if there is enough premium in the short fly due to IV increase.

You will see why I won't do these any more in the Oz market as they are too expensive in fees and slippage. They're not a holy grail as there is a risk of the market not moving when you put the first one on and then the fly holders gets all the profits at your expense.

I think there are better ways to trade than short flies as a stand alone strategy - but they can be useful as a starting point and then followed up with adjustments. Strategies like the condor are great if the market is range bound, but they are not easy to adjust if the market moves into the danger area. The short flies are great if the market moves away from the ATM area (where the best premium is to be found for the short fly) and then one can follow up with adjustments as I have described above, thus adding more favourable positions as the market moves. Of course, as mentioned above, the risk lies in the underlying not moving away from your short fly.

Well, I thought I could type up a quick answer – sorry for the long post. Very difficult to condense this stuff! And I am only passing on to the level of my own ability and understanding – there are others out there that are way ahead of me, so I am still learning too! I think it’s all about trying some of these techniques out (on paper!) in an effort to find your niche in options trading. What works for one may not work for another.

Hopefully some food for thought - and hope it makes sense. Have had heaps of interruptions while typing it.

PS - Cutz, I see you have also posted on the effect of time while I was typing up this long speel! Agree that short flies are an interesting subject!

Nice post sails, i was looking forward to your take.

jackson8 said:

when i price the short fly it seems a very small premium received for the large risk involved

Click to expand...

Totally agree, especially on BHP, suggest using XJO (as a study), its IV has fallen but still not to the levels that IMO would make a short fly viable.