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First Options Trade

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Seneca60BC

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14 October 2006
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Here is my first Options Trade

AWE expiring Dec 08 - since I am not sure what direction AWE will be heading - I have employed a straddle.

Any feedback/criticism appreciated

 
Hey Seneca, just a couple of terminology things.

The strategy you have employed is a guts strangle not a straddle. A straddle is both legs at the same strike. It is a "guts" strangle because both strikes are ITM. This would have cost you less capital if you had used the 2.50 call and the 3.00 put, for the same payoff diagram

You've written "no time value since in the money". That's not quite right. Even deep ITM options will have time value unless delta is 1 or -1.

Your breakeven points at expiry are not correct. I make it ~$2.30 & ~$3.20.

Otherwise no problems.... but you do have a little bit of positive delta, ergo, a little bit of upside bias, but no biggy if this puts on a big move for you.

Good luck with it.
 
Hi Senica,

Firstly, I don't see that you have factored in brokerage.

I haven't traded options for a few years, but gave up this type of trading because of costs.

If the price mucks around between $2.50-$3.00 when you want to exit, then you are up for another 2 lots of brokerage. In that range your loss is 19 cents (50-27-42 and maybe more with slippage) + 4 lots of brokerage. At $30, that is another 12 cents.

Max loss/risk ~$310.

With breakeven in the area Wayne suggested, or slightly worse prices, for this to be near a R/R of 1:1 you would be gunning for prices of ~$1.90 low, ~$3.60 high, and you would want a high probability of the price getting there to make the exercise worthwhile.

Like Wayne said, Goodluck.

brty
 
Hi Guys

Thanks alot for the feedback. Yes a few errors here.

I thought to calculate the breakeven, I have to use the strike price + option cost for the higher breakeven ($2.77) and likewise for the lower value where I minus the option cost from the strike (3.00 - .42) = $2.58 ?

Yes I have not taken brokerage into account for this trade.

Cheers
 
For a guts strangle the breakeven points are calculated as follows.

upper break even = upper strike + call price + put price - the difference between the strikes

= 3.00 + 0.27 + 0.42 - 0.50

= 3.19

lower break even = lower strike - call price - put price + the difference between the strikes

= 2.50 - 0.27 - 0.42 + 0.50

= 2.31
 
Seneca60BC said:
ok - looks like my first trade is a doomed failure.

cheers.
Click to expand...
Not if the underlying takes off. You're in the trade now, give it a chance and/or use it as a tool to learn.

Keep us updated.
 
Seneca60BC said:
ok - looks like my first trade is a doomed failure.

cheers.
Click to expand...

Well done for giving it a go! My first options trade ever was a five lot long strangle on Telstra . That was a few years ago and I had no understanding about volatility and did everything wrong on that first trade! I lost a small amount of money but was a good learning experience.

I agree with Wayne that it's better to let it leave it there for now. You've got until December, so it's got a bit of time to move around. If AWE falls further, IV may increase which should help increase the value of your options.

AWE options are not very liquid - so getting fair prices could be a bit of a challenge.

Good luck with it!
 
Hi Guys

Yes thanks for the encouragement. Yea I cannot beleive the illiquidity - i thought the Market Markers were suppose to at least put in a BID ASK everyday? Is this not true ?

Cheers.
 
From memory ASX option market makers are only obliged to offer spreads on 3 strikes and for only 50% of the time and then only for the stocks they are assigned.
 
There's a few different types - in some stocks the market makers have obligations to give a price when asked and also have bids in the market for a certain period of time. Others there is no obligation to give a price or be in the market as I understand it.

But liquidity/slippage and brokerage overhead are big things to consider on options trades.


Seneca I'm pretty new to the whole options thing as well so its interesting to see someone elses trade. I'm curious as to what your view on volatility was prior to entering - i.e. did you have a long or short view on volatility? Also did you consider a short strangle/straddle at all instead of the long strangle?

I'm also curious - what is the particular reason for entering a trade with AWE at this time - is there some technical or fundamental event that has caused you to enter at this time. (e.g. chart pattern, impending news, volume/volatility related event, other indicator etc.)
 
Hi Cuttlefish

You posted some good questions and unfortunately your going to get answers from a total newbie.

1. As you can see in the diagram, I calculated Historical Volatility (HV) and Implied Volatility (IV) and since IM is smaller than HV that was one reason to enter this trade.

2. I took a long strangle time frame not because I expect to sit out till expiry, but it gives me enough time before theta overpowers the trade (last 30 days or so) so i want to be out before at least 30 days.

3. I took a long (guts - thanks Wayne) strangle because I am some what confident oil will keep heading south, BUT in case I am wrong, I have protection. This is the first trade so I thought I need extra protection. So that is why I entered this trade with AWE. Hey I could be totally wrong and lose the entire lot - only time will tell.

Cheers!
 

For point 3, have you considered a put backspread? Not saying this is the correct position to have on or anything, just an alternative.

Good luck with your trade!!!
 
Hi Maz

I am so nascent in this whole thing that I am yet to come across a Put Back Spread strategy. I dont even know what this is

I plan to learn the very basics first and then consider the more esoteric strategies.

Cheers!
 
Seneca60BC said:
Hi Maz

I am so nascent in this whole thing that I am yet to come across a Put Back Spread strategy. I dont even know what this is

I plan to learn the very basics first and then consider the more esoteric strategies.

Cheers!
Click to expand...

The put backspread is not esoteric at all!! Its one of the first spreads that are usually outlined in decent options text.

Anyways...more food for thought for the journey
 
Well looks like AWE is going to rocket today after a US$19 leap in oil overnight - I think I will be exiting today if it hits my Take Profit figure.
 
Seneca60BC said:
Well looks like AWE is going to rocket today after a US$19 leap in oil overnight - I think I will be exiting today if it hits my Take Profit figure.
Click to expand...

Doesn't look like AWE wants to budge today - oh well still hanging tight at the moment.

cheers
 
Seneca60BC said:
Doesn't look like AWE wants to budge today - oh well still hanging tight at the moment.

cheers
Click to expand...

Hey mate, good luck!!!

While sitting there twiddling your thumbs - read up on Gamma Scalping

Could prove useful later on against that rotting time decay
 
Hi Mazz

yes thanks - I will get to that later - just read up on BackSpread - seems like another interesting trading strategy - as you mentioned earlier.

Cheers man
 
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