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American Capital Agency Corp. Message Board

  • JetCityExpo JetCityExpo Jul 28, 2012 1:01 PM Flag

    OT: Weekend options chat

    Some option discussion. For those not interested in options, that's ok. We don't think any less of you so please ignore this thread.

    Ok, so I just made up a term. Delta profile. To me this means I visualize a graph of how the price of the option changes over the various strike prices, for a given month, as the PPS changes. Then I visualize another month and note the subtle changes. Some programs will chart this for you. When I started, I manually made graphs of this for particular months.

    I also made graphs of time premiums as well. While a bit time consuming, you don't need to do too many of them before you get a general visualization of how PPS movement affects the price of a particular option.

    What does any of this mean? For one, when I purchase an option I'm not really concerned with strike or timeframe. I'm more concerned with the delta profile I'm buying. Yes, I have a general opinion on the direction of the move, but it does little else than get me to start looking at the available options.

    Instead I visualize the delta profile and ask "Is that a profile I am comfortable with for the amount of risk?"

    My very next thought is "What delta profile can I sell to enhance my position? I see from my long position that I have to pay x in time premium. How can I recoup that, and possibly more, should PPS not move according to plan."

    Once I find the two positions I am comfortable with (A long option and a short option) I will enter into a spread position.

    I will then adjust my spread from there as the market moves by either a) buying back the short b) rolling the short to same or different strike, or c) rolling my long to same or different strike. I only end up "naked" (meaning I don't have another option sold against a long option, a very different reference than naked selling) if PPS has moved enough, usually against me, that I feel comfortable closing my short.

    For my trading style, the point of my short option is two fold. First, if PPS flatlines for any length of time, I am able to profit, or at least not lose money, due to time erosion. This helps put some marginal odds in my favor at the expense of upside potential.

    The second purpose of my short is to offer some downside protection if PPS moves against me, allowing me to lower my entry cost by adjusting my position. Thus if PPS moves against me I can lower my cost a bit so that I become profitable sooner, when PPS heads the other way. This puts a few more marginal odds in my favor.

    Does this mean I win every trade? Heck no, but I feel I have put as many odds as possible in my favor.

    What methods do you use when trading options?

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