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?
If you are deep ITM, you will try to close out as close to par as possible (intrinsic value). Generally you will have to flip a few cents to the MM to get him to jump. My experience tells me within a nickel or so but I do not have as much experience with AGNC specific leaps as many of the others do. Maybe they can weigh in.
I'll definitely mark the IV and watch it.
So I plan to sell all my calls in September on the run up to ex, do you look at the IV to determine which day to sell, on a day with high IV? Also, since most traders will be cashing their chips at that time, would that push the calls price down? Kind of like the opposite of the SPO (calls were up because everyone was scooping them up) ? Just a thought.
Make a note on your graph of what the IV was. Then look for a day with significantly higher or lower IV and graph it. This will help you visualize what happens as these changes occur.
An additional note, and something you might notice in your research. On an up day, the IV affect on calls will be different than on puts. Opposite for a down day, generally. You can use this to your advantage when buying/selling options.
Thanks Jet, that makes sense, really exciting to do the graph and learn. Thanks for the help!
Good luck with your trades!
p.s. It just clicked to me why the OTM time value will increase, it's because as AGNC goes up the OTM's become ATM's (premium goes up) and that's when the intrinsic kicks in, then as they move into the ITM territory their time value will decrease. Right ?
Sorry, that is confusing. I would start on the far left of the horizontal axis with the ITM 30 strike. Move right placing each strike on the axis. ATM 35 should be about the middle and then continuing on up to OTM 40 on the far right.
Does this help clarify? I can re word if not.