Hey congrats all -- OIH snapped up like a rubber band yesterday and ran on into the night.
My enthusiasm is tempered however... I played the same income position on Centex yesterday that ive played the last couple months -- a play for it to remain relatively flat til dec. expiration - and waddya know... this morning the housing stocks get upgraded. Its hurtin me bad right now, but if it can just expire here then I should be ok.
Even the dependable ones go bad sometimes I guess.
Nice seeing the energies go up - although I wonder how long they can hold. I suspect it all depends on the buck, which will effect oil, which will effect the services guys. Weather is also a factor - that storm looks fierce.
Ahh well. Ive gone to mostly cash now. Time for a break.
Good luck all !
Do you have an email address I could contact you at? I emailed you at your Yahoo address, so you may have got it. If you use another address, please let me know.
You can email me at: email@example.com
Good luck trading...
Yup - it takes a bit just since there are so many factors and variables -- but as for anything else, with flexibility comes complexity. I found that after reading some books, playing a bit, then reading some of the same books again that things gelled as far as the interaction of the variables, and when to play what - which is probly the most important aspect.
There are books that are good at telling you under what conditions you play a certain position -- 'The bible of options strategies' by Cohen -- but rather than being provided a fish for a day I prefer to learn to fish -- 'Options as a strategic investment' is very very good - Id suggest that as perhaps the cornerstone of an options education, and the more complex, but very enlightenning 'Option volatility and pricing' by Natenburg -- which is more geared towards the institutional player, but treats volatility and pricing as thoroughly as you want.
Add to that a good set of tools, and some healthy skepticism and you can go as deep as you want.
Keeping it simple is great - but when you find the times where only something very specific will work, you will have the ability to do that.
hehehe - and be careful with that 'throw away' money - I find that no matter what kinda money it is, quadruple red digits still piss me off.
Good luck !
thanks for the detailed reply. it's going to take me a week to digest it! There sure is a lot you can do with options, holy sh*t!
I definitely don't plan to pursue any "delta-neutral" positions right now, or anything complex ... i'm going to be using throw-away money and will be keeping it as simple as possible for quite a while. I'd hate to lose my shirt before i even get to wear it :/
Yeah - sounds like ur doing well in teh greeks. They arent that difficult at all once you get the hang of how they interract. Tools. Tools are the key. The ones on the CBOE are ok -- but the best price/performance tools Ive found are a set of excel tools written by peter hoadley (an aussie). For $65 you can get the low-level tools, pricing calculators, probability stuff, etc - and then download all the stuff that rides on top of that for free. While not very well integrated across the tool suite, still a very capable set of tools that give you what you need from a-z.
As far as Mr. delta, he can be a sinner or he can be a saint. Its very tempting to load up on calls cuz they are so cheap - but if you arent used to seeing huge red numbers as the stock trades then start small - keep your deltas under control -- im sure you already know that the delta determines how much an option price will move for every dollar of underlying stock price movement. While your at it, take a look at gamma -- which determines how fast the delta will change as the underlying moves (basically option/position accelaration).
So... with 100 deltas being equal to 100 shares of stock, you should be able to gauge how many deltas you would be comfortable with. Ask yourself if you wouild be comfortable with a 2 point drop in stock price - or a 5 point.. or whereever you determine to support to be, or your stop loss (which will usually be based on a stock price that breaks support).
Delta neutral is a different animal. I talk about it and look at it because the VIX is at very low levels - mean reversion would dictate that it will revert sooner or later - likely when the market finally has its correction.
A delta neutral position is one that is immune to underlying stock price change -- you are putting your risk in vega, which dictates how much an option price moves for every point change in volatility. Obviously if volatility in a market or a stock is at a historic low, its a pretty good risk/reward situation to pack all your risk into vega - make delta and probly gamma neutral (gamma being neutral will mean you wont have to adjust the position back to delta neutral as often). As the underlying price does move, you make adjustments to the position periodically to get it back to delta neutral again - this usually involves selling some of the options on the winning side of the spread.
All that said, delta-neutral is tough for a couple reasons -- first of all if volatility doesnt ramp, then theta will start eating into the position. Secondly you dont want to adjust too often, as you will start eating brokerage fees.
The simplest (and perhaps riskiest) form of a delta-neutral position is the simple straddle (or strangle). Its high-vega, high gamma and high theta, due to all the bought options - and since the options are all ATM its relatively expensive. The issue I have with it is that its a tough position to just let ride for very long without 'playing' with it, or trading away the profitable leg cuz you think the stocks about to turn the other way. I call this a 'crazy legs' trade, where you throw a delta-neutral straddle or strangle on, then depend on your chart skills to know when to sell the winning side as the stock turns, then make money on the other leg. Very risky though - you have to be accurate or else you could end up losing on both sides of the trade.
Im liking the ratio backspreads... but thats for another time...
Good luck !
Yup - I agree that you stand to make more on a percentage basis buying OTM options -- the power curve is different, and you 'delta up' alot faster as the underlying comes up to meet the option strike (due to increasing gamma). You also lose slower if it goes against you - as you move further away from the underlying price Gamma is decreasing. But again, every option you buy is a tradeoff between risk and reward -- and OTM are more risky due to having no intrinsic value -- as with every option you search to find the balance that is suitable to you.
As far as spreads, I find it funny that alot of people use normal vertical spreads, assuming then are like buying a put or call, but less risky. In reality they are completely different - their reaction to volatility changes is essentially opposite of a bought call when the underlying is moving in the desired direction - basically as you are moving toward the sold option your vega is going more negative - something that surprises new spreaders -- and a consideration to take into account if you want to take an options position where the options are expensive - a negative vega would be desireable.
As far as my condor, basically you trade off a little gain to get a wider profit/max profit zone. When you find a stock whose chart shows support/resistance right at the edges of the profit zone and has a tendency to be flat, then wrapping that support/resistance in a condor is a thing of beauty - for one thing its a credit spread, with your sold options ATM. The iron part is the outside 'wings' -- cheap calls and puts to cap your risk, and since they are furhtest OTM and the position only has a couple weeks to live, the protection is very cheap.
I havent done any calendar spreads yet, but find them very intrigueing - I find diagonals even more intrigueing. One of the reasons I was tinking of changing my broker was because etrade doesnt allow some of the combinations needed for the full set of calendar and diagonal tools. Basically etrade doesnt allow naked options - and they dont consider a sold front month option to be covered if the covering opion is not in the same month.
Anyway, yes - Ive enjoyed the exchange also. Put your risk in vega, and good luck !
I agree about the selling ATM and going long on ITM. I have stopped doing spreads for the reasons I already stated.
However, if you compute expected returns on a position, you will realize buying OTM calls with a certain amount is better than ITM or ATM calls for the same amount. The main reason is the leverage offered by the OTM calls - without increasing your risk a whole lot. Try modelling it and let me know what you think - I think you will find it interesting. I got to admit, it is counter intuitive.