Account Destruction.

ForexForex · Oct 4, 2011

Quote from mikeenday:
10-03-11

max out and buy some DITM SPY puts for Oct. and Nov.

and you will get all the loss back.

Good call - up about 10% after one day.

Maverickz · Oct 5, 2011

Quote from ForexForex:

Good call - up about 10% after one day.

How is that trade today? Price ran up and Volatility dropped. A double whammy if you had bought a put. Now tomorrow, after the first 30-60 minutes, if the price is trading a little bit closer to the 20 EMA but not above, then I would look at making a credit play of some sort to the downside.

ForexForex · Oct 5, 2011

Quote from Maverickz:

How is that trade today?

You are a little late with your criticism, trade is long over. When it comes to options you have to be quick. You snooze you lose.

spindr0 · Oct 5, 2011

Quote from syswizard:

All of this delta adjustment comes at a hefty price of commissions. And don't forget, you could really get whipsawed with this approach and have to adjust almost daily in a volatile market.

That's not necessarily true because it depends on what your strategy is. For example, if you have a long delta neutral synthetic straddle, you want the big move but smaller back and forth zig zag will also reap reward. In this situation, it's time decay and IV deterioration that get you.

Maverickz · Oct 5, 2011

Quote from ForexForex:

You are a little late with your criticism, trade is long over. When it comes to options you have to be quick. You snooze you lose.

Funny I never saw a call telling him to sell. So as far as I am concerned based on the advice being given he would still be in. Second while yesterday would have seen a 10% in the underlying the volatility actually dropped a little bit eroding some of that gain. Considering the advice claimed that he would recoup all of his money I highly doubt it was intended that he be out after a 8% to 9% gain.

dhpar · Oct 5, 2011

Quote from Maverickz:

One final tidbit of info before I drop off for the night. There are 4 basic spreads. Bull Call Spread (debit), Bear Call Spread (credit), Bull Put Spread (credit), and Bear Put Spread (debit).

If you compare a Bull Call Spread and a Bull Put Spread on a risk analysis graph they will look basically identical. Both make money if the underlying goes up and both lose money if the underlying goes down. Both have caps on both the max profit and the max loss. However what is not apparent is that the Bull Put Spread improves if Volatility DROPS and the Bull Call Spread improves if Volatility RISES. So if you think the market is going to go up and Volatility is already high which spread makes more sense to you? I hope you said "the Bull Put Spread".

There are a lot more scenarios and plays to master so do NOT consider this a complete list, but here is a simplified example to demonstrate how to use market direction AND volatility to choose the best option play:

Bull Call Spread (debit) - Use when you think market is going up and volatility is already very low and probably going up.

Bull Put Spread (credit) - Use when you think market is going up and volatility is already very high and probably going down.

Ratio Call Spread - Use when you think market is going up and volatility is close to the average or expected to remain near the same levels.

Bear Put Spread (debit) - Use when you think market is going down and volatility is already very low and probably going up.

Bear Call Spread (credit) - Use when you think market is going down and volatility is already very high and probably going down.

Ratio Put Spread - Use when you think market is going down and volatility is close to the average or expected to remain near the same levels.

i always viewed e.g. bull put spreads and bull call spreads as pretty much identical. there may be some margining differences (here favouring the use of calls) but other than that the performance is the same. in other words if you buy bull call spread at vol_60 and then sell it at vol_80 then you make exactly the same profit as when you buy bull put spread at vol_60 and sell it at vol_80.
it is as simple as put-call parity...

therefore what are you talking about?

daveyc · Oct 5, 2011

if he pulled 10% in a day, well then good for him, but he would have had to been really quick on his feet when the market reversed hard. all shorts were killed. but since this is the internet, most trades are winners.

ForexForex · Oct 5, 2011

Quote from Maverickz:
I highly doubt it was intended that he be out after a 8% to 9% gain.

Not going after a home run. 10% here, 8% there etc. And then within a few months PurpleOne's account would be in the green.

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Option Expert

Maverickz · Oct 5, 2011

Quote from dhpar:

i always viewed e.g. bull put spreads and bull call spreads as pretty much identical. there may be some margining differences (here favouring the use of calls) but other than that the performance is the same. in other words if you buy bull call spread at vol_60 and then sell it at vol_80 then you make exactly the same profit as when you buy bull put spread at vol_60 and sell it at vol_80.
it is as simple as put-call parity...

therefore what are you talking about?

The difference is positive Vega vs negative Vega. They are almost identical in terms of Delta but NOT Vega.

spindr0 · Oct 5, 2011

Quote from Maverickz:

The difference is positive Vega vs negative Vega. They are almost identical in terms of Delta but NOT Vega.

I don't get it either. In a fair priced market, the credit from one spread equals the risk from the other and vice versa. If IV changes and the price of each leg changes, this relationship still holds (put call parity).

IOW, a $2.60 call debit spread has the same R/R of the equivalent $2.40 put credit spread. If IV causes the spread to go from $2.60/$2.40 to $2.70/$2.30, both make a dime. Neither side prevails.