This is what I meant by inside the strikes.
Automated trading with stocks and 2 options
- Thread starter tommaso
- Start date
What are the --- until -10 and ---until 10 ?
By "strike" I mean the exercise price.
For instance if TWM is trading 35.53, you may want to buy a PUT 36 and a CALL 35. (36 and 35 are called the strikes.)
For instance buying the 100 puts 36 you are buying the right to resell your 10,000 shares (that the robot may buy later at lower price) at 36 $.
By
until -10,000
and
until 10,000
in this example I mean the 10,000 shares "controlled" by the 100 options.
In other words, when you arrive at the maximum number of shares "protected" by you Call or Put, you quit making orders and may exercise the option.
PS
ok, now I get it. We here use "." as the thousand delimiter. Sorry
)I meant 10,000 (ten thousand).
Or 10k would have been much more clear.
I think I can clarify the question I think he is asking.
If you buy a 36Put and a 35Call what do you do if the stock stays between the two strikes.
It might also help to discuss the amount of time you are buying in your options since the more time you have the less likely a stock will stay between the strikes.
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If this isn't gamma scalping it is close enough that I think you may still run into the same pitfalls. For instance if you buy your options when volatility is high but it starts dropping while you are running this play you may lose value in your options faster than you make it by buying and selling the underlying stock shares....especially after commissions are figured in. Also as mentioned above if the underlying doesn't move much during your time frame it could also be detrimental.
I would also be interested to know the exit strategy once you have bought or shorted your 10k shares.
No, it doesn't.
1) If your robot is buying any shares at the oscillations (before break-even), then you're extending the range you have to go out above $5 before you reach break-even on the option position.
2) If you, for example, started your strategy on June 1st... and assuming your robot wasn't scalping at all, in the 7 weeks since, there would've been exactly 5 days in which you might have exercised your options for a (small) profit.
And I assume you're looking at the Aug09 options for TWM, in which case you only have 3 weeks until expiration.
If you turn on your robot, you are gamma scalping. If you don't, you have a strangle. Whatever you call it, it's not free money, and there's no "minimum profit".
Hello Tommaso. Thanks for having a good sense of humor about it. I had to fill my sarcasm quota for the month.
I admire the way you're willing to try something completely new that you haven't read out of a book or on some anonymous forum.
However, I don't think it's prudent to trade financial instruments that aren't fully understood.
The use of options in this strategy is very 2 dimensional (only concern for the strike price). The concept of extrinsic value and others are missing entirely.
You may believe otherwise but what you are suggesting really is gamma scalping.
It is possible to make money gamma scalping, especially if you have access to very low transaction costs and in situations where implied volatility is increasing...but this is far from a sure thing.
Anyway, good luck. Your testing will prove the naysayers on this thread right or wrong.
As to point 1 you are right and I think it needs to be tested carefully.
I have however an half answer and also a slight modification to the original idea which may eliminate the slippage altogether.
Imagine the Long side. First of all note that every time the robot closes the position this happens when there a price reversal. So the price is going down, I am buying increasing load of shares, and at a certain point the price goes up. In such a case, I immediately eliminate all the loss (talking about shares) sustained to arrive at that point. So while its true that the 10.000 target is "pushed away", I am in the meantime "realizing". Is this enough ? Can't "visualize" it right now, perhaps a few tests would help.
A modified version could be that instead of beginning the process from zero. We fix the number of shares to be hold at the various distances from the strike. I am throwing the idea right now, and may be a stupid one (must think better...).
In any case you are hitting the right chords because I am well aware that this kind of scenarios are those where we can experience (limited) losses. It's necessary to see how much money is produced by the robot on the oscillations to see what kind of compensation they are able to provide. Besides it's important to construct the order size plan in such a way that the range is as narrow as possible.
Another thing is to use securities which have significant movements. Maybe prefer twm to spy, for instance (more suggestions?).
The last observation you make about the strangle, I do not think really applies here because we are buying/selling shares and not doing an option strategy. In fact in the worst scenario computations the cost of the options of *both* sides is considered with the minus sign.
Min Profit = Profit from exercise - loss due shares and comms - cost of puts and calls and comms - exercise comms
(forgot something?)
and I would buy options and turn on the robot *only if* I have a complete plan where Min Profit > g, where c is hopefully some positive number.
I know you are a very smart guy byteme. I felt it from the last comments you made. But, now that you sound more possibilistic, you are creating a "credit of irony" which you may spend in the next posts
)I am disregarding entirely the extrinsic value concept because I intend to "start" the bot *only if* a "worst scenario" (as indicated in the previous post) can be built preliminarily.
Since I place a "-" sign in front of the total option cost (both sides), whatever I get from options is just something which comes to improve the "worst scenario".
Well actually, it a worst scenario "conditional on option exercise" (as heech has rightly pointed out), and another point needed to be tested is how frequently be can be never exiting from our "trading range" and how much money the bot could offer in compensation when the price goes on oscillating for weeks in a narrow range.
T
Tommaso.
I think your going to get spread out on this if your not careful.
ie. your averaging down and you've sized to 10K with only a few oscilation scalps along the way. Not enough to cover your cost, time decay and the counter bot.
Your chances to be risk neutral may increase if you startout with OTM options say 3 - 5 strikes from your market entry and start both bots buying and selling at market. Use the options as your safety to reduce your runaway losses. Average down at set trade increments until the options are ITM and close out the entire trade set.
As the trade set progresses... market dips down and reverses allowing the averaged down long to exit profitably. Take profits and close out the entire tradeset... Reset and reenter.
The modification to your idea is to create a pseudo stepped trade set. ie 3 - 5 steps with fixed trigger points and closeout triggers.
Time is not your friend...
May work well with future options: ie.
just an untested idea:
10 OESU9 P955 and 10 OESU9 C995 market at 975.
(4 strikes OTM)
5 step tradeset
Step 1: Long enters 1 at 975 with Exit at 980
Step 2: Average Down Add 1 @ 965 Exit 975
Step 3 Average Down Add 3 @ 955 Exit 965
Step 4: Average Down Add 5 @ 945 Exit 955
Step 5: Close out when the Short closes out
Obviously as the long is being drawn down the short is capturing profits. When the Long is checking up and able to exit the Short is being drawn down. Ping - Ponging within your 50 point range should generate oscilation profits with the peace of mind that any break out will at least have a cover.
The trick is being able to close out the entire tradeset cause you get into situations where both the short and long are averaging down and creating a gap. Starting OTM may keep the Gap inside your trading range.
Just some ideas to churn...
I think your going to get spread out on this if your not careful.
ie. your averaging down and you've sized to 10K with only a few oscilation scalps along the way. Not enough to cover your cost, time decay and the counter bot.
Your chances to be risk neutral may increase if you startout with OTM options say 3 - 5 strikes from your market entry and start both bots buying and selling at market. Use the options as your safety to reduce your runaway losses. Average down at set trade increments until the options are ITM and close out the entire trade set.
As the trade set progresses... market dips down and reverses allowing the averaged down long to exit profitably. Take profits and close out the entire tradeset... Reset and reenter.
The modification to your idea is to create a pseudo stepped trade set. ie 3 - 5 steps with fixed trigger points and closeout triggers.
Time is not your friend...
May work well with future options: ie.
just an untested idea:
10 OESU9 P955 and 10 OESU9 C995 market at 975.
(4 strikes OTM)
5 step tradeset
Step 1: Long enters 1 at 975 with Exit at 980
Step 2: Average Down Add 1 @ 965 Exit 975
Step 3 Average Down Add 3 @ 955 Exit 965
Step 4: Average Down Add 5 @ 945 Exit 955
Step 5: Close out when the Short closes out
Obviously as the long is being drawn down the short is capturing profits. When the Long is checking up and able to exit the Short is being drawn down. Ping - Ponging within your 50 point range should generate oscilation profits with the peace of mind that any break out will at least have a cover.
The trick is being able to close out the entire tradeset cause you get into situations where both the short and long are averaging down and creating a gap. Starting OTM may keep the Gap inside your trading range.
Just some ideas to churn...