Buying/Selling Options

Quote from taowave:

Mav,you said a mouthful there...

I would argue that long volatility(gamma) traders need to be decent directional traders,and that short volatility(gamma) traders need to be exceedingly disciplined and not take directional bets.

I fully agree that at the end of the day,the best vol traders are also adept directional traders.
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Anyone that sells vol is making a defacto bullish bet on the market all things constant. Unless he is running a discrete dispersion strategy. If I sell front month gamma, the last thing I want is for the market to roll over hard. If I sell back month vol, the last thing I want is a hard selloff causing vols to spike.

This is what I mean by vol traders being an indirect directional trader. When I sell vol, it's usually because I think the markets are going higher. If I buy vol, it's usually because I think we are going to sell off. Why would I ever buy vol with a bullish market outlook?

So at the end of the day, whether you are trading direction or trading vol, you are really trading direction regardless. One cannot make the argument that simply because of the wide placement of strikes that they don't care about direction.
 
Mav,
Thanks for all of your very good information over the years. I've learned a ton. I have a question though.

I understand forecasting vol is not easy and there's nothing saying it has to go up or down based on the underlying movement, but how would you weight your forecast based on historic implied volatility figures?

Here's an example. I had a bull spread on recently that was a bit short vol expecting MSFT vol to go down a bit while it rose. Fortunately, MSFT went my way on the direction, but the volatility went up a bit. Looking at the historical implied vol charts, ivol was really on the lower end of the range.

So my question is, if you're about to go long or short directionally, what factors weigh in and by how much when you select your vol forecast? Maybe the MSFT is just an anomaly?

Thank you.

Quote from Maverick74:

Anyone that sells vol is making a defacto bullish bet on the market all things constant. Unless he is running a discrete dispersion strategy. If I sell front month gamma, the last thing I want is for the market to roll over hard. If I sell back month vol, the last thing I want is a hard selloff causing vols to spike.

This is what I mean by vol traders being an indirect directional trader. When I sell vol, it's usually because I think the markets are going higher. If I buy vol, it's usually because I think we are going to sell off. Why would I ever buy vol with a bullish market outlook?

So at the end of the day, whether you are trading direction or trading vol, you are really trading direction regardless. One cannot make the argument that simply because of the wide placement of strikes that they don't care about direction.
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Quote from Maverick74:

Anyone that sells vol is making a defacto bullish bet on the market all things constant. Unless he is running a discrete dispersion strategy. If I sell front month gamma, the last thing I want is for the market to roll over hard. If I sell back month vol, the last thing I want is a hard selloff causing vols to spike.

This is what I mean by vol traders being an indirect directional trader. When I sell vol, it's usually because I think the markets are going higher. If I buy vol, it's usually because I think we are going to sell off. Why would I ever buy vol with a bullish market outlook?

So at the end of the day, whether you are trading direction or trading vol, you are really trading direction regardless. One cannot make the argument that simply because of the wide placement of strikes that they don't care about direction.
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I joined this thread a bit late,so I will assume you are talking about index options and not equity options...

I get your point regarding a bullish outlook and selling vol.My point is if you are short vol,you cant afford to take directional bets,while when long vol,you can let your deltas go a bit more..

I dont necessarily agree with not buying vol at these levels if you are bullish...
 
"When I sell vol, it's usually because I think the markets are going higher. If I buy vol, it's usually because I think we are going to sell off. Why would I ever buy vol with a bullish market outlook?"


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Mav - you have a point here. Do you believe this gives you a slight edge by sticking to these prInciples?

Basically this rules out calendars, diagonals etc to the upside altogether with maybe bear call spreads more suitable or flies.

OTM
 
Who said that brilliant statements appear only on this Board?

Here is a piece of brilliance I extracted today from the other Board. "Prices may move strongly higher or lower after breaking through a moving average." This is so profound that even the disagreeing experts here on ET can't controvert it's accuracy.

The only thing I could add would be that "Prices may NOT..."

See, even I have a sense of humor.

Bob
 
Quote from spreadn00b:

Mav,
Thanks for all of your very good information over the years. I've learned a ton. I have a question though.

I understand forecasting vol is not easy and there's nothing saying it has to go up or down based on the underlying movement, but how would you weight your forecast based on historic implied volatility figures?

Here's an example. I had a bull spread on recently that was a bit short vol expecting MSFT vol to go down a bit while it rose. Fortunately, MSFT went my way on the direction, but the volatility went up a bit. Looking at the historical implied vol charts, ivol was really on the lower end of the range.

So my question is, if you're about to go long or short directionally, what factors weigh in and by how much when you select your vol forecast? Maybe the MSFT is just an anomaly?

Thank you.
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You need to take into account the vol skew. If MSFT had a neg call skew, that would mean the vol would actually rise as the stock went up, even if ATM vols were dropping. You need to make sure you center your vol. When referring to just vol, people are usually referring to the ATM vol. Then they run their vol curves around the ATM.

If MSFT had a pos skew, then the vol would have actually dropped as the stock rose. You need to separate the ATM vol from the vol skew. They are two different things.
 
Quote from optiontraderman:

"When I sell vol, it's usually because I think the markets are going higher. If I buy vol, it's usually because I think we are going to sell off. Why would I ever buy vol with a bullish market outlook?"


--------------------

Mav - you have a point here. Do you believe this gives you a slight edge by sticking to these prInciples?

Basically this rules out calendars, diagonals etc to the upside altogether with maybe bear call spreads more suitable or flies.

OTM
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If you are a good directional trader, then yes, it gives you a slight edge.
 
Quote from exQQQQseme:

I have shared with the group here that my present open AAPL positions are:

a) Short 800 shares of stock
b) Long 8 Jul $95C


[................]


In another thread I discussed the fact that I was contemplating purchasing some of the Jul $120C's, principally to reduce my net negative deltas as partial protection against an upsurge in the event of a very bullish announcement. In this regard I have also academiclly laid out how the July $120C purchase could potentially be turned into a very low net debit butterfly should the stock go up after my initial purchase of the Jul 120C's.
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You current position is as you know equivalent to owning 8 long Jul$95 puts.
The premium you payed for the puts (calls) is your risk, the gain is unlimited.

When long puts are used as a bearish strategy it is normally done because of the limited-loss property that long options have. It is therefore not usual to consider hedging them.
But if you do hedge them, eg. by going long Jul$120C's you essentially will own a long strangle. I think long strangles are ok if you expect increase in IV, but since everyone is already eagerly waiting the numbers, IV will probably drop after they are announced. Long strangles are about the worst strategy to do before numbers., although they seem the most logical ones.

Another way to neutralize the -delta is to buy stock (or go less short in your case). If you buy 400 stock you will own -400s + 8c= 4p+4c. Again a long strangle, this time a straddle. Same issues here.

Seeing you now own 8 long puts and also seeing you want to study butterflies, you might want to convert this into a put fly instead of a call fly. By buying the 120 puts now and wait for the stock to drop (which is also more in line with the reason for having the long puts in the first place) you can the sell the middle puts and own a 'free' butterfly.

Again I want to stipulate that the latter don't exist. If you have a long call and it doubles in value and you sell the next higher call against it, will you own a free vertical? No, of course not, you used the profits from the first call to buy a new vertical. Important, this.

Enjoy your stay, glad you came back on your decision to leave :). Discovering the truth about options can be very discouraging, but if you keep going it also gets more and more interesting.


Ursa..
 
Quote from optioncoach:

Bob:


A word of advice here. Most people will simply criticize here rather than engage in honest discussion. Anonymity usually leads the common response to be rude and condenscending.

Basically there are two types of responses. The educational criticism, which is rare but quite useful here, is when the person responds to highlight some points in a clear manner with a true intent to help or clarify a mistake or misconception.

The other more common is the terse rude comment of the superior nature which is meant to demonstrate how much they know and how little you know and prop themselves up a bit while shredding a newbie. There usually is useful info buried in the superior attack but the tone and arrogance kind of obscures the great info. It is truly a downside of ET as egos make many demand everyone in options know as much as them and fail to take into account different backgrounds and paths to the same goal.

I am certainly no reigning expert but I enjoy good option discussions since there always will be those who know more than me. But in order to get the most out of it, you have to ignore the holier than thou attitude most take here in giving advice. I read in silence many posts and am amazed how nasty people get in responding to someone who simply posts a question or idea.

So Bob, if you forget about expecting courtesy and maturity, you can read between the lines and learn a bit no matter your level. No one has the right to put you down for the strategies or time you commit because no one knows you. They can certainly offer constructive advice. I have gotten to know you well so thus I understand where you are coming from.

My honest advice, do not post any position here at ET. From someone who has done it for almost 2 years in the end it might not be worth it as more people are likely to jump on you before helping (although they see it as helping and ignore their own tone).

People who do not trade your strategy or have no interest in it will post and 1 out of 3 will be more disruptive than helpful.

So bottom line, ignore the tone of any posters as ET is not known for good natured discussions without nastiness. Now I am not referring to everyone who has posted here as you can see some posted with true interest and sincere questions. I went through the firing squad myself when I first started posting and we all do if we are new.

So ignore the tone, focus (I said it 3x but it is important lol) on the info and share positions only with those that are interested, and not to "prove" anything. As MAV said, the goal is to make money, not be the best on ET :).

Oh yeah... never use words such as "edge" "positive expectancy" or "best strategy"
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so well written coach.
 
Urs, no doubt the IV will drop probably with Thursday morning's opening prices. But, I strongly believe that the IV impact will mostly be for the options at or near the money and only for the January and February options. The April and July options haven't really spiked that much anyway. Having said this, I will of course do my diligence and check the IV charts mid morning Tomorrow (Jan 16) just to be sure.

Everything you say regarding the equivalencies is probably correct including the fact that I have the equiv of 8 July Puts.

Regarding the much discussed $120C purchase with potential delayed Butterfly, let's discuss where my head is presently at. Make no mistake about it, my bias and desire is for AAPL to drop, as evidenced by the present negative 340 deltas. The call purchase thing is simply a "just in case" contingency. But, obviously nobody knows for sure...certainly not me.

One additional word about the short stock and long calls. My background is not buying and selling options. I'm a CPA who, while I do keep track of the stock charts through my subscription to Telechart, I closely follow the fundamentals, particularly the Balance Sheet. (I'll have more to say about this in subsequent postings.) I look at all of the published numbers and I love the abundance of free financial information available at Yahoo Finance. I am very comfortable dealing with the actual stock and supplementing my equity position with options...both buy and sell and both Calls and Puts. I prefer shorting stocks to buying stocks solely because shorting requires a much smaller working capital outlay, a fancy term for cash disbursement.

In the end it does come down to personal comfort and experience, doesn't it?

Bob
 
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