Call option premiums

spreadem · Jun 6, 2003

. 80% of the time it is better to be short premium. I would say that right now is one of those times when you want to be long. The prices are as cheap as they've been and we are as volatile as ever. The game is risk vs. return. Buying otm calls has a lousy ratio in this regard. Right now, long premium has the better one compared to short.

In general i'd agree that you buy options when premiums are low; but, remember that options are very sensitive to time also. The rate of decay of premium of an option accelerates going into the last 10 trading days. Especially if it's an out of the money option.

indahook · Jun 6, 2003

Quote from Trajan:

I forgot to add that MMs will buy lots of premium, which was the whole point of my original post. It is a mistake to think that because a strategy of retail customers is a loser that the opposite is always a winner. Most of time this is true with otm calls, which I love to be short a lot of typically. However, it is possible to make money when long these as a mm. I could never do it consistently but some can.

I would think that MMs buy all that premium as a hedge and nothing more. And I never said the opposite of the retail customer is always right........I said it was right 90% of the time

spreadem · Jun 6, 2003

quote from Trajan :

I forgot to add that MMs will buy lots of premium,

I can see MM's buying premium ... after the've sold premium during the run-up.

Trajan · Jun 6, 2003

Quote from indahook:

I would think that MMs buy all that premium as a hedge and nothing more. And I never said the opposite of the retail customer is always right........I said it was right 90% of the time

It is always a hedge, but as a mm, sometimes it becomes outsized relative to the overall position. Order flow can be one sided and as a mm you have to be prepared to marry any option that you trade.

Trajan · Jun 6, 2003

Quote from spreadem:

I can see MM's buying premium ... after the've sold premium during the run-up.

It is typically how it works. Speculators come in and buy calls during a run-up and then start to sell at a certain point. It is one of the reasons IVs come in when a stock goes up. It is one of the mechanism in the market that works to the benefit of the mm. Sometimes a rally starts by customers selling calls though, it is how the rally in csco started last April. They were very wrong.

Btw, June in Los Angeles is the worst month of the year here, especially buy the coast. It is supposed to be Summer but it is overcast for what seems like the entire month.

Trajan · Jun 6, 2003

Another thing, MM will be long otm calls as a result of making a market for a large institutional order.

Foz · Jun 6, 2003

Quote from spreadem:

Okay finally got a fill back ... I sold an sp1010 call at 9.5. I couldn't get ten.

Is that the SPX June 1010 call, symbol SPQFB, that closed at 5.10? If so, so far so good!

ktm · Jun 6, 2003

Quote from Foz:

Is that the SPX June 1010 call, symbol SPQFB, that closed at 5.10? If so, so far so good!

I sold a bunch of those at 11 this morning myself. I got in deep on the 975s, then the 995s this morning and rolled up into 1010s in the teeth of it. Luckily I have a bunch of 1025s that are coming up with me. Margin requirements for the 1010/1025 are a lot less than the 975/1025...good thing cause I need 3 times as many to get my money back!!!!

aphexcoil · Jun 6, 2003

I thought you were supposed to hedge the gamma in order to make money in options. Isn't gamma the key to options profitability? The "volatility smile" and the convex gamma line?

Foz · Jun 6, 2003

Quote from ktm:

I sold a bunch of those at 11 this morning myself...

It sounds like you are pretty active in the SPX options and want fills sooner rather than later, Ktm. How do you execute your orders? At the market? Work a limit order? If limit, what price do you use for your limit?

Thanks.

I'm short a single June 875 put from a couple weeks ago. Looks like it should expire worthless.

This was only the second time I've made a trade in the SPX options. I don't think I'm going to write a new one when this one expires, with the VIX and premiums so low. Like Spreadem, I'm torn between writing a call and buying a put instead. Maybe I'll go out to August and buy a put.