is the toughest part getting filled? what if one side gets filled and takes off before u get the other side filled? do you end up getting ton of unfilled orders eod? how do you come up with a safe strike price? and at what point do you sell out at a loss? thx again
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Conservative Options Strategy
- Thread starter yucca_mtn
- Start date
Quote from forsalenyc:
is the toughest part getting filled? what if one side gets filled and takes off before u get the other side filled? do you end up getting ton of unfilled orders eod? how do you come up with a safe strike price? and at what point do you sell out at a loss? thx again
The topic of getting good fills is interesting. Trying to get good fills by legging in is really tough and will not work for a sizable account. It is risky and you never know how the fills will work out. By bidding on the whole spread you know exactly where you stand.
The InteractiveBrokers trading platform has an âOption Traderâ screen that allows us to enter both legs of the spread at once, and place a bid for the spread price. What I do is figure out the midpoint of the bid/ask price for each leg. Then I calculate the difference and enter a bid on that difference + 5 cents. I rarely get filled if I donât add the 5 cents and sometimes I add 10 cents. It depends on the open interest volume.
DITM options are generally less traded than ATM options, so a company has to be of some size to have the open interest for deeper spreads or further out spreads. For example it is harder to get good fills for the ETF DBA than for COP. The option market on DBA is just too thin to get good fills on spreads.
Here is a fictitious example to illustrate.
XYZ APR 50 has a bid 9.0/ ask 9.3 then mid is 9.15
XYZ APR 55 has a bid 4.3/ ask 4.5 then mid is 4.4
So bid is (9.15 - 4.4) = 4.75 + -05 or 4.8.
Another way to check is to figure the mid-point of the bids and the asks, like
9.0- 4.3 = 4.7 and 9.3-4.5 = 4.8.
So your first bid is 4.8 but you might have to go to 4.85 to win it.
I just used a near month example of the bidding process, we would never actually buy a $5 spread for $4.85.
As far as taking losses, read the rest of the thread. Didn't I cover bidding already?
9/3/08 Activity:
First use of the âPropositionâ posted a couple of days ago.
SOLD: 4 DO SEPT 95/100 @ 3.75
BUY: 4 DO MAR 95/100 @ 2.75
Original cost of spread 3.5, present cost 3.5 â 3.75 + 2.75 = 2.5
History + 68.8
9/4/08
I will quell for the moment the complete panic I feel as a dynamic participant in the largest monthly commodity crash in the last 28 years. ( I read that somewhere. Lucky me.) Instead I will concentrate on how I plan to survive.
The more I think about the âPropositionâ, the more pleased I am with the practical and philosophical aspects of the tactic. In yesterdays trade, DO was about 104 when I decided to roll the spread out from Sept to Mar. With a few days to expiration, I could not count on DO holding above 100 in this wacked out market. The result of rolling out the spread was to give the market 6 more months to meet my expectations, and to reduce the cost of the spread from 3.5 to 2.5. I was kind of surprised that I could get such a favorable result only a few days from expiration. It was only because the spread was still ITM and had intrinsic value.
Today, TEX dropped 9.3 per share, to 38.02 on news that earnings are expected to drop a few cents.
I have the following spreads in TEX:
2 TEX JAN 45/50
5 TEX JAN 35/40.
Now It is my expectation that this drop in price will recover to some extent in the future. Since the spreads are Jan09, I still have several months to watch the stock, to see if it looks to recover all, some, or none of the loss.
9/5/08
Since the TEX JAN 45/5 spread holds the most risk right now, what should I do? If I invoke the âPropostionâ (aka: simple roll-out), when is the best time to do it. What are the most favorable conditions to do it? All assuming the 3 conditions of the roll-out apply.
The following numbers were taken today from livevol.com:
Here is todaysâ figures for TEX @ 37.33 call options:
TEX OCT 50 @ .25 DELTA= 8
TEX OCT 45 @ .7 DELTA=19
SPREAD DELTA = 11
SPREAD VALUE = .45
TEX JAN09 50 @ 1.37 DELTA 23
TEX JAN09 45 @ 2.37 DELTA 35
SPREAD DELTA = 12
SPREAD VALUE 1.37
TEX APR 50 @ 2.5 DELTA=31
TEX APR 45 @ 3.75 DELTA=42
SPREAD DELTA = 11
SPREAD VALUE = 1.24
TEX JAN10 50 @ 5.65 DELTA 46
TEX JAN10 45 @ 7.0 DELTA 53
SPREAD DELTA = 7
SPREAD VALUE = 1.35
If I decided to roll-out the JAN09 position to JAN10, I can sell the spreads for 1.37 and replace them for 1.35. Almost even. The JAN9 delta is 12 and the JAN10 delta is 7. This suggests that if I wait for an up day, I can get a better fill because the JAN9 spreads would rise more than the JAN10 spreads.
Now suppose that today is 4 to 5 weeks from expiration, then the numbers would look like those from the October numbers. So if I waited too long to roll out the OTM spreads, I could only sell the spreads for .45 and would have to buy them for about 1.3.
So it seems that the sooner I roll out the 45/50 spreads, the better.
It is a different story with the TEX 35/40 spreads. They are still ATM and have time to recover, maybe. Either way, I donât have to take immediate action. (Note: I actually looked at live data but the actual conditions today would have me pay about .4 more than I could sell it for. Not favorable, and I passed. I will be watching for an opportunity to complete this trade in the near future.)
Here is an actual roll-out trade that I did today:
BUY BACK PUT SPREAD: 8 CNX OCT 55/60 PUTS @ 2.7
SELL (roll out to): 8 CNX APR 55/60 PUTS @ 2.8
POSITION NOW: 8 CNX APR 55/60 PUTS @ .42 HISTORY â1834.4
When I put on this spread earlier, it was discussed with much drama on 6/4/08. If you think I wished I never did it, you would be right.
Now there is no doubt that this is the worst set of market conditions I have ever faced. I hope to survive it by using all the stuff that has been discussed on this thread. This latest tool, the simple roll out to a further month offers powerful medicine to a sick position. I am effectively taking real losses now, and rolling out positions in order to recover those same losses in the future at supposedly less risk, and to eventually capture the original expected profit. I am losing liquidation value, but maintaining maximum future account value.
In theory, I am only sacrificing a high annual gain for a lower annual gain. This is not the most wonderful status for a portfolio to be in, but when the stuff hits the fan, I canât think of a better way to handle it. The much preferred methodology would be to avoid this type of market condition altogether, as I have mentioned before.
First use of the âPropositionâ posted a couple of days ago.
SOLD: 4 DO SEPT 95/100 @ 3.75
BUY: 4 DO MAR 95/100 @ 2.75
Original cost of spread 3.5, present cost 3.5 â 3.75 + 2.75 = 2.5
History + 68.8
9/4/08
I will quell for the moment the complete panic I feel as a dynamic participant in the largest monthly commodity crash in the last 28 years. ( I read that somewhere. Lucky me.) Instead I will concentrate on how I plan to survive.
The more I think about the âPropositionâ, the more pleased I am with the practical and philosophical aspects of the tactic. In yesterdays trade, DO was about 104 when I decided to roll the spread out from Sept to Mar. With a few days to expiration, I could not count on DO holding above 100 in this wacked out market. The result of rolling out the spread was to give the market 6 more months to meet my expectations, and to reduce the cost of the spread from 3.5 to 2.5. I was kind of surprised that I could get such a favorable result only a few days from expiration. It was only because the spread was still ITM and had intrinsic value.
Today, TEX dropped 9.3 per share, to 38.02 on news that earnings are expected to drop a few cents.
I have the following spreads in TEX:
2 TEX JAN 45/50
5 TEX JAN 35/40.
Now It is my expectation that this drop in price will recover to some extent in the future. Since the spreads are Jan09, I still have several months to watch the stock, to see if it looks to recover all, some, or none of the loss.
9/5/08
Since the TEX JAN 45/5 spread holds the most risk right now, what should I do? If I invoke the âPropostionâ (aka: simple roll-out), when is the best time to do it. What are the most favorable conditions to do it? All assuming the 3 conditions of the roll-out apply.
The following numbers were taken today from livevol.com:
Here is todaysâ figures for TEX @ 37.33 call options:
TEX OCT 50 @ .25 DELTA= 8
TEX OCT 45 @ .7 DELTA=19
SPREAD DELTA = 11
SPREAD VALUE = .45
TEX JAN09 50 @ 1.37 DELTA 23
TEX JAN09 45 @ 2.37 DELTA 35
SPREAD DELTA = 12
SPREAD VALUE 1.37
TEX APR 50 @ 2.5 DELTA=31
TEX APR 45 @ 3.75 DELTA=42
SPREAD DELTA = 11
SPREAD VALUE = 1.24
TEX JAN10 50 @ 5.65 DELTA 46
TEX JAN10 45 @ 7.0 DELTA 53
SPREAD DELTA = 7
SPREAD VALUE = 1.35
If I decided to roll-out the JAN09 position to JAN10, I can sell the spreads for 1.37 and replace them for 1.35. Almost even. The JAN9 delta is 12 and the JAN10 delta is 7. This suggests that if I wait for an up day, I can get a better fill because the JAN9 spreads would rise more than the JAN10 spreads.
Now suppose that today is 4 to 5 weeks from expiration, then the numbers would look like those from the October numbers. So if I waited too long to roll out the OTM spreads, I could only sell the spreads for .45 and would have to buy them for about 1.3.
So it seems that the sooner I roll out the 45/50 spreads, the better.
It is a different story with the TEX 35/40 spreads. They are still ATM and have time to recover, maybe. Either way, I donât have to take immediate action. (Note: I actually looked at live data but the actual conditions today would have me pay about .4 more than I could sell it for. Not favorable, and I passed. I will be watching for an opportunity to complete this trade in the near future.)
Here is an actual roll-out trade that I did today:
BUY BACK PUT SPREAD: 8 CNX OCT 55/60 PUTS @ 2.7
SELL (roll out to): 8 CNX APR 55/60 PUTS @ 2.8
POSITION NOW: 8 CNX APR 55/60 PUTS @ .42 HISTORY â1834.4
When I put on this spread earlier, it was discussed with much drama on 6/4/08. If you think I wished I never did it, you would be right.
Now there is no doubt that this is the worst set of market conditions I have ever faced. I hope to survive it by using all the stuff that has been discussed on this thread. This latest tool, the simple roll out to a further month offers powerful medicine to a sick position. I am effectively taking real losses now, and rolling out positions in order to recover those same losses in the future at supposedly less risk, and to eventually capture the original expected profit. I am losing liquidation value, but maintaining maximum future account value.
In theory, I am only sacrificing a high annual gain for a lower annual gain. This is not the most wonderful status for a portfolio to be in, but when the stuff hits the fan, I canât think of a better way to handle it. The much preferred methodology would be to avoid this type of market condition altogether, as I have mentioned before.
The stocks and the stock markets are going through an emotional roller-coaster of late. Its emotional because so many people and whole countries are losing a lot of money in asset values. As I write this, my small country is coming under attack from the currency speculators. Since as I have mentioned before that the DITM method is basically a directional long bullish trading strategy, it doesn't make much sense to continue doing it when the whole markets and stocks are essentially going down. Its' like throwing good money into a bad situation (pardon the pun).
This is the difference between a good and bad trader when it comes to survival - a good trader will change and adept his methods to the emotions of the market and not fight it.
This is the difference between a good and bad trader when it comes to survival - a good trader will change and adept his methods to the emotions of the market and not fight it.
Though the strategy is indeed a directional long strategy, I don't think you need to change your methods - they are sound. You need to change your sectors, or at least diversify into sectors not correlated with commodities. Try healthcare, tech or even financials.
Todayâs Activity:
ROLL OUT AND DOWN:
SOLD: 4 EOG OCT 85/90 @ 3.05
BUY: 4 EOG APR 80/85 @ 2.95
(COST of new position = 3.8, history â371.2
ROLL UP AND OUT:
SOLD: 12 GG OCT 27.5/32.5 @ 1.75
BUY: 12 GG JAN10 30/35 @ 1.65
(COST of new position = 3.9, history -2688)
I think time I last reported a spread distribution was July 15.
Today's Spread Distribution (of expiration dates and number of spreads):
OCT 27
NOV 30
DEC 64
JAN 164
FEB 11
MAR 20
APR 34
JAN10 16
-------------
TOTAL 366
ROLL OUT AND DOWN:
SOLD: 4 EOG OCT 85/90 @ 3.05
BUY: 4 EOG APR 80/85 @ 2.95
(COST of new position = 3.8, history â371.2
ROLL UP AND OUT:
SOLD: 12 GG OCT 27.5/32.5 @ 1.75
BUY: 12 GG JAN10 30/35 @ 1.65
(COST of new position = 3.9, history -2688)
I think time I last reported a spread distribution was July 15.
Today's Spread Distribution (of expiration dates and number of spreads):
OCT 27
NOV 30
DEC 64
JAN 164
FEB 11
MAR 20
APR 34
JAN10 16
-------------
TOTAL 366
9/9/08 Activity:
Another rollout:
SOLD 4 ECA OCT 60/65 @ 2.64
BUY 4 ECA APR 60/65 @ 2.5
Original cost of OCT spreads 4.0
Present position cost 3.86, history â555
Journal reference: GLD 76.5, UNG 34.28, SLV 11.15, USO 81.5
*****
Todayâs Activity:
Beginning around mid-July, this journal was no longer about a âConservative Options Strategyâ.
The journal now sounds like a narrative of a guy in a small boat flying a storm jib in the middle of a raging sea, catching fish and rainwater to survive. Does he survive? Stay tuned.
Today was a nice day, caught a good-sized fish. Winds not so heavy.
******
My trading strategy now is to simply weather the market madness (my view) that abounds, and maintain the profitability potential of my portfolio, until the manipulation and interventional factors die down and reason returns to the market. I will continue to do that by using all the defensive measures Iâve been using so far. Since I havenât capitulated so far, I donât think I will have too. I fully expect to survive these market forces and restore the May highs, But the survival trades Iâm doing now are definitely NOT DITM.
This defensive activity in no way means I have lost confidence in the original strategy. But a âconservativeâ portfolio manager would have sold in May â and gone away. That same fictitious, idealized manager also would be buying this month, not selling. As money has been accumulated in other accounts, Iâm using that money to acquire new DITM positions.
I only have 3 october positions left, and 6 november positions. I will watch them closely, and I will roll them out as the need arises.
Journal reference: GLD 75.15 +2.1, SLV 10.7 +.4, UNG 34 +.7, USO 81.4
Another rollout:
SOLD 4 ECA OCT 60/65 @ 2.64
BUY 4 ECA APR 60/65 @ 2.5
Original cost of OCT spreads 4.0
Present position cost 3.86, history â555
Journal reference: GLD 76.5, UNG 34.28, SLV 11.15, USO 81.5
*****
Todayâs Activity:
Beginning around mid-July, this journal was no longer about a âConservative Options Strategyâ.
The journal now sounds like a narrative of a guy in a small boat flying a storm jib in the middle of a raging sea, catching fish and rainwater to survive. Does he survive? Stay tuned.
Today was a nice day, caught a good-sized fish. Winds not so heavy.
******
My trading strategy now is to simply weather the market madness (my view) that abounds, and maintain the profitability potential of my portfolio, until the manipulation and interventional factors die down and reason returns to the market. I will continue to do that by using all the defensive measures Iâve been using so far. Since I havenât capitulated so far, I donât think I will have too. I fully expect to survive these market forces and restore the May highs, But the survival trades Iâm doing now are definitely NOT DITM.
This defensive activity in no way means I have lost confidence in the original strategy. But a âconservativeâ portfolio manager would have sold in May â and gone away. That same fictitious, idealized manager also would be buying this month, not selling. As money has been accumulated in other accounts, Iâm using that money to acquire new DITM positions.
I only have 3 october positions left, and 6 november positions. I will watch them closely, and I will roll them out as the need arises.
Journal reference: GLD 75.15 +2.1, SLV 10.7 +.4, UNG 34 +.7, USO 81.4