Conservative Options Trades

stevegee58 · Jan 21, 2015

oldnemesis said:
Trade:
With IBM at 156.95

Jan '16 200/205 bear call spread for a net credit of $40
Yield = 40/460 = 8.7% in 360 days or 8.8% annualized
Prob = 85%
Expectation = .85(40) - .125(460) - .02(230) = 34 - 57.5 - 4.6 = -28.1

When a trade shows negative expectancy do you pass on it or take it and just manage it more closely?

oldnemesis · Jan 21, 2015

When a trade shows negative expectancy do you pass on it or take it and just manage it more closely?

I usually will not take the trade... the exception is if recent events lead me to expect a more favorable price distribution in the future...which would imply a better expectation.

The expectation I compute here is based on the distribution of past prices.

stevegee58 · Jan 21, 2015

oldnemesis said:
The expectation I compute here is based on the distribution of past prices.

But aren't the probabilities based on the options' IV rather than SV and therefore be forward-looking?

oldnemesis · Jan 23, 2015

MCD:

http://finance.yahoo.com/news/mcdonalds-mcd-beats-q4-earnings-155703939.html

http://finance.yahoo.com/q/ks?s=MCD Key Statistics

http://stockcharts.com/h-sc/ui?s=mcd

http://finance.yahoo.com/echarts?s=MCD Interactive#

Trade:
with MCD at 89.74
June 100/105 bear call spread for a net credit of $30
Yield = 30/470 = 6.38% in 147 days or 15.8% annualized
Prob = 82%
Expectation = .82(30) - .094(470) - .09(235) = 24.6 - 44.2 - 21.15 = -40.8

Price.....................Profit / Loss..................ROM%
70.00.........................30.00........................6.38%
80.00.........................30.00........................6.38%
90.00.........................30.00........................6.38%
100.00.......................30.00........................6.38%
100.30.........................0.00........................0.00%
105.00.....................(470.00)....................-94.00%
105.42.....................(470.00)....................-94.00%
120.00.....................(470.00)....................-94.00%
130.00.....................(470.00)....................-94.00%

oldnemesis · Jan 24, 2015

UPS:

http://finance.yahoo.com/news/ups-takes-hit-during-holidays-142244501.html

http://stockcharts.com/h-sc/ui?s=ups

http://www.msn.com/en-us/money/stockdetails/fi-126.1.UPS.NYS?symbol=UPS&form=PRFIEQ

http://finance.yahoo.com/q/ks?s=UPS Key Statistics

Trade:
with UPS at 102.93
Jul 115/120 bear call spread for a net credit of $48
yield = 48/452 = 10.6% in 174 days or 22.2% annualized

Price................Profit / Loss..............ROM %
90.00...................48.00....................10.60%
100.00.................48.00....................10.60%
110.00.................48.00....................10.60%
115.00.................48.00....................10.60%
115.48..................0.00......................0.00%
120.00..............(452.00).................-90.40%
125.00..............(452.00).................-90.40%
135.00..............(452.00).................-90.40%
150.00..............(452.00).................-90.40%

rickty · Jan 25, 2015

Hey Dan,
You forgot to include the expectation calculation for the UPS trade:
Prob = 81.7%
Expectation = .817(48) - .123(452) - .064(226) = 39.2 - 55.6 - 14.46 = -30.8
(You're welcome

)

stevegee58 · Jan 25, 2015

rickty said:
Hey Dan,
You forgot to include the expectation calculation for the UPS trade:
Prob = 81.7%
Expectation = .817(48) - .123(452) - .064(226) = 39.2 - 55.6 - 14.46 = -30.8
(You're welcome )

What source did you use for your probability numbers?

rickty · Jan 25, 2015

stevegee58 said:
What source did you use for your probability numbers?

TOS platform

oldnemesis · Jan 26, 2015

AAPL

http://finance.yahoo.com/news/bull-day-apple-aapl-bull-060006551.html

http://stockcharts.com/h-sc/ui?s=AAPL

Trade:
with AAPL at 113.85
Mar 95/90 bull put spread for a net credit of $26
Yield = 26/474 = 5.5% in 53 days or 38% annualized
Prob = 91%
Expectation = .91(26) - .04(474) - .05(237) = 23.7 - 19.0 - 11.8 = -7.1

Price...............Profit / Loss............ROM %
70.00...............(474.00).................-94.80%
80.00...............(474.00).................-94.80%
90.00...............(474.00).................-94.80%
94.74....................0.00.....................0.00%
95.00...................26.00....................5.50%
96.86...................26.00....................5.50%
110.00.................26.00....................5.50%
120.00.................26.00....................5.50%
130.00.................26.00....................5.50%

andrew black · Jan 26, 2015

oldnemesis said:
AAPL

http://finance.yahoo.com/news/bull-day-apple-aapl-bull-060006551.html

http://stockcharts.com/h-sc/ui?s=AAPL

Trade:
with AAPL at 113.85
Mar 95/90 bull put spread for a net credit of $26
Yield = 26/474 = 5.5% in 53 days or 38% annualized
Prob = 91%
Expectation = .91(26) - .04(474) - .05(237) = 23.7 - 19.0 - 11.8 = -7.1

Price...............Profit / Loss............ROM %
70.00...............(474.00).................-94.80%
80.00...............(474.00).................-94.80%
90.00...............(474.00).................-94.80%
94.74....................0.00.....................0.00%
95.00...................26.00....................5.50%
96.86...................26.00....................5.50%
110.00.................26.00....................5.50%
120.00.................26.00....................5.50%
130.00.................26.00....................5.50%

Hi Oldnemesis,

I am a bit confused by the way how you calculate the expectation for your trades. In APPL's case, shouldn't be like this:

Expectation = 0.91 x 26 + 0.04 x (-474) + 0.05 x ((26 - 474) /2) = -6.5

Also, in a previous post you mentioned that you are getting the probability numbers from TOS. Is there a way to have TOS calculate the expectation for a trade as well?

TIA.