I begin trading (investing in) options on Monday

[MajorUrsa]

Quote from optioncoach:

No no you misunderstand, it is not a question based on me doubting it could be done. It is based on wanting to see the person think through their approach. I have seen a lot of beginners catch on to an approach or phrasing casually read in a book but do not think it through.

OK, I cleared up now, and I agree.

I am not sure what you mean by ratio strangle. If you mean more calls than puts or vice versa then you can get to delta neutral and all strangles are long vol, but simply choosing stocks whose IV is at the low end of the range is not enough. Choosing the appropriate time to expiration to overcome theta on long calls and puts and the wider loss zone of the strangle means stock selection is more crucial than anything. You can have numerous long strangles sit there and decay away before one can make some money.

I agree completely. This strategy seems not very rewarding, both psychological and moneywise.

PS. Would this mean in your opinion that the opposite strategy is rewarding? Ie. selling outside strangles?

It can be done but not as a means of trading 100% of your capital. I just want beginners to put more time in planning the trades out thoroughly than simply running after a strategy.

Maybe it is the only way to learn about options, run, fall, lose your shirt, break a leg etc... The stuff is rather complicated so newbies will embrace any set of believes they can comprehend, only afterwards finding out about the next complexity.

Ursa..

 

[Trajan]

Quote from optioncoach:

No no you misunderstand, it is not a question based on me doubting it could be done. It is based on wanting to see the person think through their approach. I have seen a lot of beginners catch on to an approach or phrasing casually read in a book but do not think it through.

I am not sure what you mean by ratio strangle. If you mean more calls than puts or vice versa then you can get to delta neutral and all strangles are long vol, but simply choosing stocks whose IV is at the low end of the range is not enough. Choosing the appropriate time to expiration to overcome theta on long calls and puts and the wider loss zone of the strangle means stock selection is more crucial than anything. You can have numerous long strangles sit there and decay away before one can make some money.

This is akin to the game of simply buying OTM calls or puts alone. It is a low percentage gamble and leads to frequent losses. The fact that you are now OTM on both sides increases your chances slightly but the loss zone is still pretty wide.

Phil

I'm going to agree with coach here and reemphasize the need for a catalyst for the IV to be mean reverting. It isn't enough to say that the IV is at 20 and should revert to 35 because it must. This is specifically why I look for stocks that are breaking out, about to or perhaps have a smooth trend which has crushed IV. Even though the pricing model may imply that Volatility is constant, we know that it isn't, but it can have long persistence.

Second point is that while I haven't read Taleb, I think I have a pretty good idea what he advocates. Straight buying strangles in anticipation of a big move is a very difficult trade. As Coach says, you need be careful with stock selection. If this is your strategy, the best way to trade it is to sell some atm straddles against them whether as an initial hedge or when you get a move. The strangles aren't going to work well and stocks themselves will sometimes exhibit a degree of mean reversion. However, you could make some nice money if you get a decent move and sell some options.

 

[murray t turtle]

Quote from bladerunner:

you stand better chance playing mega millions/powerball.

=======
Possibly true.especially if mr Union1411's plan includes planing on riding 80 % approximate drawdowns on GOOG ITM options, and I am not sure mr Union 1411 would actually plan/do that, he did imply something like that,perhaps on another thrread.

Also true most of probablilities favor sellers in both your comparisons;
however at least occasional entry probabliities on options can be better, see delta on ITM,ATM.

No wonder powerball sellors dont like to mention probablilties.

Maybe shouldnt mention this since it also is highly improbable, but since you like the milky way;
ever thought/pondered about the probablilty of a star
[mass of gas]
or even millions/billions of them.

Also amoung stars , The sun is a star;
a mass
of incandescent gas.......Like these sunglasses also..

 

[TorontoTrader2]

Get a good Black Sholes calculator (my trading platform has one built in) so you can gauge your risk/reward under different scenarios and set exits.

BTW: Dow shaves off hundreds of points recently but the VIX stays at 11-12? Very odd, would make options quite 'underpriced'

 

[Trajan]

Quote from TorontoTrader2:



BTW: Dow shaves off hundreds of points recently but the VIX stays at 11-12? Very odd, would make options quite 'underpriced'

I Agree, it does seem odd. I would have figured that people would come in for some puts. And I do think vols pretty cheap right here, but some of that may just be anticipating summer doldrums. Also, I always think vols cheap.

 

[jmmathieu]

If you're going to buy the OTM strangles, do them in anticipation of a news release or some other important bit of information. Earning reports are horrible to trade with this strategy, especially with the volatility drop that usually comes right after the release. I've heard that FDA announcements are the best way to go here.

Jacques

 

[MTE]

Quote from jmmathieu:

If you're going to buy the OTM strangles, do them in anticipation of a news release or some other important bit of information. Earning reports are horrible to trade with this strategy, especially with the volatility drop that usually comes right after the release. I've heard that FDA announcements are the best way to go here.

Jacques

FDA announcements suffer from exactly the same problem as earnings - the volatility drop.

All in all, I'd say there's a 50-50 chance of profit on a strangle/straddle. About half the times the market prices the straddle correctly prior to the announcement, hence a straddle would make a loss on volatility drop, and about the other half the market underprices the straddle, hence it ends up profitable.

 

[pauri]

I will be grateful if anybody could explain me the meaning of fat tails in IV curves and its implications for trading in options.
I have been trading options for about 7 years now , last 1 yr in profit, mainly on QQQQ --OTM long calls or Puts based upon tech analysis about the direction of QQQQ.
Although I have not backtested it thouroughly but I am observing the underlying to move in the direction of higher (diff more than 50%) of the Open Interest of the CALL or PUT . (sorry if I could not phrase my question properly).I will be grateful for comments.
Regards to all of you.

 

[Trajan]

Quote from pauri:

I will be grateful if anybody could explain me the meaning of fat tails in IV curves and its implications for trading in options.
I have been trading options for about 7 years now , last 1 yr in profit, mainly on QQQQ --OTM long calls or Puts based upon tech analysis about the direction of QQQQ.
Although I have not backtested it thouroughly but I am observing the underlying to move in the direction of higher (diff more than 50%) of the Open Interest of the CALL or PUT . (sorry if I could not phrase my question properly).I will be grateful for comments.
Regards to all of you.

I'm not sure how familiar you are with statistics, but here it goes. If you take one standard deviation of returns for a stock, that should mean that 68% percent of observed returns should fall within a range of up or down one STD. Taking that out to three STD means that 99% of observations should fall within that range. This relates the IV or as this phenomenon is more commonly called, the skew, in that the number of observations at 3,4,5,...,10 standard deviations is more than one would expect. So that the distribution isn't really normal, but probably lognormal. It has fatter tails and the otms options are priced higher. For equity options, this is often oberserved to the dowside; hence it is the puts which have a higher IV.

 

[union1411]

Quote from pauri:

I will be grateful if anybody could explain me the meaning of fat tails in IV curves and its implications for trading in options.
I have been trading options for about 7 years now , last 1 yr in profit, mainly on QQQQ --OTM long calls or Puts based upon tech analysis about the direction of QQQQ.
Although I have not backtested it thouroughly but I am observing the underlying to move in the direction of higher (diff more than 50%) of the Open Interest of the CALL or PUT . (sorry if I could not phrase my question properly).I will be grateful for comments.
Regards to all of you.

Here is a pdf of a book on Probability. 510 pages of goodness. Print and enjoy.

http://www.dartmouth.edu/~chance/teaching_aids/books_articles/probability_book/pdf.html