Introduction and backround. I think I have a good backround to have success
- Thread starter smallcapgrowth
- Start date
Because Put = Call in the technical sense. Usually they have the exact same characteristics, concerning gamma/vega/time value/delta etc. That's because they sit at the same spot on the probability curve.
It's kinda out of wack when a dividend is involved, because the dividend effectively changes the ideal date of maturity for certain ITM calls... but that's probably a bit too technical to dive into here.
So what would you trade here in CELG? What's your suggestion?
I would think that if you are blindly buying or selling (no attempts to add some form of alpha), being net short risk premium would produce better risk-adjusted return, at least in terms of Sharpe and duration of drawdowns. That's why it's a risk premium (as in premium means it's more expensive then it should be).
Couldn't read past page 8 or 9. Sorry. Gambling/not gambling - in the end it is all about semantics. Moreover the answer to this question is irrelevant to one's profitability. Questions like this have zero value as well as there is zero philosophy in trading. Some users here have so much energy they spend it participating in these multimonth Wittgensteinian debates - it's amazing. I'm just envious. Questions like "What is the true color of love?" or "Would we treat Earth differently if we named it Mars?" always attracted my attention.
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First, I plugged a random symbol to show you the expected move and how TOS shows it on their platform, a direct answer to your question. This was NOT a recommendation for a trade.
I was introduced to option premium selling in 2013 and it is the only area that I have been able to find a consistent edge. I think my bio page says "daytrading since 2004" but I have never found a consistent edge in directional options, pattern day trading or futures.
As they say, different strokes for different folks, so keep doing what you are finding successful as I am not trying to make ET converts here. My only reason for making the case here is for the PM with 1.2M to consider a more relaxed way to turn an annual income. It appears that not many on ET have liked this advice, but would you give the reverse advice to him? "Buy out of the money options 3 days prior to expiration."
One more thing. This does not work prior to earnings. I have tried to use this to take advantage of the "vol crush" but there are just too many earnings surprises that cause the stocks to blow right through your protection causing a max loss.
This is the way I would set up a trade in CELG for the March 31 expiration to illustrate the mechanics of the trade style.
Sell the Iron Condor +128 Call -126 Call -123 Put +121 Put
This morning the mid point on this quote was a 51 cent credit. You are dealing with the market maker on this so generally you will get the midpoint although sometimes they get testy and you have to give a cent or two if you don't get filled. Always place a limit order at the midpoint.
With a two dollar spread on your protection you are risking $1.49 to make $.51
If the price of CELG stays within the 123-126 range by Friday you make full profit.
Since you already received the $.51 credit your breakeven point is $122.49 and $126.51
So, since your breakeven points are beyond the expected move (+ or - $1.78) you have an odds on trade. Can this trade lose? of course it can. I have experienced an upgrade or downgrade and had the stock zoom thru my protection immediately for a max loss but that is the risk of trading.
If the trade is not expiring worthless on Friday you will need to buy back the short to avoid delivery.
I don't understand why you think you have the odds on this trade. The expectation of being ITM is lower, but it's multiplied by the payout value that's high. The only way you have improved statistical expectation on this trade is if you are somehow predicting that the realized terminal distribution is going to be tighter then what the options market is forecasting. Are you doing any sort of analysis (for example, historical distribution analysis) for it?
@Illini Trader , that trade kinda makes sense. But it will depend largely on the fees involved as well. If you're paying 15-20 cents then I would say it's not worth it. If you hardly pay any due to providing the liquidity, then yes...
But you also have probably have to sit out the trade until expiry, since if the stock moves 1.80 either way, you're looking at a paper loss, depending on when. So what then...?
As @sle says, the odds are not great... but maybe in short term it might be warranted. You're right on not to do this at earnings.
You could argue, if you'd do this on multiple stocks at the same time... then you only need to be right 3 out of 4 times and you could mitigate the risk by getting some index premium... although you'd be doing the opposite of what most desks do with dispersion...
But you also have probably have to sit out the trade until expiry, since if the stock moves 1.80 either way, you're looking at a paper loss, depending on when. So what then...?
As @sle says, the odds are not great... but maybe in short term it might be warranted. You're right on not to do this at earnings.
You could argue, if you'd do this on multiple stocks at the same time... then you only need to be right 3 out of 4 times and you could mitigate the risk by getting some index premium... although you'd be doing the opposite of what most desks do with dispersion...