John Bender's ideas
- Thread starter Maverick1
- Start date
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Ex: BRL. Go back to last Friday. First breakdown took the stock down 2.46 points to 66.54. I checked the implied vols at 3.45p.m. The June 65 call was trading at 3 bid, 3.40 offered, vol around 40% implying that BRL had roughly 68% (1 standard deviation) chance of being between 71.8 and 61.3 at June expiry. Now here's the catch. Was it really likely that within the 1 s.d, BRL had a 50/50 chance of going up to 71! or down?
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You lost me with the math.
Its interesting the way you look at the long leg. Just insurance against an extreme move against you. That brings up the question of execution. You could leg into it, the short side naked, and cover that day if it moved the wrong way. Buy the long side before the close. The other question is, will the mmaker give up half the b/a spread to you if you place the order as a spread?
I never traded spreads, only long options. I liked to buy otm when trading a reversal. And itm when trading momentum. Id uses the same plan for vertical spreads, a bear put debit in this case. This would be recomended for a short term trade because max profit would be realized sooner. Your not going for max profit though, because the long option is so far otm.
Ex: BRL. Go back to last Friday. First breakdown took the stock down 2.46 points to 66.54. I checked the implied vols at 3.45p.m. The June 65 call was trading at 3 bid, 3.40 offered, vol around 40% implying that BRL had roughly 68% (1 standard deviation) chance of being between 71.8 and 61.3 at June expiry. Now here's the catch. Was it really likely that within the 1 s.d, BRL had a 50/50 chance of going up to 71! or down?
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You lost me with the math.
Its interesting the way you look at the long leg. Just insurance against an extreme move against you. That brings up the question of execution. You could leg into it, the short side naked, and cover that day if it moved the wrong way. Buy the long side before the close. The other question is, will the mmaker give up half the b/a spread to you if you place the order as a spread?
I never traded spreads, only long options. I liked to buy otm when trading a reversal. And itm when trading momentum. Id uses the same plan for vertical spreads, a bear put debit in this case. This would be recomended for a short term trade because max profit would be realized sooner. Your not going for max profit though, because the long option is so far otm.
Re the math: I de-annualized the implied vol figure to match the time frame I was looking at. Vol figures, whether statistical or implied are generally quoted as annualized and you have to rescale them for the appropriate period under consideration. In the BS model (as fate would have it, the abbreviation had to leave us with such a reassuring name, lol, no seriously it is the only model we can use as a starting point), volatility is proportional to the square root of time. I used a simplified version of the black scholes called a binomial tree, to check for put call parity, ignoring the cost of cash. The option prices lined up pretty well, although the june 65 put ask came .15 short of the expected value. These computations confirmed that the 'risk neutral' measure was indeed used to price the options.
The challenge was in determining whether BRL's real probability distribution was really centered around it's mean or not. Sure, the mmakers were implying that it had a 68% chance or being at 61 or 71 at expiry but at the same time were also implying that the movement up or down, was equiprobable. I felt that down movement was more likely than up in the near term so the real distribution looked skewed to me.
In many ways, I am reaching the conclusion that although the mmakers are hard to beat, their achilles tendon remains the assumptions of the black scholes.
You mentioned that you like to trade otms for reversals and itms for momentum. Could you share an example of something along those lines that worked for you recently? That'd be cool
The challenge was in determining whether BRL's real probability distribution was really centered around it's mean or not. Sure, the mmakers were implying that it had a 68% chance or being at 61 or 71 at expiry but at the same time were also implying that the movement up or down, was equiprobable. I felt that down movement was more likely than up in the near term so the real distribution looked skewed to me.
In many ways, I am reaching the conclusion that although the mmakers are hard to beat, their achilles tendon remains the assumptions of the black scholes.
You mentioned that you like to trade otms for reversals and itms for momentum. Could you share an example of something along those lines that worked for you recently? That'd be cool
No matter how many times we take hits in the markets, we always reserve ourselves the right to better judgement in the future and if you're perservering in your trading and analysis while learning from the past, you are on the right track.
From what I've read in market wizards, many of those guys actually did blow up and some more than two times I think. Some names that come to mind are michael marcus, mark cook, saliba (kind of blew away the account early in his career) But they stuck with it and then developed risk control methods that drastically if not virtually reduced their odds of losing everything
Now That's inspiration to me.
From what I've read in market wizards, many of those guys actually did blow up and some more than two times I think. Some names that come to mind are michael marcus, mark cook, saliba (kind of blew away the account early in his career) But they stuck with it and then developed risk control methods that drastically if not virtually reduced their odds of losing everything
Now That's inspiration to me.
Maverick1,
Since vol's ramp in a decline, wouldn't short stock/long OTM call be a superior way to play an anticipated decline? Similarly, wouldn't a put credit spread be the best way to play an upside reversal, assuming you were only looking to hold a couple of days? Is it necessary to work through the vega's case by case or is it safe to make a global conclusion?
Since vol's ramp in a decline, wouldn't short stock/long OTM call be a superior way to play an anticipated decline? Similarly, wouldn't a put credit spread be the best way to play an upside reversal, assuming you were only looking to hold a couple of days? Is it necessary to work through the vega's case by case or is it safe to make a global conclusion?
A covered put in anticipation of a breakdown sounds fine to me.
Like i mentioned earlier, the example I chose, the brl trade, wasn't posted as the 'best' trade to do under those cirmcumstances, but rather just as something to get the discussion going on Bender's thoughts.
If your t.analysis is spot on and you feel comfortable waiting for a pullback (uptick) in a downtrending stock to short, and if you have a big account for margin issues then all the power to you.
Like Redzuk said, some folks like to play the momentum by buying in the money puts on a situation like Brl. That's the beauty of options to me, you can tailor the trades according to your own risk preferences.
I do have to say however, that for me, bull put spreads for reversals are not a high probability trade and not worth the risk-reward ratio under that setup. That is if I understand 'reversal' correctly. I'd rather put a credit spread on after careful analysis of the stock's behavior and statistical vol (average true range etc). Implied vol is also important as you often need enough 'juice' to the spread worth it. For ex, about three to 4 weeks ago I saw the Amzn june 10-12.5 bull put trading for .30 credit. Not bad if you consider that amzn would have to fall 2 standard deviations to kill the trade.
Like i mentioned earlier, the example I chose, the brl trade, wasn't posted as the 'best' trade to do under those cirmcumstances, but rather just as something to get the discussion going on Bender's thoughts.
If your t.analysis is spot on and you feel comfortable waiting for a pullback (uptick) in a downtrending stock to short, and if you have a big account for margin issues then all the power to you.
Like Redzuk said, some folks like to play the momentum by buying in the money puts on a situation like Brl. That's the beauty of options to me, you can tailor the trades according to your own risk preferences.
I do have to say however, that for me, bull put spreads for reversals are not a high probability trade and not worth the risk-reward ratio under that setup. That is if I understand 'reversal' correctly. I'd rather put a credit spread on after careful analysis of the stock's behavior and statistical vol (average true range etc). Implied vol is also important as you often need enough 'juice' to the spread worth it. For ex, about three to 4 weeks ago I saw the Amzn june 10-12.5 bull put trading for .30 credit. Not bad if you consider that amzn would have to fall 2 standard deviations to kill the trade.
I agree . The mmaker most probably doesn't care about taking the other side of a trade like that because he is hedged within seconds. I wonder if there are any mmakers on these forums who could confirm that... doubt it, they're probably making too much money to bother 
option trading without tech.analysis is, to me, a real shot in the dark and a terrible gamble. You're right, you have to believe in your edge and work it non stop.
Re finding setups like the brl one. You know what, I was just reading some threads on Tony Oz and I think we are all very lucky to have a guy like him be on this site. He's a killer trader. Knows where his edge is, has no bull risk control and has top notch software to find the high probability setups even intraday.
His stock scanner seems to be the best out there for folks who can't do their own programming on tradestation.
I was going through his scans on his website and the one you might want to check out is his 'Knock Down' one intraday. Once in a while when a guy like Tony comes around , big mind and big heart, and shares his stuff, you can't help but be grateful! Learning from the best is the way to go.
option trading without tech.analysis is, to me, a real shot in the dark and a terrible gamble. You're right, you have to believe in your edge and work it non stop.
Re finding setups like the brl one. You know what, I was just reading some threads on Tony Oz and I think we are all very lucky to have a guy like him be on this site. He's a killer trader. Knows where his edge is, has no bull risk control and has top notch software to find the high probability setups even intraday.
His stock scanner seems to be the best out there for folks who can't do their own programming on tradestation.
I was going through his scans on his website and the one you might want to check out is his 'Knock Down' one intraday. Once in a while when a guy like Tony comes around , big mind and big heart, and shares his stuff, you can't help but be grateful! Learning from the best is the way to go.