My Conclusions

[Cache Landing]

Quote from luh3417:


Everyone here is so proud of their understanding of greeks. But nobody admits that they don't balance them out daily or weekly. Why not? Because retail traders get poorer execution and this helps make it too difficult and expensive.

Or maybe you don't do it because you always pick underlyings that move in your direction. If so, my hats off to you. If not, admit to us that you are speculating, pure and simple, and please post back when you blow up. Hear me now, believe me later. Or comfort yourselves and stay positive by ridiculing me and ignoring the substance of my questions and arguments.

You're right. I don't balance the greeks out daily. I have a big problem with strategies that require it, such as many delta neutral stategies. Balancing out doesn't need to be daily and sometimes not even weekly, although I rarely go for a week with an unbalanced portfolio. The balancing you speak of needs to be done to suit your personal strategy. Mine doesn't require it. My strategy hinges more on balanced entries than constant adjustment.

Anyway, the reason I didn't go into more detail was because of the nature of your posts. You are posting as one who is asking questions to better his trading skills, while you seem to be looking for a debate. I am not inclined to enter that debate because we will be debating personal styles. If your personal style (which you seem to indicate is non-speculative) makes you money then it is no worse or better than mine, as mine also makes money nearly every month for quite some time now.

IV_trader makes money focusing on IV and earnings reports.

Others prefer to try to gamma scalp "neutral" strategies.

Everyone has preferences, and there is more than one way to skin a cat. It doesn't matter how you do it as long as the job gets done and you are satisfied with the results.

In any case, there is no such thing as a non-speculative investment. Even when buying fixed income securities you are speculating that interest rates won't increase. If you are good at what you do, you'll get compensated proportionately to the amount of risk you are taking. If the r/r is lopsided against you then failure is inevitable. If it is lopsided in your favor it is referred to as an edge, and you will make money consistently. Point is, speculating doesn't equal a blown account. Poor risk management equals a blown account.

My comment regarding a lack of understanding on this thread was prompted by the statements that were being made. These comments made it very obvious that those making them were quite unfamiliar with options, I wasn't trying to be a jerk. IF someone really wants to learn how to trade options there are a few journal here that do a fairly good job explaining the various aspects, but it would be wise not to enter a discussion by attacking the nature of the strategies themselves.

 

[riskarb]

Quote from luh3417:

Everyone here is so proud of their understanding of greeks. But nobody admits that they don't balance them out daily or weekly. Why not? Because retail traders get poorer execution and this helps make it too difficult and expensive.

Or maybe you don't do it because you always pick underlyings that move in your direction. If so, my hats off to you. If not, admit to us that you are speculating, pure and simple, and please post back when you blow up. Hear me now, believe me later. Or comfort yourselves and stay positive by ridiculing me and ignoring the substance of my questions and arguments.

You're indignant and self-righteous... fantastic attributes for an option-trader. Options are priced in volatility -- OTC interbank conventions price options on yearly vols, sans premium. So, "always pick[ing] underlyings that move in your direction" has zero impact with isolating/trading volatility... Buying/selling an XYZ atm straddle at 50% vol is not a directional bet, savvy? Have you considered the fact that some of us trade options for their intended purpose? As hedges or volatility bets, and not stock-proxies?

 

[resinate]

Quote from scriabinop23:

but with buying puts and calls, you lose at most what you put in. With futures, you're downside is potentially much deeper (all the way to 0) (thus requiring stop orders if you don't have the stomach to gamble riding out a drop).

I want to emphasize this post as to me the most compelling aspect of trading options- risk control . Long options have it built in- you can never lose more than premium paid. Simple but key....

One other point about "their" ie options market maker's advantage that has not been mentioned amid all this defensive we are not we and they are not them talk: MMs, unlike retail traders, can have concurrent bids and offers on the same contract greatly enhancing their odds of capitalizing on the built in edge of the bid/ask spread.

 

[scriabinop23]

Quote from resinate:

I want to emphasize this post as to me the most compelling aspect of trading options- risk control . Long options have it built in- you can never lose more than premium paid. Simple but key....

Of course, the same holds true for futures purchased with 0 leverage. Leverage is built inclusive of the option premium. Anything else (futures, stocks, forex) doesn't necessarily have to be.

Leverage leverage leverage.

 

[Eliot Hosewater]

Quote from resinate:

Long options have it built in- you can never lose more than premium paid. Simple but key....

Wrong answer.

I was reading a website
(http://www.21stcenturyinvestoreducation.com) the other day with an options knowledge quiz. That was one of the questions.

Their answer was that if you somehow forget or fail to close your long call that is ATM or slightly ITM, it can be exercised, then the company can have some kind of bad news over the weekend, so you wake up Monday morning owning shares that are now worth less than what you paid for them.

 

[riskarb]

Quote from Eliot Hosewater:

Wrong answer.

I was reading a website the other with an options knowledge quiz. That was one of the questions.

Their answer was that if you somehow forget or fail to close your long call that is ATM or slightly ITM, it can be assigned, then the company can have some kind of bad news over the weekend, so you wake up Monday morning owning shares that are now worth less than what you paid for them.

It's called an exercise; assignments occur on short options. And you're similarly-fcuked if you forget your parachute when jumping out of a perfectly-sound airplane.

The only response to such a question is to beat the tester bloody with the quiz book.

 

[Eliot Hosewater]

Quote from riskarb:
It's called an exercise; assignments occur on short options.

Yeah, I went back and edited my post at the same time I was adding the web address, but assigned is still correct. You hold a long call, it is assigned to someone who holds the short end of it.

The only response to such a question is to beat the tester bloody with the quiz book.

That's the way I felt. They had a few other "trick" questions which I don't recall at the moment.

 

[luh3417]

Quote from riskarb:

You're indignant and self-righteous... fantastic attributes for an option-trader. Options are priced in volatility -- OTC interbank conventions price options on yearly vols, sans premium. So, "always pick[ing] underlyings that move in your direction" has zero impact with isolating/trading volatility... Buying/selling an XYZ atm straddle at 50% vol is not a directional bet, savvy? Have you considered the fact that some of us trade options for their intended purpose? As hedges or volatility bets, and not stock-proxies?

Indignant and self-rightous, its a good start I agree, but do I have a "positive attitude", that's what some feel is the missing ingredient. I would just say that some consider people pessimists, but pessimists consider themselves realists. Anyway, I appreciate you're using the words "volatility bets", since it has the word bet in it. Am I being a realist or a pessimist when I say that... we'll let the reader decide.

Good point about hedging. I should know the answer, but let me ask, is your ATM straddle above completely neutral on its greeks? And as the underlying moves, do you rebalance them?

Regarding the other post, there is a very long thread somewhere on this forum about getting hurt by automatic exercise; a novice trader with some GOOG calls. Ask him if he thinks its just a quiz question. http://www.elitetrader.com/vb/showthread.php?s=&threadid=51251
"On Monday, IB liquidated GOOG at the open for a net loss of around $10,000. Now IB wants me to deposit $9200.00 in my account to settle the negative balance."

 

[riskarb]

Quote from luh3417:

Good point about hedging. I should know the answer, but let me ask, is your ATM straddle above completely neutral on its greeks? And as the underlying moves, do you rebalance them?

The atm straddle is short gamma at all points on the distribution, as well as vega. There is no method of neutralizng either w/o buying options. You can overhedge in spot to overwhelm gamma, but then the hedge becomes the risk.

If you're looking for someone to hand you edge and neutral-risk you're looking in all the wrong places.

And no, I don't neutralize my exposures in discrete moments -- doing so would be masturbation w/o the payoff. I trade gamma and vega bets; either a bet on the distro or shape[stoch vol].

I think you're confused in your belief that the retail option trader should somehow emulate the arbitrageur or market maker. Market makers have the advantage of risk-haircut, but they're also forced to trade paper to maintain their position in the pit/post. The retail trader can trade when the opportunity avails.

 

[OddTrader]

Quote from mayo367:

The "big boys" that you refer to Luh3417 is a myth.
The so called "big boy network" is often alluded to by traders that are usually either struggling, experiencing poor returns, reaching for that something extra that appears to be within reach.... but remains elusive, etc.. Think rationally for a moment, these so called "big boy networks" are also humans, have access to the same education, software, they experience the same problems we do, etc.. Oh, let me guess, here is what some traders might suggest to you, they belong to covert societies, with advanced academic degress & thus they're more capable than 'us' the retail trader, hogwash!!

A competent retail trader will never bow down to a so called "dynamic force" that supposedly rules with an iron fist while the retail trader must suffer, because it does not exist, a competent trader accepts responsibility & blames no one. While a struggling trader inevitably arrives @ these far flung theories as the reason for falling short, not achieving a desired expectation. In adhering to these theories, a trader is providing a form of consolation that appeases his own incompetence. In reading your commets near the bottom, ahh, just as I thought, your post is a well crafted cry for help.

Well, you have taken an admirable step by posting your comments in this forum & seeking help. It's really a simple matter, either you need to educate yourself more, hook up with a mentor that knows his craft well perhaps. Remember, profitability for many is earned with experience & experience cannot be wished for, it must be earned. You may have to work at it a little more.

One more thing, don't believe those traders that tell you that the odds are stacked against you, that is a myth as well, if you develop a winning strategy, the odds are never against you, struggling traders always find excuses on why the markets are bigger & stronger than me or you. The world is filled with those that say "it can't be done," or "only the big boys win in the end." These people are usually miserable & cannot stand to be wrong, always with an agenda up their sleeve, always having to prove something to someone. Only to tell you later: "I told you so." Do not waste your precious time with these individuals.

Excellent post with great value, thanks.