My Options Play

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Quote from Maverick74:

I used a 43 vol line. It's foolish to think the vol would not jump back to those levels if we got a 60 to 70 pt explosion in a week or over a few weeks. You can't use today's vols because they have been crushing the vol the last week. That 82.50 price is very accurate at a 43 vol line. This call is 13 months out! I also have a sharp call skew factored into the modeling which would certainly exist if we got that kind of move. Anyway, bad trade no matter how you look at it. The guy is short 5 deltas for a mountain of risk!

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Mav, the skew flattens as we approach the strike, that's why it's termed a smile. Regardless, take a look at the data that's staring us in the face; namely, the JAN 450 Call.

So, you're telling me with a straight face that you're modeling a $52 rise in the 15d call into a 75 point move in two weeks... all with a 43 vol-line. Are you sure you don't have the oscillator-inverted? Maybe you're assuming it's an 85delta call? hehehehe
 
Quote from riskarb:

Mav, the skew flattens as we approach the strike, that's why it's termed a smile. Regardless, take a look at the data that's staring us in the face; namely, the JAN 450 Call.

So, you're telling me with a straight face that you're modeling a $52 rise in the 15d call into a 75 point move in two weeks... all with a 43 vol-line. hehehehe
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Skew will not flatten hardly at all in a jan 07 leap! At 480, that call is still 40 pts OTM. Maybe the skew drops a few ticks but what do you think that call skew will look like if we got a 75 pt move in a week. Did you ever trade QCOM in the late 90's? Did you ever see what the upside calls skews did on these kind of moves. They went ballistic!

And btw, I'm not using the 43 vol for the 520 call, that's the ATM vol! I'm using the slope from the existing skew and steepening it on the curve. Anyway, it's a moot point, this trade is totally worthless. His gains are all on paper as they from 13 month vega! Like I said before, he is short 5 deltas and that's all he can lock in on any kind of selloff.

I know Beck you cannot be advocating this trade. I understand if you are trying to argue semantics. Fine, we can leave it at that. But neither you nor I know what the GOOG call skew is going to look like if this baby rockets 85 pts in a week to a new all time high. You say 60, I say 80, we'll settle on 70. Either, this trade makes zero sense unless he was trying to capture the drop in vol we had the last week and plans on taking it off tomorrow. I do not think this NEWBIE trader was doing that. I could be wrong though.
 
LOL, no, I am not advocating this trade, nor would I ever consider selling deep-curvature a year out. In fact, I never sell upside gamma. Never. It's just that the magnitude keeps increasing! Now it's 85 points! :D

I sold a bunch of 410 straddles a day later, but in Dec05 and Jan06. Did well, but was gritting my teeth on those.
 
Quote from riskarb:

LOL, no, I am not advocating this trade, nor would I ever consider selling deep-curvature two years out. Never. It's just that the magnitude keeps increasing! Now it's 85 points! :D
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You better make it 200 pts. I don't know if you have been around lately, but there is this little pos company that sell i-pods that went from 46 to 65 in 4 weeks! A 50% move in one expiration period! You don't think GOOG could make that kind of move? I'm saying it could happen. And if it does, this kid will never be allowed around an option ever again the rest of his life. :D
 
I might regret again interfering, but here it is:

A quick and dirty estimate of the probabilities that these puts expire worthless, with TXN $32.48 and 51 days to go (based on 11/30 data, when this discussion started):
  • TXN Jan 06 32.5 put bid $1.5: probability = 54%
  • TXN Jan 06 27.5 put bid $0.15: probability = 93%
So you see that you get ten times less premium for an increase in probability from 54% to 93%. If you do it repeatedly, selling the ATM will definitely fare better.
Quote from hajimow:
Not my intention to be derogatory. % return, but at what price? Risk-reward shouldn't take a backseat to absolute return.
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I agree with you here one million percent !!!!.
I don't think that I ignore risk in my trades. I know that there is no free lunch. Since I am a chicken !!,I prefer to take lower risk and get lower reward but a low reward that has a higher probability. Say a stock is at 32.5. I sell naked PUT for 27.5 and get 15 cents and you sell naked PUT for 32.5 and get $1.5. The chance that I get the whole 15 cents is higher that you end up getting nothing. If the stock goes to 29, your position will lose money but not mine. If it goes to $34, definitely you will get more because you took a higher risk and if it goes to $20, both of us are smoked. So simple.
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It's lunacy that this thread is 200 pages! Prob of profit has a great allure, but as cnms points-out:

.54 * 150 = $81
.93 * 20 = $19
 
TXN Jan 06 32.5 put bid $1.5: probability = 54%

TXN Jan 06 27.5 put bid $0.15: probability = 93%

cnms2 you comments are welcome. we are here to learn. I see the first case, as betting on head or tail in flipping a coin that in the long run you will lose as the long term probability of wining is zero but not in case 2.
 
Here there is a free download link to "reminiscences of a Stock Operator"

Thanks for the link. I really encourage you and everyone else to read it. Your postings show that you are a technical person and you want to analyze all the trades. I leaned from the book that this guy was doing all the calculations in his head and then was doing his trades based on what his gut was telling him.
 
CNMS2, I really think that your postings are helpful, esp the links you have sent incl chartbender and the historical quotes.

Just curious what you are using to figure out these probabilities:

A quick and dirty estimate of the probabilities that these puts expire worthless, with TXN $32.48 and 51 days to go (based on 11/30 data, when this discussion started):
  • TXN Jan 06 32.5 put bid $1.5: probability = 54%
  • TXN Jan 06 27.5 put bid $0.15: probability = 93%
So you see that you get ten times less premium for an increase in probability from 54% to 93%. If you do it repeatedly, selling the ATM will definitely fare better.

Thanks.
 
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