Novel Option strategy!

A. 2100 contracts is not huge open interest especially on a 2.50 strike.

B. Institutional traders and option MMs "should" always hedge, and they are usually sellers while retailers are the buyers.

C. Charts work until they don't IMO

D. Your calls will be worth zero in 6 trading days if the stock isn't over 2.50.

E. Ask of .90 means squat if the bid is .50

F. If you let a 10 bagger get away from you... think of it as education and learn from it.

ps don't forget Uncle Sammy and my x-mas card next year !
 
I agree 2100 OI is not large at all.

You're looking for explosive options? Well they all have the potential to be explosive it depends on the underlying. Buying of puts or calls simply to leverage your directional speculation in a particular issue over a finite time frame is very very difficult. Yes, I always see a lot of people on the internet who step in and tell you that they make a fortune buying calls or puts to leverage their guesses but, hey its the internet, and there are more Ferrari's owned by internet posters then ever produced too. History tells us that the big scores are few and far between and the ones that go out worthless end up bleeding you out in the long run.

Despite what Najarian may say there is no tape which tells you which side initiated a trade in options or what side was an opener or a closer. I noticed you speculate on what the "tape" saying in a stock but in reality you don’t know if a hedge fund is buying or whether is some other kind of Institution etc etc.

In options it’s even more difficult to know what the volumes really saying. Let’s say you're looking at XYZ and it’s around 50 bucks. Generally about 10,000 contracts trade a day on XYZ spread around the strikes and months. Today you see that 20,000 contracts have traded in the Jan 40 puts. WHAT HAVE YOU LEARNED?

Nothing really is the answer. You don’t know the following. Were they opening buys? Were they opening shorts? Were they buy to close? Were they sell to close? If they were buy to open what did the buyer do vs. the options? Are they a straight spec buy and they believe XYZ is going down? Did they do the synthetic call and buy stock with the puts which is a bullish position? Where they part of a pair’s trade vs. another underlying? Were they just part of a big dispersion trade?

You simply don’t know so volume info is not that helpful.

Listed equity options all have the same "explosive" potential. As someone already pointed out the bid offer spread in these things, especially the less liquid issues which are only listed on 1 or 2 exchanges can make entry and exit difficult. I also agree and want to reiterate the point someone else made. The market making firms don’t just take the other side of the trades and say ho hum I just sold a bunch of call I hope the market goes down. They are required to make 2 sided markets in all the options listed in the books they market make in. They basically delta hedge just about every trade, and these days most of the MM business is part of a bigger dispersion book. That means the mm’s who are making the prices and the actual trades are pretty much “trade and forget” guys and the position management is done in a centralized fashion. They’re not worried about many individual positions.

Time plays a huge factor in options, as you noted we’re heading into expiration week. All of the variables in the price of an option will accelerate next week. In layman’s terms their potential to “explode” becomes greater as time is shorter. The converse is that their potential to “implode” and go to zero is much greater too. From your posts it sounds to me like you’re trying to time the markets with options and that’s a very very hard thing to do.


Hope this helps, good luck.
 
I saw Najarians working tick platform at the MoneyShow... I'm sure its on his website optionmonster.com somewhere.

Why nobody else has come up with one I don't know ...

It showed buy vs sell transactions and also size.
 
Buys vs Sells in the retail clients? As an institution some of that info is out there because most of the big order flow gets shopped around.

In all cases as orders go to market whether it be electronically or open out cry they're marked customer or firm and opening or closing. So that info is out there and in this day of electronic market places and electronic clearing it may be possible to access it. I am personally skeptical that any institutional order flow would give up their open or close into the public domain, but I surely could be wrong.

The other issue is that you simply can know what the initiator of the trade is really doing vs. the options.

Thanks for the info
 
Quote from Whistlingleaf:

I saw Najarians working tick platform at the MoneyShow... I'm sure its on his website optionmonster.com somewhere.

Why nobody else has come up with one I don't know ...

It showed buy vs sell transactions and also size.
More...


And yet with their amazing niche product, they still have a losing track record...at least for the time period that I subscribed to their service. And this was about a year ago when there was a major buyout announced every day!
 
Sorry TYPO that last line of..

"The other issue is that you simply can know what the initiator of the trade is really doing vs. the options."

should read CANT not can
 
(I think this is my first post on ET. Sheeesh.)

NathanG, there's some great (if ho-hum gee-whiz boring) info in the replies to your post. Read them twice.

FWIW, on my first trade (a teensy one), I made 3 days' take-home pay in 90 minutes. MAN[!] but that was fun. And then I lost it all because...

1) I thought the underlying should track back up to X, but it never retraced as farther than .8X as its chart suggested. ("Charts are always right, until they're wrong.") I held on, being patient "'til the market smartened up." ("The market's ALWAYS right.")

and then, when I decided to run...

2) The options were illiquid, which meant that the bid and ask I was looking at meant NUUUUUTHINNNN, cuz I hadn't been matched in a trade yet.

(Two great lessons, for cheap!)
So to repeat and paraphrase another piece of already posted advice, if you get halfway to where you think you should get, get your finger on the EXIT[!] button. If you're 3/4s of the way there, GET OUT, MAN.

On your "Which Broker" question, I recently changed set-ups rather dramatically, and the method I used was to take my trading habits ([number of trades] X 2/3rds of $$$ in 10% "swing+"of trading effort; 1/3rd of $$$ in 90% of trading [intraday]) and put them into the brokers' platforms and costs. I went over the various broker choices platforms for which ones seemed most intuitive for me and my trading pattern (an intensive 3-4 weeks in detailed study), then developed a cost-to-trade spreadsheet mirroring my trading pattern. The results were remarkable. (OK everyone: guess who won.) I would HIGHLY recommend you do those three steps:
1) what trading pattern will I be using?
2) which platforms lend themselves to easy methodological translation?
3) how much will it cost me?

Oh, and a warning: brokers are priced foremost on comfort, and only second on tools/data/etc. You can find comfort in a Ford Fiesta or a Cadillac. You'll pay for it, too. Go for the Fiesta, if it'll handle what you want to do. If you can handle a Mustang, do that. A Corvette may not be as comfortable as the Mustang, but hell's bells, will it move AND be fast.

FWIW, IMO, for US-traded equities/options,
TradeKing (imo) is a Mustang without real time prices or market depth. (It gets a lot done for cheap.) ToS is a 'vette with Level II. (It gets more done BUT in real-time; but is spendy!) If you're going to intraday, you need the F-1. I be with IB for the intraday stuff.
 
Quote from xflat2186:

I agree 2100 OI is not large at all.

You're looking for explosive options? Well they all have the potential to be explosive it depends on the underlying. Buying of puts or calls simply to leverage your directional speculation in a particular issue over a finite time frame is very very difficult. Yes, I always see a lot of people on the internet who step in and tell you that they make a fortune buying calls or puts to leverage their guesses but, hey its the internet, and there are more Ferrari's owned by internet posters then ever produced too. History tells us that the big scores are few and far between and the ones that go out worthless end up bleeding you out in the long run.

Despite what Najarian may say there is no tape which tells you which side initiated a trade in options or what side was an opener or a closer. I noticed you speculate on what the "tape" saying in a stock but in reality you don’t know if a hedge fund is buying or whether is some other kind of Institution etc etc.

In options it’s even more difficult to know what the volumes really saying. Let’s say you're looking at XYZ and it’s around 50 bucks. Generally about 10,000 contracts trade a day on XYZ spread around the strikes and months. Today you see that 20,000 contracts have traded in the Jan 40 puts. WHAT HAVE YOU LEARNED?

Nothing really is the answer. You don’t know the following. Were they opening buys? Were they opening shorts? Were they buy to close? Were they sell to close? If they were buy to open what did the buyer do vs. the options? Are they a straight spec buy and they believe XYZ is going down? Did they do the synthetic call and buy stock with the puts which is a bullish position? Where they part of a pair’s trade vs. another underlying? Were they just part of a big dispersion trade?

You simply don’t know so volume info is not that helpful.

Listed equity options all have the same "explosive" potential. As someone already pointed out the bid offer spread in these things, especially the less liquid issues which are only listed on 1 or 2 exchanges can make entry and exit difficult. I also agree and want to reiterate the point someone else made. The market making firms don’t just take the other side of the trades and say ho hum I just sold a bunch of call I hope the market goes down. They are required to make 2 sided markets in all the options listed in the books they market make in. They basically delta hedge just about every trade, and these days most of the MM business is part of a bigger dispersion book. That means the mm’s who are making the prices and the actual trades are pretty much “trade and forget” guys and the position management is done in a centralized fashion. They’re not worried about many individual positions.

Time plays a huge factor in options, as you noted we’re heading into expiration week. All of the variables in the price of an option will accelerate next week. In layman’s terms their potential to “explode” becomes greater as time is shorter. The converse is that their potential to “implode” and go to zero is much greater too. From your posts it sounds to me like you’re trying to time the markets with options and that’s a very very hard thing to do.


Hope this helps, good luck.
More...

Good post. You have explained very well. Can you comment more on dispersion trading.
 
Dispersion trading is basically trading the implied volatility on options of the individual stocks which make up an index or ETF vs. the implied volatility of options on that index or ETF itself.

Its not a retail trading strategy. If you run dispersion books on several sectors you then can run those books off one on a broad market options book too.

In todays world of global markets with the way real time is most of the markets on a macro scale are all about buying and selling risk for small increments of theoretical edge in large volume. Virtually all assets classes can be colateralized as packaged risk and traded vs. one another. There are obvious pros and cons as we saw in august with the freeze in MBS markets.
 
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