Option Experts
- Thread starter youngtradersla
- Start date
Youngtradersla,
I don't think anyone can add anything useful to the closing trades that you listed. However, for the following opening trades, to aid the discussion it would help to know your sentiment and forecast for price and volatility at the time of placing the trades:
This was a double long calendar on CSCO. Postpone discussion of this till after the MSFT calendar has been dissected.
This is was a long PUT vertical on NTRI. Long gamma, short theta, long vega and short deltas i.e. you were bearish on NTRI. The position decayed but had the potential for small gamma to expand quite nicely in your favor.
Debit for the 5 point vertical was $0.95 meaning a maximum profit potential of $4.05 at expiration if NTRI finished below $55 which it did!
This trade should have been a big winner. It had a lot of leverage being an OTM debit vertical with approx 1:4 risk/reward.
I can only assume that the trade was closed prior to expiration after the head-fake on the May 10th perhaps. Given that the trade was a bit of a lottery ticket, a possible reason for being shaken out of the trade was due to using a position size that was too large. You might want to consider using the entire debit of the trade as the stop loss and therefore using a smaller position size versus using a larger position size and cutting losses when the PnL reaches a certain point. Hope that makes sense.
This was a long calendar on MSFT. Long calendars are net long vega due to the back month option outweighing the front month option i.e. you are buying volatility here. This means you have to think that volatility has the potential to increase after the trade is placed.
The position was also bullish given that the $25 strike was OTM. You may or may not be aware that implied volatility tends to decrease as the underlying rallies (for equities). This puts the position at odds with also being long vega (wanting volatility to increase). Therefore, OTM CALL calendars are usually not a very good play under most circumstances IMO.
Calendars are most profitable when the underlying finishes at the short strike of the front month. This did not happen in your case.
It is usually a good idea to keep an eye on the short front month leg to see how much hedging power it has against the long back month. As soon as it looks as if it is no longer providing any hedging potential it is prudent to start thinking about adjusting the position. A possible adjustment would have been to roll the short front month option to the JUN 24 strike resulting in a bear short vertical on the back month.
Any adjustment you make needs to result in a position that you want to have and is consistent with your forecast at the time. Did you remain bullish on MSFT as MAY expiration closed in? Also, the adjusted position should not cost more than if you had to open the position from scratch at that point in time.
In the case of this calendar, it could just be the case that you got the forecast wrong on where MSFT would go. It happens.
There is a thread here on ET that had some coverage of calendar spreads: http://www.elitetrader.com/vb/showthread.php?s=&threadid=58716
That might provide some further insight over and above what you already know.
Good luck. It's difficult to ascertain your level of options knowledge as you seem comfortable using various kinds of spreads. The problem may just be bad luck/inability to forecast underlying/volatility hitherto or perhaps position sizing and adjustment methodologies.
Further reading that you may consider:
Option Volatility and Pricing by Natenberg
Options: The Hidden Reality by Cottle available at www.riskdoctor.com
Those should solidify and round out your current knowledge before you move on to more advanced topics IMO.
2 Cents.
MoMoney.
I don't think anyone can add anything useful to the closing trades that you listed. However, for the following opening trades, to aid the discussion it would help to know your sentiment and forecast for price and volatility at the time of placing the trades:
This was a double long calendar on CSCO. Postpone discussion of this till after the MSFT calendar has been dissected.
This is was a long PUT vertical on NTRI. Long gamma, short theta, long vega and short deltas i.e. you were bearish on NTRI. The position decayed but had the potential for small gamma to expand quite nicely in your favor.
Debit for the 5 point vertical was $0.95 meaning a maximum profit potential of $4.05 at expiration if NTRI finished below $55 which it did!
This trade should have been a big winner. It had a lot of leverage being an OTM debit vertical with approx 1:4 risk/reward.
I can only assume that the trade was closed prior to expiration after the head-fake on the May 10th perhaps. Given that the trade was a bit of a lottery ticket, a possible reason for being shaken out of the trade was due to using a position size that was too large. You might want to consider using the entire debit of the trade as the stop loss and therefore using a smaller position size versus using a larger position size and cutting losses when the PnL reaches a certain point. Hope that makes sense.
This was a long calendar on MSFT. Long calendars are net long vega due to the back month option outweighing the front month option i.e. you are buying volatility here. This means you have to think that volatility has the potential to increase after the trade is placed.
The position was also bullish given that the $25 strike was OTM. You may or may not be aware that implied volatility tends to decrease as the underlying rallies (for equities). This puts the position at odds with also being long vega (wanting volatility to increase). Therefore, OTM CALL calendars are usually not a very good play under most circumstances IMO.
Calendars are most profitable when the underlying finishes at the short strike of the front month. This did not happen in your case.
It is usually a good idea to keep an eye on the short front month leg to see how much hedging power it has against the long back month. As soon as it looks as if it is no longer providing any hedging potential it is prudent to start thinking about adjusting the position. A possible adjustment would have been to roll the short front month option to the JUN 24 strike resulting in a bear short vertical on the back month.
Any adjustment you make needs to result in a position that you want to have and is consistent with your forecast at the time. Did you remain bullish on MSFT as MAY expiration closed in? Also, the adjusted position should not cost more than if you had to open the position from scratch at that point in time.
In the case of this calendar, it could just be the case that you got the forecast wrong on where MSFT would go. It happens.
There is a thread here on ET that had some coverage of calendar spreads: http://www.elitetrader.com/vb/showthread.php?s=&threadid=58716
That might provide some further insight over and above what you already know.
Good luck. It's difficult to ascertain your level of options knowledge as you seem comfortable using various kinds of spreads. The problem may just be bad luck/inability to forecast underlying/volatility hitherto or perhaps position sizing and adjustment methodologies.
Further reading that you may consider:
Option Volatility and Pricing by Natenberg
Options: The Hidden Reality by Cottle available at www.riskdoctor.com
Those should solidify and round out your current knowledge before you move on to more advanced topics IMO.
2 Cents.
MoMoney.
I have no clue if this will be of any help to you...but
1) Unless you have a number of years of experience trading equities with success DON'T trade options on equities. Instead find 1-3 indices/etf's that you can research (know the basis of the underlying) and then use your Greeks and TA that you are comfortable with to trade those options.
2. Take a "beyond the basics" one day seminar...Free..coming to your city soon. Re-Read the 1st 25 chapters of McMillan "options as a strategic investment". Pick up the workbook that comes with it. Make a chart of the types of options that work in high vol's/low vols/ bullish/bearish/ neutral and commit them to memory.
3. Now take ONE type of strategy that you feel might work in this market and over a period of several months....just do that strategy. You have already tried some bull and bear spreads and found out they only work if you are correct in direction. Try an IC setting up the Bull put side when market is oversold then the Bear call when the market gets overbought. Once you get comfortable with that type of trade you might work on calendars....for several months.
4. DON'T trade why you do not know, understand or cannot find a strong fundamental or TA reason to trade.
5. The B-fly is one of the hardest to really master. It works best if built at first a debt spread...then if your correct with that direction you can fade the move with your credit spread which should give you a B-fly for free. This takes great patience and I would save even trying B-flys until you master and are profitable with your spreads/ IC's and calendar's. Also don't trade diagonals until you are comfortable and profitable with calendars.
The Journey is difference for every person but if you start small and narrowly focused, build on SUCCESS and truly learn from failure you will succeed. Good Luck!
1) Unless you have a number of years of experience trading equities with success DON'T trade options on equities. Instead find 1-3 indices/etf's that you can research (know the basis of the underlying) and then use your Greeks and TA that you are comfortable with to trade those options.
2. Take a "beyond the basics" one day seminar...Free..coming to your city soon. Re-Read the 1st 25 chapters of McMillan "options as a strategic investment". Pick up the workbook that comes with it. Make a chart of the types of options that work in high vol's/low vols/ bullish/bearish/ neutral and commit them to memory.
3. Now take ONE type of strategy that you feel might work in this market and over a period of several months....just do that strategy. You have already tried some bull and bear spreads and found out they only work if you are correct in direction. Try an IC setting up the Bull put side when market is oversold then the Bear call when the market gets overbought. Once you get comfortable with that type of trade you might work on calendars....for several months.
4. DON'T trade why you do not know, understand or cannot find a strong fundamental or TA reason to trade.
5. The B-fly is one of the hardest to really master. It works best if built at first a debt spread...then if your correct with that direction you can fade the move with your credit spread which should give you a B-fly for free. This takes great patience and I would save even trying B-flys until you master and are profitable with your spreads/ IC's and calendar's. Also don't trade diagonals until you are comfortable and profitable with calendars.
The Journey is difference for every person but if you start small and narrowly focused, build on SUCCESS and truly learn from failure you will succeed. Good Luck!
Pattersb: Notice there has been little comments from the Ass gallery.
Daddy'sboy: If Elliott wave is such crap, WHY did some of these stock do EXACTLY what I wanted them to do. You don't have to understand everyting, but don't mock what you don't know.
Moneyth...:
Csco: was pure graph analysis
NTRI: That went up way to far way to fast, it was sure to crash. (I do not remember the reason that was closed, most probably because it did not move when I expected it to.)
MSFT:
I had broken even and won a bit earlier in the year so I thought I had a good understanding of this stock.
To all:
At this point, I think I have learned much already, and before this gets out of control I would like to close this out.
Thank you for the web pages indeas, I will def check them out!
I learned that despite the fact I am picking direction, have a decent record of being right, (in my mind), I need to stick with the system and let the price do it's thing. Not to get out early or let counter moves throw me off. I also will study the underlying more before entering trades.
Thanks for your support. I am pleased with the responces and good information contained therein.
Daddy'sboy: If Elliott wave is such crap, WHY did some of these stock do EXACTLY what I wanted them to do. You don't have to understand everyting, but don't mock what you don't know.
Moneyth...:
Csco: was pure graph analysis
NTRI: That went up way to far way to fast, it was sure to crash. (I do not remember the reason that was closed, most probably because it did not move when I expected it to.)
MSFT:
I had broken even and won a bit earlier in the year so I thought I had a good understanding of this stock.
To all:
At this point, I think I have learned much already, and before this gets out of control I would like to close this out.
Thank you for the web pages indeas, I will def check them out!
I learned that despite the fact I am picking direction, have a decent record of being right, (in my mind), I need to stick with the system and let the price do it's thing. Not to get out early or let counter moves throw me off. I also will study the underlying more before entering trades.
Thanks for your support. I am pleased with the responces and good information contained therein.
Coincidence.
"You're connecting a computer bug I had, a computer bug you might have had, and some religious hogwash. If you want to find the number two sixteen in the world, you'll be able to pull it out of anywhere. Two hundred and sixteen steps from your street comer to your front door. Two hundred and sixteen seconds you spend riding on the elevator. When your mind becomes obsessed with anything, it will filter everything else out and find examples of that thing everywhere. Three hundred and twenty, four hundred and fifty, twenty-three. Whatever! You've chosen two sixteen and you'll find it everywhere in nature. But Max, as soon as you discard scientific rigor, you are no longer a mathematician. You become a numerologist."
Sol speaking to Max, "Pi", Darren Aronosfsky, 1998.
-segv
To youngtradersla:
Hey chief
I think you should really read the posts more carefully. Steve is the one who said EW is crap. I said the opposite. Not much point trying to help someone like you with your aggressive attitude.
daddy's boy
Here's your problem, you think you know something. Try going under the assumption that you don't know jack, and then place a bet. When you try to rationalize something, you have already made up your mind. So look at it objectively, trade off a coin toss and use money management like your right hand.
Hello:
I would just like to say this again to emphasize my point.
Elliot wave is about on par with astrology as a way of providing a constructive context for trading.
To put it more directly, while the concept of cyclical analysis is productive in engineering and other sciences, in trading it has no predictive value. If there were something to it, you would hear much more about it, not only here at ET, but in also in the public domain. Unfortunately Elliot wave as developed by Ralph Elliot and practiced by Prechter and others, is pure crap. You would do just as well to toss a coin to generate trading signals. Sorry about that.
Thank you
Steve
I would just like to say this again to emphasize my point.
Elliot wave is about on par with astrology as a way of providing a constructive context for trading.
To put it more directly, while the concept of cyclical analysis is productive in engineering and other sciences, in trading it has no predictive value. If there were something to it, you would hear much more about it, not only here at ET, but in also in the public domain. Unfortunately Elliot wave as developed by Ralph Elliot and practiced by Prechter and others, is pure crap. You would do just as well to toss a coin to generate trading signals. Sorry about that.
Thank you
Steve