Option Income Portfolios

[riskarb]

It's virtually impossible to make a living under regT with $20k in equity options. Obviously you'd have to make large % gains immediately. Can you turn $20k into $200k in two to three years? Absolutely.

Recipe for $20k:

1 -- Open a BOM or ABN AMRO marketindex.com account with $10k.

2 -- Open an IB account to trade vanilla and futures hedges with the remaining $10k.

3 -- Hedge BOM with vanilla options or futures. ABN-AMRO offer spot contracts in the same account. No need for hedge account.

I know two traders in the UK who have turned smaller stakes [<20k] into 200k in less than two years; one with SocGen's clickoptions, and the other with BOM. I don't recommend SocGen, horrible edge loss.

You can sell synthetics on either side at equal prem :: delta if you limit you durations to 14d or less. The plays are all gamma, zero discount on debits with otm puts. Makes for a ton of flexibility to go wither way.

That's it. Work out your own method, but it's attainable. My 17yo niece has doubled her $10k following the basic premise outlined above.

 

[Eliot Hosewater]

Quote from RichardRimes:

I was about to highlight his response and say "even I understand it"
.

Can you translate this sentence into a concrete example?

Sell delta straddles if you want to short gamma and take a directional bet.

 

[riskarb]

Quote from Eliot Hosewater:

Can you translate this sentence into a concrete example?

XYZ at $122 with vols at 40%, top two deciles. Divergence seen on daily chart; 1,2,3 top formation or whatever technical or fundamental data you'd use to make your bet. Sell 30-60d 115 straddle at 40% vol. Hold for a drop in vols or a touch of 115.

 

[RichardRimes]

Quote from Eliot Hosewater:

Can you translate this sentence into a concrete example?

actually I understood the gist of it the concrete example need's Mo's interpretation. You can take a directional risk which is delta...a stock will go up or down...OR a volatility risk...if the current IV is higher that historical IV then you might sell banking on reversion to the mean. Collapsing of IV's will make you money and correct prediction of the direction of the stock will make you money. You can also BUY premium when IV's are lower than historic and/or you have a bias on direction.

 

[xtrhvydty]

exc replies above, great stuff.

I looked at short straddles on the ES per IB's b/a spread history during the May slide - I saw massive b/a gaps as well as a failure of the calls to hedge the Put price differential. I don't know if this is just IB but I am just too ignorant to know if this is a serious risk or not.

Conclusions:

1. Consequently, I decided not to sell an ES put unless tightly hedged by another ES put, i.e. a condor. Thus a call butterfly seemed more attractive. A bear call butterfly at high IV seems to best the next best equivalent IV/gamma scalping vehicle, although I could also use an ATM put calendar for scalping upward IV spikes.

2. At low IV, a ratio spread such as -100 1365C/ +140 1370C yielded a $1.6k credit (really $1k minus comm/slip) at the time with a positive vega and only a slight dip into -pnl around 1330. However I wonder if these options would even be affected by a an ES IV change.

3. Regarding vertical credit spreads, it seemed that I would need a massive account to escape the premium dip into negative profit even at far OTM strike spreads. Thus I stuck with the ratio spread.

True/false? What am I missing here?
Many thanks again

 

[xtrhvydty]

[meant]
I looked at short straddles on the ES per IB's b/a spread history during the May slide - I saw massive b/a gaps as well as a failure of the call IV [edited] to hedge the Put IV differential -bottom line I was not sure how to predict the varying put/call IV with the simulator. I don't know what is just [edited] IB feed error but I am just too ignorant to know if this is a serious risk or not.

 

[riskarb]

You need to follow the vol-smile. Price the atm straddle vs. the delta-straddle to determine whether it's worthwile to take the directional bet. Index skews make it worthwile in a bearish scenario, provided you don't need to hold the combo through a delta inversion. IOW, give yourself a lot of room on the downside when choosing a neutral strike.

Smile issues are a rare-event in index components, so you're welcome to trade upside and downside delta-straddles. Just be certain the delta-straddle trades at a sufficient premium that will satisfy your PnL target should the spot trade to neutrality w/o a drop in vols within a short period of time. Don't bank on theta.

 

[smilingsynic]

Quote from xtrhvydty:

Searched but found no discussion on this topic -

1. What is your annual composition of option strategies? For example, do you trade 20% butterflies, 20% calendars, 20%short verticals, 10% exotics, 15% diagonals, keep 15% in cash etc.

2. What is the approximate % revenue attributed to each of your strategies?

3. What is your basic option trading philosophy? IV trader, theta scalper?

4. What have you specialized in? What have you learned about this strategy?

There is plenty of discussion on ET on this. I'd suggest going to the search page, look under "journals" and read what posters riskarb, optioncoach, and Maverick74 have written. There are few books (if any) that can teach you what you can learn from these guys (esp riskarb).

What have I learned about this strategy? Be careful about using margin, because you don't want to be short on cash when the position goes against you. I have always traded conservatively, but I know of others who sold gamma aggressively, failed to hedge, and lost more than they bargained for.

I have never regretted being too careful.

Good luck.

 

[segv]

Quote from riskarb:

Don't bank on theta.

Poor, poor, poor Theta. She had a hard time getting a date to the prom, too (all of the binge eating). Theta and I know how to dance, however.

-segv

 

[frank99]

riskarb,

I've very interested in this strategy. I have a couple questions for you:

1) What is a BOM and an ABN AMRO?
2) Do you have to use two separate accounts with two brokers? Or can you do this with one account?
3) In item #3, what do you mean by "hedge BOM with vanilla options"?

Thanks very much!

Frank

Quote from riskarb:

It's virtually impossible to make a living under regT with $20k in equity options. Obviously you'd have to make large % gains immediately. Can you turn $20k into $200k in two to three years? Absolutely.

Recipe for $20k:

1 -- Open a BOM or ABN AMRO marketindex.com account with $10k.

2 -- Open an IB account to trade vanilla and futures hedges with the remaining $10k.

3 -- Hedge BOM with vanilla options or futures. ABN-AMRO offer spot contracts in the same account. No need for hedge account.

I know two traders in the UK who have turned smaller stakes [<20k] into 200k in less than two years; one with SocGen's clickoptions, and the other with BOM. I don't recommend SocGen, horrible edge loss.

You can sell synthetics on either side at equal prem :: delta if you limit you durations to 14d or less. The plays are all gamma, zero discount on debits with otm puts. Makes for a ton of flexibility to go wither way.

That's it. Work out your own method, but it's attainable. My 17yo niece has doubled her $10k following the basic premise outlined above.