Options: advantages/disadvantages?

weewilly · Feb 23, 2004

Quote from ertrader1:

My point is, explain to me, without just throwing around the idea of theta, gamma, and delta, HOW IS THAT MORE RISKY THAN SHORTING OUTRIGHT?

I cant wait to read LINDQs response on this example, by the way, Im out of all the calls in NGEN as of today, So i no longer have NGEN short.

I dont trade that kind of size but there may be liquidity problems if you _need_ to cover 500 short options in a pinch. I would rather be on the wrong side of the market with 50 sticks of stock than 500 options.

wee

resinate · Feb 24, 2004

Sorry if someone mentioned this but I didn't see it.

Strictly speaking in terms of controlling risk, there is no position, short of a hedged one, which has more controlled and limited risk than long option strategies.

By definition you can only lose the amount paid in premium for long options. Short options can be RISKIER than stock due to to gamma, vega etc. ER's example was very cute as his so called hedging to limit risk was actually more akin to locking in profits.... Point being that with unhedged short options one has nuke risk like being short the underlying.

riskarb · Feb 24, 2004

Quote from resinate:

Sorry if someone mentioned this but I didn't see it.

Strictly speaking in terms of controlling risk, there is no position, short of a hedged one, which has more controlled and limited risk than long option strategies.

By definition you can only lose the amount paid in premium for long options. Short options can be RISKIER than stock due to to gamma, vega etc. ER's example was very cute as his so called hedging to limit risk was actually more akin to locking in profits.... Point being that with unhedged short options one has nuke risk like being short the underlying.

If you're cash-secured, i.e. if your delta position would be traded equal(stock delta = option delta) then the risk is all vega.

riskarb

ktm · Feb 24, 2004

Quote from ertrader1:

I think the most dangerous things to an option trader is themselves.

Options are also an easyer way to make a trade with less capital.

I would go further that the most dangerous thing is a lack of discipline among those who discover options. I have had numerous people approach me who have "discovered" options and want to know more. Eventually they learn that they are able to put on X times the same $$$ on many more options than they would have been able to play on the underlying. I tell them to NEVER use more options than they would have traded using outright stock.

To be sure, after a few winners the wheels start turning and they start doing all the multiplication and the urge is there. We're all human. Fear and greed run this sandbox we are all playing in.

I certainly respect all you guys who are very fluent in the greeks. If you are selling short dated stuff AND have written a small enough percentage of margin available, the greeks only affect your margin til expiry. In the end, all that matters is whether you wind up ITM at expiry. The VIX could be 100 and I still won't get assigned if my contract is 2 points out of the money. I understand the margin can really explode and cause you pain, but that's why you don't write to the hilt and you don't just sit on your hands.

If you're writing that stuff, you have to have a plan for almost everything.

traderob · Feb 24, 2004

Thanks again for all this. How many of you who are trading options use optionvue?
I can't see how one could find a good value deal or strategy without software (unless you stick to the same equity like omcate)

IndexTrader · Feb 24, 2004

You pay a fortune for the crap and if you ever try to liquidate they give you peanuts fot it.

If you want to own precious metals then buy gold bullion, not jewelry.

If you want a liquid, investable asset, buy/sell a stock.

Only the jewelers (option sellers) tell you their stuff is good.

ktm · Feb 24, 2004

Quote from roberk:

Thanks again for all this. How many of you who are trading options use optionvue?
I can't see how one could find a good value deal or strategy without software (unless you stick to the same equity like omcate)

There are more strategies, methods and systems out there than you can believe. I don't use any software. I built my own model over 3 years and many thousands of hours. I pretty much exclusively sell SPX futures options.

TempusFugit · Feb 24, 2004

Quote from riskarb:

You don't need to wait for Lindq... your risk is greater than delta and gamma... your vega could KILL you w/o a move in the underlying shares, in fact, you could've experience a fall in the stock and still have lost on the short calls had volty exploded.

If you don't believe it, then take a look at the recent implied volty in SEPR shares. Another example, the many short gamma traders in SPX who blew-up while being SHORT CALLS into the crash.

I find it EXTREMELY hard to believe that you were short 500 equity option calls with your options knowledge. If so, good for ya, but you need to learn a bit.

This isn't a flame, just constructive criticism.

riskarb

Regarding your SPX comment: was that the 1987 crash?

murray t turtle · Feb 24, 2004

Quote from IndexTrader:

You pay a fortune for the organic fertilizer and if you ever try to liquidate they give you peanuts fot it.

If you want to own precious metals then buy gold bullion, not jewelry.

If you want a liquid, investable asset, buy/sell a stock.

Only the jewelers (option sellers) tell you their stuff is good.

%%%%%

I changed one word in your quote- ''organic fertilizer''
& another business key follows.

Shop around long , real long,enough so you get your fertilizer dirt cheap;
cant think of any market worse to daytrade than options.

Good points in this forum, including the Maverick insurance company;
note most insurance companys tends to be more prosperous than the '' clients'' Like large deductibles, generally...

Another advantage for the seller is the noise level of even the most liquid index call & puts in a bull market.

Even though the limited risk can favor the buyer temporarily;
even the limited risk factor for the average buyer is inferior to the average seller's skills.

Leverage magnifies mistakes;
notice 1,000 shares[ seems, but not really ] to be much larger than 10 contracts.

The leverage nature of options, even though its wisely limited;
and when one cuts a loss the loss is leveraged.

omcate · Feb 24, 2004

Quote from ertrader1:
I think the most dangerous things to an option trader is themselves.

Quote from ktm:
I would go further that the most dangerous thing is a lack of discipline among those who discover options.

Agree. If one likes to start a successful business, he/she needs to know what he/she is doing, and have a game plan. Trading options is no exception.

One of my friends has been investing in stocks for decades. He discovered options in 1990. When IBM began to crash in 1991, he started to buy IBM Calls. He continued to do so for two years, and lost over $1,000,000. Although his total asset value was far above 20 million, it still hurt. He never touches IBM stock or options thereafter.

Is a Porsche, which can accelerate from standstill to 60 mph within 30 seconds, a good car ? To a teenager with a driver permit and three hours of driving experience, it definitely isn't.

:eek: