Options and leverage : Question

[uninvited_guest]

Quote from riskarb:

Yes, I absolutely disagree. I don't define risk via a delta figure.

Buying February options, in this case puts, with a strike of 10% below current price of the index they follow I would say is very risky.

The bid/ask spread on the Feb 97 DIA puts is $0.15/$0.25. You are down 40% plus commisions when you place your order.

 

[riskarb]

Quote from uninvited_guest:

Buying February options, in this case puts, with a strike of 10% below current price of the index they follow I would say is very risky.

The bid/ask spread on the Feb 97 DIA puts is $0.15/$0.25. You are down 40% plus commisions when you place your order.

That's a ridiculous argument; now you're arguing market-variance? At the risk of coming-off as an ass... anyone who defines an option's "riskiness" via an arbitrary-route such as "otm/itm" doesn't know enough theory to offer a sound debate.

Using your logic, which option is more "risky"? :

Both options at 20% volty

XYZ atm call at 12.00
XYZ 2sigma otm call at .50

 

[uninvited_guest]

Quote from riskarb:

That's a ridiculous argument; now you're arguing market-variance? At the risk of coming-off as an ass... anyone who defines an option's "riskiness" via an arbitrary-route such as "otm/itm" doesn't know enough theory to offer a sound debate.

Using your logic, which option is more "risky" :

Both options at 20% volty

XYZ atm call at 12.00
XYZ 2sigma otm call at .50

I was going by the original post with my example, February put options with a strike 10% below current level of index. The QQQQ 38 Feb PUTS @ $0.20 and SPY Feb 112.00 PUTS @ $0.25 were mentioned, but DIA puts also recommended later on. I would say very risky.

 

[smilingsynic]

Quote from uninvited_guest:

I was going by the original post with my example, February put options with a strike 10% below current level of index. The QQQQ 38 Feb PUTS @ $0.20 and SPY Feb 112.00 PUTS @ $0.25 were mentioned, but DIA puts also recommended later on. I would say very risky.

OTM index puts are "expensive" in that they have higher IV; OTM index calls are "cheap" in that they have a lower IV. I sometimes sell puts if I am bullish, but rarely sell calls if I am bearish. If you're going to buy gamma, buy cheap; if you're going to sell it, make sure you are getting paid for the risk you take. Selling cheap gamma will work most of the time, and for that reason it is tempting; but when you lose, and you will lose in a sharply bullish market that seems to keep surging (last month and a half), you can lose big, at least in terms of risk/reward.

OTM puts have the advantage of retaining their time value well. Otherwise, they are an expensive form of insurance

 

[riskarb]

OTM puts[itm calls] carry larger thetas as a function of their higher IV. Any "value retention" must come in the form of a rising IV.

 

[uninvited_guest]

Quote from riskarb:

......Any "value retention" must come in the form of a rising IV.

Plus a price decline in the underlining, in the case of the puts. I don't think index options really have a rising IV the way stocks do when it comes to expected news. I think I'm on the right track.

 

[smilingsynic]

Quote from uninvited_guest:

Plus a price decline in the underlining, in the case of the puts. I don't think index options really have a rising IV the way stocks do when it comes to expected news. I think I'm on the right track.

The IV is not high, but deep OTM puts trade at a much higher IV than do ATM puts (negative skew). Optionetics has a table of IV for ES futures options, which I trade. I find the table helpful.

To take advantage of the skew I have been known to sell 2 atm puts (or 3 otm) per contract sold (close to delta neutral--a straddle). I wouldn't do that now, since I have no strong opinion on future vol. I am not an indiscriminate prem seller who feels I have to do sell every month.

I sell only if, as Bob Barker (still around??) would say, the price is right.

 

[uninvited_guest]

Quote from smilingsynic:

....The IV is not high, but deep OTM puts trade at a much higher IV than do ATM puts (negative skew). Optionetics has a table of IV for ES futures options, which I trade. I find the table helpful.......

So deep OTM puts that expire in 2 months are high risk then. Right?

 

[Profitaker]

Quote from riskarb:

Using your logic, which option is more "risky"? :

Both options at 20% volty

XYZ atm call at 12.00
XYZ 2sigma otm call at .50

Defining riskiness as a probability of loss, the 2 sigma OTM is more risky. In terms of expectancy (which I think is what you're alluding to) they are both the same.

 

[Sammy Iyer]

Hi Risk arb

Quote from riskarb:

OTM index calls have the cheapest gammas. As a rule: buy upside gammas[otm], sell downside gammas[atm].

Which is it better to use? calls / puts to employ this strategy of " selling the ATM & buy the OTM "?
Regards
sammy