Options: First Paper Trade

ondafringe said:
wouldn't you spend most of your time just waiting and not trading?
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Something I have learned is this...most successful traders have a handful of setups they are extremely good at...like 3,4...maybe 5. But they are extremely good at those specific setups...it is part of their personal edge that they have developed. They wait and wait and wait until the setup presents itself, then pounce like a tiger knowing the odds are in their favor. And they do this same thing over and over and over getting better and better. The turtles talked about how the vast majority of their time with Dennis was spent reading magazines and playing ping pong waiting for a breakout signal...trend trading is probably not for you lol.

Patience is key. If you are one of those that needs to be active all of the time then consider shorter time frames if you haven't already.
 
zghorner said:
I don't have much wisdom to share...hence why I gave up on options and moved to futures.

But i don't see how anyone can argue against the importance of DTE when putting on a trade. For a simple example...would it be better to sell premium on a LEAP...or a contract with 45 DTE if the goal is simply to collect premium?

Which is the better value to the buyer? Premium/dte = price per day. Would you, as the seller not wish to structure the trade to best favor you and sell a more expensive (per day) contract? Giving the buyer a year or two for some multi sigma move to occur really just sounds like a bad idea when you are short a convex instrument. Also, As mentioned before...theta increases at an exponential rate, with decay really ramping up at around the 45 dte mark...how is this not advantageous to the seller?

IMO vol is more important when it comes to options...but time must be taken into consideration...with that said, is volatility usually higher or lower on more near dated options? Buy underpriced, sell overpriced...

To be clear, I think selling premium is lame and only used the above as it is a simple example.
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I certainly agree with your assessment. And since you pointed out the theta curve to me earlier, and given that theta decay accelerates <45DTE, it now makes sense why the general recommendation for DTE is 45-60.
 
zghorner said:
Something I have learned is this...most successful traders have a handful of setups they are extremely good at...like 3,4...maybe 5. But they are extremely good at those specific setups...it is part of their personal edge that they have developed. They wait and wait and wait until the setup presents itself, then pounce like a tiger knowing the odds are in their favor. And they do this same thing over and over and over getting better and better. The turtles talked about how the vast majority of their time with Dennis was spent reading magazines and playing ping pong waiting for a breakout signal...trend trading is probably not for you lol.

Patience is key. If you are one of those that needs to be active all of the time then consider shorter time frames if you haven't already.
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Oh, yeah. I understand the need for patience in this game. I've learned that trading MES. But if IV of 194 is an anomaly, rather than the norm (and I have no idea if it is), how many times could that show up in a year? Now, if it isn't an anomaly, and it happens, say, monthly, then I might could understand waiting around for it.
 
ondafringe said:
Well, based on that, with extremely high IV, I guess it is possible. But wouldn't an IV of 194 be an outlier?
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Such high IVs are very normal in the biotech and pharma sector (when waiting for FDA approval of their new medical drug products etc).
And if you were only willing to trade those very high, outlier IVs, wouldn't you spend most of your time just waiting and not trading? Doesn't make sense to me, unless you planned on going all-in on that one trade, which is not something I would do.
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Yes, I'm trading such highIVs, but I'm doing exactly the opposite: doing many of such trades using different tickers, and binding (investing) only a minimal money amount in the range of $125 to $250 with each trade and then also using many different tickers. Ie. doing diversification b/c such highIV trades are obviously dangerous. OTOH when traded as spread then one can reduce the risk significantly and also substantially.
No, I'm not constantly looking at them. It's a very normal trade, I'm not doing daytrading or scalping, I'm quietly just waiting till my profit target gets hit and then it gets closed automatically b/c for each open position I already have such close orders opened.

And: above I said I'm not doing daytrading, but that soon will change when my auto-trading program is finished that is still in development; will take about 2 months or so. Then I'll do daytrading with options :) Sounds crazy, but I'll try it out :)
FYI: I'm a relatively newbie in options trading. Just trying to find my own "edge". :D
Just thinking out loud. I don't know, I haven't even made a real trade yet. lol
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Yes, not easy for someone in your position, b/c of such an information overload. But you have to go thru it :)

But if the general recommendation is to look for a credit >= 1/3 of the spread width, that sounds to me like, for the most part, risk:reward on credit spreads is almost always upside-down.
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I haven't studied that yet, but I usually believe only what I myself can confirm... :)
 
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ondafringe said:
Oh, yeah. I understand the need for patience in this game. I've learned that trading MES. But if IV of 194 is an anomaly, rather than the norm (and I have no idea if it is), how many times could that show up in a year? Now, if it isn't an anomaly, and it happens, say, monthly, then I might could understand waiting around for it.
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Yea I know what you mean. Frequency must be taken into consideration for the very reason you stated. Some trade running a 100 day breakout signal with a 20% SL and do well...have to find something that fits your personality.

Finding vol anomalies is a good one...but you need to be able to find it in many different tickers. With options you are kind of limited to very large, liquid companies but even still there are plenty for you to scan for your particular edge(s).
 
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I've been digging into theta decay/curve to gain a better understanding. It appears the chart that was posted on page 2 represents an ATM curve.

The credit spread I paper traded was at a 30 delta, so it was OTM. Even though an OTM theta curve is still nonlinear, I don't think it's as pronounced as the ATM curve. And from what I've read, the big theta drop off for OTM is from the 30 delta at inception down to a 15 delta, when it becomes far OTM. After that, theta decay is more gradual (or more linear?).

Since it appears the market is up against some pretty good resistance this week... and since I believed the bulk of theta decay had already occurred in my spread (my spread delta was down around 13/14)... and since I had already captured 60% of my max credit... and since there was still a whole month left until expiry... it seemed prudent to bank that profit. Anyway, that was my logic for buying back the spread yesterday. Time will tell whether that logic was faulty.

I'm just thinking out loud; still trying to put all this together in my head.
 
ondafringe said:
and since I had already captured 60% of my max credit... and since there was still a whole month left until expiry... it seemed prudent to bank that profit. Anyway, that was my logic for buying back the spread yesterday. Time will tell whether that logic was faulty.
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Nope, man, irrelevant what happens after the close. 60% of max is a good number. Just leave this trade behind you (after studying / researching / simulating / testing etc.) and find the next one to trade, IMHO :D

A tip: for your profit, earned in few days, you can compute the annualized profit in percent, ie. by this you can "normalize" each trade result (ie. by using the same basis for all, for easy comparison), as follows:
Code: 
plpct     = ...               (your PLpct that you made in nd days; this is different from your above 60%)
nd        = ...               (the number of days your trade lasted)
np        = 365 / nd          (number of such periods in year)
plpct_ann = 100 * pow(1 + plpct / 100, np) - 100
Example for 15% in 30 days:
plpct = 15 ; nd = 30 ; np = 365 / nd ; plpct_ann = 100 * pow(1 + plpct / 100, np) - 100 ; plpct_ann
447.63 %
 
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