Options Noob... 1st 100 trades completed

[Scataphagos]

Buyers of options rarely make money, but I'm extremely thankful they are in the pool!

"Option buyers lose money what, 70% of the time?"... That's the common wisdom. (Probably a lot to that. As previously stated I just completed a 100 option trade test with free recommendations from vendors who want me to pay them significant money for their option picks. Result... 62% losers.) What about "well chosen" option buys? By that I mean those buys when the stock was in a highly favorable position for the move? Say, "at support"*? And if you bought a call ATM or slightly ITM/OTM, not much different risk from buying the stock in the short run.

*If a stock is at/near "daily chart support" and the chart reasonably could still be in uptrend or sideways chop, it's reasonable to expect the stock to bounce... SOON! Like immediately or shortly thereafter.... and for enough to make the play worthwhile... like 5%, 10% or so. In my mind, that's one of the the better kinds of trade option players should be looking for. IOW... if you can find a good place in the chart to buy the stock, you can buy the call at the same place. Of course you could also sell an OTM put with a high probability of success... just for small money.

I think there's probably a difference in success between "all option buys", and "well chosen option buys".

 

[tradelosses]

I don't do options but know that there a pros that are trading options by buying (volatility) only just because everyone out there thinks that selling is the only way to go and it's really crowded out there with everyone i.e. shorting volatility.

While option sellers might make a lot of money, they are also prone to spectacular blow outs. Option selling is like trying to be an insurance company. But most forget that insurance business is a regulated industry with mandatory reserves taken from profits each year to cover big losses that will come one day. And you can be assured that they WILL come.

But the skew on SPX is pretty steep, so there is a lot of fear priced into the OTM option market even though ATM is low. A high skew makes selling more profitable. Big blow-outs are rare if you do it correctly (hint: very long dated is almost always better). Selling 30-50 day option like the tastytrade fools do will kill you . but doing it 300+ day is much better

 

[punisher]

my point was that the blow outs while rare they are always spectacular.

the problem is that when shit hits the fan things don't go smooth. You may get the market open a few % lower because there are no bids and suddenly everyone is rushing for the fire exit. Before you know it all correlations don't work the way you think they would and you are left with your pants down. And you have a big blow out as a result.

I know nothing about options trading so I might be talking out of my ass.

 

[tradelosses]

It all depends how you set up the trade. There are many ways of selling premium where you cannot blow up

 

[punisher]

you mean you are safe from flash crashes, huge unexpected gaps due to geopolitical events or market distress? Maybe, but then again, if the risk is small so must be the pay-off.

 

[beerntrading]

my point was that the blow outs while rare they are always spectacular.

the problem is that when shit hits the fan things don't go smooth. You may get the market open a few % lower because there are no bids and suddenly everyone is rushing for the fire exit. Before you know it all correlations don't work the way you think they would and you are left with your pants down. And you have a big blow out as a result.

I know nothing about options trading so I might be talking out of my ass.

I protect against this by using credit spreads for my core positions and then buying debit spreads to hedge.

And I use stops and exit opportunistically. Absolute maximum risk is 100% of profile, but probable maximum is nearer 40%...in a hit-the-fan systemic event.

 

[punisher]

Since I know little about options I'm not going to pretend that I know what you are talking about. But in regards to your "probable maximum risk" let me remind you just one word: LTCM.

If you're playing it super safe, then what is the potential for profit? Somehow selling options reminds me of the expression of "picking pennies on the railroad tracks in front of the freight train".

Again, if option selling is similar to running insurance company, then tell me why there are obligatory reserves for the latter?

I'm not trying to say one should not write options. All I'm saying is that one needs to understand truly unlimited risk involved. When shit hits the fan it is always much crazier than everyone thought it would be. That's the nature of the beast. And we might be nearing a point when volatility explodes again catching most off guard.

 

[beerntrading]

Since I know little about options I'm not going to pretend that I know what you are talking about. But in regards to your "probable maximum risk" let me remind you just one word: LTCM.

If you're playing it super safe, then what is the potential for profit? Somehow selling options reminds me of the expression of "picking pennies on the railroad tracks in front of the freight train".

Again, if option selling is similar to running insurance company, then tell me why there are obligatory reserves for the latter?

I'm not trying to say one should not write options. All I'm saying is that one needs to understand truly unlimited risk involved. When shit hits the fan it is always much crazier than everyone thought it would be. That's the nature of the beast. And we might be nearing a point when volatility explodes again catching most off guard.

Well, risk isn't unlimited if you limit it. PML is indeed an insurance term.

In an given spread, my maximum loss is the spread minus premium plus commissions...100%. But because I cap the off with exits for intra-day moves, I catch a good portion of these somewhere around 20-30% (in line with profit target). And I diversify across sectors so portfolio isn't subject too a single news item unless systemic.

I then hedge with SPX / SPY, or a stock sensitive to a given sector (I.e. If I had AAPL and MU positions, I might hedge that with IBM or MSFT). The hedges tend to have a maximum payout of 5:1 or 4:1. I use around 30% of max profits to pay for hedges.

So total exposure is credit net spreads plus debit premiums...100% of my about baseline (which is a sizing tool to keep risk level across time). But that's incredibly unlikely because it means my core positions have to make a big move against my hedges...and do that on a day gap or I'll get out on stops.

Essentially each position I have is reinsured, and highly correlated positions with high payoffs protect against a specific disaster.

That means I'm "reserved" over 100%. This contrasts with insurance companies that are reserved somewhere between 0.1% and maybe 2% of absolute risk. Some risk retention groups may approach 10% reserves on a highly specific undiversified book. Obviously a very different risk profile.

As for profit potential, about 30% is maximum core profit, but in a highly unlikely uncorrelated move, the max is better than 90%. The top of the bell curve is somewhere around 8% per week.

 

[Scataphagos]

No one will look after your money better than you. Remember Bernie Madoff?

Everybody's money needs "looking after". Somebody needs to do it... preferably the investor himself. But most people don't/can't, so there is a market for those to "look out for them".... a significant part of my financial services career. I always told people, "if you can't do it yourself, you need to hire somebody to do it for you". Problem... who is competent/honest help?

 

[Option_Attack]

This is, I know, a small sample size. And just "anecdotal," but YTD my long options-only stats of swing trading (a few days to a couple weeks) shows: 43 trades, 67% wins, avg win 53%, avg loss 45%, PF 2.75. These are real trades, but usually just 1, 2, or 3 contracts. I want some more data and "house money" before I ramp things up.

This is mostly ETFs like SPY, QQQ, FAZ, XLF, QID, SPXU, GLD, TNA and is about evenly split between calls and puts. I usually buy next month and ATM or a little bit OTM.

Trading long options can be done successfully, just like stock trading. Of course method and experience rules the day.

Good trading to all.