A lot of fun when you are right and a lot more pain when you are wrong, speaking from painful experience.
Options Noob... 1st 100 trades completed
- Thread starter Scataphagos
- Start date
Nope. A stop loss does not change the expectation of pain, it simply spreads it across time (so, instead of one large loss you will get a few smaller ones) plus due to mean reversion and transaction costs it makes the pain worse. Think of it this way - if stop loss orders really worked, you would not need options, you would just buy something and hold it with a stop loss
Spreading is a different animal all together - it is best to think of them as two separate trades with separate expectations. So if you sell a 100 put and buy 80 put to hedge, there is good chance that you bought an option that has a worse statistical expectation.
You can't change the expectation of pain, however, it is possible that your personal pain tolerance is different from the other market players. For example, very few PMs could survive a down year while it's no big deal for a retail investor like yourself.
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Definitely not. You should be prepared to stop on certain intraday moves, but a 1% gap in the underlying on the open may blow miles past your stop (plus you'll get hit with early session illiquidity). Credit spreads limit the damage on these.
Thanks for the coaching, I think you are saying there is no free lunch.Nope. A stop loss does not change the expectation of pain, it simply spreads it across time (so, instead of one large loss you will get a few smaller ones) plus due to mean reversion and transaction costs it makes the pain worse. Think of it this way - if stop loss orders really worked, you would not need options, you would just buy something and hold it with a stop loss
Spreading is a different animal all together - it is best to think of them as two separate trades with separate expectations. So if you sell a 100 put and buy 80 put to hedge, there is good chance that you bought an option that has a worse statistical expectation.
You can't change the expectation of pain, however, it is possible that your personal pain tolerance is different from the other market players. For example, very few PMs could survive a down year while it's no big deal for a retail investor like yourself.
Yeah, there are no free lunches but there are cheap lunchesThanks for the coaching, I think you are saying there is no free lunch.
Hi
One thing that is sure about options is that the extrinsic value will be worthless at the end.
So if you sell it for 1 you know one day will be 0. It is better to sell than buy.
But everybody that makes multyleg strategies is at the same time buyer and seller. And almost all the strategiescan be made of both ways being credit strategy or debit strategies, with the same risk profile. I prefer credit strategies because they pay me more extrinsic value than I pay.
The important thing it is to believe in the risk profile you are playing, and most important is to be right. For me it is easier to be right with credit strategies with b.e. very far of the price. Buying options, in my opinion, is like gambling or investing , directional bets, and you have to be right about the direction of the price, so the important thing isn't the option but the
method you have to choose the direction.
The convexity of the long options is very interesting. I have to admit that never though that way.If I go long convexity and hedge with no convexity, stock, I am winning more than what lose. is this correct? A lot to think about this. But a priori it seems a very subtle way to win, and probably only for authentic pros. with lots of capital.
One thing that is sure about options is that the extrinsic value will be worthless at the end.
So if you sell it for 1 you know one day will be 0. It is better to sell than buy.
But everybody that makes multyleg strategies is at the same time buyer and seller. And almost all the strategiescan be made of both ways being credit strategy or debit strategies, with the same risk profile. I prefer credit strategies because they pay me more extrinsic value than I pay.
The important thing it is to believe in the risk profile you are playing, and most important is to be right. For me it is easier to be right with credit strategies with b.e. very far of the price. Buying options, in my opinion, is like gambling or investing , directional bets, and you have to be right about the direction of the price, so the important thing isn't the option but the
method you have to choose the direction.
The convexity of the long options is very interesting. I have to admit that never though that way.If I go long convexity and hedge with no convexity, stock, I am winning more than what lose. is this correct? A lot to think about this. But a priori it seems a very subtle way to win, and probably only for authentic pros. with lots of capital.
Hi
thanks.
Please explain your idea a little more. And what are you looking, the volume, the iv, the OI.
thanks.
Open interest and volume...and the imbalance favoring the call side.
You assume market makers are net short on the OI, and need to cover them at expiry. the best is the second week of a month and Feb/May/Aug/Nov/Dec when you have a weekly, expiring before a monthly, expiring before a quarterly/annual. The most important is the weekly expiring, because that's what they'll have to hedge almost one-to-one. This means there's going to be a TON of buying pressure below the strike, and selling pressure above.
Here's what the market makers are doing: https://optionstradingresearch.com/hedge-ratio/
I look for large imbalances on the call side (puts don't exert as much pressure because there's a hard limit to short losses, and it's often not a disadvantage to accept delivery if they're assigned). And this needs to be a large percentage of the average daily volume so the hedge activity will move the market. You'll see the spreads widen towards the end of the expiry day, and the volume on the underlying will start to spike as the market makers balance their books. I don't have a hard rule for what kind of volume, but I usually wouldn't take note if the call OI isn't at least 2.5x the put, AND the call OI represents shares greater than average daily volume.
FB did exactly this on 7/14--the stock didn't break a .05 range during the afternoon. Here's my live call on this--missed a 2-cent closing range calling 2 or 3 hours out by a penny: https://www.elitetrader.com/et/threads/the-super-terrific-happy-hour.309621/page-67