Question about puts

mynd66 · Dec 20, 2008

Good stuff spindr0. Thats what I thought that with leverage you'll make out the best with the far OTM's. But I guess if your timing is off the OTM's are all time value and you'll pay more if you wait too long. Wow learning alot here and its all making more sense now.

I don't know if I should create a new topic for this question but I always wondered... With the stats saying that around 80% of all managed funds cannot beat the S&P500 and there is a slim chance that the ones that do cannot year over year... Why not just be long the SPY and sell far OTM Calls? I'm sure that there will be a few times that you'll get exercised but it seems that you'll probably make up for those rare instances with the sale of the other calls. I'd say out of ten years you should beat the S&P at least 8 times (just a guess). Anyway I have no doubt that this idea has been tried tested and there is a reason why its not so popular. Just wanted to throw it out there.

dagnyt · Dec 20, 2008

Quote from mynd66:

Why not just be long the SPY and sell far OTM Calls?

Covered call writing is a very popular strategy. And it's okay for some traders, but not everyone.

But, what's to be gained by writing very FOTM calls? The premium is so low that it cannot be worthwhile. And every once in a blue moon, you get a huge market advance. You'd sacrifice part of that advance for a measly premium.

If you consider writing covered calls, at least get something for them.

Remember that it's a bullish play with significant downside risk. Writing the call provides a bit of protection, but it's not much when compared with recent market volatility. And when you sell inexpensive calls, there's virtually zero protection.

This strategy limits gains. Over the long term (see BXM, the buy-write index), covered call writing on the S&P 500 (with specific trading rules that are never violated), BXM slightly outperforms a simple buy and hold strategy. But the major advantage is that your portfolio is significantly less volatile over time when covered calls are written.

In very bullish years, this method earns less - and many traders are not willing to accept less at any time, even though this strategy is a winner in the majority of years.

Mark
http://www.typepad.com/account/stats

spindr0 · Dec 21, 2008

Thats what I thought that with leverage you'll make out the best with the far OTM's. But I guess if your timing is off the OTM's are all time value and you'll pay more if you wait too long. Wow learning alot here and its all making more sense now.

Leverage is a double edged sword. If the underlying doesn't cooperate, OTM options will lose more in terms of percent. Going with the previous example,

Suppose XYZ is 100 and XYZ is 98 at expiration

Jan 95p 3.30
Jan 100p 5.50
Jan 105p 8.50
Jan 110p 12.00

If you bot the Jan 95p for 3.30, you'd have a 3.30 loss ( -100 %)

If you bot the Jan 100p for 5.50, you'd have a 3.50 loss ( - 64 %)

If you bot the Jan 105p for 8.50, you'd have a 1.50 loss ( - 18 %)

If you bot the Jan 110p for 12.00, you'd have no gain/loss ( 0 %)

You can run scenarios for any expiration price. Since all time premium is lost by expiration, obviously, OTM's lose the most if the strike isn't reached. How well the each position performs will be determined by how much intrinsic value you pick up, if any. So IOW, your conclusion is correct. Results prior to expiration are a bit tougher to guesstimate. toss in some IV change and now you have a head scratcher that needs an option pricing formula so let's not go there.

spindr0 · Dec 21, 2008

I don't know if I should create a new topic for this question but I always wondered... With the stats saying that around 80% of all managed funds cannot beat the S&P500 and there is a slim chance that the ones that do cannot year over year... Why not just be long the SPY and sell far OTM Calls? I'm sure that there will be a few times that you'll get exercised but it seems that you'll probably make up for those rare instances with the sale of the other calls. I'd say out of ten years you should beat the S&P at least 8 times (just a guess). Anyway I have no doubt that this idea has been tried tested and there is a reason why its not so popular. Just wanted to throw it out there.

LOL. Don't worry about the "new topic" police. No matter what they say, you still get to walk around at home in your underwear (g).

As for your SPY CC writing idea, I'm not too sure that I'd be interested in beating the S&P500 year over year . Given that the SPY is down 40% this year, it would be a Pyrrhic victory to be down only 35%.

mynd66 · Dec 21, 2008

Quote from spindr0:

toss in some IV change and now you have a head scratcher that needs an option pricing formula so let's not go there.

Yea its that IV that got me last time. So is it basically a selling indicator when IV is high and buy when low (in general)?

Well aside from doing what the market does... I don't think anyone that trades for themselves, for a living, does so by doing what the market does... there isn't any option strategy that works blindly on its own right? There always needs to be an educated outlook, timing and appropriate counter action given any outcome. At least in my eyes trading with options gives you an added edge than being long or short the underlying. With trading only the underlying your stops can be tagged at anytime even though your target price was reached eventually. At least utilizing options your max loss can be set and no matter what swings the underlying takes, your in the game till expiration. And even more so waiting till expiration is usually not the best route depending on your strategy of course.

Maybe my last few calls had a lot of luck attributed with them but if not I am finding it a little more reassuring to try and forcast not more than a week. If I am wrong I can exit or alter my position without assuming the max loss. Any thoughts on that last comment?

dagnyt · Dec 21, 2008

Quote from mynd66:

Yea its that IV that got me last time. So is it basically a selling indicator when IV is high and buy when low (in general)?

Many people look at it that way, but you must remember that when IV is high, it's high for a reason. Thus, blindly selling 'high IV' is not a guaranteed road to success.

Many started selling volatility when VIX passed 40. Then sold more when it passed 50. Then it rose to 60, 70 , 80. If not already broke from being short IV too early, did these players sell more and more? I don't know. In retrospect, the winning play was to sell at 80 - but who would know that in advance?

One more point - as high as IV has been, it's really been 'undervalued' because the market has been more volatile than IV predicted it would be. In other words, those who paid for gamma, were rewarded. Those who sold gamma and vega usually lost.

There always needs to be an educated outlook, timing and appropriate counter action given any outcome. At least in my eyes trading with options gives you an added edge than being long or short the underlying.

Yes, options provide alternatives and great hedges and : an edge.

If I am wrong I can exit or alter my position without assuming the max loss. Any thoughts on that last comment?

Options give you more choices, but you can exit any position before it kills you (barring a huge gap).

Mark

murray t turtle · Dec 21, 2008

Quote from mynd66:

I bought the Spy jan 16, 91 Put on tues 16th. It gained .30 after todays drop. I was confused why after looking at the chains for the same expiration why almost all of the OTM puts lost value today after Spy was down almost 2%. I thought that as the price moves closer to the strike, granted its still a few weeks from expiration, that the option should gain in value.

I don't know what the price of the options were during the trading day, I checked them today and looked at all of the closing prices. Don't know if that is a factor. As you can see I am rather new to options but I am learning, reading, and taking some chances. Thanks -Ray

ps, just quick question... can you chart option contracts?

=================
Mynd66-50;
Yes,truth be told, i can & do chart options occasionaly, but i dont know if that helps you.

SPY ,otm calls or puts are NOT very liquid;
compared to say C,MSFT,QQQQQ......................................................
Several reasons for those spy otm s to lose like that;
a] wide bid ask spread, a necessity with options being low volume.Some never split b/ask, so eod data can reflect that.

a50] Lots of SPY put/call options in JAN dont have much/any bids;
could be a problem for a buyer wanting to sell,LOL

b]Used a market order once to exit a qqq option, usually dont;
it worked well, but market order usually is not a good idea/wild prices

c]Simply bad or stale quote, quite common ;
& time decay

Hope this helps, it helped me

mynd66 · Dec 21, 2008

Quote from murray t turtle:
Yes,truth be told, i can & do chart options occasionaly, but i dont know if that helps you.

SPY ,otm calls or puts are NOT very liquid;
compared to say C,MSFT,QQQQQ......................................................
Several reasons for those spy otm s to lose like that;
a] wide bid ask spread, a necessity with options being low volume.Some never split b/ask, so eod data can reflect that.

a50] Lots of SPY put/call options in JAN dont have much/any bids;
could be a problem for a buyer wanting to sell,LOL

b]Used a market order once to exit a qqq option, usually dont;
it worked well, but market order usually is not a good idea/wild prices

c]Simply bad or stale quote, quite common ;
& time decay

Hope this helps, it helped me [/B]

Does charting options give you any kind of edge since most do not? Can there be some sort of arbitrage opportunity by watching the movement of underlying to price that cannot be as obvious as looking at the numbers?

And why would there be less sellers for spy options in jan? Sounds like being a buyer is the right side... if you move with the crowd that is.