Quick Please help me on my first options trade

chewbacca · Jul 28, 2006

I just exited the position, massive short covering in the S&P. I still think XLE won't make new highs for the year, but may very well take out july highs in august - so i'll try again then. Once the fed pauses then we get a huge sellof. Until then we're going to continue to get 'fed is done' rallys like we've been getting for over a year now. Once the fed finally does signal the pause it'll be a case of buy the rumor and sell the news.
Besides, today's gdp number was probably the worse number we could have gotten. Lower than expected economic growth + higher than expected inflation = stagflation.

Eliot Hosewater · Jul 31, 2006

Question about the XLE 55 calendar:

What to do if the September put gets cheap enough to buy back (like if it get to be .10), but the October options aren't out yet? Should I go ahead and buy it back and wait till the Octobers come out to sell a new one?

volatilitypimp · Jul 31, 2006

Quote from Eliot Hosewater:

Question about the XLE 55 calendar:

What to do if the September put gets cheap enough to buy back (like if it get to be .10), but the October options aren't out yet? Should I go ahead and buy it back and wait till the Octobers come out to sell a new one?

Fortunately for you the XLE is in the pilot program for quarterly expiry options and they have Sept. listed which will expire the 5th friday of the month. This should give you additional 'options' to work your trade.

EDIT: If you're bearish, buy back those auggie's and hold the back months for delta gains. Once spot reaches 'neutrality' ~55, sell the quarterlies or by that time the octs should be availavble. my 2 cents.

kiwi_trader · Jul 31, 2006

Chewy,

Thanks for creating an interesting and informative options thread.

FWIW ... my first options trade was every bit as dumb as yours and less successful

Eliot Hosewater · Jul 31, 2006

Quote from volatilitypimp:

Fortunately for you the XLE is in the pilot program for quarterly expiry options and they have Sept. listed which will expire the 5th friday of the month. This should give you additional 'options' to work your trade.

Yeah, I saw those.

RichardRimes · Jul 31, 2006

Quote from Eliot Hosewater:

Question about the XLE 55 calendar:

What to do if the September put gets cheap enough to buy back (like if it get to be .10), but the October options aren't out yet? Should I go ahead and buy it back and wait till the Octobers come out to sell a new one?

If you have a good reason to buy back sure...if you don't have a good reason to buy back...no. I can't think of a good reason to buy them back. It cost to buy them back plus comission. The big thing with calendars is patience. I look at it every day because its there...but have no plans to do any trading on it until mid/early sept.

edit: OCT will come out after Aug exp..THATs when you'll look to roll

Eliot Hosewater · Jul 31, 2006

Quote from RichardRimes:

If you have a good reason to buy back sure...if you don't have a good reason to buy back...no. I can't think of a good reason to buy them back. It cost to buy them back plus comission. The big thing with calendars is patience. I look at it every day because its there...but have no plans to do any trading on it until mid/early sept.

edit: OCT will come out after Aug exp..THATs when you'll look to roll

The good reason to buy back is if it falls to about .10.

I went to a TOS/OptionPlanet seminar yesterday. The instructor, Don Kaufman, said one of the guidelines for buying back is if the price falls to 1/10 of the strike increment. In this case that would be 10 cents. If you give it a chance it might creep up so it's more expensive to buy back later. He also said to always roll at least 4-10 days prior to expiration.

Edit: Maybe I don't have to worry about it getting that low with this much time left. The Aug 53 is still 15 cents.

taowave · Aug 1, 2006

Quote from RichardRimes:

If you have a good reason to buy back sure...if you don't have a good reason to buy back...no. I can't think of a good reason to buy them back. It cost to buy them back plus comission. The big thing with calendars is patience. I look at it every day because its there...but have no plans to do any trading on it until mid/early sept.

edit: OCT will come out after Aug exp..THATs when you'll look to roll

Rich,as I am sure you know,when you are long a calender spread you are generally,

Long Vega
Short Gamma
Short theta
Apx Delta flat
And have risk only up to the debit of the spread

As i said generally,i am assuming the strikes of both options are close to ATM,and the spread is not a diaganol spread...

Essentially,when you have a long time spread you are running a short time decay trade with limited risk..and profit...

If the short theta aspect of the trade is what appeals to a trader than one should know when the "greeks" start to change and the trade becomes long theta and you start to bleed..

You should also know what the maximum trade potential is from the day you put the trade on..Yo need to simulate on day 1,what the value of the trade would be on the near term option expiration day assuming the stock is at strike.That is the max you will make .You already know what you can lose,so its very easy to decide what your risk reward ratio is...You may want to drop vol a couple of handles to be conservative.

With all this said,you should always look at the calender and see what percent it is trading at vs your "max" value.If its trading at 80% of max value,you are risking quite a bit to make very little.

In the trade mentioned above where the near term option is trading at .15,I would certainly look to see if the greeks had flipped and you are now bleeding time decay.If you are,one should really think about keeping the position on or rolling,or even taking a shot with a stop...But in NO WAY should you ever let commisions influence your decision,especially at 1 per contract...That is a cardinal sin of trading

With that said,when one option get

RichardRimes · Aug 1, 2006

Quote from Eliot Hosewater:

The good reason to buy back is if it falls to about .10.

I went to a TOS/OptionPlanet seminar yesterday. The instructor, Don Kaufman, said one of the guidelines for buying back is if the price falls to 1/10 of the strike increment. In this case that would be 10 cents. If you give it a chance it might creep up so it's more expensive to buy back later. He also said to always roll at least 4-10 days prior to expiration.

Edit: Maybe I don't have to worry about it getting that low with this much time left. The Aug 53 is still 15 cents.

I really like Don's beyond the basics...and buying back at .10 is certainly a reason IF there is time for the stock to move and you can sell again the same strike for more. I certainly do roll before expiration often. And Tao I agree commission isn't a reason however why do it just to do it? Again I (personally) need a reason. Also the max value of your calendar can never be known if you... say buy back and sell the same short strike or convert to a diagonal. I generally only worry about loss...the gain takes care of itself.

taowave · Aug 1, 2006

Quote from RichardRimes:

I really like Don's beyond the basics...and buying back at .10 is certainly a reason IF there is time for the stock to move and you can sell again the same strike for more. I certainly do roll before expiration often. And Tao I agree commission isn't a reason however why do it just to do it? Again I (personally) need a reason. Also the max value of your calendar can never be known if you... say buy back and sell the same short strike or convert to a diagonal. I generally only worry about loss...the gain takes care of itself.

Agreed,But you should know the theoretical max...and it doesnt matter if its you turn it into a diagonol or you roll..That is a new bet....what is great about calenders is you can really apx your risk reward,with a little slippage for vega...

BTW,i will guarantee you that if you roll when you have a gain,you intuitively looked at you risk reward and realise that you are maxed out