Simple option trading question...

[El OchoCinco]

I understand your theory but this makes the assumption about the magnitude of the move.
Well chosen for me is the assumption that you will guess correctly each instance the magnitude of the move. I just think OTM is appropriate only when you expect a significant move in the underlying and feel strongly about it, then OTM presents the best opportunity assuming you choose a strike that encompasses this move.

 

[El OchoCinco]

This is an interesting point to discuss and we can engage on it if you desire so.

I advance the thesis that playing long "gamma" with long dated options is inefficient, as (for me at least) the only reason I would take extra risks in options is to enjoy optionality. And because long date options have little to no optionality at inception (gamma is basically zero) then I don't see the point of using them at all. It kind of defeats the point of doing gamma trading when gamma approaches zero.

That being said, long date options are less risky than the underlying, but that doesn't mean that they are efficient vehicles at least for gamma trading.

Your point assumes that it is all about the gamma. If I have a .9 delta, the gamma is meaningless to me. Gamma is a fucntion of moneyness where ATM options have the greatest gamma. Long term options have greater delta than short-term options at the same strike. Optionality really does not have any meaning to me so you might have to define what you mean by it. It is wrong to say options have no gamma if they are long term. Long term options have higher deltas than shorter-term options, the gamma is not as relevant.

My point always is the general statements are more opinion than fact to say you do not see the point in using them. If you expect a stock to make a move over the next 5 to 6 months, why would you buy a 2 month option? Your trading bias is clouding your view/utility of options of longer term expirations.

A LEAP option with almost 2 years to expiration with a delta of .9 has less risk than owning the stock outright and with .9 delta, gamma is irrelevant. Delta >gamma

 

[blueplayer]

I understand your theory but this makes the assumption about the magnitude of the move.
Well chosen for me is the assumption that you will guess correctly each instance the magnitude of the move. I just think OTM is appropriate only when you expect a significant move in the underlying and feel strongly about it, then OTM presents the best opportunity assuming you choose a strike that encompasses this move.

Of course we agree on this point, my original post in this thread specified that you have to have a thesis first, and that thesis implies: Magnitude of the move, time frame and stopping point. There is no magic "system" or "strategy" all boil downs to having a thesis first and then looking for the best way to execute it.

 

[El OchoCinco]

Below is TSLA APR 2016 and SEP 2016 Calls and Greeks.

$265 strike is OTM and SEP $265 Call has delta of .38 versus .18 for April $265 Call. Gamma for both rounded is about the same.

ATM Calls for both show .56 for APRIL $230 Calls and .58 for SEP $230 Calls. Gamma if taken out to 3 decimal spots will be extremely similar.

But if you expect TSLA to rebound this price level and get back higher in the next 3 to 4 months then the APRIL options are not as attractive.

 

[El OchoCinco]

But I think we are simply agreeing on the same general idea so thank you for the discussion!

 

[blueplayer]

Your point assumes that it is all about the gamma. If I have a .9 delta, the gamma is meaningless to me. Gamma is a fucntion of moneyness where ATM options have the greatest gamma. Long term options have greater delta than short-term options at the same strike. Optionality really does not have any meaning to me so you might have to define what you mean by it. It is wrong to say options have no gamma if they are long term. Long term options have higher deltas than shorter-term options, the gamma is not as relevant.

My point always is the general statements are more opinion than fact to say you do not see the point in using them. If you expect a stock to make a move over the next 5 to 6 months, why would you buy a 2 month option? Your trading bias is clouding your view/utility of options of longer term expirations.

A LEAP option with almost 2 years to expiration with a delta of .9 has less risk than owning the stock outright and with .9 delta, gamma is irrelevant. Delta >gamma

You are correct when you said that for me is all about gamma, after all gamma is what makes an option an option. Of course you are free to structure a trade any way you want, but that doesn't mean you are making an efficient use of the instrument chosen to implement the trade.

Optionality refers to the non-linear payout of an option. The higher the gamma of an option the higher the optionality it has and that is where options are superior to pretty much anything else out there. LEAPs have very little gamma on them (basically non existent) so the PnL profile is basically linear. There is nothing wrong with a linear PnL, but you are actually giving away the only advantage that options have. I have always puzzled at what use a LEAPS option can actually have for a trader.

I have no issue with using options only for pure leverage, but if I have the chance I prefer to structure trades that take advantage of the non-linear nature of their PnL.

 

[blueplayer]

Below is TSLA APR 2016 and SEP 2016 Calls and Greeks.

$265 strike is OTM and SEP $265 Call has delta of .38 versus .18 for April $265 Call. Gamma for both rounded is about the same.

ATM Calls for both show .56 for APRIL $230 Calls and .58 for SEP $230 Calls. Gamma if taken out to 3 decimal spots will be extremely similar.

But if you expect TSLA to rebound this price level and get back higher in the next 3 to 4 months then the APRIL options are not as attractive.



View attachment 163101

Yes I agree, for a move in the 3 to 4 month time frame it is better to play the Sep options.

 

[El OchoCinco]

The PNL profile for any option is linear if viewed to expiration. The gearing you talk about is only true with respect to an OTM option moving ATM money prior to expiration but has nothing to do with time? SEP options have gamma as do April and June options. You imply that only front month options have gamma which is incorrect.

 

[blueplayer]

The PNL profile for any option is linear if viewed to expiration. The gearing you talk about is only true with respect to an OTM option moving ATM money prior to expiration but has nothing to do with time? SEP options have gamma as do April and June options. You imply that only front month options have gamma which is incorrect.

I see where we are diverging here, of course gamma and all the greeks in fact, are irrelevant once the option expires. So if you are trading options with a view to let them expire then I agree with you.

My whole point during this discussion is trading with a view of closing the trade way before expiration, therefore that is why I want a non-linear PnL, which will be more pronounced when using options with shorter expirations (as gamma decreases with time to expiration).

 

[El OchoCinco]

I am not focused on expiration, just making the point that only at expiration is the PnL linear, all times prior to you can show itis non-linear with respect to gamma gearing no matter the expiration month. Gamma is certainly relatively lower in front months than in back months but the difference is offset by higher deltas and also quite small. I think you locked into this idea about higher gamma in front month but it is offset by higher deltas in later months. So the distinction is relatively insignificant.

Also if your time frame is only 2 to 3 weeks than the discussion is clouded by your time bias.

April ATM option with delta .56 with gamma .01 versus Sept options with delta of .58 and gamma of .008. They both with have gearing.

MOST IMPORTANT, the gearing is only true OTM to ATM, gamma is an upside U curve peaking ATM.

Using Sept options also has non-linear PnL according to your criteria. You keep saying over and over that you non-linear PnL but you have not disproved that 3, 4 and 5 month options have similar gearing.

I have to respectively disagree with your assertion that only the front month options have non-linear PnL. I have showed you with a few examples this is untrue already so I think we can go no further.