Too good to be true?

F

frostengine

Would you trade a position that had the following characteristics at expiry in 2 weeks:
1. Unchanged +$36
2. -10% from current price -$97 (happens to be max loss on trade)
3. +10% from current price +$213

Seems a market can only go in 1 of 3 ways. Stay the same (we make 1/3 of at capital risk). Goes up, at a 10% up move we get a 2x return on risk. Or goes down..

We make money in 2 of the 3 directions and our gain for an equidistant move is 2x the risk. Thoughts?
 
You have to apply probabilities to each of the 3 scenarios. It obviously isn't 33% across the board. Then, you will have an expected value. If it is positive and definite, take out a 2nd mortgage and keep repeating the trade.
 
The prices mean very little. The options market is pretty efficient, and there's always the other side of the trade. So in your little breakdown of prices there, the probability of it going down is going to be far greater than the probability of it going up. That's why it's priced the way it is.

Simply put, don't trade options based on price. It will never make any sense to you, and you'll always think you see opportunities that actually aren't there.

Just trade the probabilities and the greeks, and forget the price. If you do this, you'll start to see why things are priced the way they are, and maybe you'll start seeing real opportunities to trade the volatility with a real edge, rather than fake opportunities based on prices.
 
frostengine said:
Would you trade a position that had the following characteristics at expiry in 2 weeks:
1. Unchanged +$36
2. -10% from current price -$97 (happens to be max loss on trade)
3. +10% from current price +$213

Seems a market can only go in 1 of 3 ways. Stay the same (we make 1/3 of at capital risk). Goes up, at a 10% up move we get a 2x return on risk. Or goes down..

We make money in 2 of the 3 directions and our gain for an equidistant move is 2x the risk. Thoughts?
More...

What is the ticket got this trade ? equity ? index ?
 
Without knowing the exact structure you are proposing it's difficult to say what you are missing. So my answer would be that the structure can't exist or you are missing a VERY significant outcome.
 
VIXTrader said:
The prices mean very little. The options market is pretty efficient, and there's always the other side of the trade. So in your little breakdown of prices there, the probability of it going down is going to be far greater than the probability of it going up. That's why it's priced the way it is.

Simply put, don't trade options based on price. It will never make any sense to you, and you'll always think you see opportunities that actually aren't there.

Just trade the probabilities and the greeks, and forget the price. If you do this, you'll start to see why things are priced the way they are, and maybe you'll start seeing real opportunities to trade the volatility with a real edge, rather than fake opportunities based on prices.
More...
Where can one go to learn to trade this way? Is there a comprehensive course available just for trading the probabilities and the greeks?
 
frostengine said:
Would you trade a position that had the following characteristics at expiry in 2 weeks:
1. Unchanged +$36
2. -10% from current price -$97 (happens to be max loss on trade)
3. +10% from current price +$213

Seems a market can only go in 1 of 3 ways. Stay the same (we make 1/3 of at capital risk). Goes up, at a 10% up move we get a 2x return on risk. Or goes down..

We make money in 2 of the 3 directions and our gain for an equidistant move is 2x the risk. Thoughts?
More...

Ach, laddies.

+/- 10% with 2 weeks to expiry? What's missing is the range in between. The max. loss could be a constant from -1 pt. or - 1% or whatever. Whereas the profit is much lower over a range.

I'm sure that there are many structures that could accomplish this. I looked at SPY (SPY = 208) option chain 2 weeks to go (12/20) and found this. 206/207 call credit spread for +.81 and +4 211/212 bull call spreads @ 4x.15=.60 debit.

At expiry, the loss is a constant -79 blow 206. Between 207-211 the profit is +21. Above 212, the profit is +421. Call premium is skewed by the div. so you'd have to watch that.

I'm sure that there are simpler structures that could accomplish the P/L and given more time and/or IV there'd be many more.
 
MerchantPrince said:
Where can one go to learn to trade this way? Is there a comprehensive course available just for trading the probabilities and the greeks?
More...

Just read an options book. A lot of people recommend "Option Trading" by Sinclair. There is also Sheldon Natenberg. A classic with a recent re-write.
 
Ach, donnap. Bad example. The div's going to wreak havoc on that trade, except at max. loss. I gotta go out now, but could post a better example this evening. Hopefully, though, you get the idea.
 
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