What am I missing?

[cdcaveman]

Quote from jimmyjazz:

I've been re-reading a couple of my options books, and I see some of the points made on this thread more clearly. Thank you.

I have a specific question about one suggestion from several days ago (a vertical spread): are the arguments against that strategy the same as those against a covered call? Is there something about the "underlying" being a long DITM call instead of the stock which changes the nature of that sold call?

you need to understand the nature of each structure. buying a call.. or buying soft deltas , as Mav put it.. soft because the delta position changes with time.. hard delta means delta one. or the underlying.. there is no advantage to going synthetic long as oppose to long the underlying.. theta is not for or against you. i would recommend reading option market making by baird, maybe some of euans Sinclairs books as well. .

verticals " debit and credit spreads"
horizontals, diagonals.. selling calls , and buying calls in different expiration..
butterfly, a debit and a credit spread joined at the middle strike , call the body..

there is a lingo to all this stuff , and people will use it in discussing it..

heres a good site.. http://www.theoptionsguide.com/synthetic-position.aspx

all these expressions give you ways to express your view on the market.. but your always taking a position in volatility....

if your long the stock, your short volatility by the nature of the relationship between vol and the stock going down..

so if the stock goes up, typically the vols go down.. premium deflats and you can lose on your calls even though you called the direction right...

an options price implies a future distribution of the underlying.. thats what implied volatility is..

 

[jimmyjazz]

Thanks for clarifying, cdcaveman. I'm definitely not all the way there yet. I understand the synthetics -- I always start with "stock equals call minus put" and go from there -- but I have never put together the "long stock is short vol" relationship.

From that, I see that being LONG vol (e.g., a long call) can put me in a precarious position. Ultimately, I suppose this (and theta, etc.) explain why a P/L chart of a position isn't fixed until expiry? At expiry, the whole thing has to be ITM, ATM, or OTM, but in the meantime, gain/loss is more ephemeral?

Comparing a debit call spread on SPY (Oct13 155/171) to just being long the 155 call, for equal delta I reduce vega almost 70% with the spread. Good, right, given that my prediction is a rise in the underlying? My original question about the spread was more in the vein of "picking up pennies in front of a steamroller", but I have quite possibly misunderstood that metaphor in that the spread has limited downside risk where as the covered call does not. (Well, it's limited, but only by "zero".)

 

[sonoma]

Quote from jimmyjazz:

Comparing a debit call spread on SPY (Oct13 155/171) to just being long the 155 call, for equal delta I reduce vega almost 70% with the spread. Good, right, given that my prediction is a rise in the underlying? My original question about the spread was more in the vein of "picking up pennies in front of a steamroller", but I have quite possibly misunderstood that metaphor in that the spread has limited downside risk where as the covered call does not. (Well, it's limited, but only by "zero".)

I'm not sure if this comment is addressing my suggestion of an ATM vertical or not, but here goes. If you have a high rate of predicting direction, then the long ATM vertical is cheap and ROI is high. But don't do a 155/171. Do the 155/157.

 

[jimmyjazz]

Didn't mean to imply that 155/171 was ATM -- 164/165 would be. Looks like the Sep13 164/165 risk:reward is ~ 1.38 (and it's a pretty binary trade). Stretch to Nov13 164/165 and it's ~ 1.22, but I'm not really predicting direction that far out. My average trade is 7 days or so. Probably should stick with the position that expires near that time frame. (As luck would have it, the SepWk1 spread also has a risk ratio of 1.22 or so.)

 

[eagle4x]

I submitted my 1st post yesterday with my question similar to yours - basically what is the best bullish strategy? However, no replies, which I'm somewhat disappointed. My time frame is longer than yours, but the concept is still the same.

Since my post yesterday, I revised the trade and came up with even a better one, and I'll apply it to NEM that your bullish on:

S1 11/13 42C (IV = 41.8%)
B2 01/14 35C (IV = 41.2%)

Total debit/max risk = $355
Max Profit = Unlimited
Delta = 67.55
Gamma = 6.737
Vega = 12.63
Theta = 1.37
100 day SV = 48.21

Since many of the suggestions in the thread was to use a DITM call, I chose the 11/13 23 strike:

Total debit/max risk = $895 (IV - 55.3%)
Max Profit = Unlimited
Delta = 90.73
Gamma = 1.89
Vega = 2.3
Theta = -.53
100 day SV = 48.21

Seems to me the spread would a more optimal trade since the delta is decent and the cost is more than half of the DITM call. Additionally, an advantage of the spread would be the possibility in the future of writing a 12/13 option against the bought 1/14 (if 11/13 is closed) thereby reducing cost basis of the trade. However, I don't know much about the other greeks - would the higher greeks of the spread make the DITM call the better trade even though the cost of the trade is more?

 

[sonoma]

Quote from jimmyjazz:

Didn't mean to imply that 155/171 was ATM -- 164/165 would be. Looks like the Sep13 164/165 risk:reward is ~ 1.38 (and it's a pretty binary trade). Stretch to Nov13 164/165 and it's ~ 1.22, but I'm not really predicting direction that far out. My average trade is 7 days or so. Probably should stick with the position that expires near that time frame. (As luck would have it, the SepWk1 spread also has a risk ratio of 1.22 or so.)

If you can predict consistently in your timeframe that the underlying will move to a certain price point or higher (assuming calls), then the ATM vertical is a good ROI trade. I'm assuming that you want to be options-only. If you're trying to scalp, then a vertical is not the optimal choice.

 

[Wait4proof]

Quote from sonoma:

If you have a high rate of predicting direction, then the long ATM vertical is cheap and ROI is high.

Quote from sonoma:

If you can predict consistently in your timeframe that the underlying will move to a certain price point or higher (assuming calls), then the ATM vertical is a good ROI trade.

If you can predict direction, then just buy ATM Calls or Puts - forget about spreads.

 

[sonoma]

Quote from Look4aSine:

If you can predict direction, then just buy ATM Calls or Puts - forget about spreads.

Nope. Plenty of evidence to the contrary. But if it works for you, have at it.

 

[Wait4proof]

Quote from sonoma:

Nope. Plenty of evidence to the contrary. But if it works for you, have at it.

Your confidence has piqued my curiosity to ask you, what is your definition of "Good ROI"? I know that this would be hard for anyone to answer without using an example scenerio, so let's just use a daytrade as an example. Pick whatever underlying stock you want - what ROI would you claim to be able to make with a Vertical for a typical stock movement that occurs on a day the DJIA has a $150 day?

 

[sonoma]

Quote from Look4aSine:

Your confidence has piqued my curiosity to ask you, what is your definition of "Good ROI"? I know that this would be hard for anyone to answer without using an example scenerio, so let's just use a daytrade as an example. Pick whatever underlying stock you want - what ROI would you claim to be able to make with a Vertical for a typical stock movement that occurs on a day the DJIA has a $150 day?

Sure. But remember that I’ve already acknowledged that verticals are not an optimal approach to scalping, so if you’re good at predicting a 150 handle move in the DJI, then use the future or the etf. But scalping wasn't the OP's problem. He identified his trades as usually lasting 1-2 weeks and that at first he bought stock, and then trying to ‘game’ the trade bought calls. He found that his results were all over the place, a result he attributed to a variety of greek risks. He’s correct-decay almost always kills these types of trades-which you can mitigate by spreading off the risk. Just mimic the equity curve in SPY from Aug 19 until the close Friday using the front month ATM call or the long ATM spread (of course with similar margin req). Spot nearly unchanged and, if anything, vix is higher, which will favor the long call. The minimal excess p/l at times from the higher delta ATM call vs the vertical can not consistently overcome the loss suffered on a bad call on direction nor from lack of net movement in the spot. Particularly true if the losers are 60% greater than the winners, as the OP mentioned.