Okay fine, your timing is great with stocks. Here's why your results are all over the place with options: Supply and Demand - specifically Demand. Like I said before, you will need to think for yourself and quit chanting the Dogma of the Church of the Greeks. Implied Volatility is the religious doctrine you are having a BIG problem with. There IS NO Implied Volatility - it does NOT exist. Instead, there is Demand - as in High Demand and Low Demand. And, what you are experiencing with buying Calls is a fluctuation between the High and Low Demand. Although personally, I find 2-1/2 week options to be more consistent in this regard. Your "trigger" happens when there is High Demand for the Call options - the Herd has the same trigger as you - the option price has been Bid-up. The Call profit has already been made by others who had a trigger before you. Then, when you want to sell, so does everyone else, and Demand is Low. Therefore, the stock goes up, but the Call value goes down. The only way to fight this phenomenon is to nullify the IV in your BS calculation and focus on intrinsic value. So, to repeat what I've told, focus on making the guaranteed money and do not even attempt to calculate the possibility of a bonus check. Isaac Newton said the same thing, "I can calculate the motion of heavenly bodies but not the madness of people." That madness is why your results are all over the place. You will NEVER be able to calculate future Demand (aka. IV). This is EXACTLY your problem - you want to be able to calculate it.
What am I missing?
- Thread starter jimmyjazz
- Start date
By the way, to know more about these Demand fluctuations, read about Volatility Skew.
ATM and near otm for etfs don't have as much of that "demand problem" so the asine part is stopping yourself from measuring the profit level you want and not from simply expecting an ATM or close OTM option to require the same number of contracts to be purchased before expiration and yield approximately similar results.
The method I just described will always be in the range of the bid-ask spread and is always better now that pennying is allowed electronically. All is based on closing option price which is last intraday and you can test the idea for yourself to see as price negates away you lose as much as is predicted but by moving too far too fast profitably eventually you see overvaluation and cause to exit provided theta is not too highly negative against your directional bet. In any case, each day that closing price should be your implied vol calc followed by delta leverage ratio that'll price the option in the bid ask spread practically always and this would be a good basis with which to make markets.
I do not want to overlook learning something beneficial, therefore I would like you to explain your "method". Are you just calculating the IV at the EOD for the next day? If so, how is that useful for 1-2 week long swing trades?
Since IV for delta is based on a $1 move in the underlying, delta will tell you the approximate percentage change that it will move given the percentage change in the stock/underlying.
Using that, the closing price ending period delta from implied volatility can be calculated on close and be good for most of the day and is even more accurate if you do it on every tick of the option, which is where market making would find it particularly useful as a pricing mechanism to base what the option price should be based on what the change in the underlying is.
It is that calculation he is missing, and probably everybody who hasn't heard of it or found that it can be used that way.
I run an inventory, so any individual trade isn't independent. Only rarely do I take a shot. When I do, it's with the future or the underlying. Not options-only. My comments about the advantage of the long call spread is mainly to address the OP's difficulty as he identified it. The notion of a "better" roi for the spread comes from the reduction in loss vs the loss in the naked call when things don't go as expected. And of course this has to be viewed over hundreds of trades. The superior roi is not meant to imply the larger delta of the naked call won't outperform on a quick move up-it will. If you're lucky enough to only have those types of trades, then no need to change. The OP hasn't been that lucky. Neither are most other traders.
Still struggling. I placed the following trades in response to triggers generated by my system:
8/29 9:50 AM EDT Bought 20 FHN Nov13 $9 calls @ $2.34 (FHN @ $11.28)
9/06 9:30 AM EDT Sold 20 FHN Nov13 $9 calls @ $2.15 (FHN @ $11.30)
Bought 20 minutes after the open, sold at the open. "DITM" enough for delta > 0.9, and time to expiry > 2.5 months. Underlying goes up 0.2%, call goes down 8.1%.
Yeesh. I'm thinking this is mostly slippage -- the bid/ask spread is currently $0.15, which is more or less what I lost. I don't have the open data in front of me, so I can't be sure.
Is this just a fact of life with options? Any suggestions about how to combat this? I suppose I could place my orders with limits in the middle of the spread, but that doesn't guarantee fill.
8/29 9:50 AM EDT Bought 20 FHN Nov13 $9 calls @ $2.34 (FHN @ $11.28)
9/06 9:30 AM EDT Sold 20 FHN Nov13 $9 calls @ $2.15 (FHN @ $11.30)
Bought 20 minutes after the open, sold at the open. "DITM" enough for delta > 0.9, and time to expiry > 2.5 months. Underlying goes up 0.2%, call goes down 8.1%.
Yeesh. I'm thinking this is mostly slippage -- the bid/ask spread is currently $0.15, which is more or less what I lost. I don't have the open data in front of me, so I can't be sure.
Is this just a fact of life with options? Any suggestions about how to combat this? I suppose I could place my orders with limits in the middle of the spread, but that doesn't guarantee fill.
If you are going to be holding these for just a day or two, trade the shares and not the options. The slippage is going to be bad over short periods. Picture a demand curve in economics where you have a straight line moving from the upper left down to the lower right with time on the horizontal axis and slippage on the vertical. The further you go out in holding time, the lower the slippage will be in terms of p&l. Hopefully that makes sense.
DITM options will usually have a wider b/a spread than OTM options - you can look at the synthetic (long stock, long otm put) to see if it has a tighter spread.
Additionally, spreads are wider at the open, so it might make sense to wait 5-10mins...personally I like waiting until the first 30mins are over unless there's a particular urgency. HTH.
Thanks so much for the input. I didn't realize slippage tightens over time -- that's not true for the underlying, I presume? There is no "time" component to long stock.
My rationale for selling at the open and buying 20 minutes later was tied to a comment in this thread that volatility tends to drop after the open. Perhaps that's true, but it's obviously not the only effect going on.
These aren't day trades, and getting an immediate fill isn't crucial. I'll start considering synthetic longs, perhaps with a (trailing) stop, as well as putting my orders in the middle of the bid/ask spread. (I realize stops are known to reduce performance.) Is this a reasonable approach?
My rationale for selling at the open and buying 20 minutes later was tied to a comment in this thread that volatility tends to drop after the open. Perhaps that's true, but it's obviously not the only effect going on.
These aren't day trades, and getting an immediate fill isn't crucial. I'll start considering synthetic longs, perhaps with a (trailing) stop, as well as putting my orders in the middle of the bid/ask spread. (I realize stops are known to reduce performance.) Is this a reasonable approach?