Assuming the stop wasn't hit. No stop was mentioned in the "what-if" trade, but a stop should be included.
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why trade options ?
- Thread starter Wallace
- Start date
Assuming the stop wasn't hit. No stop was mentioned in the "what-if" trade, but a stop should be included.
Quote from ForexForex:
Assuming the stop wasn't hit. No stop was mentioned in the "what-if" trade, but a stop should be included.
you're right.
wallace, here's a simple website that allows you to input diff numbers for options prices. for ex. you can realistically change the following:
stock price
iv
you can't change div yield or rates (usually it's not going to have that much of an impact if you change it a small amount and it's not going to change a large amount over a short time period unless a company stops paying a div but we're starting to get into extreme scenarios)
you obviously can't change the number of days til expiry or the strike. you can trade diff expiry/strike.
so bottom line you enter what you think will happen (e.g. price will be 40 instead of 50, iv will increase 20%) and see how that effects the option value.
http://www.intrepid.com/robertl/option-pricer1.html
There are statistics that argue that financial markets spend about 15% of their time going up, 15% going down and the remaining 70% of the time going sideways. If this is true, then statistically speaking, a directional bet is going to be wrong approximately 85% of the time. Personally, I find it much easier to trade volatiliaty than direction for which options are a great tool. (Volatility is one of the most influential components of options pricing).
For example, a statistically significant drop in whatever financial instrument you are trading is typically accompanied by an increase in volatility. For such an event, a put could be sold instead of going long, with the capital set aside to purchase the underlying if assigned (I am not suggesting going naked). The intention is to either buy back the option for a lower price than what it was sold for, or optimally, to let it expire worthless.
Some would argue that profits are limited while going long the underlying is unlimited. This is true. But what is gained in exchange for this sacrifice is a higher probability of a winning trade because the option has now potentially decreased in value in multiple ways (which is what a seller of options wants):
1. If the undering moves up, the put benefits from the capital gains.
2. If the underlying goes up, volatility will decrease and the put once again benefits. Often, volatility will decrease without a price movement based on trader's altered perception of future events. (The Trading public spooks easy).
3. Time decay (Theta) will be gnawing away at the premium of the option with each day that passes and will even accelerate exponentially as expiration approaches. Once again, the option benefits. If the statistics mentioned above are anywhere near correct (70% of time spent going sideways), then you want to be able to make mney even when the markets are oscillating.
Remember, that the option was originally sold when a statistically significant drop occurred in the underlying so the situation is primed to go from a highly irritated state to one that is more relaxed, diminshing otion premiums in the process.
Hope this helps.
For example, a statistically significant drop in whatever financial instrument you are trading is typically accompanied by an increase in volatility. For such an event, a put could be sold instead of going long, with the capital set aside to purchase the underlying if assigned (I am not suggesting going naked). The intention is to either buy back the option for a lower price than what it was sold for, or optimally, to let it expire worthless.
Some would argue that profits are limited while going long the underlying is unlimited. This is true. But what is gained in exchange for this sacrifice is a higher probability of a winning trade because the option has now potentially decreased in value in multiple ways (which is what a seller of options wants):
1. If the undering moves up, the put benefits from the capital gains.
2. If the underlying goes up, volatility will decrease and the put once again benefits. Often, volatility will decrease without a price movement based on trader's altered perception of future events. (The Trading public spooks easy).
3. Time decay (Theta) will be gnawing away at the premium of the option with each day that passes and will even accelerate exponentially as expiration approaches. Once again, the option benefits. If the statistics mentioned above are anywhere near correct (70% of time spent going sideways), then you want to be able to make mney even when the markets are oscillating.
Remember, that the option was originally sold when a statistically significant drop occurred in the underlying so the situation is primed to go from a highly irritated state to one that is more relaxed, diminshing otion premiums in the process.
Hope this helps.
I've 'been Short' the ES since last year, with the proviso of If a reversal formation
occurs, one did and completed in July this year
Stops aren't generally part of my intraday trading system and while I'd thought
about writing one for the example, chose not to since I expected the ES price
to have dropped below 1111.00 by the time most people read the thread, and it
was a what-if example anyway
thanks for the replies, I obviously need to start at Options 101 and can't shortcut
the learning process
occurs, one did and completed in July this year
Stops aren't generally part of my intraday trading system and while I'd thought
about writing one for the example, chose not to since I expected the ES price
to have dropped below 1111.00 by the time most people read the thread, and it
was a what-if example anyway
thanks for the replies, I obviously need to start at Options 101 and can't shortcut
the learning process
Buying options eliminates black swan "tail risk." For example, if you hold ES overnight for swing trades, imagine you're long and you wake up to discover Greece gave up and defaulted. Or imagine you wake up and discover Iran launched missals into Israel. What do you think would happen to your ES position? Even if you had a stop, it would likely blow through and stop you out way below your intended stop price. For other futures, like the Ags, check what happens when a surprise crop report send the futures limit up or down for a couple of days and you can't get out of your positions.
Options also save you in flash crash situations - flash crashes trigger stops and you lose even if the market recovers quickly. Options keep you in the trade.
This is not to say options are easier to trade in all respects. You need to deal with option-centric dimensions like vega and theta (the option "greeks"), which requires new ways of thinking.
Options also save you in flash crash situations - flash crashes trigger stops and you lose even if the market recovers quickly. Options keep you in the trade.
This is not to say options are easier to trade in all respects. You need to deal with option-centric dimensions like vega and theta (the option "greeks"), which requires new ways of thinking.
Quote from Robwynge:
Buying options eliminates black swan "tail risk." For example, if you hold ES overnight for swing trades, imagine you're long and you wake up to discover Greece gave up and defaulted. Or imagine you wake up and discover Iran launched missals into Israel. What do you think would happen to your ES position? Even if you had a stop, it would likely blow through and stop you out way below your intended stop price. For other futures, like the Ags, check what happens when a surprise crop report send the futures limit up or down for a couple of days and you can't get out of your positions.
Options also save you in flash crash situations - flash crashes trigger stops and you lose even if the market recovers quickly. Options keep you in the trade.
This is not to say options are easier to trade in all respects. You need to deal with option-centric dimensions like vega and theta (the option "greeks"), which requires new ways of thinking.
+1. This is required reading for everyone daytrading the ES with ridic low $500 margins from bucket shop brokers. Imagine someone sets off a dirty bomb in NYC and the ES gaps down 100 points. You just lost $5k against equity of $500. so you OWE your clearing firm $4.5k per car. nice.
the negatives to being long options (as op mentioned vega, theta) are more than outweighed by the positives (limited risk, benefit from vol expansion during black swan events, etc).