Writing Covered Puts

[exQQQQseme]

Actually, in the final analysis, what is said here - by me or one of you- means nothing. It's only what shows up on the scoreboard (our brokerage statements) that counts. And, for sure, I have never seen a synthetic equivalence on a broker's statement.

But this is a lot of fun.

Bob

 

[MajorUrsa]

Quote from Algorithm:

Granted many here would have us believe they're trading very complex strategies (maybe so, maybe not), but many, if not most successful options trading/traders are not.

I hope you see that by ignoring synthetic equivalences things get more complicated than needed. So it's the other way around, and in my experience it is the ignorants that build the 'very complex 'strategies''.

Regardless, it seems dangerous to me to let someone trade options without understanding the difference between a straddle and a calendar. They "invent" new combiantions that haven't been published yet, and discover they that are equivalent to the ones proven useless, only when it's too late.

Ursa..

 

[AAAintheBeltway]

Quote from MajorUrsa:

I hope you see that by ignoring synthetic equivalences things get more complicated than needed. So it's the other way around, and in my experience it is the ignorants that build the 'very complex 'strategies''.

Regardless, it seems dangerous to me to let someone trade options without understanding the difference between a straddle and a calendar. They "invent" new combiantions that haven't been published yet, and discover they that are equivalent to the ones proven useless, only when it's too late.

Ursa..

I agree. How can knowledge be a bad thing? Certainly retail traders need to think carefully about the costs of putting on multi-leg strategies. Most will probably be better off with directional plays, but to ignore the greeks, synthetics,etc is like driving your car with the dashboard taped over.

 

[Algorithm]

Quote from MajorUrsa:

I hope you see that by ignoring synthetic equivalences things get more complicated than needed. So it's the other way around, and in my experience it is the ignorants that build the 'very complex 'strategies''.

Regardless, it seems dangerous to me to let someone trade options without understanding the difference between a straddle and a calendar. They "invent" new combiantions that haven't been published yet, and discover they that are equivalent to the ones proven useless, only when it's too late.

Ursa..

Look, I agree that many people get hurt trading options out of ignorance, but with that being said, you don't need to know any of the more complex strategies or greeks for that matter to trade/utilize them successfully. Everyone uses options for different reasons, and hey it's a free country! But for the love of Jesus, people there's a hell of a lot of options 'masturbation' going on in the ET options forums.

 

[cohenmichaela]

Quote from Algorithm:

Look, I agree that many people get hurt trading options out of ignorance, but with that being said, you don't need to know any of the more complex strategies or greeks for that matter to trade/utilize them successfully. Everyone uses options for different reasons, and hey it's a free country! But for the love of Jesus, people there's a hell of a lot of options 'masturbation' going on in the ET options forums.

No, you don't need to know synthetics or greeks to trade successfully if you're a good directional trader. However, having a better understanding of what you're trading will undoubtably help and not hurt one's success.

 

[exQQQQseme]

"Good Directional Trader"

I hear this term from time to time. Does it mean:

A. One who is correct on the direction of the underlying a high percentage of the time?

B. One who is proficient in positioning themselves for profit a high percentage of the time, irrespective of which direction the underlying moves?

C. Some from Column A and some from Column B?

D. Something altogether different?

 

[MajorUrsa]

Quote from exQQQQseme:

I hear this term from time to time. Does it mean:

A. One who is correct on the direction of the underlying a high percentage of the time?

To me it means A. Not only knowing the direction the underlyer will take but also where the pivots are, will make adjusting spreads so much easier. It involves insight in TA, for multi-day intervals anyway.
I'm not good at it.

Ursa..

 

[exQQQQseme]

Thanks Major. My answer would have been B. At least that't the way I trade. Would be interested in the views of others also.

Bob

 

[smilingsynic]

Quote from exQQQQseme:


Actually, Smililngsynic agreed with me in stating that there was a visual relationship. That's all I was getting at. No need to go on an assumption spree. My posting doesn't warrant that much effort.

Bob

Yes, there are some similarities, but they are very different in risk. A calendar/time spread's risk is limited to the debit (the amount paid to put it on). The risk is limited because the longer term option will always have more or equal value than the shorter term one.

An example of a calendar is buy March ES 1425 put, sell February ES 1425 put, hoping that ES will trade around 1425.

Writing a straddle entails UNLIMITED risk, unless one buys otm options (sometimes called "buying the wings"). There is a journal here devoted to SPX credit spreads, where this strategy is discussed. An example of a short straddle is sell February 1425 puts and sell February 1425 calls.

For both the calendar and the short straddle examples, the trader wants ES to trade around 1425. If ES moves far away from 1425, both the long calendar and the short straddle will be losers.

Worst case scenario, for the calendar: at exp both Feb and March puts trade at the exact same price (either real high or real low, like zero).

Worst case scenario for the short straddle writer: ES trades far, far away, at a much higher volatility. Writing a straddle for 40 and buying it back at 80 or higher is possible (not often, but it happens). Those who write straddles are prepared to hedge by either (1) buying volatility and gamma--buying options; and/or (2) hedge (replicate) with the underlying.

For the calendar, the trader wants ES volatility to increase as it trades toward 1425. For the straddle writer, the trader wants ES volatility NOT to increase.

Writing straddles is for advanced traders only who are willing to take an occasional big loss in order for the high probability of a small but limited profit.

Calendars are better for beginners, but only risk capital should be devoted to options.

Ursa--glad to have you back here. I always liked your posts over at google.

 

[smilingsynic]

Quote from cohenmichaela:

No, you don't need to know synthetics or greeks to trade successfully if you're a good directional trader. However, having a better understanding of what you're trading will undoubtably help and not hurt one's success.

Those who write/sell options better know something about gamma (and vega, and delta).

Imo, even good directional traders will struggle only if they buy options (unless vol is at major lows), but can make good money by writing.