Writing options for a living

[crayon851]

The irony in this is that as we were talking about just selling naked premium and how an account could blow up if you're just picking up pennies.

TODAY, my account almost blew up. sort of.

My mistake was I got over confident about BKS and put on a naked position call at 18.00 and at 19.00 to expire today. I did this a few days ago. Didn't even do the 1-2 std dev move. Up till now I've been doing a 1.5-2STD move and in small quants.

Fast forward, I checked the markets at around 10am today, all seemed fine.
@12PM I checked it again, all was well. went to take a nap.
@1PM I checked it again and BKS just got a buy out offer for $22 a share. Both those contracts rocketed on the underlying moving to $18.99! I closed out both positions at a net loss of about $600ish. I watched it for a bit and it started to die down, I re-established my positions at the 18.00 and 19.00 strikes (probably a rookie move), and was able to cover about $200 ish. For the month, I'm looking at a down month of about $300 ish consolidated because of that one position. Probably going to roll these positions to cover.

I managed to save my girlfriends account though, because I waited and the contracts eventually dropped back down and actually turned a profit on that move. We had the same positions on.

question: was it the right thing to do to close out those positions at a loss and then re-establish them? what would you guys have done? I also didn't have a hedge on and I was out of my comfort zone in terms of margin. Normally I use about 50% margin requirement (high I know, but I need growth.)

 

[shooter]

I think you should trade simulated so you can see some adverse market situations. Go live after you've seen enough "oh shit, that wouldn't have worked" moments...and even then, you don't really know everything. Just my opinion. Don't sacrifice your real account while you're learning.

"I managed to save my girlfriends account" that's never a good starting point, especially short options. "I need growth", sounds like famous last words.

 

[Brighton]

Fast forward, I checked the markets at around 10am today, all seemed fine.
@12PM I checked it again, all was well. went to take a nap.
@1PM I checked it again and BKS just got a buy out offer for $22 a share.

If your sleep pattern is such that you need a nap at noon, don't be shorting close to the money options and then fall asleep with a couple of hours to expiration.

 

[crayon851]

I think you should trade simulated so you can see some adverse market situations. Go live after you've seen enough "oh shit, that wouldn't have worked" moments...and even then, you don't really know everything. Just my opinion. Don't sacrifice your real account while you're learning.

"I managed to save my girlfriends account" that's never a good starting point, especially short options. "I need growth", sounds like famous last words and also a line from an Extenze commercial.

Well her account ended up with a profit, mine ended up with a net loss. Same positions on both.

I know I don't know everything and I'm still learning, but I mean you might as well do it with real money because simulating trades you don't have the same risk and are more bold. That can lead you to carrying bad habits into the real world.

Like today, what I learned was

1) to try to stick to the 2 STD move.
2) make sure you have a position on both sides of the trade.
3) Don't go over 50% of your margin.

All these things I did today on BKS was not what Ive been doing over the last 6 months, and I paid for it.

I think that if the only risk is "Blowing up" your account while being short premium, its more of controlled risk.
For example, selling at the 2STD move strangle, with stop limit orders and enough cash to buy the shares/short them, you can always manage these positions by converting them into covered calls etc to assist you in lowering your loss (if any).

Had i waited till close, I wouldve been profitable on both sides. The reason I closed my positions was because I couldn't afford to be put the stock or w.e.

In the case of BKS, the IV percentile was over 50 and rich in premium. If I sold the strangle 18.00 14/15.00 strangle on it at the same price point I did, it would've netted me about 25 cents a share. with a B.E of 18.25 and 14.75.

Had I initially placed my stop limit orders to buy at 18.1 and short at 14.9, my premium would still be $15. If what happened today happened, where it went up to 18.99,

The high for the 18.00 call was $1.10, underlying high was 19.19. delta was 0.21.
scenario 1A)
I'd be long stock at 18.1 lets say worst case scenario is I manage to sell it at 18.75 and close my 18.00 call at around $1.00 (has a 0.21 delta, correct me if im wrong).
Underlying nets: +65
premium nets: +15
total : $80.
cost to close contract is $100.
net loss of $20.

Scenario 1B)
-I buy those shares at 18.1 and then it dips back down below $18.
- stop order to short if it drops below the put strike price 14.90.
-worst case scenario , shares it a low of 17.60, so I'd be down $50.
-hold till expiration nets: -35. +15 premium - $50.

*in both of these scenarios where the underlying flirted multiple times, I think it was necessary to widen the strikes and weight one side heavier than the other to compensate for the loss. Had I done this, the loss could have been a minor profit or a break even.

scenario B) How it actually played out. BKS rocketed to 18.99 and then settled at 17.80 by end day. In my account, I managed to lessen the loss by selling more premium on the 19.00 contract, after I watched the news roll in and the price action. managed to consolidate about $120-$150 of the $680 loss.

Had I done nothing, I would've profited with no losses at all.
net profit is $25.

Is there anything you guys wouldve done differently?

 

[StarDust9182]

I only write on futures. Fundamentals/technicals doesn't matter in the long run…trade management makes all the difference. Well, that was the difference for me anyway.

I like this comment very much. One of the reasons that fundamentals and technicals fail in the long run is because there is no way to know the absolute truth (vs perception or relative truth) of the data being priced into the market (for example Citigroup in 2007 or Enron or TRE on the tsx).

One principle I use is that stocks are like people, they are born weak and needing help to grow, grow stronger and get healthier, get to middle age and eventually die or get taken out. None last forever. Even GE, long running as it was, needed government assistance to deal with it's issues in 2008. Some people (companies) last longer than others, some commit suicide, some are murdered. Yes stocks are like people in some ways.

Trade management AKA risk management is one important key.

 

[StarDust9182]

Correct, the math says that and it can be proven. Now beyond the math there is the concept of optionality. That is, when the shit hits the fan, regardless of whether you are long the 10 delta strike or short it, which position is easier to manage? Which position gives you more "options" hence the term optionality. No one goes broke in one day being long the 20 delta or 10 delta option. But many go broke being short it. If you are long the option, you have an infinite amount of moves you can make to manipulate your position. If you are short, the only thing you can really do is get out without adding on to the risk you already have. So when you factor that in, ceteris paribus, the buyer has a slight advantage because the optionality has some intangible value outside the math. But on math alone, it should make no difference if you choose heads or tails or buy heads or sell heads. And again, we are speaking here strictly ceteris paribus. Once you add another variable to the argument like your volatility modelling skills, the argument changes.

This is fact if the market is random series (probably not if it is chaotic), but equates to my disputed past comment that every trader will lose in the very very long run, since the future is unknowable and we trade in the past based on our knowledge of the past. (Although, one respected ET trader has given me what sounds like a solid argument privately that may contradict that principle. I have not yet had the time to incorporate it into my principles).

 

[StarDust9182]

I think you should trade simulated so you can see some adverse market situations. Go live after you've seen enough "oh shit, that wouldn't have worked" moments...and even then, you don't really know everything. Just my opinion. Don't sacrifice your real account while you're learning.

"I managed to save my girlfriends account" that's never a good starting point, especially short options. "I need growth", sounds like famous last words.

Excellent answer. IMO what takes most people out of the trading game is not their knowledge but they don't realize the full true risk of what they are doing and deplete their capital (dollars and emotional).

PS: the quickest way to lose a GF is to trade their account IMO.

 

[crayon851]

This is fact if the market is random series (probably not if it is chaotic), but equates to my disputed past comment that every trader will lose in the very very long run, since the future is unknowable and we trade in the past based on our knowledge of the past. (Although, one respected ET trader has given me what sounds like a solid argument privately that may contradict that principle. I have not yet had the time to incorporate it into my principles).

Cool analogy. I look at the market like a game of Jenga. With every new height it reaches it becomes a little more unstable, until it crashes and then re-builds again.

 

[kcgoogler]

I was not talking about legging into a conversion or reversal simultaneously, but separately. My point was, I could buy the calls today (neg expectancy trade), then two days from now, after the stock rallies, I could sell the same strike put and short stock to complete the reversal. Now all three of these trades alone were negative expectancy. However, the reversal I know have is risk free and therefore, not just a positive expectancy trade, but almost 100%. This is an easy example. I wanted to use the conversion/reversal/box/jellyroll example to minimize the back and forth. There are many trades that you can put on that are much more grey, they will give you positive expectancy, but only slightly so.

And I never said legging into the trade was risk free. How do you know that I just didn't want to be bullish when I bought the calls. Then 2 days later I had the opportunity to complete the reversal. The point was not that I'm trying to put on risk free trades, but that I made an adjustment that changed my expectancy.

Mav, resurrecting an old thead. if you buy a call and after a few days and an up move you complete the other legs of the conversion to lock in a profit, you might as well simply sell the call at a profit (unless its too far itm and hence needing the conversion to lock in the gain) - i dont think this should be considered as changing the trade from neg expectancy to positive. its just taking a profit on one of the sample paths mid way (not saying its a bad thing), but it doesnt change the expectancies of either the first one or the subsequent legs.

 

[Maverick74]

Mav, resurrecting an old thead. if you buy a call and after a few days and an up move you complete the other legs of the conversion to lock in a profit, you might as well simply sell the call at a profit (unless its too far itm and hence needing the conversion to lock in the gain) - i dont think this should be considered as changing the trade from neg expectancy to positive. its just taking a profit on one of the sample paths mid way (not saying its a bad thing), but it doesnt change the expectancies of either the first one or the subsequent legs.

The trade was more in reference to market makers. Market makers are always taught to lock up open strikes by converting them into conversions and reversals. It's driven by order flow. Sure I could sell calls I'm long but to who? I don't want to give the edge. So if paper comes in to bid the puts at the reversal strike I can now lean on that paper to complete the reversal.

There is no reason for a retail trader to lock in conversions and reversals because Reg T does not offer margin offset so it locks up your trading capital. But market makers get that risk off their sheets and can do it for some positive edge.