Writing options for a living

The last page looks scary, but I am too lazy to read it from my last post (some 20 pages back) - can someone summarize the cause of penis fencing?
 
Quote from Trend Fader:

Does this mean that in general terms.. if a stock breaks up and you are long call or stock breaks down and you are long put.. it should be pretty much equal option % appreciation assuming they are both ATM?

Because I figured that if a stock breaks up on a thrust the IV of the call would go down.. thus decreasing the value of the call option.
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TrendFader, This gets kind of complicated and there is not a single answer that applies to all situations. Generally speaking, you are correct that volty drops as stocks go up and volty increases as stocks go down. But this is not enough. We have to look at the volty skew and factor in not only the skew itself but whether or not the skew is going to flatten or steepen.

To make things simple, let's assume a static volty. If you buy OTM options, whether they be calls or puts, and there is a volty skew that is present, if those options go ATM, your options volty will flatten all other things being constant.

What this means in general, is that there is a neg volty slope going into the ATM's. If you want to mitigate the risk of the volty smile and the consequences of flatter vols, you would want to purchase ATM options and sell OTM options. However, this is being very general because one, it's assuming a static vol when in reality, volty is not static. And two, it's assuming the slope of the skew will not change. It's very possible it could flatten on rallies and steepen sharply on selloffs.

This is where it really comes in handy to be able to model volty skew and its effects on your position over a range of prices, time and volty settings. Of course keep in mind if you are holding positions till exp, this may not be a deep concern for you. However, if you are trading further out, this could be more problematic in pricing back month options.
 
Anseld:

Why don't you give us a detailed example of a recent trade of yours with the concommitant logic included. Riskarb frequently posts his trades and includes updates and adjustments. In the past, Maverick has also gone into great detail in discussing specific strategies, adjustments, etc, etc...

So if you are going to continue your campaign against whom you perceive as the "evil crusaders of options disinformation" then throw your positions onto the table for everyone else's "constructive criticism"
 
We almost have enough for a "West Side Story" with a score of house/trance music. I don't think we can persuade Mav to wear assless-chaps, however. Anseld?

j/k :D
 
Quote from vulture:

Anseld:

Why don't you give us a detailed example of a recent trade of yours with the concommitant logic included. Riskarb frequently posts his trades and includes updates and adjustments. In the past, Maverick has also gone into great detail in discussing specific strategies, adjustments, etc, etc...

So if you are going to continue your campaign against whom you perceive as the "evil crusaders of options disinformation" then throw your positions onto the table for everyone else's "constructive criticism"
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(crickets chirping) :D
 
Quote from union1411:

Speaking of OTM options, let me say that every options book should have in big red letters a warning for options buyers that the bid/ask spread for otm options is insane.

When do you ever see a bid for a stock (say Ebay) at $20 and the ask at $40? Never.

But that's what happens with the OTMs. As soon as I buy an OTM for, say, an ask of .10, I am in the red because the bid is .05.

This post is meant for newbies I guess - I consider myself now a semi-newbie :)
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huh? is there some point here?
 
Quote from Maverick74:

LoosenUp, one thing you need to understand about options, is that most professional options traders don't just put on a position. They build them. I spend weeks building my positions. I look at each of my positions as a whole position, not the individual trades that compose that position. Like I have pointed out before, each trade on it's own, has negative expectancy, but as a combined position, it can be morphed into a positive expectancy trade. I really could care less about each of the legs. At the end of the month I care about my position as a whole and my p&l.

Let's look at another example. Let's take a trade that riskarb is actually attempting to do on his journal thread. He is selling the ATM combo on a stock and looking to offset with the purchase of the wings 7 to 10 days down the road. His goal is to try to capture as close to a full 5 pt credit as possible.

So let's say he sells the Sep ATM combo in EBAY for 3.70. Now the 42.5/47.5 wings are trading around 1.95. He is going to wait on the purchase of the wings to try to get them cheaper. Maybe he thinks volty will continue to drop and perhaps 10 days from now he can purchase the wing combo for 1.20. He now has a net credit of 2.50 in the trade. What is his risk? He has none!

His risk is the difference between the 2 strikes minus the credit. So 2.50 minus 2.50 is 0! He now has a risk free trade. And his expectancy is certainly positive. If he ran a simulation on his trade going forward from that date to exp 1000 times and summed the results and divided by the number of trial runs, he would get a positive expected return. This trade certainly has a positive expectancy.

Now I know what you are saying. But he took risk when he sold the first ATM combo. Of course he did. All option traders take risk when they are building the positions. There is no way around that. The idea is to be able to offset as much of that risk over the course of that trade as possible and create a positive expectancy trade. Neither the sale of the ATM combo nor the purchase of the wings carried a positive expectancy on their own. But combined, in this example, they turned into a risk free trade with the upside of 2 1/2 pts! Not a bad trade.

All successful option traders try to build their positions towards a positive expectancy. This is why I keep saying over and over that to be successful, you need to be a good trader. You can't just slap on a fly or a condor and sit back and watch. At some point, a trader has to trade. There is no escaping this. But the beauty of options, is you can create all sorts of combinations and permutations that offset risk with each additional trade and increase your upside! That is why we trade options. Not to blindly sell juice and count our theta! It just doesn't work that way. I hope this example cleared a few things up for you.
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well said....

If one was going to put a message in a bottle... in hopes it reached a group of beginnning options traders on some Gilligans Island... this post would have to be included therein.

:D


Ice
:cool:
 
Quote from Maverick74:

I'll let him answer but my guess is he would sell the ATM combo knowing there is negative edge in the trade. He, like me, acknowledges there is negative edge in all trades when they start out, but he is attempting to morph the trade into something that will carry some positive edge at some point in the future.

He may be dead wrong. Maybe EBAY gaps down 20 pts tomorrow. This is the risk of this business. We are not teaching 3rd grade public school here. I think we can all agree that somewhere, a risk has to be taken.

However, a good trader will find ways to offset this risk going forward and improve the risk/reward ratio over time.
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this has to go into that same bottle...

thanks for some more great advice/insight/reminders!
 
Quote from Anseld:

all i asked was how the market was treating him, and then i told him he didn't really need to answer because it's kinda obvious, and then he just exploded. and he went into this psychotic rage.

i guess asking maverick how he's doing is like asking a fat girl how much she weighs.
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Anseld.... do you feel better now!
 
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