As I said a few times previously, I don't understand why people don't use this for short term gains. I never said anything about long term.
As I said a few times previously, I don't understand why people don't use this for short term gains. I never said anything about long term.
attempting to trade options to profit from what you believe are mispriced underlying securities or mispriced options is usually regarded a fool's game, usually resulting in wipe-out losses over time.
I sincerely hope you are one of the rarest of rare guys who profits over time, even after adjusting profit calculations for riskiness, as you must do. Then please write a book.
the general idea is that the prudent use of options is to hedge a portfolio of stocks. So that means using options for insurance rather than for speculation.
I sincerely hope you are one of the rarest of rare guys who profits over time, even after adjusting profit calculations for riskiness, as you must do. Then please write a book.
the general idea is that the prudent use of options is to hedge a portfolio of stocks. So that means using options for insurance rather than for speculation.
well it's not so much mispriced securities, as I'm waiting till near earnings. I buy before the run-up in price in the option due to volatility from the impending earnings release. (usually I'm in about 10 market days before hand). Usually I'll sell as soon as there is a profit, even if it's before earnings come out. Of course as I said yesterday I was up significantly on both ABMD and ABBI but I was holding out for more...here's what's happened so far today....
ABMD
7/26: ABMD is trading at 10.49. I buy a 10.00 straddle (9/22 expiration) for 1.30/0.70 (C/P)
7/31: 0.90/0.65 (C/P) so I'm down about 23%
8/6: 0.95/0.45 (C/P) so I'm down 30%
8/8: 2.70/0.25 (C/P) so now I'm up 48%, but I get the feeling that this run up is hinting at a huge jump tomorrow after earnings. I sell the put side for .15 and then wait...
8/9: 3.50 Call...I'll probably hold onto it a little bit longer today see if I make a bigger profit. right now if I sold I'd make an 83% profit.
8/9: The call is at 3.45. Screw it I'm dumping it. I could hold out for more, but if there's massive profit taking I could lose some profit, and I almost doubled my money.
Final Profit: 80%
ABBI
7/26: ABBI is at 20.23. I buy a 20.00 straddle (9/22 expiration) for 1.50/1.10 (C/P)
7/31: 1.25/0.95 I'm down 15%
8/6: 1.40/0.80 I'm down 15%
8/8: 3.40/0.20 I'm up 38%. Again I think that the inclement run up will spill over to the 9th. I dump the call for .10
8/9: It's an hour before earnings release (10:30 right now) and the call is going for 3.90. I'm up 54% as is...I'm holding out for more.
8/9: I just sold the call for 4.10.
Final Profit: 62%
Miramonti
Lifer
- Aug 26, 2000
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I think your experiences trading options are so far a very small window of what issues are involved over the long term trade successfully.
Your first example was to buy an nvda straddle, you sold the call when them stock was up, then sold the put when the market was down, essentially going short before the market went down, and neutralizing when the it went down by selling the put. You can make money in any market going short and long at the right time at the right time.
Right now you seem to be relying on your instincts for volatility to benefit from market direction in the short term, and using the leverage of options to capitalize on it. You're not discussing implied volatility (a fundamental basis for pricing options based on the original black-scholes(?) model), which is extremely high right now.
Over the long run the majority of people will lose money trading options for three reasons:
a) the bid/ask spreads are wide and paying the offer or selling the bid has a statistical disadvantage
b) implied volatility bites people in the @ss more than it feeds them if they buy it - normally interest in a stock drives up volatility (prices of all of its options) and an expected move in the stock is built into the pricing (you're paying up for them). Over the long run a trader may see a move they were looking for, yet the price of the options actually decrease (or calls don't go up as much as the puts collapse etc.) due to the sudden collapse of implied volatility (ie the move happened, things calm, little more is expected.)
c)When a position goes against a trader (particularly non-pro's) they won't know value enough to know whether or not to increase the position, exit the position (probably selling on the bid or buying the offer), or holding, and the trader will usually make the wrong decision because emotions and greed will direct them into the wrong decision.
I read a post recently about a want-to-be trader who's backtesting showed his system was accurate 95% of the time. Only problem was that the other 5% he'd lose 30% of his capital. :Q
If you're going to trade a lot of options I recommend learning about implied volatility and using software to calculate it and graph the changes in it over time. You will have a much greater potential for success if you can add that you your arsenal. Options are not easy - they are simply leverage with more ways to get burned imo. Just like any other trading opportunities, there biggest opportunities buying when 90% are selling and vica versa etc, which not only includes market direction but implied volatility values.
Btw what brokerage do you use? I highly recommend Interactivebrokers.com.
Your first example was to buy an nvda straddle, you sold the call when them stock was up, then sold the put when the market was down, essentially going short before the market went down, and neutralizing when the it went down by selling the put. You can make money in any market going short and long at the right time at the right time.
Right now you seem to be relying on your instincts for volatility to benefit from market direction in the short term, and using the leverage of options to capitalize on it. You're not discussing implied volatility (a fundamental basis for pricing options based on the original black-scholes(?) model), which is extremely high right now.
Over the long run the majority of people will lose money trading options for three reasons:
a) the bid/ask spreads are wide and paying the offer or selling the bid has a statistical disadvantage
b) implied volatility bites people in the @ss more than it feeds them if they buy it - normally interest in a stock drives up volatility (prices of all of its options) and an expected move in the stock is built into the pricing (you're paying up for them). Over the long run a trader may see a move they were looking for, yet the price of the options actually decrease (or calls don't go up as much as the puts collapse etc.) due to the sudden collapse of implied volatility (ie the move happened, things calm, little more is expected.)
c)When a position goes against a trader (particularly non-pro's) they won't know value enough to know whether or not to increase the position, exit the position (probably selling on the bid or buying the offer), or holding, and the trader will usually make the wrong decision because emotions and greed will direct them into the wrong decision.
I read a post recently about a want-to-be trader who's backtesting showed his system was accurate 95% of the time. Only problem was that the other 5% he'd lose 30% of his capital. :Q
If you're going to trade a lot of options I recommend learning about implied volatility and using software to calculate it and graph the changes in it over time. You will have a much greater potential for success if you can add that you your arsenal. Options are not easy - they are simply leverage with more ways to get burned imo. Just like any other trading opportunities, there biggest opportunities buying when 90% are selling and vica versa etc, which not only includes market direction but implied volatility values.
Btw what brokerage do you use? I highly recommend Interactivebrokers.com.
Great post! I'll actually edit my OP to put that in as a counter-point. I agree that what I'm doing isn't for everyone, and there's more to it than what I've posted here, I just haven't actually written down specifically how I've managed to do it so far, I'm going to probably do that over the next day or two. I DO lose on these straddles occasionally...I lost 11% on Starbucks recently, but again I rarely have a trade where I make LESS than 11%, so I'll take that loss every now and then.
I'm actually using TD, I love them...never looked at interactivebrokers before, I'll have a look at it later today.
I don't only do straddles...I bought a 2nd set of Calls on NVDA because it looks like there's heavy positive volume on it...so that put I have on the straddle is probably going to lose most of it's value...that way this call pays for it. I'm actually up on that call 23% right now, so even if NVDA gets creamed on earnings, the put increases in value, and I probably still profit on the 2nd call I have.
Miramonti
Lifer
- Aug 26, 2000
- 28,653
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IB will cost you $.75 per contract, however I forgot about the downside, they will charge $10 or $20 a month for inactivity.
I used to use Datek/Ameritrade but they stopped developing their software execution platform when datek was bought by amtd, and amtd focused on aquisitions and rested on datek's 1999 Streamer/Command Center technology (which they still have little more than that imo.) With IB you can do spreads, call/put spreads, ratio spreads, and trade it at one price etc. Their software also has hotkeys for just about anything (changing prices, cancelling, opening windows, whatever. I don't trade options (anymore) tho so I'm not familiar with that part of the platform.
Are you talking about calculating the ISD (implied standard deviation) of the underlying security price?
If not, then what are you looking at for volatility?
(P.S.: My options professor was Dan Galai.
Dan Galai is now the Abe Gray Professor of Finance and Business Administration at the Hebrew University, school of business administration in Jerusalem.
He was a visiting professor of finance at INSEAD and at the University of California, Los Angeles and has also taught at the University of Chicago and at the University of California, Berkeley.
Dr. Galai holds a Ph.D. from the University of Chicago and undergraduate and graduate degrees from the Hebrew University. He has served as a consultant for the Chicago Board of Options Exchange and the American Stock Exchange as well as for major banks. He has published numerous articles in leading business and finance journals, on options, risk management, financial markets and institutions, and corporate finance. He is a co-author of Risk Management published by McGraw- Hill, July 2000. He was a winner of the first annual Pomeranze Prize for excellence in options research presented by the CBOE. )
Because on a risk-adjusted basis, they are a losing bet. People look to generate alfa with a low-beta strategy, and options generate exactly the opposite result (unless you use them to hedge).
Miramonti
Lifer
- Aug 26, 2000
- 28,653
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I don't know who that it but it looks like he's written quite a bit and probably was informative.
Implied volatility is a little different than real or historical volatility. Its a prediction of the annual volatility of the underlying instrument. Higher expected volatility means higher option premium, lower expected volatility means lower option premiums.
Overall market volatility will be reflected in a stock option's pricing (when overall market vol increases, individual stock option volatility will increase...that's an product of cross-market arbitrage) as well as anticipated volatility of the stock.
For example if its a small quiet utility company, the option implied volatility will be low (because the real volatility is so low). However if there are many rumors about the stock (ie takeover target etc.) then the option volatility will increase significantly, particularly the calls (even if the stock doesn't move and hasn't for a long time.) Its this future volatility estimation that is a fundamental factor in valuation of options, and that estimation can very on a daily basis, even hourly for that matter.
That's off the top of my head. I would probably have been clearer (and more accurate) if I looked it up.
well aware of that one.
Is there anything as far as software that would tell me more than a Vega measurement off of TD would?
Miramonti
Lifer
- Aug 26, 2000
- 28,653
- 100
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Originally posted by: Accipiter22
well aware of that one.
Is there anything as far as software that would tell me more than a Vega measurement off of TD would?
Honestly I don't know because I'm very removed from options, and the software I have doesn't specifically support them very well. But there are no doubt numerous good choices out there. A good package should allow you to chart the volatility, tell you the delta of the option (at the money strike price would be a 50 delta), the gamma (amount delta changes per $1 move of the stock), the theta (?...the time decay each day of the option.), and other greeks. Some people have different greek references for certain values, altho I'm pretty sure delta and gamma are universal.
If you're going to track them intraday, you'd need a datafeed as well, and different software packages support different feeds. If you want to only track them after the close, downloading the days data at the end of the day, then a feed subscription is much cheaper.
I'd point you to elitetrader.com, the software section, and ask them for software recommendations for options trading. Just like any software, flexibility and customization abilities are always key, but you're a relative beginner so you don't want to pay for a highly advanced customizable package that you may or may not wind up using long.
Beware there's a lot of nonsense on that site, but so goes the internet and I'm sure you'll get plenty of assistance from most people.
Originally posted by: Special K
Originally posted by: Anghang
Originally posted by: kyzen
I'd like a PM as well
+1 for me too.
Capt Caveman
Lifer
- Jan 30, 2005
- 34,543
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Originally posted by: Cal166
Originally posted by: Special K
Originally posted by: Anghang
Originally posted by: kyzen
I'd like a PM as well
+1 for me too.
Please send me a pm also. Thx!
- Oct 28, 1999
- 62,484
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- 126
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