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Old 06-15-2013, 02:14 PM   #221
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utrecht,

Why did you choose to use ITM puts rather than OTM calls for your upper strike part of the bracket?
I had already been trading ATM put calendar spreads and had a good feel for how they reacted so I just stayed with puts all the way when I started using the bracketed approach. I have wondered if using all calls or a combination of the two would work better but haven't researched that yet. Do you have an opinion on that?
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Old 06-15-2013, 08:06 PM   #222
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...
I have now created a market neutral trade that profits not by stock movement, but from time decay which is a given. ...
Well, I'm a simpleton when it comes to this, but how can one expect to profit from something which is a given? Don't the people on the other side of the trade(s) know that time is passing?

emph mine:

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... Unless the stock moves 7-8%+, the one trade that profits will normally profit by more than the other one loses.

...

Other than the obvious risk of several stocks going nuts in either direction, are there any other risks that anyone sees?
Again, approaching as a simpleton, I always assume the people on the other side of the trade(s) have done their homework, and know as much or more than I do. And I assume that they have taken the odds of a stock moving 7-8%+, and/or the odds of stocks 'going nuts' into consideration when they priced the trade.

I think the risk is in assuming they haven't.

-ERD50
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Old 06-15-2013, 08:54 PM   #223
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Time decay is a given. Options decay in value as time passes and the closer the option is to expiration, the faster it decays. Here's a simple example:

You are short June 150 puts on a given stock. You sold them for 1.00 with one month to expiration.
You are long July 150 puts and bought them for 1.75, 2 months from expiration. The trade cost you .75

At the end of June expiration if the stock is still at 150, the June puts expire worthless and the July put you are long are now worth the same 1.00 that the June puts were worth when they were one month from expiration. You made 33% profit. Now there are other factors such as volatility changes, and differences in the number of days in a month, but the main point is shown here which is that the front month options decay faster than the longer dated options. That's what I meant by "time decay is a given".
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Old 06-15-2013, 10:55 PM   #224
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Time decay is a given. Options decay in value as time passes and the closer the option is to expiration, the faster it decays.

...

That's what I meant by "time decay is a given".
Yes, I know that, and you know that, and presumably the vast majority of the money behind those options is placed by people who know that too.

So my question is, how do you make money on something that everyone knows is going to happen (unless the world ends, and then it is moot)? I'm not a card player, but that sounds like a poker game where everyone shows their cards.

-ERD50
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Old 06-16-2013, 12:08 AM   #225
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I really messed up with one of recent option trades. When HPQ dropped to $11.38 in Nov 2012, and everyone was really down on the whole PC sector, especially HPQ, I sold 2/13 covered call for HPQ at 16. From 11/12 to 2/13. HPQ went from 11.38 to 18+ with hardly any news. My shares were called away. I thought when they announced the Q1 earning, the share price will drop and I can replace them at 16+ to 17. Well earning and profit continued to drop for Q1 compared to Q4 of 2012 but the loss was less than expected, and the stock price went up to $22. When projection for Q2 was announced, the revenue for every division of HPQ dropped some more, but at a lower rate, the stock price went up to $25 before the recent correction to $23+. It is amazing that a stock can more than double in price when revenue and profit margin keep eroding (HPQ's tablets are not exactly selling like hot cakes and the cloud computing area it went into has not made substantial inroads) and the outlook for the PC sector is still dismal.
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Old 06-16-2013, 07:31 AM   #226
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ERD50,

I dont know how to answer that other than to say that the vast majority of people who trade options lose money. The majority also buy options. I'm going to say that that means the small minority that are making money are selling options, or more correctly they are net short time premium which is what I'm doing.
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Old 06-16-2013, 09:06 AM   #227
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I understand the theory that the time decay (Theta) will be faster on the near term short put and then you can cash out the long put with a gain since the time decay is slower. However, if volatility in the underlying changes against you then you will have a loss. Be careful around earnings reports. I would think if volatility stays the same or increases then this strategy would work. Perhaps you could use a small hedge in the VXX. The good news is that it is working for you, just be aware of possible pitfalls. But I'm not an expert...just my thoughts.
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Old 06-16-2013, 09:58 AM   #228
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I believe that when volatility increases, my trades will profit because both options will increase in value and since I am long the more expensive option, if they both increase the same percentage, the more expensive option will increase more on a dollar by dollar basis. When volatility decreases, I believe it hurts me.

However, I'm not trying to make money by correctly predicting which way a stock is going to move or whether the volatility is going to increase or decrease around a specific event, so like you advised, I avoid stocks around earnings report time.

Thanks for pointing out possible pitfalls. That's exactly what I was looking for.
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Old 06-16-2013, 10:43 AM   #229
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ERD50,

I dont know how to answer that other than to say that the vast majority of people who trade options lose money. The majority also buy options. I'm going to say that that means the small minority that are making money are selling options, or more correctly they are net short time premium which is what I'm doing.
OK, assuming your observations are correct, I still would not expect to be able to make a large profit on this strategy long-term. If there was a lot of money there for the taking by other smart money, the smart money would rush in and buy it up until the prices rose to the point that there was no great money to be made.

I generally believe that long-term, opportunities will tend to move towards their market risk/reward adjusted prices.

Good luck.

-ERD50
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Old 06-16-2013, 10:54 AM   #230
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What do you consider long term? A few years? Ive already been doing it for 10 months and have a profit of 138%. Now, can I increase my position sizes by 100 fold and it still work? I have no idea. Maybe not. Maybe that's why the big boys don't do it. They cant trade large enough positions. A lot of the options that I'm trading have small amounts of open interest. I am currently short 8 MA June 615 puts and long 8 July 615s. The open interest on both of those puts is 8 so these are the only trades in those strikes. Others I have less than 1% of the open interest so who knows.
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Old 06-16-2013, 11:16 AM   #231
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What do you consider long term? A few years? Ive already been doing it for 10 months and have a profit of 138%. ...
Yes, a few years. That is really not a very large sample size when we are talking monthly options. I have not studied your trades closely enough to evaluate the risk/reward slope, but recall the thread that poster dixonge started. He was trading in such a way that it was normal to profit on most trades, so it wasn't unusual at all to go many, many months with a good profit (picture betting against #17 coming up on roulette). But then a single bad trade could wipe out those many, many good trades.

Perhaps you are playing in a space that the big boys can't reach effectively. But with computerized trading and (from what I understand), the low cost trades that the big boys can make, I'm not sure there are any hiding places. But I could be wrong about that. Good luck.

-ERD50
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Old 06-16-2013, 11:29 AM   #232
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Yes, I understand the concept of having many good small trades and then one really bad one. I also sell naked puts which fits that category, but I keep the trades small and even then they do worry me. These trades are different because the downside risk is limited since they are debit trades.
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Old 06-16-2013, 11:58 AM   #233
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What I lost in having my HPQ shares called away at 16 when they are now trading at 24 was enough to wipe out all previous gains from playing with options. Like you said, you only need one really bad trade.
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Old 06-16-2013, 12:31 PM   #234
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What I lost in having my HPQ shares called away at 16 when they are now trading at 24 was enough to wipe out all previous gains from playing with options. Like you said, you only need one really bad trade.
I would submit that your HPQ options trade was fine. The stock was at 11.38 when you made the trade. You collected some premium and had the stock called away from you at 16 which was a 40% profit from where it was. I dont know how much premium you collected but you can add that to the $16 per share and that was your selling price. You didnt miss out much on much between there and $18. You cant think about the fact that it is now at $24. If you thought it was going to keep on rising you could've bought the stock back at $18 and rode it up. That has nothing to do with your options trade. Its a whole new trade.
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Old 06-16-2013, 12:36 PM   #235
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I would submit that your HPQ options trade was fine. The stock was at 11.38 when you made the trade. You collected some premium and had the stock called away from you at 16 which was a 40% profit from where it was. I dont know how much premium you collected but you can add that to the $16 per share and that was your selling price. You didnt miss out much on much between there and $18. You cant think about the fact that it is now at $24. If you thought it was going to keep on rising you could've bought the stock back at $18 and rode it up. That has nothing to do with your options trade. Its a whole new trade.
Except I was selling a covered call, and the cost basis of my HPQ shares were $26 a share. I was trying to get a little premium to cover the paper loss when HPQ dropped to 11.38, thinking when HPQ and the whole sector looked that bad, HPQ could not have gone up 40% in 3 months, but the covered call turned out to be actual loss of $10 a share when the shares was called away at 16. I was trying to buy back at around 17 when the company announced Q1 result, except the stock price went up even more despite revenues and profit margins dropped more.
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Old 06-16-2013, 12:47 PM   #236
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You will drive yourself crazy if you think about trades that way. The fact that you bought HPQ at $26 and it had sunk to $11.38 doesn't have anything to do with the options trade. You had already lost a chunk of money on the stock. The original stock trade when you bought HPQ at $26 was your mistake. The options trade was fine.

You were trying to salvage the bad stock trade. At the time you made the option trade, I bet you were thinking "I will be ecstatic if HPQ gets back to $16 by Feb. I'll get a good chunk of the money I already lost back, and I'll be out of this dog of a stock". You were right. Nice trade. If you think about the trade any other way, you will never be satisfied with yourself. You'll never get in or out at the exact right time.
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Old 06-16-2013, 01:26 PM   #237
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You do have a point. The option trade should be look at as a different trade than the original share buy.
Buying HPQ at 26 was not that bad at the time, it went up to 44 and then dropped like a rock last year. You are right, one never knows when it is the right rime to get in and especially OUT. I was selling covered call as some financial writers suggested to bid my time while hoping for a HPQ recovery. It did recover, but so fast, on so little reason, that my shares got called away.
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Old 06-16-2013, 02:29 PM   #238
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Always and ever, option trading is a losing game for traders in the aggregate. They are betting on the game, and the pot is to be split over time among all participants is stakes, less commissions, fees, and spread.

There are likely durable advantages that accrue to some classes of traders- my guess would be to cost and information edges for exchange member firms.

My hat is off to any private individual who wins over time, and manages to cash out at the end with a profit still intact.

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Old 06-16-2013, 04:19 PM   #239
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What do you consider long term? A few years? Ive already been doing it for 10 months and have a profit of 138%. Now, can I increase my position sizes by 100 fold and it still work? I have no idea. Maybe not. Maybe that's why the big boys don't do it. They cant trade large enough positions. A lot of the options that I'm trading have small amounts of open interest. I am currently short 8 MA June 615 puts and long 8 July 615s. The open interest on both of those puts is 8 so these are the only trades in those strikes. Others I have less than 1% of the open interest so who knows.
I think there is something to be said for what Utrecht is saying. Plenty of options being traded have very small open positions and probably aren't interesting enough for professional money traders, although maybe computerized trader programs buy and sell individual contracts, I don't know.

When I first learned about options and dabbled in trading them was in my early 20s. All my co workers who were in their 20 and 30s we all bought options (either calls or puts) nobody had the capital or the inclination to write options. What fun is it to collect $2 by writing an option when you can make $20 buying a OTM call and seeing the stock shoot up in couple of months. So I think the number of individual trader who write options is much smaller than the number of individual who want to buy them. This imbalance I think creates an opportunity to make a profit.

Back in the 80s it was way more expensive to trade options than it is today and the 5+% commission (including the larger spreads) wiped out any potential of profit. Now days the cost are pretty small a percent or so round trip.

Still in the case of SPY options the volumes are high and there is little doubt we are competing with the big boys, so I am less convinced that there is any advantage to be found. My experience writing weekly puts was there probably some Alpha, but the tax hassles (even though turbo taxes imported the trades I still want to verify them) and trading hassles weren't worth the extra few hundred dollars. When I looked at doing the same thing in IRA, the logistical hassle outweigh any advantage.

Regarding you mastercard options trade. It looks like you are paying $3.50 or so for buying a deep in the money put. Is there some reason you think the stock will drop in July and not in June?
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Old 06-16-2013, 06:25 PM   #240
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Regarding you mastercard options trade. It looks like you are paying $3.50 or so for buying a deep in the money put. Is there some reason you think the stock will drop in July and not in June?
These trades have nothing to do with where I think the stock is going. I'm not making any prediction of any movement during any time frame. At the end of the June expiry cycle, I close the whole trade. I dont hold the July put hoping that MA drops.
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