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Old 06-16-2013, 06:28 PM   #241
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If possible I prefer to sell options with high open interest and lots of liquidity. Options with low OI tend to have wide bid/ask spreads.
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Old 06-16-2013, 06:46 PM   #242
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Originally Posted by Leon44 View Post
If possible I prefer to sell options with high open interest and lots of liquidity. Options with low OI tend to have wide bid/ask spreads.
That's true, but as long as the underlying stock is a large very liquid stock like MA or AMZN, I can normally place an order right in the middle of the bid/ask and within minutes the spread tightens up and I get filled. Trying to trade options with very small open interest on thinly traded stocks is a fools game.
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Old 06-16-2013, 09:24 PM   #243
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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.
Ok but in this case doesn't the lack of liquidity hurt?. By late Friday afternoon the value of the June put will disappear for a deep in the money put or more likely it will just be exercised and you'll own 800 shares of MasterCard and have to come up with $492,000.

Right now there is a $3+ difference between spread and ask, and I sure it will narrow during trading hours but that still is a big spread. Assuming the MA price stays the same during the next week doesn't the profit you make by the higher theta (time premium decay) get canceled by the wide bid and ask price spread?
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Old 06-16-2013, 09:46 PM   #244
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I wont have to come up with $492,000. I just have to sell the shares. If you look at my chart you can see that I was short 20 PNRA June 200s. Someone exercised 6 of them on Thursday and I got put 600 shares. I sold the shares as soon as the market opened on Friday and since I was 4 weeks into the trade anyway, I just closed out the entire PNRA trade at the same time. I actually made an extra $180 on top of what is shown in my chart due to the option assignment because the stock opened up about 1% which made me $180 more than I would made based on the change in the option premium of the puts that were exercised.

As far as the spread goes, I put in an order at half way between the bid/ask and get filled pretty quickly most of the time. The current price I have listed on my chart for the MA June 615s is the middle of the spread which is also the price that OptionsHouse shows as its current value. As long as I get filled at that price or very close to it, it makes no difference how wide the spread is.

Also, I normally don't wait until late Friday afternoon to close out the trades. I normally try to do it on Wed or Thur depending on my work schedule. I may not have time on Friday to get to my computer when I want to. Sometimes I do it earlier if there is no time value left in the options that Im short.
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Old 06-16-2013, 11:05 PM   #245
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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.
There may be, I really don't know either. I suspect that if there is money to be made, the big boys will figure out how to grab many small chunks, but it is just speculation.

...

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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.
I agree that it seems to create an opportunity. I just don't think it is a big opportunity, for the reasons I stated below - the big boys would sell so many that the price would fall until the big opportunity became a moderate one. Now, if the smaller fields really are not touched by the big boys, and these opportunities are better, the bid-ask spread does hurt. It's still just tough for me to imagine that large % profits are there and others aren't jumping in to bring it back to more normal profits. But I could be wrong.

It's tough to prove one way or the other, IMO. I used to sell options on smaller stocks, and those prices and spreads seemed so volatile that the whole deal seemed to change before my eyes in just seconds. It was hard for me to feel very scientific about it.


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Old 06-17-2013, 09:40 AM   #246
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I dont think its tough to prove. All you have to do is test the theory and see if it works. The only question is how long of a test do you need before you make your conclusion. I tested it with paper trades for several months and have been trading with real money for 10 months now. I am convinced. I can see that you're not and that's OK. I'm not trying to convince anyone. Just trying to see if anyone can point out any pitfalls that I hadn't thought of.
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Old 06-17-2013, 09:53 AM   #247
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I am convinced. I can see that you're not and that's OK. I'm not trying to convince anyone. Just trying to see if anyone can point out any pitfalls that I hadn't thought of.
It is OK. Just my observations, and I hope you do continue to post your results, I find it interesting.

And to be a bit more precise, I don't doubt you can make money selling options, I think you can. What I doubt is whether there is relatively big money to be made.

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I dont think its tough to prove. All you have to do is test the theory and see if it works. The only question is how long of a test do you need before you make your conclusion. I tested it with paper trades for several months and have been trading with real money for 10 months now.
And how many trades is that? I'd have to brush up on my stats, but you can calculate a confidence interval to see what 10 months plus paper trades tells you. Just like my roulette example, if you bet against #17, you will likely win many times before losing, but over the long haul the odds are all about the same.

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Old 06-17-2013, 10:25 AM   #248
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I see what you mean by your roulette example but it isn't exactly the same thing. We know for a fact that if you roll the ball enough times, you will lose money because the payout is less than the odds of winning.

Selling options make money because most people who trade options want to buy them. Why? Because that's where the quick strike is made. You can make 1000% in a few days sometimes. Because of that, options are more expensive that they are really worth. Selling options profits by taking advantage of that fact. Selling options outright can make money but when you lose, you lose big. You risk many multiples of your reward. Buying calendar spreads have a much smaller risk. You can only lose your investment. No more. So you can take advantage of option buyer's greed without massive risk as long as you spread your investment around enough and dont sink your entire options trading bankroll into one position.

Here is the question:

Are they priced too high compared to the chance that the stock will make an outsized move? If they are, the option prices need to come down. But if option prices come down, more people will buy options so the prices will go back up. Hence, I propose that they are priced correctly now.

This month my spread have had a great month. I believe its mostly because volatility has risen this month causing the options Im long to rise more in value than the ones I'm short. In the future when volatility is higher, this strategy may not work if there is a steady lowering of volatility. As long as volatility stays fairly constant or rises during any given month, I believe it will work.
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Old 06-17-2013, 12:16 PM   #249
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I see what you mean by your roulette example but it isn't exactly the same thing. We know for a fact that if you roll the ball enough times, you will lose money because the payout is less than the odds of winning.
Yes, it's an analogy and analogies are seldom 'exactly the same thing'. But hypothetically, assume this bet on average paid a small % gain. Over the long haul you would make that slight %. Occasionally, you would get walloped with a series of big losses when a random 'cluster' of 17s came up that were not equally distributed, which is exactly what happens in real life. The question then becomes, can you keep playing long enough for that to regress to the mean, or are you tapped out (emotionally or literally)?


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Selling options make money because most people who trade options want to buy them. Why? Because that's where the quick strike is made.
I agree with that. I think the only difference we have is the degree to which they are over-priced in the long run. I suspect it is a relatively small amount, you think it by a considerable amount. I don't feel confident that I can prove my point, so I'll just observe and hopefully learn. Maybe later I'll take another look at those indexes which sell slightly OTM calls, that could provide another data point.

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Old 06-17-2013, 04:32 PM   #250
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If possible I prefer to sell options with high open interest and lots of liquidity. Options with low OI tend to have wide bid/ask spreads.
This...and on products that use SPAN margin...and naked if you are comfortable doing that.Or spreads are fine too...but SPAN margin is the biggie.
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Old 06-18-2013, 08:51 AM   #251
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Here's something similar that I haven't tried yet. The same bracketed put calendar spread but instead of using individual stocks, using SPY and using 3% brackets instead of 5%. The only real risk that I see in my strategy is that a stock can move a great deal in any given month and if it moves more than 7-8% there is probably going to be a loss, depending on the implied volatility of the stock. SPY is very rarely going to move that much in any one month. However, since volatility is lower, so are the option prices so I'm not sure if it would would better or worse.

Here were the prices as of the beginning on May 20th which is when I opened the trades for the June option cycle.

SPY...166.80

June/July 162...0.95
June/July 167...1.05
June/July 172...0.61

Current prices as of right now with SPY at 164.79

June/July 162...1.67......75.7% profit
June/July 167...1.25......19.0% profit
June/July 172...0.17......72.1% loss

Total profit of 18.4% profit while SPY is down 1.2% during the same time frame.

Now any hedge fund or other big traders have access to this same information and have since the beginning of options trading. Would something change if someone poured huge amounts of money into it? I don't know, but what I do know is that nothing is going to change when I invest my comparatively piddly amount of money into it.

I'm not saying you can make 18% every month. I believe profits are higher this month because volatility has risen while the trades were open. There will be months where volatility drops while the trades are open which will hurt and there will be months when SPY moves 4-5%. I'm not sure how far it needs to move to cause a loss. Long term I believe this is a low risk profitable strategy as long as I don't increase my position sizes every month along with the size of the bankroll that I allot to this strategy.
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Old 06-18-2013, 03:58 PM   #252
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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?
I would think the liquidity and bid-ask spreads would be better with OTM calls than ITM puts. Also I would expect a reduced chance of an early assignment.
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Old 06-18-2013, 04:07 PM   #253
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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)?
Calendar trades are volatility bets, and any excess return comes from a mismatch in implied volatilities. Usually the one-month option has a higher implied volatility than the two-month. So long as the underlying stock realizes a volatility less than the implied volatility of the one-month option, the trade is likely to be profitable. As utrecht points out, these trades blow-up when the underlying stock makes a larger move than would be expected from the implied volatility of the one-month option. The GOOG calendar discussed in his blog is a prime example. utrecht's method of using "brackets" is a clever attempt at controlling losses should the underlying stock make a large move.

If the implied volatilities of both the one and two month options are the same, the trade should be a "fair game". However, if the one-month option is systematically overpriced relative to the two-month (in terms of implied volatility), the probability of the trade being profitable is increased relative to the what would be theoretically expected (analagous to a weighted coin which comes up heads more than half the time when flipped thousands of times).
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Old 06-18-2013, 04:32 PM   #254
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I would think the liquidity and bid-ask spreads would be better with OTM calls than ITM puts. Also I would expect a reduced chance of an early assignment.
I'll be opening a new batch of trades early next week. I'll paper trade the calls on the high side of the bracket just to see how they react compared to the puts.
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Old 06-19-2013, 11:42 AM   #255
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Wow.....13 pages.

I always smile when I see this thread.

Know a guy who took $10k and turned it into $1.2m buying calls.
Back in the 90's just prior to the Dot Com boom.
My company hired a very bright PHD out of grad school.
Forgot the year but he was buying way out of the money calls, six months out for pennies. Then market took off.
That company went from single digits to over 80 in less than 6 months.

I was his mentor/coach. One day he couldn't focus. All excited and didn't know what to do. I didn't believe him until he showed me his account balance on my computer. We had a long talk. That weekend he brought his wife a new car and she quit her $20k a year job. Two weeks later they brought a 3,800 sq ft, 3 car house in a prime area. Paid cash. There's a lot more to the story but I will keep it short. He is a good friend.
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Old 06-21-2013, 12:56 PM   #256
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I had an interesting conversation with an old friend the other day. For the past year or so, he's been telling me how great he's doing trading options. But I could never get him to give me a reference point, like how are you doing versus the S&P? He always had some excuse - he wouldn't invest in the S&P, it can take a big dive, and supposedly the way he constructed his options he had a limited downside, etc, etc.

He kept telling me about this or that trade, basically structured as selling puts, and he'd keep saying things like "What is the chance that stock XYZ will drop below my b/e point in that time!" And I'd always say - "I don't know, but on average I'd think the chances are pretty much aligned with the premium you are earning. I doubt the people on the other side of the trade are willing to give a way a lot of money. Maybe some, but not a lot". He always thought he 'knew' that most of his trades were a good deal for him. OK, maybe he's good at picking them, I don't know. He's a very smart guy, he's constructed all sorts of complicated spreadsheets and macros to evaluate each trade. Maybe he can make it work for himself.

So in this conversation, he starts talking options again. Well, the market had been on a tear this year, so I figure he's doing great selling puts. He tells me he tripled his money last year! Of course, I don't know how much absolute $ this is, but he's very well off, he puts a lot of time/effort into this, spends some significant $ on software for tracking gains and tax liabilities, and he mentioned he had outrageous taxes due, so I take it that it is not small potatoes. He goes on to say, he lost every penny of last years gains so far this year - ouch!

Then I get the line I hear from so many of these traders - "I should have followed my 'system', I knew better, but I deviated by this or that.". Yeah, right.


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... Know a guy who took $10k and turned it into $1.2m buying calls.
Back in the 90's just prior to the Dot Com boom. ...
Good for him, but I suspect that this was similar to knowing someone who won the lottery. Good for them, but that doesn't mean we should all go out and buy lottery tickets.

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Old 06-21-2013, 05:20 PM   #257
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If he tripled his money in one year he was taking WAY too much risk. It's no wonder he lost all his profits in 6 months.
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Old 06-21-2013, 06:17 PM   #258
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If he tripled his money in one year he was taking WAY too much risk. It's no wonder he lost all his profits in 6 months.
I agree with you. But I was amazed at how he just couldn't/wouldn't see it.

And I don't mean to infer that to you either. It's just something I see with many traders.

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Old 06-21-2013, 11:06 PM   #259
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I have some positions with plenty of risk, but they are fairly small percentages of my trading account. The only way to triple your entire account is to take massive risk with the whole account. That's just plain dumb.
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Old 06-22-2013, 08:38 AM   #260
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My friend up above learned a hard lesson about margin.
A few years after making that money he was using margin.

Took the family and mother in-law to Europe for 3 weeks.
Market crashed (dot com bust).
He didn't check his account for over 9 days and had margin calls.
The firm sold everything and he lost over $500k.
He has never recovered from that loss but has a good paying job and no debt.

When I was a young man, I learned that I always lost money trading options.

So today I will sometimes write calls against a position.
Sometimes write puts on something I want to buy at a lower price.

I did buy some deep in the money calls on BAC and made $10k back in Q1 but that
was me just gambling. I don't do that very often.
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