Lets discuss some real time option trades

[KiraC]

I obviously like this thread so I'm hoping we can keep it going.

Next week RedHat (RHT) has earnings on Monday and Oracle on Tuesday. News as of this morning is positive on RHT; ORCL tends to move up by 5 points from what I see in their charts. Let's hope for the best!

I'm definitely small time when doing this as I'm just learning. All my training so far has said trade small to limit your risk. We'll see what's on Options Action tonight!

 

[ERD50]

Just a thought, but maybe we should keep one thread devoted to option plays on earnings announcements, and another on longer term strategies like clifp's put/call on SPY vs B&H?

I've generally avoided earnings announcements, thinking that the occasional big swings might wipe out many premiums. But I also see how it could make sense to jump in. The 'excitement' and attention could be driving the premiums to higher than expected levels?

I dunno, but it would be interesting to observe, and maybe play along if I like what I see.

-ERD50

 

[utrecht]

Just a thought, but maybe we should keep one thread devoted to option plays on earnings announcements, and another on longer term strategies like clifp's put/call on SPY vs B&H?

I've generally avoided earnings announcements, thinking that the occasional big swings might wipe out many premiums. But I also see how it could make sense to jump in. The 'excitement' and attention could be driving the premiums to higher than expected levels?

I dunno, but it would be interesting to observe, and maybe play along if I like what I see.

-ERD50

Can you explain that bolded statement? In my opinion, you would only want to avoid big swings if you were selling options. When earnings come out, there are big swings but that's what you want if you buy options. You can only lose 100% of your investment if you're wrong but you can easily double or triple your investment, or more, when you're right.

 

[ERD50]

Can you explain that bolded statement? In my opinion, you would only want to avoid big swings if you were selling options. When earnings come out, there are big swings but that's what you want if you buy options. You can only lose 100% of your investment if you're wrong but you can easily double or triple your investment, or more, when you're right.

Yes, I was referring to selling options. When I've looked at buying them on EA, they look attractive on one hand - hey, this stock could swing wildly and give a nice profit on the trade - but they also seem expensive, and often the stock doesn't end up doing much.

Having a 2x or 3x upside and 1x downside means little to me. As I tried to explain in the thread dixonge started, I see that as the difference between betting evens/odd or red/black on the wheel, versus betting on 17. The odds and payoff on a single bet are different, but in the long run they both provide the same average payoff.

-ERD50

 

[utrecht]

The roulette analogy is a bad one. You cant compare something with a 35-1 payout and 37-1 odds against hitting it...to something with a 2-1 or 3-1 payout and somewhere near even odds of hitting it.

(My roulette odds might be slightly off. I don't play roulette rumbers)

 

[clifp]

The roulette analogy is a bad one. You cant compare something with a 35-1 payout and 37-1 odds against hitting it...to something with a 2-1 or 3-1 payout and somewhere near even odds of hitting it.

(My roulette odds might be slightly off. I don't play roulette rumbers)

It isn't a bad analogy. You can take any odds you want at roulette table even (red and black) 2-1, 3-1, 5-1 (various combinations) or even 35-1 with a single number. You can do pretty much the same thing with options, the main difference is the house's edge is a lot lower

 

[utrecht]

Apparently I am really bad at explaining myself.

 

[ERD50]

Apparently I am really bad at explaining myself.

I used those numbers to illustrate the principles. It isn't important whether the numbers are in alignment with your example or not. It's the concept that is important.

Look up 'roulette' on wiki, and they give all the odds. Play any way you like, the long term averages are the same for each bet. They are all an expected value on a $1 bet of −$0.053, except for the "Top line" bet, which is worse, a −$0.079. It makes no difference if the odds on a single roll are 37:1 (any singe #) or 1.111:1 (even/odd, red/black, etc), or anything in-between.



This is all getting very deja' vu of that http://www.early-retirement.org/forums/f30/insane-emergency-re-strategy-40682-2.html thread. Which is not to imply that anyone here is saying anything insane, it is just that the discussion is very similar. I hope it ends better.

-ERD50

 

[clifp]

I couldn't get everything settled in time to do option trading this week. My one virtual trade on Options house selling a Dec 124P and 128C at a net credit of 1.84 when the SPY was ~126 on 12/12 I end up closing at 2.40 for a net loss of .56.

Fortunately my real money monthly trades all did much better.
SPY Dec 117P/123C strangle with net credit of 5.06 traded on 11/21 when the SPY was ~120. Both sides expired worthless.
Likewise my USO 35P/40C short strangle net credit 1.31 also expired worthless written on 11/21
Individual puts also all expired worthless. BRK/B 65, CVX 95, ITW 42.50, O 30, GOOG 460, $14 for that 3 month option and since I'd do cart wheels to own GOOG <450 I'm disappointed that didn't get exercised but the 14% annualized return is ok also.

Expired calls BBT @28 CMP @105 (of course it would have been nice to sell the stock in the mid 90s rather see drop to 72..) Exercised calls BBT@22. This is tax loss selling but I wrote a put so I'll probably be buying this stock in Jan.

I did lose money on a GE put that I sold for .95 and bought back yesterday at 1.24.

Now that the VIX has dropped below 25, I am going to cut way back on selling individual puts, once all of my Jan options expire I'll probably only write a couple until VIX is near 30. Instead I'll concentrate on selling the index options.

 

[utrecht]

I used those numbers to illustrate the principles. It isn't important whether the numbers are in alignment with your example or not. It's the concept that is important.

Look up 'roulette' on wiki, and they give all the odds. Play any way you like, the long term averages are the same for each bet. They are all an expected value on a $1 bet of −$0.053, except for the "Top line" bet, which is worse, a −$0.079. It makes no difference if the odds on a single roll are 37:1 (any singe #) or 1.111:1 (even/odd, red/black, etc), or anything in-between.



This is all getting very deja' vu of that http://www.early-retirement.org/forums/f30/insane-emergency-re-strategy-40682-2.html thread. Which is not to imply that anyone here is saying anything insane, it is just that the discussion is very similar. I hope it ends better.

-ERD50

What I'm doing and what the other guy was doing in the thread you referenced is apples and oranges. He went bust taking insane risks. A few posts ago you said my trading wasn't risky.

I'm not going to debate this anymore. Its getting old having people tell me what Ive been doing successfully for years wont work.

 

[utrecht]

I couldn't get everything settled in time to do option trading this week. My one virtual trade on Options house selling a Dec 124P and 128C at a net credit of 1.84 when the SPY was ~126 on 12/12 I end up closing at 2.40 for a net loss of .56.

Fortunately my real money monthly trades all did much better.
SPY Dec 117P/123C strangle with net credit of 5.06 traded on 11/21 when the SPY was ~120. Both sides expired worthless.
Likewise my USO 35P/40C short strangle net credit 1.31 also expired worthless written on 11/21
Individual puts also all expired worthless. BRK/B 65, CVX 95, ITW 42.50, O 30, GOOG 460, $14 for that 3 month option and since I'd do cart wheels to own GOOG <450 I'm disappointed that didn't get exercised but the 14% annualized return is ok also.

Expired calls BBT @28 CMP @105 (of course it would have been nice to sell the stock in the mid 90s rather see drop to 72..) Exercised calls BBT@22. This is tax loss selling but I wrote a put so I'll probably be buying this stock in Jan.

I did lose money on a GE put that I sold for .95 and bought back yesterday at 1.24.

Now that the VIX has dropped below 25, I am going to cut way back on selling individual puts, once all of my Jan options expire I'll probably only write a couple until VIX is near 30. Instead I'll concentrate on selling the index options.

My bet is that it wont take long.

 

[clifp]

What I'm doing and what the other guy was doing in the thread you referenced is apples and oranges. He went bust taking insane risks. A few posts ago you said my trading wasn't risky.

I'm not going to debate this anymore. Its getting old having people tell me what Ive been doing successfully for years wont work.

I think what we have here is a failure to communicate. ERD50 isn't claiming what you are doing is crazy and not even all that risky. There are other people on the side of the trade and if options are priced fairly on average you break even (less commission.)

The exceptions are if only
1. If you are more skilled at trading.
2. You are more lucky
3. Or options are not priced correctly.

It is obviously difficult to separate 1 from 2.
My guess is options aren't always priced correctly and generally speaking puts are overpriced in volatile markets, and index options are overpriced generally.

 

[ERD50]

What I'm doing and what the other guy was doing in the thread you referenced is apples and oranges. He went bust taking insane risks. A few posts ago you said my trading wasn't risky.

I'm not going to debate this anymore. Its getting old having people tell me what Ive been doing successfully for years wont work.

clifp said it well. Thanks clifp.

I wasn't comparing your trades to his, but the expectations of reward exceeding the risk profile and the betting analogies seemed very similar.

I'm not really debating it, just trying to give you my viewpoint. I like to get different viewpoints on investing to test my own thinking. And I'm interested to see your trades. It's hard for me to imagine that 'the market' can be so consistently wrong that one can make large profits in a zero sum game, or that the big boys aren't jumping in and trading on it until the advantage gets soaked up.

That doesn't mean it can't happen, just that I don't expect it to be so over the long haul. I've been wrong before, and will be wrong again.

So I'm interested to see how it goes.

-ERD50

 

[utrecht]

Personally I don't care if I'm more skilled, more lucky or the options are priced incorrectly as long as I make money which Ive been doing long enough to have full confidence that I will continue. I don't spend much time wondering which it is either.

Today I bought HANS Feb 85 Puts for 1.05 when HANS was at 96. The puts closed at 1.13 with HANS at 95.89. I may leg into a spread at some point.

I also legged into a put spread on FDX. I made a nice pile of change on the calls I bought before earnings but I think the run-up is temporary. I own a Jan 82.50 / 80 Put spread for 0.50. Its now worth 0.70. FDX is down further after hours.

I sold SPY 121 weekly puts for 1.26

A bullish trade was discussed on Options Action regarding ORCL which has earnings coming out on Tue. I don't like the trade because I dont feel like it is appropriate for a stock with earnings coming out, but I will probably make some other bullish trade on ORCL on Monday because I do agree its going higher.

 

[FIRE'd@51]

That should be very interesting. You'll normally be 1/2 in cash, so in an up market, you'd need to do pretty well to make up for not having that money in the market. But selling on both sides, maybe those premiums could exceed B&H over time.

This is exactly the point I was trying to make in the other thread. An ATM call has a hedge ratio of about 0.5, so a covered call on SPY starts off with a beta of 0.5 (one half stock and one-half cash). As SPY declines the call's hedge ratio declines, increasing one's beta in a down market. Vice-versa as SPY rises. For this reason, I would expect that over time a covered call strategy on average would underperform a 50/50 stock-cash mix, let alone a 100% stock B&H. A cash-secured put is functionally the same investment as a covered call and behaves the same way. Net result - increased exposure to the left side of the probability distribution (down market) and reduced exposure to the right side (up market). It takes a lot of overpricing in the options to make up for this.

 

[utrecht]

I couldn't get everything settled in time to do option trading this week. My one virtual trade on Options house selling a Dec 124P and 128C at a net credit of 1.84 when the SPY was ~126 on 12/12 I end up closing at 2.40 for a net loss of .56.

Fortunately my real money monthly trades all did much better.
SPY Dec 117P/123C strangle with net credit of 5.06 traded on 11/21 when the SPY was ~120. Both sides expired worthless.
Likewise my USO 35P/40C short strangle net credit 1.31 also expired worthless written on 11/21
Individual puts also all expired worthless. BRK/B 65, CVX 95, ITW 42.50, O 30, GOOG 460, $14 for that 3 month option and since I'd do cart wheels to own GOOG <450 I'm disappointed that didn't get exercised but the 14% annualized return is ok also.

Expired calls BBT @28 CMP @105 (of course it would have been nice to sell the stock in the mid 90s rather see drop to 72..) Exercised calls BBT@22. This is tax loss selling but I wrote a put so I'll probably be buying this stock in Jan.

I did lose money on a GE put that I sold for .95 and bought back yesterday at 1.24.

Now that the VIX has dropped below 25, I am going to cut way back on selling individual puts, once all of my Jan options expire I'll probably only write a couple until VIX is near 30. Instead I'll concentrate on selling the index options.

Clifp,

Can you give some more details, like your position size as compared to your total trading account and the size of your trading account as compared to your total portfolio? Percentages is fine, you dont need to give dollar figures. How many positions do you normally have open at the same time?

I like your short strangle idea but only on a monthly basis. Ive paper traded it using weeklies and didn't like it.

 

[clifp]

Clifp,

Can you give some more details, like your position size as compared to your total trading account and the size of your trading account as compared to your total portfolio? Percentages is fine, you dont need to give dollar figures. How many positions do you normally have open at the same time?

I like your short strangle idea but only on a monthly basis. Ive paper traded it using weeklies and didn't like it.

I normally write 5 SPY strangles and 5-10 contracts on puts. Most of my individual stock positions are in the 20-30K range (although some have appreciated to twice that). Prior to the Dec expiration I had 16 puts and 8 calls (all but SPY covered and I use VTI for my B&H). I had 320K in short puts, (plus two short 2013 puts) backed up by 120-140K in cash, mostly sitting in Schwab savings with .35% interest rate. This is roughly twice as many options as I've normally had, but as I've said the increase in VIX struck me as golden opportunity to make some gold.

I am trading this in my main account which is north of million and 40% of my liquid assets.

In order to reduce taxes my plan was to do my SPY trades in one of my IRAs. 1000 SPY and 125K in cash to write the strangles. However, I after looking at the weekly pricing for calls like you am not convinced it is a good strategy, but I do like on it monthly basis.

When I compare a narrow strangle weekly D23 120P 123C the net credit is only 1.74 I'm not all that confident that market will finish next week between 118.26 and 124.74. But if I move to a monthly basis I can have slightly wider strangle Jan 119P 124C get 4.71 in premium and I have a wide range of profitable SPY closes 114.29 to 128.71 although significantly less than last month, where I got 5.06 for a 6 point spread and only had 4 weeks vs 5 weeks of trading time.

I am starting to think that just selling weekly SPY puts may be the best strategy of all.

 

[FIRE'd@51]

In order to reduce taxes my plan was to do my SPY trades in one of my IRAs. 1000 SPY and 125K in cash to write the strangles.

Have you considered using the SPX's instead of SPY's in a taxable account since they qualify for the 60/40 tax treatment?

 

[clifp]

No I had not. I vaguely remember the 60/40 tax treatment (aka the tax for wall street ok no politics). Everytime I look at futures trading it seems scary and confusing. I am also loath to open yet another brokerage account (I closed down my Ameritrade and Fidelity this year which I opened because of some premium they offered).

But this is an excellent suggestion. Is there any way to trade SPX other than opening a future account?

 

[utrecht]

I normally write 5 SPY strangles and 5-10 contracts on puts. Most of my individual stock positions are in the 20-30K range (although some have appreciated to twice that). Prior to the Dec expiration I had 16 puts and 8 calls (all but SPY covered and I use VTI for my B&H). I had 320K in short puts, (plus two short 2013 puts) backed up by 120-140K in cash, mostly sitting in Schwab savings with .35% interest rate. This is roughly twice as many options as I've normally had, but as

How does that add up to being short 320K in puts? Can you help me with the math?

 

[FIRE'd@51]

But this is an excellent suggestion. Is there any way to trade SPX other than opening a future account?

You don't need a futures account to trade these as they are not options on futures. They are cash-settled European (no early exercise) options on the S&P500. The mini-SPX is one-tenth the size of the SPX, which makes the notional amount of $ per contract the same as SPY.

You can check out the contract specs at the CBOE web site.

 

[clifp]

How does that add up to being short 320K in puts? Can you help me with the math?

I am saying if everyone of my 14 short put on individual stocks that was open between Dec. 17 and Jan 2012 finished in the money I would need to come up with $320K to purchase the shares.

 

[clifp]

You don't need a futures account to trade these as they are not options on futures. They are cash-settled European (no early exercise) options on the S&P500. The mini-SPX is one-tenth the size of the SPX, which makes the notional amount of $ per contract the same as SPY.

You can check out the contract specs at the CBOE web site.

I called Schwab and found out I can easily trade these. Schwab using some strange symbols for index so I could never find the options associated with SPX.

I also read the rules regarding the tax treatment on SPX options and you are exactly right they do qualify for the 60% long-term capital gains and 40% short term.

Frankly it is mystifying why if I sell a SPX 1200 Dec 23 put for say $9.00 which expires worthless $540 of the profit is taxed at the 15% cap gain rate for the 6 days I was short the option (or my counterparty held it.)

Even more baffling is if I sold 10 SPY 120 Dec 23 puts for $.90 this same $900 in profit is treated at short term capital gains. If I don't know better I'd say it is because the folks who traded options in $120,000 blocks have better lobbiest than those who trade $12,000 securities.

Two other benefits for doing as you suggest are the options are European style which eliminates the early assignment hassles that ERD had. Most importantly for me is lowers my trading cost significantly. Schwab charges 8.95+ .75/contract for up to 2 options legs (say a calendar roll out or writing a strangle) A typical trade for me using SPY would 10 or 20 contracts costing me $16.45 or $23.95. Optionshouse is cheaper costing me between $10 to 15.50. Trading at single contract SPX will only cost $9.70 or $10.45 at Schwab. If I am doing weekly trades this adds up to several hundred dollars. The trading volume is lighter so the spreads maybe more.


So thanks very much for the tip.
Over the years reading/participating in this forum has saved/earned me well over a $1/post!!

 

[utrecht]

OK, now you have me interested. My normal position size when I do a SPY trade is 10 contracts. Where do I find the SPX options at Optionshouse?

 

[ERD50]

RE SPX vs SPY

The trading volume is lighter so the spreads maybe more.

When I was looking at SPX (for the same reasons), the spreads seems significantly wider. And I worried a bit about getting filled if I set a limit near the middle with that lighter volume.

Maybe that's changed, I'll probably take another look in the AM.


-ERD50