Anyone here trade options?

[utrecht]

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.

 

[Leon44]

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.

 

[utrecht]

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.

 

[ERD50]

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

 

[utrecht]

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.

 

[ERD50]

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

 

[utrecht]

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.

 

[bondi688]

utrecht
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.

 

[utrecht]

utrecht
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.

 

[bondi688]

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.

 

[utrecht]

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.

 

[bondi688]

utrecht
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.

 

[haha]

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.

Ha

 

[clifp]

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?

 

[utrecht]

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.

 

[Leon44]

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.

 

[utrecht]

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.

 

[clifp]

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?

 

[utrecht]

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.

 

[ERD50]

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.

...

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.


-ERD50

 

[utrecht]

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.

 

[ERD50]

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.

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.

-ERD50

 

[utrecht]

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.

 

[ERD50]

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)?

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.

-ERD50

 

[Snoopy80]

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.