AES - Experiment - Placed a 1/18 vertical call spread (S 13, B
15) as an experiment for a stock that may decline. Max loss is
about $95 per contract and max gain is about $100. Let's see how it
works out.
Normally, you would have a 50/50 probability on this trade, but
AES isn't a liquid instrument for options - look at the very wide
spreads & very low open interest (your sale of the 13's makes
yours the only position in that strike, unless others bought/sold
today).
Mid-price is $1.20 on that vertical, so you basically have 20%
in lost edge on the sale & would pay similar % to get out if
you need/want to.
One of the great things about options is that you can improve
your odds of success by trade selection - 50/50 would be the same
as buying or selling the stock here; you have a lower than 50/50
because of the inefficiency of the instrument, though you have
defined your risk.
I would recommend looking at liquid, efficient instruments
(penny-wide spreads on lower-priced underlyings, which would be
maybe up to $30-50; nickle or dime on mid-priced underlyings;
$.50-$1 on higher-priced underlyings).
Then, look to have a statistical edge 60-70% probability of
profit on a credit spread is a good starting point. That way,
you've got a measurable edge going in that just buying or selling a
stock/etf doesn't give you. I hope this helps.
Great info, that may be why I called it an experiment. I usually
just sell so I am just beginning to explore the more exotic ideas.
Maybe we need an options thread here at
BPT. Again, thanks.
Posted by scottdelara on 6th of Jan 2014 at 05:11 pm
I also should have mentioned - I am a professional options
trader for a proprietary trading firm since 2009. I am usually in
long gamma positions for cheap or a small credit. I try not to be
short units, although that doesn't always happen. :) Generally
speaking we have one PRIME rule which is - Live to trade another
day. I never want to be in a trade that could cash me out
regardless of how unlikely the worst case appears. That means I am
not going to be short gamma. I am managing risk first, profit
second, and only taking the best trades that fit my very defined
parameters. I am all for experimenting but I myself use the paper
trade for those. Good luck and great suggestion.
And this statement Scott is what makes professional traders
different from the wannabe traders : "I am managing risk first,
profit second, and only taking the best trades that fit my very
defined parameters."
Posted by scottdelara on 6th of Jan 2014 at 04:37 pm
if I am reading this right, you are short the call spread for
$1.15 credit? you are long a worthless call and short the itm call.
your break even looks like its about 14.15. below that you make
money and above it you lose. and your short call doesn't appear to
have any juice, so you are not shorting vol. ultimately, you are
just short deltas. i'm not sure if you were trying to collect
premium or be short deltas (or both) based on your post, but there
are better ways to do both. sheldon natenbergs option volatility
and pricing is a great book that i recommend to anyone asking about
options. the risk reward of this trade is just not good at
all and doesn't make use of options to give you an edge.
Besides being an inefficient options vehicle, the HV range over
the past year is 14% - 31% with IV looking about the same. It
doesn't look like there's ever enough juice in AES to make
strategic options trading in it worthwhile.
They can be a way to take money out of the markets on a steady
basis, especially when the crystal ball clouds up. I am not that
much of an expert but I do tend to stay mostly on the sell side.
That means that I take advantage of the premiums people are willing
to pay, often to hedge positions. They are ether bets or insurance
and the longer the life of the contract the more the premium.
People often react to options as risky but they can be used in
ways that are actually less risky than trading stocks. Selling a
put rather than buying a stock you would like to own is one example
where one is giving up large upside gains for immediate income and
some downside protection compared to buying the stock.
They are great adjuncts to stock trading and could be
appropriate for use with your tutorial methods.
As long as we're talking options ... (not that this is a great
entry point or well priced option pair) .. Example Nat Gas short
using UNG call spread at 21 / 20 ... buy the 21 in case
it
goes on a tear, sell the 20 because you think it's going to
19. You pocket 50c and keep it if UNG finishes below 20 at
feb expiration. You'd also win above 21.50.
Much better to own futures in nat gas, though it takes some
scratch at $10k per contract, and hedge with one of these scam ETFs
that have horrible tracking error and basically are just monthly
exercises in loss-booking when the commodity goes down. Call
spreads very useful if you're limited to IRAs. Also, avoids
having to chase gaps and avoids whipsaw stopouts.
Just to follow on in this example ... price hit up into that
thin area at 4.42 I'd mentioned ... Hades did not freeze over this
week, so , of course, it makes sense for JPM to blow out longs back
to a support area. Spread went from 50c to about 32c as
of this screengrab. So, one could cash it in or hold and try
to let the 32c decay for awhile (feb exp)
historically (as in decades) i was always a buyer of
options, call and puts. finally i realized (~2 years
ago) that, like Vegas, the house usually wins, today i'm a
seller of options, primarily puts and some covered calls (my
strategy is very pedestrian, nothing fancy). BPT (including this
blog) helps provide both the individual stock, sector and market
ideas along with the technicals. this gives me a relatively
low risk portfolio profile for a respectable return (i'll take
my 2013 low double digits despite the ~30% spx return). good
trading, Haz
for today i sold some MLNX feb 32 puts @ $0.70; data: 12
month low 32.32. earnings end of january (hopefully they will have
some) short interest 17% vs a p/e that is clearly too high, but we
are technical traders here.... .i'm 18% otm (out of the money) and
my standstill ROR is 17%. while below the 200 dma, it is currently
just above the 100 and 50 day. lots of support around that 32
level going back well into 2011. i'm buckled up. Haz
Newsletter
Subscribe to our email list for regular free market updates
as well as a chance to get coupons!
AES - Experiment - Placed
Posted by jroger on 6th of Jan 2014 at 11:53 am
AES - Experiment - Placed a 1/18 vertical call spread (S 13, B 15) as an experiment for a stock that may decline. Max loss is about $95 per contract and max gain is about $100. Let's see how it works out.
Small suggestion:
Posted by a_l_ on 6th of Jan 2014 at 01:24 pm
Normally, you would have a 50/50 probability on this trade, but AES isn't a liquid instrument for options - look at the very wide spreads & very low open interest (your sale of the 13's makes yours the only position in that strike, unless others bought/sold today).
Mid-price is $1.20 on that vertical, so you basically have 20% in lost edge on the sale & would pay similar % to get out if you need/want to.
One of the great things about options is that you can improve your odds of success by trade selection - 50/50 would be the same as buying or selling the stock here; you have a lower than 50/50 because of the inefficiency of the instrument, though you have defined your risk.
I would recommend looking at liquid, efficient instruments (penny-wide spreads on lower-priced underlyings, which would be maybe up to $30-50; nickle or dime on mid-priced underlyings; $.50-$1 on higher-priced underlyings).
Then, look to have a statistical edge 60-70% probability of profit on a credit spread is a good starting point. That way, you've got a measurable edge going in that just buying or selling a stock/etf doesn't give you. I hope this helps.
Great info, that may be
Posted by jroger on 6th of Jan 2014 at 04:48 pm
Great info, that may be why I called it an experiment. I usually just sell so I am just beginning to explore the more exotic ideas. Maybe we need an options thread here at BPT. Again, thanks.
An options thread is a great idea
Posted by scottdelara on 6th of Jan 2014 at 05:11 pm
I also should have mentioned - I am a professional options trader for a proprietary trading firm since 2009. I am usually in long gamma positions for cheap or a small credit. I try not to be short units, although that doesn't always happen. :) Generally speaking we have one PRIME rule which is - Live to trade another day. I never want to be in a trade that could cash me out regardless of how unlikely the worst case appears. That means I am not going to be short gamma. I am managing risk first, profit second, and only taking the best trades that fit my very defined parameters. I am all for experimenting but I myself use the paper trade for those. Good luck and great suggestion.
The Holy Grail
Posted by payday on 6th of Jan 2014 at 05:23 pm
And this statement Scott is what makes professional traders different from the wannabe traders : "I am managing risk first, profit second, and only taking the best trades that fit my very defined parameters."
The Holy Grail of trading is right there.
Thanks Scott
I have to agree with a_i_
Posted by scottdelara on 6th of Jan 2014 at 04:37 pm
if I am reading this right, you are short the call spread for $1.15 credit? you are long a worthless call and short the itm call. your break even looks like its about 14.15. below that you make money and above it you lose. and your short call doesn't appear to have any juice, so you are not shorting vol. ultimately, you are just short deltas. i'm not sure if you were trying to collect premium or be short deltas (or both) based on your post, but there are better ways to do both. sheldon natenbergs option volatility and pricing is a great book that i recommend to anyone asking about options. the risk reward of this trade is just not good at all and doesn't make use of options to give you an edge.
Good points -
Posted by a_l_ on 6th of Jan 2014 at 06:29 pm
Besides being an inefficient options vehicle, the HV range over the past year is 14% - 31% with IV looking about the same. It doesn't look like there's ever enough juice in AES to make strategic options trading in it worthwhile.
thanks for all the nice
Posted by matt on 6th of Jan 2014 at 01:57 pm
thanks for all the nice posts today guys!
using options is something I
Posted by matt on 6th of Jan 2014 at 12:04 pm
using options is something I wish I was better at - some of you guys here are pretty good at it,
They can be a way
Posted by jroger on 6th of Jan 2014 at 12:15 pm
They can be a way to take money out of the markets on a steady basis, especially when the crystal ball clouds up. I am not that much of an expert but I do tend to stay mostly on the sell side. That means that I take advantage of the premiums people are willing to pay, often to hedge positions. They are ether bets or insurance and the longer the life of the contract the more the premium.
People often react to options as risky but they can be used in ways that are actually less risky than trading stocks. Selling a put rather than buying a stock you would like to own is one example where one is giving up large upside gains for immediate income and some downside protection compared to buying the stock.
They are great adjuncts to stock trading and could be appropriate for use with your tutorial methods.
Nat Gas Example Short Using Call Spread
Posted by cmunny on 6th of Jan 2014 at 01:24 pm
As long as we're talking options ... (not that this is a great entry point or well priced option pair) .. Example Nat Gas short using UNG call spread at 21 / 20 ... buy the 21 in case it
goes on a tear, sell the 20 because you think it's going to 19. You pocket 50c and keep it if UNG finishes below 20 at feb expiration. You'd also win above 21.50.
Much better to own futures in nat gas, though it takes some scratch at $10k per contract, and hedge with one of these scam ETFs that have horrible tracking error and basically are just monthly exercises in loss-booking when the commodity goes down. Call spreads very useful if you're limited to IRAs. Also, avoids having to chase gaps and avoids whipsaw stopouts.
http://screencast.com/t/7Iod5Vda
UNG sell feb 20 monthly call buy feb 21
http://screencast.com/t/dM90lXJz7Mz
UNG FEB 21/20 CALL SPREAD 50C TO 32C IN 4 DAYS
Posted by cmunny on 9th of Jan 2014 at 02:12 pm
Just to follow on in this example ... price hit up into that thin area at 4.42 I'd mentioned ... Hades did not freeze over this week, so , of course, it makes sense for JPM to blow out longs back to a support area. Spread went from 50c to about 32c as of this screengrab. So, one could cash it in or hold and try to let the 32c decay for awhile (feb exp)
options strategy
Posted by hazbin1 on 6th of Jan 2014 at 01:04 pm
historically (as in decades) i was always a buyer of options, call and puts. finally i realized (~2 years ago) that, like Vegas, the house usually wins, today i'm a seller of options, primarily puts and some covered calls (my strategy is very pedestrian, nothing fancy). BPT (including this blog) helps provide both the individual stock, sector and market ideas along with the technicals. this gives me a relatively low risk portfolio profile for a respectable return (i'll take my 2013 low double digits despite the ~30% spx return). good trading, Haz
example of plain and simple
Posted by hazbin1 on 6th of Jan 2014 at 03:28 pm
for today i sold some MLNX feb 32 puts @ $0.70; data: 12 month low 32.32. earnings end of january (hopefully they will have some) short interest 17% vs a p/e that is clearly too high, but we are technical traders here.... .i'm 18% otm (out of the money) and my standstill ROR is 17%. while below the 200 dma, it is currently just above the 100 and 50 day. lots of support around that 32 level going back well into 2011. i'm buckled up. Haz