Posted by sonofrebel on 27th of Jun 2019 at 03:42 pm
I trade alot of options - let me illustrate how I make the
choice with SPY Pro.
I use OptionVue as an analytical platform; there is a feature
called TradeFinder. I set a target (in this case SPY up 5% in
20 calendar days) to look for optins that will have the highest
return. In this case the scan came up with a 4:1 return for
optins around 305/306 strike. These are only delta 20 as it
turns out (for most stocks the program selects delta 30 or so).
I also assume no change in volatility - it may fall with an
increase in price. In any event, this owuld change the
numbers to be a little less, but will make littel differnce in
ranking.
The issue with going out of the money as far is you suffer
time decay; the 85 delta options Matt picks are really a stock
substitute and have little theta.
For the same dollar investment though, you can have 25
contracts and, if right, htte upside is quite a bit more. If
you are doing this, I would suggest you assume a complete loss of
premium to set you risk level.
Attached are three screen shots as of close of day on Tuesday
(OptionVue can go back in time to the prices at that time).
1. The run of option returns for a $1,000 investment ranked
by expected return if SPY gains 5% in 15 days.
2. The risk graph of 1 option at 266; differnet timeframes
are very close as there is little theta.
3. The risk graph of 25 options at 305; timeframes are widely
spaced relfecting the theta.
The solid vertical line is the target - I have highlighted
the 27 day line in these graphs - the reward from 1 option is 50%
and from 25 OTM options it is over 300%.
Dont be seduced by the extra returns - you risk losing money
a lot faster as well! Hence my comment on sizing risk
above.
nice! thx for the post. some things to model: as I said
generally mode 2 - 2 1/2 months out even though the average trade
is only about 17 days. And I tend to use options at a 0.90 - 0.85
delta for 1st entries, 0.8 for 2nd entries, and 0.7 - 0.6 delta for
3rd entries. I think personally going out to a 0.90 delta is
too deep for the high probability systems since they are very high
probable already. For the original system that had more draw
down the 0.90 delta options made more sense, so I'm thinking the
first entries might be better to go 0.8 delta. I've also been
told that going out 2 plus months is too far, I should only go out
1 month, but I'm not sure about that. anyway if you have
thoughts on that or could model some things I'd really appreciate
it.
I would not favor going too short - I don't like to start
anything less than 30 days and your choice seems about right to me.
Less of an issue with delta 85's but even at delta 70's, the
time decay which really kicks in at 30 days starts to bite. See
general chart below - I assume this is at the money mmodel (delta
50).
It makes little difference to price (and hence leverage) once
you go past 30 days - see attached for comparison of Aug and Sept
delta 85 options - 17.10 vs 21.70. Also note that short term
options are much cheaper.
But here are the time decay calculations:
July @ 11.71, theta is 10.7 c per day - 0.91% per day (which
increases with time as do all the numbers below)
Aug @ 17.10, theta is 7.37 c per day - 0.43% per day
Sept @ 21.70, theta is 6.45 c per day - 0.30% per day
I have attached risk graphs for the three dates using roughly
the same $ invested - as you can see there is little difference
between Aug and Sept but July has much higher risk of losing and
making money quickly. I have also included 2 screen shots of
data behind this comment.
My summary would be that people should look at increasing
their risk in steps with SPY Pro system and pick which level they
are most comfortable with;
1. SPY
2. 2 or 3 x SPY ETFs
3. Spy in the money high delta options - 60 days out - this
level is where you are really using options as stock substitute
rather than making an option trade
4. Spy in the money options closer in time
5. Spy at the money options
6. Spy out of the money options etc.
My advice would be to start with 1 and then increase as you
get comfortable with the high probabilities and are willing to take
more risk (so I agree with your suggestion on this approach)
- recall with an option, you can be right and still loose
money!
I trade alot of options
Just to clarify on the SPY system around the leverage ...
Posted by sonofrebel on 27th of Jun 2019 at 03:42 pm
I trade alot of options - let me illustrate how I make the choice with SPY Pro.
I use OptionVue as an analytical platform; there is a feature called TradeFinder. I set a target (in this case SPY up 5% in 20 calendar days) to look for optins that will have the highest return. In this case the scan came up with a 4:1 return for optins around 305/306 strike. These are only delta 20 as it turns out (for most stocks the program selects delta 30 or so). I also assume no change in volatility - it may fall with an increase in price. In any event, this owuld change the numbers to be a little less, but will make littel differnce in ranking.
The issue with going out of the money as far is you suffer time decay; the 85 delta options Matt picks are really a stock substitute and have little theta.
For the same dollar investment though, you can have 25 contracts and, if right, htte upside is quite a bit more. If you are doing this, I would suggest you assume a complete loss of premium to set you risk level.
Attached are three screen shots as of close of day on Tuesday (OptionVue can go back in time to the prices at that time).
1. The run of option returns for a $1,000 investment ranked by expected return if SPY gains 5% in 15 days.
2. The risk graph of 1 option at 266; differnet timeframes are very close as there is little theta.
3. The risk graph of 25 options at 305; timeframes are widely spaced relfecting the theta.
The solid vertical line is the target - I have highlighted the 27 day line in these graphs - the reward from 1 option is 50% and from 25 OTM options it is over 300%.
Dont be seduced by the extra returns - you risk losing money a lot faster as well! Hence my comment on sizing risk above.
nice! thx for the post.
Posted by matt on 27th of Jun 2019 at 03:50 pm
nice! thx for the post. some things to model: as I said generally mode 2 - 2 1/2 months out even though the average trade is only about 17 days. And I tend to use options at a 0.90 - 0.85 delta for 1st entries, 0.8 for 2nd entries, and 0.7 - 0.6 delta for 3rd entries. I think personally going out to a 0.90 delta is too deep for the high probability systems since they are very high probable already. For the original system that had more draw down the 0.90 delta options made more sense, so I'm thinking the first entries might be better to go 0.8 delta. I've also been told that going out 2 plus months is too far, I should only go out 1 month, but I'm not sure about that. anyway if you have thoughts on that or could model some things I'd really appreciate it.
SPY
Posted by sonofrebel on 28th of Jun 2019 at 08:24 am
I would not favor going too short - I don't like to start anything less than 30 days and your choice seems about right to me. Less of an issue with delta 85's but even at delta 70's, the time decay which really kicks in at 30 days starts to bite. See general chart below - I assume this is at the money mmodel (delta 50).
It makes little difference to price (and hence leverage) once you go past 30 days - see attached for comparison of Aug and Sept delta 85 options - 17.10 vs 21.70. Also note that short term options are much cheaper.
But here are the time decay calculations:
July @ 11.71, theta is 10.7 c per day - 0.91% per day (which increases with time as do all the numbers below)
Aug @ 17.10, theta is 7.37 c per day - 0.43% per day
Sept @ 21.70, theta is 6.45 c per day - 0.30% per day
I have attached risk graphs for the three dates using roughly the same $ invested - as you can see there is little difference between Aug and Sept but July has much higher risk of losing and making money quickly. I have also included 2 screen shots of data behind this comment.
My summary would be that people should look at increasing their risk in steps with SPY Pro system and pick which level they are most comfortable with;
1. SPY
2. 2 or 3 x SPY ETFs
3. Spy in the money high delta options - 60 days out - this level is where you are really using options as stock substitute rather than making an option trade
4. Spy in the money options closer in time
5. Spy at the money options
6. Spy out of the money options etc.
My advice would be to start with 1 and then increase as you get comfortable with the high probabilities and are willing to take more risk (so I agree with your suggestion on this approach) - recall with an option, you can be right and still loose money!
I posted a detailed follow
Posted by sonofrebel on 28th of Jun 2019 at 09:10 am
I posted a detailed follow up here with screen shots but seems tohave disapeared? If so, can repost later - if it re-appears, it would be nice
Thanks for you post -
Posted by steve on 28th of Jun 2019 at 09:17 am
Thanks for you post - just click on the "Title:SPY" to expand your post. Since it was so detailed and long it was condensed.