Coming back to optios. Need safer trades.

Discussion in 'Options' started by iSeriesGuy, Oct 24, 2010.

  1. MTE

    MTE

    I bet that risk free profit you extract from this trade would just about cover the interest you would pay to finance the position (alternatively, the interest you would forgo by committing capital to the trade). Not to mention the commissions and slippage...
     
    #51     Oct 27, 2010
  2. spindr0

    spindr0

    No one is suggesting that long options are similar to short options. It's kinda obvious that they are :)
     
    #52     Oct 27, 2010
  3. spindr0

    spindr0

     
    #53     Oct 27, 2010
  4. spindr0

    spindr0

    OK, we're on the same page now. Forget the call being sold. Howwwww-ever... :)

    The key to the above statement is finding an undervalued below parity ITM put (where I'm stretching the meaning of parity to include the dividend). Buying the stock against that put is a way to capitalize on the hope that the put returns to fair value (or is achieved via exercise).

    Suppose I saw some overvalued puts. I could sell a bunch of them naked and if an hour later the underlying was unchanged and the puts were back at fair value, I could take the profit.

    That gain doesn't validate that selling naked puts is a good strategy or is safe. It just means that I took advantage of a market inefficiency.
     
    #54     Oct 27, 2010
  5. download platform, click analyze tab then thinkback tab. I backtest manually quite a bit.

    No one seems to value the data as much as me...:confused:
     
    #55     Oct 27, 2010
  6. I use ThinkBack all the time. I thought you were referring to something else. Thanks anyway.
     
    #56     Oct 27, 2010
  7. Carl K

    Carl K

    Basic but Free
    http://www.optionabc.com/Level-One:-Foundation.php

    Carl
    __________________
    Enjoy life, it's limited.
    You only get as much as you take.
     
    #57     Oct 27, 2010
  8. That is the strategy exactly. I wouldn't personally be able to find undervalued puts just by nosing around for them, but a screening service with the right algorithm could possibly find and publish them.


    Agreed, success in this latter strategy doesn't validate naked put selling as being good or safe. Naked put selling, however, is unrelated to married put buying, which is the former strategy. The kind of married put trade proposed by Dividendium is special, in that it takes advantage of those rare cases where the dividend is not being accurately reflected in the put's price, due, I'm guessing, to a decline in IV. A married put strategy, under these circumstances in particular, would work consistently and is free of risk as long as the dividend is not cut. Selling puts (tantamount to trading covered calls) would work only if the market didn't tank, which is a big if.
     
    #58     Oct 28, 2010
  9. spindr0

    spindr0

    The point of my naked put example (which you grasped) is that the key to the dividenduim.com concept is finding an undervalued put and utilize a strategy to take advantage of it. Whether there's a dividend or not, it all equates to buying OTM calls (equivalence) and hoping for a miracle.

    You happen to be a believer in undervalued puts being identifiable, publishable and availble. I'm not - I'm a heretic :). Retail has little to no chance of getting to the had of the line as floor traders would suck up anything that's undervalued and lock them up, most likely via conversions and reversals.

    FWIW, a decline in IV does not cause undervalue, at least in terms of the married put strategy we're talking about. I'm not referring to current IV versus historical but a combo that locks in a profit upon execution (your premise). In order for that to happen, the price of either the option or the underlying must move and the other doesn't keep pace, dropping below parity (in this case, negative time premium). Again, not going to happen - and if it does, arbs will snatch it.

    If IV were to decline, option prices would decline. If IV went to zero, the options would trade at parity (no time premium).
     
    #59     Oct 28, 2010
  10. spindr0

    spindr0

    Here's a link to dividendium's explanation of their put protected dividend concept as well as an example:

    http://www.dividendium.com/blog/index.php/how-can-we-invest-while-avoiding-losses/

    Stock: SO
    Stock Price: $34.59
    Annual Dividend Yield: 4.86%

    Option: SOWH
    Option Ask: $5.80
    Option Strike: $40.00
    Option Expiration: 11/21/2008

    Dividends Expected By Expiration: $0.42
    Minimum Profit: ($40.00 + $0.42 – $34.59 – $5.80) $0.03
    Max Loss Without Dividend: ($40.00 -$34.59 – $5.80) $-0.39
    Percent Gain Needed For Profit: ($40.00 / $34.59 – 1) 15.6%

    Here's their $64 question: "How can we invest while avoiding losses?"

    SO is a low beta utility. That means its implied volatility is an IOU. :) IOW, it's in the 10-15 area. So a 15 IV stock needs to move 15.6% to make money? That's a pipe dream.

    Rather than all of the smoke and mirrors, one could buy the equivalent OTM 40 strike call for maybe 15 cents. Save on the slippage and commissions and have the same lottery ticket.

    They should be ashamed of pumping this stuff.


    PS Note that the position can make money before 40 if the UL moves up quickly (timewise) since the put's delta is less than that of the UL and declines as price increases.
     
    #60     Oct 28, 2010