extra-short term (1-7 days) options

Discussion in 'Options' started by CaroKann, May 23, 2001.

  1. I'm trying to figure out how these "market casinos" hedge themselves when they sell 1 to 14-day contracts. I set up a virtual money acct at xodds.com, but I doubt I would ever use real money there because of their high commissions/spreads. Anyway, I'm looking right now, and you can buy a 10-day bull contract on the dow (which is 11154) and make 21% on your money if the dow is above 10800 at the close on June 4, 2001. Of course they don't mention that if you are wrong you lose 100% of your capital. Also, they sell 5 to 8-day contracts but not right now because that would fall on Memorial day (or the weekend). I am trying to figure out, especially in the case of the 5-day contracts, how to do the same thing with options (or futures/options). I would like to do it for myself without paying them their exorbitant spread. I have heard of "one day rollover" futures contracts, but don't know about them or where to trade them. Is that how they do it? You can do the same thing with some individual stocks.. Maybe using single stock futures on liffe? Any other ideas?
     
  2. def

    def Interactive Brokers

    CaroKann,
    I would be very surprised if you could get a better deal with these casinos than your would from the listed options market. They make their money from the spread, high commissions and long odds. If they do not have two sided flow I gather they would just hedge themselves at better prices by trading either trading the listed Dow Futures/Options or other index products.

    In the end, all you are buying is a cheap option that will decay rapidly. If you like long odds with the chance of reaping huge rewards, wait till a week before listed options expire and trade them where you can get a fair price and some regulations on how your money is protected. Otherwise, my advice would be to stay away.
     
  3. exactly right.. I know they are raping their customers with the spread, which is why I am trying to figure out how to do the same thing with normal options and futures. What I can't figure out is how to do the shorter term "bets." e.g. there is a "double up" contract where you nearly double (about +85% or so) your money if the underlying moves up by the end of the day. How do they hedge themselves for the same day?! (anywhere from 30 mins to 7 hours away). I would like to figure out how I can set up similar positions to the ones they are selling, but on an open market and without paying them their exorbitant commissions/spreads. any ideas?
     
  4. def

    def Interactive Brokers

    In essence what these guys are doing is repackaging in layman terms out of the money options. They make the returns sound exciting but the odds are really stacked against you. Even with the listed index products, the odds are you may lose more than 90% of the time when purchasing cheap otions. However, if you win with the index options I would bet that your returns would be higher than what these types of firms offer. In any event, to participate, you need to be willing to lose most of the time while waiting for the home run.

    as for how these firms hedge for the same day, all they have to do is be long out of the money index options. One contract purchased in the beginning of the month can hedge 4 series of 5 day expiring options.