It's much better to buy slightly OTM options than ATM ones?

Discussion in 'Options' started by crgarcia, Dec 2, 2009.

  1. Your breakeven point increases with OTM options, but they cost much less so you can buy more options.

    The Black Scholes model (from those morons who blewup LTCM) used in pricing most options doesn't adequately price OTM options, as the Bell curve pretends large movements from the average are extremely likely.

    So slightly OTM options are the thing.
     
  2. What you talkin bout willis?

    Sweeping statements like that are almost never true.
     
  3. 1) Those options are and were "adequately" priced.
    2) You're not taking into account when the market makes price gaps and behaves "discontinuously". :mad:
     
  4. Yep, you can buy more OTM options than ITM and that gives you more leverage. It also gives you a higher probability of losing a larger per cent of your investment.

    How do you spell T-R-A-D-E-O-F-F ?
     
  5. No pain no gain.
     
  6. livevol_ophir

    livevol_ophir ET Sponsor

    Agreed - that's why I love watching order flow for OTM that trade on offer.

    Like a company that averages < 500 total option contracts a day but > 5,000 OTM calls trade on the offer in the front month (or puts for that matter)

    Livevol Pro has awesome real time market scans - of which some of my favs are the OTM trading on offer with unusal volume.

    I am on NYSE ARCA floor MMaker and I check that scan at least once a day. That's how I found ANDS.
    http://livevol.blogspot.com/2009/11/anadys-pharmaceuticals-ands-insider-tip.html
     
  7. heech

    heech

    Alright I gotta say it... I don't usually go for marketing pitches, but that's pretty impressive.

    It'd be nice to see similar functionality implemented for commodity options, by the way. But maybe with a lot of that action still in the pits, you can't really pick up comparable details from the ticker.
     
  8. If you’re a market maker you’re not walking around and stopping in to buy some calls here and buy some puts there. Your job is to make markets in specific issues and make markets in every series in those issues.

    Despite seeing 5000 contracts trade on what appears to you to be the offer you really don’t know a whole lot. In a series which only trades 500 contracts a day you’re not going to get 5000 contracts on the offer to lift so easily. An order like that would have been shopped around and since that the case it does not matter where the price falls, on the offer or bid you don’t know what side initiated the trade. You also don’t know if that trade was tied to doing stock or if that trade was tied to some other options.


    Buying some calls or puts just because you saw some volume on the tape is a really poor strategy.
     
  9. livevol_ophir

    livevol_ophir ET Sponsor

    All reasonable points - but in here option traded for a nick. Market was no bid; issue does not trade pennies. The trade condition was regular way and intemarket sweep. No other choice - this was a purchase on the offer by cust.

    The likelihood of stock traded against the nick options (i.e. buy write vs 0.05 in the option is hugely unlikely). Pros do not sell nickels - not 3000 times in a pharma. In any case 3200 traded for 0.05 - they are .30 bid 3 days later.

    I don't always chase down order flow - but a nickel bet on a pharma with data coming out in one day - seemed back then at the very least worth looking at. If for no other reason, to convince yourself it is just noise.

    FYI - Bloomberg has picked up the blog on this one (ANDS) and posted it to their news under Livevol. Seems like someone else liked this as well.
     
  10. Are you Stefen Choy, then? There's a couple of other BBG articles quoting LiveVol. That's pretty good for you guys, credibility-wise...
     
    #10     Dec 3, 2009