Let me know what you think of this trade idea

Discussion in 'Professional Trading' started by lasner, Feb 6, 2010.

  1. lasner


    I've been trading for close to a decade now (just futures) and have never really traded options. I've been looking for ways to add safe income to my account.....mainly to help with getting stopped out.

    I just recently looked at writing small naked calls but don't like it....I think I might have stumbled across a good idea to add income and was wondering what you guys thought. Again I'm new at options.

    I found this link that was kind of interesting http://www.optionfind.com/tutorial.asp

    It talks about how if you write an overpriced call and buy an under priced call same month same strike price but in different similar companies you can profit.

    Since I trade futures I thought it might work on Gold and the U S Dollar. They are different markets and move inversely to one another. So instead of buying an under priced call and selling an overpriced call you would buy a call and sell a put.

    Using Black Scholes you can determine the fair market value of the options you are buying and writing....the difference is your profit.

    Again I'm new to options and just brainstorming ideas.....let me know what you guys think.
  2. nickdes


    I think, those with high powered scanners are scooping these up before we get a chance. I have got lucky, and I do say lucky a few times doing this, But that has been the exception.
  3. lasner


    Damn....so it's tough to do
  4. "Overpriced" and "underpriced" would most likely be a myth or at best, an opinion. The market price is the correct price; if not, it will get there extremely fast. There is a lot of institutional computer power that makes sure that apparent inefficiencies are arbed away.

    And what little over/underpriced aspects there are to any instrument, when considering all trading costs, it is likely not worth it.

    You either have an edge or you don't. Sitting down and reading the published prices and guessing about the proper pricing of each is not a way to make money.

    It is like people who convince themselves that just writing options is a money maker, because 70 (or 80 or 90, depending on who you listen to)% of options expire "worthless."
  5. For short term trading of naked options check out FAS, AAPL, AMZN.
  6. Hi Lasner,

    Its a good question and one many of us have looked at. I currently write options on a limited basis as well but its hard to not have a negative edge.

    The rules of the exchange are that unless your an insider you can not be on both sides of the market. Without the public being market makers the spread stays wide and it gives the CBOE members and others like it a license to steal, ah I mean print money. How the SEC continues to allow that is a mystery to be beyond one or two explanations that include incompetence or corruption in my opinion.

    This means often unless your dealing with highly liquid and correctly priced options (lower edge) your going to take the worst of it during the times you need to get out (stop loss) which will negate all or more of any edge you may have.

    Also, and this is somewhat interesting and argued all the time on ET and elsewhere is that Black Scholes doesn't (IMHO) correctly calculate "black swan" events so it may be possible to be a buyer of puts and have a positive edge is your buying at or better than the BS model suggests. (while many are not arguing FOR buying puts they argue against writing puts for the same reasons, it tends to work until it doesn't and when it doesn't it doesn't very much) This in my mind is the same as arguing that you should be a buyer (both sides can't lose IF commissions are taken out of the picture) Loss of utility of course is a factor but its a factor regardless of where you put your money to work.

    My back testing suggests that if you like a stock and your willing to buy it at the current price with a holding period of greater than one week it may make sense to sell puts instead. Its a much less risky way of investing although many don't think of it that way. To counter the "you lose upside" I suggest that upon expiration there will be another stock out of the hundreds that effectively can have puts sold once again so that overall the risk is lower and the rewards are just as good. futures (for me)on the other hand do not apply to this concept as I have not testing it on anything other than stocks.

    Best to you


  7. tomk96


    what exactly do you consider a wide market? why do you think it would be a good idea to have "the public" be able to market make options? are you going to make a two-sided market in every strike of some stock you like?

    just curious.
  8. tomk96


    lasner, i think the biggest problem with gold vs the us dollar would be picking what to buy and what to sell. they are currently moving inversely, but they don't necessarily have the correlation that two stocks in the same sector may have. you would also need to margin the naked short option, so you better look into to what that would cost you before you go any further.

    do you want to do this just to collect some sort of premium or make a play that one will move more than the other? you also need to look at how tight the markets are in the options you want to trade. if you are trying to sell an option in 1 stock .10 over the long option you plan to buy, you'll need a fairly tight market after giving up the bid/ask or working in between.