GATrader, You can trade stock against your Long Straddle Option positions if you buy your options at the correct Volatility and you can trade around the straddle to make up your decay and hopefully get a big enough move in the stock to make it worthwhile. When stocks are moving and you are long option volatility(Straddles,Strangles) , you can make a fortune .(Theory) The Option Volatilty is hard to predict and you can get killed on straddle positions if the option premiums crunch and the stock doesn't move. This is why seat leases have "crashed" in recent months on some major option exchanges. If the stocks don't move as you expected, you lose. Option commissions are 3 to 5 times as expensive off floor.(Reality) We have a couple of guys that do ok trading stock against long option positions, however this strategy like all others may not work all the time and you have to adjust your trading. Gene Weissman Lieber & Weissman Sec., L.L.C. gweissman@stocktrade.net
I really appreciate your insights Gene. Would you say that there are more successful outright stock traders there than option traders? DO you think it is a function of traders don't know much about options so they gratvitate to the easy thing to do which is daytrade? or is there no $ to be made in them. At this point, I refuse to believe the 2nd scenario since a good % of traders in the wizards made their $ in options not to mention the retired ones you don''t hear about. The reason I am plumbing the idea of trading options was that I had the displeasure of living through last summer's doldrums and I think that if I had traded longer term 3-10 days with options as opposed to tick trading with an LLC I would've made more $ since I can scalp gamma, sell flies, etc. I am very risk averse on an overnight basis and would'nt carry stocks overnight. Most price action last summer was charaterized by low vol wherein stocks would go up 1-3 $ for the week but do so 80 cents/day which made it hard to daytrade. My hope is that by being exposed in the market through options I would be in a position to make $ even under difficult conditions. Any thoughts? thanks in advance
There are several reasons why option trading is very hard now and was easier years ago. There were no option models years back. No one knew what the "greeks" were and there was alot of option mispricing. You could lock in profits in arbitrage strategies like Conversions , if you knew what you were doing. Blair Hull(Hull Trading),O'Conner & Company ,Tom Peterfry (Timber Hill)who were sophisticated when options were in it's infancy(way before I started) and knew the Conversion markets , spreads, how to calculate Option Volatility etc., made millions. Now the "genie" is out of the bottle. The small customer at E-Trade has an accurate pricing model they could use and I have a free one on my site at http://www.electronicdaytrader.com/tools.htm . So you have to understand that the "option" markets are mature and it's hard to "take" money out of the option market due to mispricing and all options are dual listed and the Bid-Ask spread is very slim. The only thing left to do for the option "pro" is predict Option Premium expansion and contraction due to market conditions( Vega -Option Volatility). Predicting Vega is sometimes as hard as predicting a stocks movement. I believe you can still make money in options, however it's much harder since most options are fairly priced and most traders are more sophisticated than they used to be. There are no free rides on wall street and no option strategy will work all the time. If Option Premiums are high(Vega), they are high for a reason, the underlying stock is very volatile and the options are "fairly" priced and you will make money trading around a straddle. However, if the stock stops moving and the option premiums crunch, you will lose holding the straddle since you will not be able to make up the premium "crunch". I would say that most of the traders making money in options are sophisticated. Remeber , you can invest in stocks, but you cannot invest in options. Gene Weissman Lieber & Weissman Sec., L.L.C. gweissman@stocktrade.net
I totally agree with you Gene. I too, was on the floor for 5 years and saw the futures options change from being inefficient to efficient . We were doing flies for credits then...ahh the good ol days. But would you agree with me that this maturing has made it easier for desk traders to compete since the floor edge is gone? Dual listing, autoex, shrinking spreads could in a perverse way make it better for us AS LONG as we can guess on the underlying movement and the greeks. I just look at options an a conduit to engage in longer term swing trading without the risks of using the underlying. The theta risk I would have to live with in exchange for sleeping beter at night knowing that I won't get "Enroned". Once again, thanks for your insights.
I would say you are correct. If you are a good "spreader" or "Vol. Trader", why be on the floor if there is no edge? The only reason to be on the floor is the floor margin. However, for Timber-Hill,Susquehanna, Hull and other big arb firms, having a trader in every crowd may give the firm an edge in their overall trading. The "local" is having a hard time on the floor from what I hear. Gene Weissman Lieber & Weissman Sec., L.L.C. gweissman@stocktrade.net
The "edge" the floor traders may still have is probably the depth of "shopped" spreads and broker's books. I agree with Gene; with Blair Hull, and other "old friends" with people in nearly every pit, it takes the edge out even in floor trading. If you can't do it on the floor, it is certainly harder off-floor. IMO
I have recently experimented with buying calendar spreads and have a question regarding proper selection. According to McMillan's book calendar spreads are best bought when IV's are low so you benefit from an IV expansion since you are long the back month. I've put Jan/Feb calendars about a week ago and found that the short gamma kills me, since the IV is not expanding yet the underlying moved. Take the case of TYC, I put on Jan Feb 55 calendar and TYC moves 10% that day, the IV's stay the same, while my long does not appreciate. For anyone out there who has traded calendars successfully, it it better to put on calendars wherein the front month is greater than 1 month so gamma is not too big. Feb/aprils instead of jan/febs? Thanks!!
Can anyone out there with spreading experience offer an opinion on this position. Buy EK Feb 30 C Sell EK Feb 25C hedged delta neutral with EK stock. Vol edge is 10% or better yet Sell the same call spread, hedge with selling the feb 25 put getting a 12% edge over the Feb30C. The current IV of EK is 95 percentile for the past 2 years... Two thoughts... 1. I hear all the time about the efficiency of the option market, to me having a 10% skew between 2 ATM strikes is not efficient.. Something does'nt smell right. Are they going to report bad earing soon? Someone is making a huge bet on the 25 put!!! 2. I put on this spread 5 times, (since I just started option trading) If I can't make $ in this spread I am going back to 100% daytrading because if one can't make $ with a 10% edge no one can without stepping over what I consider taking a prudent business risk (i.e. selling straddles and hope that it stays quiet) Any thoughts....