Money management in long options

Discussion in 'Options' started by turkeyneck, Oct 11, 2008.

  1. Is this a good rule of thumb to follow: get out no matter what if you lost 50% of the premium because the odds are clearly against you?
  2. It sounds as if you are referring to an option BUYING program.

    My answer is No.

    Not that it's a bad rule, but the truth is that no single rule turns out best for every investor.

    You want to develop your own rule - one that suits your individual comfort zone. But, if you have no place else to begin, sure it's okay to try using the '50% rule' for now. But don't feel that this is going to be your lifetime rule.

    Your own judgment will lead you towards a rule that works for you. And keep in mind that the cost of buying options is enormous right now - and it may be appropriate to pay those prices, considering how volatile the markets have been. But that can change quickly.

  3. Johno


  4. i rather do reverse calendar spread than just long the otm calls.

    2 profit characteristics of a reverse calendar spread
    1) drop in IV
    2) large move on either direction from atm strike.

    both seems well suited for the current market. The tricky part is to have the patience to find a good print, as the spread can be very wide at times.
  5. Johno


    Something you need to remember, the markets can and at times will exhibit any behavior. Here you're betting not only on picking the bottom, but also the speed of the anticipated bull reversal whilst in a strong bear move. All I can say is good luck with that and please post your results to let us know how it worked out!

    IV is high - it can go higher = IV losses
    Oversold - it can go lower = Deta losses
    Extremely Oversold so should rebound - it can stay flat or move down for months. = Theta losses

    All for limited upside potential!

    Best Regards

  6. I am not really try to pick a bottom. My last reverse calendar spread i sold at 1080 ended up in profit because the market continued to gap down despite the position is short vega.

    Also even if the market does not move and i take on theta decay, the IV should come down. Basically my thinking is the market either move and/or the IV start to drop.

    Worst case is the market does not move and IV does not drop/increases. Then i am losing theta/vega, and will close when my stop loss is hit. But chance of that happening in current market with 70 vix and a historical gap last week, is very low. That's why i think this is a good play, not sure why you think i am trying to pick a bottom. Also the position is much less risky than a directional long/short bet.

    I could not get in last week due to the huge bid/ask hole, will try again this week.
  7. Johno


    Generally I consider falling IV to be Neutral/ Bullish (with the caveat that just because IV is high doesn't mean that it can't go higher) therefore I view it as bottom picking! Also, just making the point that there were three potential directions with different probable outcomes.
    If I were looking at this tactic one of the questions that I would be asking myself is, at this point in time, am I forcing a trade considering the RR that I generally look for. Bearing in mind that I relinquish power the minute I enter any position!
    My approach would be described as a strategic trend follower as opposed to a Premium Seller hence my reluctance.

    Good luck with the position, I hope it works out for you.

    Best Regards

  8. this position would be profitable today, iv crush+gap
  9. Johno


    As you said ,you couldn't get set due to the wide spreads (probably due to high IV I suspect, increased risk premium usually equals reduced % return, once again nothing for nothing in the markets) Profits or Losses can only be achieved on positions that are actually held!

    Strong move to the upside reflects IV Crush hence the percieved bullish bias inherant in the position as mentioned in the previous posts.

    Best Regards

  10. wrote the positon atm for 35pt credit:

    short JUN 960C
    long DEC 960C

    net vega -1.4, theta 0.3, stop loss around mid nov and/or if vix explodes from the current 60 (will evaluate)
    #10     Oct 15, 2008