Newbie Options Trader looking for ideas

Discussion in 'Options' started by Sean McLaughlin, Jan 24, 2006.

  1. Hello -

    I am an experienced Trader (over 8 years) who will be delving into the Options markets for the first time soon with a proprietary group.

    To prepare myself for this indoctrination, I've been reading a ton of books on strategy. However, most books tend to focus on strategies that take days to weeks to play out. While there is nothing wrong with this, I suspect the trading group I will be joining focuses solely on intraday trading and closes all positions by the end of the day.

    Are there any experienced Options/Delta Neutral Traders in here that can offer a humble trader some insight?

    To get the ball rolling, Here's a trading idea I've been thinking about:

    Find stocks that are up/down large percentages on the day (minimum of $15 stocks, preferably higher) with sufficient average daily volume (>1 million?), as well as stocks making 52-week highs/lows (same price/volume requirements) and put synthetic butterflies on using puts and taking advantage of the bid/ask spread on the options.

    For Example: Stock XYZ opens up the day 35% higher and is trading at $40/share. Average volume for this stock is around 3 million shares a day.
    With the stock at $40, I place a bid at the inside price on the $40 puts that are greater than 30 days out (so that theta decay is minimized?) As soon as my put options bid is hit, I immediately offset this position by purchasing the stock at the market to make my position delta neutral. This accomplishes two things: 1) it hedges my position and 2) gives me a slight edge in the options position by buying on the bid and benefiting from the spread. I then wait out the play and look to exit the position for a credit of 25 cents or greater either by selling the puts on the ask and capturing the spread in a flat market, or taking advantage of the changing options delta as a volatile market fluctuates throughout the day.

    I could do the same thing by purchasing at-the-money calls and then shorting the stock to hedge and become delta neutral, but I suspect there may be times I might get hung on the stock as I wait for an uptick to get short.

    Does this sound like an idea that could actually work in the real world?

    Please keep in mind that although I am an experienced trader (traded stocks, futures, currencies, and options for hedging purposes)...I've never had direct access to the options markets like this before.
     
  2. Long the atm calls/short stock at neutrality = long synthetic straddle. Equivalent to buying one atm call and put. ATM delta = 50; long 2 calls would require an initial 100-share short to be neutral. Any deviation in discrete share-hedge would abrogate the equivalence, but it stands for any unaltered, 1x2 ratio.

    Make certain that your knowledge of synthetic-relationships is solid, or the greek-mag won't mean a thing.

    I recommend Baird's "Option Market Making" and Natenberg's "Option Pricing And Volatility"
     
  3. exactly --I think you are going too far and complicated to get neutral. Just buy the straddle--personally I prefer selling for net credit instead of buying
     
  4. The only people who make any money trading options are those who sell them.
     
  5. I believe that to be very true in the long haul rip--if you are good enough to guess correct direction, you may as well trade the underlying instead of buying options. Selling allows you to be very very wrong and still make money.
     
  6. Those of you who believe that selling premium offers some advantage need to take a second look. Your understanding is incomplete. It would be impossible for the market to exist given that condition. Give it some more thought.

    Steve
     

  7. Also otm puts and calls are very much forgiving, sometimes offering gains even if underlying moves aginst u.
     
  8. Each of course has their own preference and I certainly would not begrudge another their own trading plan. For me however, the premium received has been a fantastic income stream and in general I am not selling calls at a market bottom or selling puts at a market top. This gives me in my view a greater advantage than someone selling the premium in middle congestion areas. I try to maintain good directional analysis, so defensive strategy is is simpler.
     
  9. Ripley,

    Are your pants on fire?
     
  10. To the O.P. and others looking for good option info. and understanding about profitability.

    I suggest you go over to the IB website (I am not affiliated nor have an account there) and look at their list of webinars. Under the link you can access old webinars, there is a VERY GOOD one concerning options volatility. I STRONGLY suggest you or anyone interested visit it.

    There are many misconceptions about options that are addressed and some good explanation about IV and historical volatility that I feel many option traders and potential traders don't pay enough attention to. Volatility, and the lack thereof, is one of the main reasons that day trading options can be difficult and not profitable, the other is the leveraging of time premiums. Options are multidimensional instruments, thus their use as hedge devices and leverage devices opposed to the underlying.

    Time is possibly the greatest factor in options and to not leverage this value in the overall option equation is a big mistake in my opinion. Limited time horizons may cripple many profitable option strategies. Short term option trading is usually most profitable when the underlying is moving or about to move on a story/news such as earnings misses or surprises. The active trader may find these events limited and few in number.

    A deadly (in the good sense) use of options by the active trader is when that trader has an in depth knowledge of the underlying and uses the options in conjunction with their short/long activities. My experience with successful options traders and trades has been that it takes a more encompassing view of the underlying security to really max out the benefits of options. More of a 10,000 foot view of the underlying where as day trading tends to take on more of a tree top view.

    Just my .02
     
    #10     Jan 25, 2006