I've been on the SPX credit spread trader forum of Phil's. A number of people tell me I should learn GREEKS, so this week I'm studying the greeks. I ran across several blurbs that say do GAMMA trading. Another says weeklies are pure gamma plays. ANYBODY CARE TO EXPLAIN? ********************************** That said; I ran across a site that started to tell you about GAMMA trading a stock, not caring if it went up or down. You had to sign up to get more information, which I'm reluctant to do. Somebody must know something about it. The advertising blurb sounded a lot like doing INDEX range bound OVERLAPPING STRADDLES. Unfortunately I never got past the salesmanship BLARNEY point. I understand OVERLAPPING STRADDLES, I know nothing of GAMMA TRADING, or any sort of overlapping gamma trades. ANYBODY ENLIGHTEN ME?
trading weeklys, these two guys have some interesting videos, optionsrocket dot blogspot, somebody on et posted this link, my thanks to him, john has a lot of good free stuff. theoptionguru dot com/blog, i have been reading jeff for about a year, i think he has one of the best free option blogs.
Gamma is the rate of change in the delta of an option, or position of options. The easiest example of a gamma play is a straddle. Let's say you pay $5 for a 500 strike weekly straddle. If the product drops to $495 you become short delats, meaning you will make money as the underlying continues to drop, or lose money if the underlying goes back up. This allows you to buy stock against your straddle to flatten your deltas. This way, if the stock goes up to $505, you make can sell your stock and make $10 on your stock scalp. I would advise all of you to NOT trade OEX options. The OEX early exercise risk is one of the most misunderstood risks in the options world. Owners of OEX options have until 3:20 to decide to exercise an OEX option. Be aware that OEX options exercise into cash money against intrinsic value as determined by the 3:02 closing price of the sp100 index. That means, if a bomb hits NYC between 3:02 and 3:20, as the sp500 futures market drops, the traders get to exercise their calls into cash vs the 3:02 price. You may think you have a winning position, only to wake up with a massive loss. A few things: 1) This is not a risk that the average investor understand. 2) If you are a short OEX options trader, chances are eventually this risk will bite you in the ass (the option will have to be ITM), 3) If you choose to buy OEX options you will pay a premium for the exercise risk that does not exist in other products and 4) unless you can measure exactly when you should exercise these OEX options AND you watch the market every day from 3:02 to 3:20, the extra premium you pay in #3 will go to waste. Trade the XEO or SPX options instead.
I've spent about 4 months learning the nuances of credit speads. I'm disappointed in the result. I'm down about $6000. Fortunately this is paper money on Thinkorswim. Only one actual loss in the credit spreads in around 13 weeks. But what I've learned in CREDIT SPREADS, you cannot even take ONE LOSS. It is a no loss type strategy. My goal is $100,000 a year. Nor do credit spreads seem to be able to do that? Phil on SPX trader is gambling in margin, about a $100,000 a time, but making around 3% which is just $3000 a trade, which roughly translates into say ten successful months x $3000 = $30,000. No where near my goal and one LOSS would wipe out your margin, which is much greater. Not to say, given correct market conditions, you couldn't add a credit spread that seemed to be a sure thing once in a while. But tying up your capital for a month seems self defeating? Bear Market plunges work good for credit spreads on pull backs. I've come to the conclusion I'm wasting my time with credit spreads. Most people are only going to make about $12,000 a year, to $25,000 a year if they are lucky. The returns are just not there! *************************** CACHE LANDING on the SPX credit spread trader forum had some good advice and said to go to E Minis. Took a brief look at them yesterday. Will look some more. They are S&P Futures it says, but the E Mini is a 1/5 th contract. Meaning about $50 a point of movement. The E Mini and the S&P track the OEX and you can use the OEX to trade the S&P. I'm not too keen on open ended FUTURES trading, but will look at their options if they have them. Interestingly enough the EMINI is a wilder swing than the OEX but otherwise tracks it. The E MINI seems to lead the OEX too, which might be useful to know, but I wouldn't know at this point how to use that knowledge? The margin runs $2500 to $4500. ****************************** I did start studying the GREEKS, though I'm more used to tracking prices and index bar movement as in technical chart reading. I cannot relate the greeks to anything useful for trading a CREDIT SPREAD so far. There was a mention on GAMMA TRADING and did some searching for that. Didn't find much! What I did find said that GAMMA trading is basically trading DELTA NEUTRAL. It seemed to be doing LONG OPTIONS? When you go UP, you sell some of the options you are holding to bring your DELTA back to neutral. If the market goes down, you buy more options to add delta and bring it back to neutral. Long options have TIME DECAY eating you up, so I expect 2nd month options would be traded. Right now that takes about 8 pts in the OEX to break even and make a bit. Almost impossible to get such moves these days, though once long ago you could. It does say DELTA or GAMMA trading is to do with fast movements in changing IMPLIED VOLATility. I'm familiar with that idea, but I call it premium ballooning. When the index is moving in one direction fairly steady, you jump in and get out before it slows and stops basically. Premium ballooning depends on one directional speed of changing index values.The advice on the GAMMA DELTA trading is to hedge, or adjust the DELTA by buying or selling often when the index is moving. If you have a steady one directional move, then you do not do anything to your bet, or less often. Can't seem to figure out how to use that idea in the OEX. The index doesn't move that much. Though there are trends about once every six weeks. I'd guess if you worked a trend for the 12 or 14 days that it runs, this could work using ATM options. I'm wondering about DEBIT SPREADS? Maybe that would work this way? Have no experience with DEBIT SPREADS yet. But they are directional plays on a trend, is my understanding? **********************************
Most of the indexes track the OEX. The charts look the same. For a MONTHLY BAR the OEX covers on average 30 pts. The weekly bar does around 10 pts. This can be one directional, or back and forth. Most trends every six weeks or less, run about 20 OEX pts. Essentially you are trying to take a chunk out of the middle. You normally need about 12 pts. to make any money. There are of course exceptions which are wilder and longer. But for 6 times a year, you are looking at a monthly bar of around 20 pts. Building a strategy around that is the goal. Time decay kills buying straight LONG OPTIONS either PUTS OR CALLS. You need a rapid move. I don't know what has happened since I was out of the market for a dozen or more years, but I can't seem to forecast any short moves in the OEX anymore? They all seem to be either at the end of the day, or mostly during the opening of 20 minutes. Perhaps all this computer automatic trading has effected things as market makers use new algorythyms? The E Mini futures seems to be a good game? Don't know anything about them yet? I understand futures might have time decay as well? I was pondering using a Vertical DEBIT Spread and combining that with a DELTA NEUTRAL strategy? Don't have any experience with either one yet?
The CME e-mini options are indeed a great choice. They trade electronically, and have better screen markets than the open-outcry SPX options at the CBOE. Interestingly enough, the big CME spx options are completely open outcry to the point where you can barely find a decent market disseminated electronically. Be aware of the small differences between the products though. The CME e-mini option has about 50% of the risk of the cboe SPX option, which has about 40% of the risk of the big CME spx options. E-mini and CME spx options expire in the PM into futures contracts, whereas, the cboe spx expires into cash. E-mini options expire into e-mini futures, while CME spx expires into big spu futures.
Jerkstore Thank you for the comeback and information. I just printed it out, as I am unclear of what you are talking about. Don't have enough background yet. I did not understand at all the reference to e mini options expiring int emini futures and CME expires into big spu futures. I'm guessing an option expiry into futures is the same as an option month? Which gives one time to exit? Especailly if you are buying say 3 rd month out options? I don't know what thinkorswim brokerage are using, as I just type in ES and get what they give? Same with Option House. I appreciate that tidbit of information though and somewhere shortly will understand it all. Cache Landing also gave me some good stuff, which is sort clearing the fog of war here. Much appreciated
Jerkstore â I am not sure I completely agree with your comment but I could be thinking about it incorrectly. Closing price on OEX is determined at 3:02, check. Owners have until 3:20 to decide if they want to exercise, check. It is my understanding that with cash settled options, that the âsettlement amount is the difference between the exercise-settlement value and the exercise price of the optionâ per the cboe website. To me this means that if you are short a 490 call when the market at 3:02 is at 500, that your 10 points OTM. Let say a bomb hits NYC, as in your example, between 3:02 and 3:20 and the Sp500 futures tank. Why would the payout to the long call owner change? I thought that was part of the beauty of cash settled options . . . Am I missing something here (I very well might be)?
The ES options expire into the nearest term quarterly e-mini futures contract. That means that the August options will expire into the Sep futures contract, and the Sep options will expire into cash effectively, as the Sep future turns into cash at the same time the Sep options expire into Sep futures. In this way the quarterly (March, June, Sep, Dec) E-mini options are almost identical in risk to the CBOE spx options (except they are half the size of course). Falcon, if your options expire OTM, there won't be much difference. However, if your options expire ITM, you need to understand that you will have continuing risk from a futures position if you trade ES non-quarterly options, whereas CBOE spx options expire into cash. PM me if you have any questions. I am sure that I didn't give enough info to explain this properly.