The Beerish Bull's Great Chronicle of Alcohol and Poor Decisions

Discussion in 'Journals' started by beerntrading, Jul 28, 2017.

  1. What I mean is you have a much higher exposure as a percentage of your outlay in options trading. I follow Max's journal regularly and I was just saying that when you already make money playing price moves, options don't offer a lot more for price exposure. And when they do, you're taking on a higher risk of loss, but a lower absolute risk. But in the aggregate, your losses on a long options portfolio would be slightly higher than if you traded the shares directly, or your gains would be slightly lower.
    Read this:

    That's about the most useful discussion of using options to price the underlying that I know of. Whenever I make one of those calls with a ridiculous range of +/- 0.02 for a Friday close, it's looking at options to see the underlying's likely movement. ( SQ 26.50 before earnings was an exception to that--that was fairly straight forward fundamentals / outlook with a little luck)

    Beyond that, there's certain patterns I look for when I trade options. It takes some getting used to and scrolling back and forth between expiry, but you get to the point where you can spot the spreads and the calendars.

    At the moment, there's not a ton of good examples of this because earnings season is going to cloud the numbers for the Aug monthly expiry, and there was a lot of Thursday / Friday volume on these with the NK mess.

    One I noticed today is the DAL Sept $55 call (I'm long the Dec $55 call at the moment). This is most likely a bearish position (covered calls) because the volume was high when the price was decreasing (with the biggest day at the DAL peak). So, retail is short on this, which means market makers are long. Unfortunately, this won't generate the same buying and selling pressure that it would if the market makers were short. But the imbalance here is probably enough to suggest a little buying pressure towards $55.

    But look at the Aug $50 call. Most of the volume here was on 7/27--if you recall, that coincides with my bullish call on your thread (7/31 - 2 trading days later). Presumably, this is a speculative bullish position, which means market makers are short, which means as they hedge, the price will tend towards $50. There's a pretty good chance we'll finish the week out at $50 +/- 0.10. There's a pretty good chance that I'll be shorting the 50.50 call tomorrow as the short half of a diagonal.

    So, price expectancy on this is neutral for the week, and quite bullish from next Monday. Looking to the 8/25 chains gives a tacit confirmation here. The open interest on that looks like put spreads covering 50-50.50, and call spreads over (oddly) 51-56--this could be a broken-wing condor too. So the market is looking for a 1-2% upside next week from a presumed Friday close around $50...though, I'd discount the next weekly on this one because open interest (~1,100 on any one leg) represents only 110k shares or about 2% of daily volume....not enough to move the market. But Friday has 1.3 million shares in play, about 1/4 daily volume--that's enough to move the market and center it on one price.

    We'll wait till the week ending 9/8--that will give us a very strong indicator of price movement because we'll have a weekly expiring 1 week before a quarterly--those give some of the strongest indications because you have market moving volume in both.

    I'll try and point some of these out as I see them. Zany pointed out the GS call volume ($250 Sept calls) representing nearly 1.8 million shares. I actually opened a speculative $240-250 call debit spread following along on this one because these appeared to be unsupported speculative buys--meaning as the price approaches $250, market makers will have to pick up a TON of shares to cover their obligations should this one go ITM.
    #41     Aug 14, 2017
  2. johnnyrock


    Vendor alert! I am not accusing you of being a vendor. But, if you had any inclination to put out a paid newsletter this would be it. This would be great for stock traders. With a litle added info , float, etc. this is information that traders want, a watchlist of stocks that are subject to short covering rallies! Way better than a scanner.
    #42     Aug 14, 2017
    beerntrading likes this.
  3. That only touches obliquely on the short squeeze stuff--this is more market maker centric view of the market. It's actually quite accurate for figuring out what Friday closes are likely to do--and less accurately, Monday's openings.
    #43     Aug 14, 2017
    johnnyrock likes this.
  4. johnnyrock


    Then, that is a gold mine. I have tried to "pin" contracts before and could never do it. Maybe I should look that over and see if there was a way to consistently do that in oil or the indices.
    #44     Aug 14, 2017
  5. I'm no expert, but if you don't intend to model and trade volatility, stick with the outright. If you just want to trade direction (Delta), stick with outright.
    #45     Aug 14, 2017
    beerntrading likes this.
  6. It's unlikely to work on over diversified assets (ETF, indices...) because it presumes someone is making a decision on the specific asset at a specific price and volume...this is always a problem of mine, in fact. When you decentralized decision making to each constituent part, the index isn't going to move because some market maker is going to have a bad day.

    There's also the question of liquidity...I suspect the more liquid, the less accurate this would be. On something like the SPX, I doubt the short / long imbalance is so great to reliably influence the price, and the risk market makers retain is just a whisper in ES volume.
    #46     Aug 14, 2017
    johnnyrock likes this.
  7. Bingo.

    The big exception to this is shorting hard to borrow, when a long, deep ITM put will do the same job while limiting absolute risk at reduced costs
    #47     Aug 14, 2017
  8. johnnyrock


    #48     Aug 14, 2017
  9. Actually, I liked the $50 call better. Short at .47 (should have gotten a better fill, but was testing my eclipse glasses and left the order...doh!)
    #49     Aug 15, 2017
  10. ironchef


    Thanks for the explanation. I agree with what you said here. Long options do carry a much higher beta (calculable using B-S) than the underlying.

    Thank you for posting your journal. I enjoyed reading them.

    #50     Aug 15, 2017
    beerntrading likes this.