I think you, Cache and Mo put out some of the best posts that really challenge the "conventional thinking" out there on ET, some people resist that in their own way. Funny thing is, the best information seems to come out during the "heated" discussions but usually the person who started the attack doesn't see it because they are too busy trying to defend their ideas instead of opening their eyes. All of you have challenged me to think differently about the way I trade options and I think it has been a good thing for me. I don't trade many options on equities, I like to stick to the indexes (SPX and SPY mostly). I've been doing some paper trading for the last month or so on CTM strategies and really like the results especially when compared to the risk. I will start putting real money on the line very soon and will post my trades as we go along so maybe I can offer something to everybody instead of being a leech .
Well that's good and dandy, but a sharp move up right after you opened the position will easily cut the premium in half or more with it being so rich on delta/gamma. The way i see it, with regards to building a risk free position(though i wouldnt call it "riskfree"), when you start ATM you take onto more risk at the outlay and you only have to be right that first time to get into a pretty profitable position. On the other hand, going OTM gets you in for less but based on the magnitude of the move, after you adjust whether it's a vertical, fly or condor, you still have some risk on the second directional move and have to be somewhat right yet again. No better way if you ask me, $ for $ on risk, just a matter of preference and/or confidence in the market move. Just my opinion.
Nick and others, it seems most questions have been answered? RE: Gamma scapling a straddle with options - nice work if you can get it. Personally, I generally won't do this on the CALL side however due to unfavorable IV activity. If I'm really bullish, when I sell the PUTs, I might also go long some CALLs (i.e. trade a synthetic) which would give me three legs of a BOX. If there is then a nice rally I might complete the BOX by selling the appropriate CALLs (aim being for a significant credit on the BOX), however, for some reason I normally just take profits on the CALLS LOL. Gamma scalping with options obviously does not give you the fine control over deltas as you get when scalping with stock/underlying. Gamma scalping with the underyling is not something I do very often. Choice of whether to go ATM or OTM when deciding on your anchor position... This is largely decided by personal preference. My preference happens to be going ATM or NTM (Near the money for those that are wondering). Why? Because I like to keep the anchor within arms reach! I basically ignore the absolute dollar value of the option - which is obviously going to be larger than that of an OTM option. Anecdotal evidence (mine) suggests that either as a result of mean reversion or other factors, more often than not, the underlying comes right back sooner or later if you happened to be wrong in your initial prediction. In other words, I will often hang on to an ATM option that has moved against me because it might come in handy later on for building a different position. Personal judgment is needed to decide if/when to cut losses obviously. If you go OTM, my view is that it can end up being lost out at sea! If you're going to sell another option against it, you will normally sell an option that is closer to the money resulting in a credit spread. Less common are the circumstances when it would make sense to sell an option further OTM because that would require a forecast of a much larger move. In otherwords, your position building options are limited to making a credit spread. Not sure if any of that makes any sense. Naturally, theta (decay) and gamma are greater for options ATM and this can be a factor in your decision for when deciding where to drop your anchor. I trivialized the whole process in my earlier post. Getting into a free or better debit vertical is fairly straight forward. Getting into free or better PUTS requires a lot more co-operation and time from the underlying. However, current market activity, where multiple strikes are crossed in a single day and IV fluctuations are significant, means that this strategy is particulary viable at the moment Purely out of luck, I have been able to sell the same set of PUTs no less than 3 times LMAO. Bought back twice each time more than covering the cost of the initial PUT debit. It's an enviable position to be in when you can sell PUTs on high IV with impunity. It's also nice to be in a position where you want the underlying to move rather than wanting it to sit still and stick to it's range. This is of course the essence of being long gamma versus short. Newbie Guide Buy an ATM PUT. When underlying moves down by the distance of one strike e.g. 5 points, in general the option that is now ATM will now cost about the same as the one you bought barring any significant decay (recent price action has meant this happens in one day). If you sell the ATM option, your net debit on the trade is $0 and the max gain is $5 for the vertical. Because you are selling ATM, the vertical will already be at max value in terms of price level needed to be reached by expiration. If you wait for the underyling to move further still before selling you can lock in that $5 vertical for a credit. Or even you can lock in $10, $15 verticals for free/credits/small debits. The strike selection choice is yours and depends on how long you want to wait. Again, movement has been so large recently that you could even wait till the next day to see if the movement continued in your favor without risking a beneficial lock-in. Timing is the skill/luck part of any gamma scapling strategy. Due to the fact we are in a market tug of war at the moment, IV fluctuations have been extremely beneficial to this strategy. Following on from the initial example, when the underlying moves down one strike, 5 points, the option now at ATM is actually going to be slightly more expensive than the one you bought due to the harmonious increase in IV which trumps any minor decay. It's all starts with a speculative directional bet. If you're right on the bet then it's just a matter of waltzing with the mistress after that. It doesn't matter which direction she goes. Apologies for being verbose in this post and possibly reiterating what others have said but I prefer to be thorough so that I can just link back when the topic inevitably comes up again! MoMoney.
Mo, Thanks for this little dissertation. I've included it in my "Trading Methods" document that I keep to help me learn more about trading.
mo, your posts sound like excerpts from a book but with many more practical examples. You should write an e-book and link each chapter to your corresponding topics on ET
Thanks Mo for the detailed explainations. As for me today... I've tried for some ATM bear calls on AMD a couple times but I want more than they are willing to give up. I don't think the underlying has the strength to creep up high enough for me to get a good credit.
Mo, Thanks a lot. I'll try this out on the paper first. I agree with you about bigger movement than usual on the SPX. Congratus on your scalping too. -Nick
Yep, missed the boat on that one. Looking for AMGN to break to the upside, and still expecting SPX to hold at 1245 until wednesday.