What do day traders/scaplers think of this?

Discussion in 'Trading' started by Grinder, Dec 25, 2010.

  1. Grinder


    Im not a day trader but this piqued my interest.

    I came across a guy who scalps one stock both long and short at the same time (obviously 2 accounts are involved) allday long, he also writes options OTM on both sides to apparently hedge his positions. He makes money but doesn't seem to use any t/a, only DOM and excel.

    Is anyone fammiliar with this type of trading?
  2. Grinder


    Why no takers?
  3. im sure an experienced options trader will respond to your question within an hr or two, patience is a virtue on this site ;)
  4. It's okay. Nothing remarkable. Writing options against positions on the underlying hedges max loss while limiting max profit. That assumes dude buys back option positions at underlying trade close. Otherwise, it's just trading naked and dumb. Also, the option market must be liquid or the spread would kill the strategy. I'm no option expert, btw.
  5. ammo


    he may be catching premium erosion and using stock to lower his margin
  6. Either you misunderstood what he's doing or he's smoking you about his strategy :)

    If you're long and short the stock at the same time in different accounts, it's a wash, meaning that whatever the stock gains in one account, it loses in the other. Carrying two stock positions ties up a lot of margin and in reality, he has no stock position at all (the wash).

    By writing options on both sides, I assume that you mean covered calls on the long stock and covered puts on the short stock. If so, he's essentially just writing NAKED OTM strangles. The OTM options written aren't a hedge because the stock cancels out... and they reduce the margin minimally.

    If he's making money, it's because he's writing far enough OTM and the short options aren't getting him into trouble.
  7. The margin for a naked option position is lower than for an equity position.
  8. ammo


    margin on naked short option is high,with stock offset ,very low
  9. He might be getting around some firms capital requirements to sell naked options. If he has an account under 100k, some firms dont let you write naked calls. So this way, in each acct its considered covered calls and puts, and he doesn't have that problem.

    Otherwise, its just a wash on the equity side, and he has a naked strangle or straddle like the other poster pointed out. So as a strategy, there is no advantage to being long and short at the same time, but because of the arcane margin requirements of many retail brokerages, it is a way to essentially sell naked options. However, it is just as easy to buy a cheap wing for pennies and have it as a spread and get rid of it that way I guess.
  10. Grinder


    He does run too accs, one for longs and other for shorts. So what he does is scalp for pennies as the sp fluctuates up and down, he writes his calls and puts and also scalps them. So he is essentially day trading one stock by taking lots of small profits allday, if there is a big move on either side he says he still makes money.

    Ex: If the sp drops he cashes in on his shorts & short calls, holds onto his longs and short puts then does the same on the other side when the market heads up.

    Apparently theres not much too it, however I figure you have to keep your distance b/n your longs and shorts very close and be privy to day trading margin.

    #10     Dec 28, 2010