Nuff said.. After years of reading about options and trading them both as a punter and a market maker, If anyone here has any options question.. post it and I will answer it... (out of the generosity of my kind heart!!!) In Common Sense Terms: Options are tools which add 2 elements to trading direction: 1. Leverage 2. Stop Loss If you sell options: you are selling stop losses on positions over the life of the option: plain and simple... thats why selling options "can" be a very naive and stupid exercise.. Greeks can easily be very misleading as well..
Volga, I have a question, Which is better for trading credit spreads US Bonds and Notes futures or QQQ,SPY . Or some other instruments ? hombre
When you say credit spreads, I assume you mean selling call and/or put spreads, or time spreads, where in each case, you are collecting a premium. The real question is: What kind of exposure do you desire? Do you want to do the trade without a hedge (leaving yourself open to the direction of the underlying security)? Inherently when done naked, these trades leave you with an exposure to the underlying security as well as exposure to implied volatility.. but its going to be mostly a "delta" trade. When you delta hedge such a trade, you are exposed to other more complicated risks. As you are a "seller" per sey, you probably want to find markets where implied volatility is high.. or relative premium for that manner.. ((option or spread)price/asset price) Since all these markets are very liquid, I think execution should be pretty seamless. Figuring out which market to do it in is up to you.. you need to make your own decisions on where u think the asset is headed and what the possible volatility could be!
I am a fundamentalist; constantly trying to reduce information into meaningful parts....so please!! all option experts correct my logic: 1. I sell a spread for a credit (call spread far OTM above the market and a put spread far OTM below the market) 2. If the volatility is HIGH (relatively speaking), my credit is greater than if the volatility is low. 3. But who cares??? The objective is to CLOSE (or expire) the positions when the market falls in between both lower strikes of the spread. 4. Risk vs. Reward....Higher Vol = more profit potential but NOT more likiehood of success. Lower Vol = less profit (if choosing same strikes) but greater probability of success 5. I would presume that first order of business is to pick 2 strike prices (above and below market) that trader feels the market WON'T go. Second order of business is to determine how confident you are and buy (hedge) your bet with purchase of the outer legs. Therefore, my question, based on these suppositions, would be why the worry on the greeks here other than to give estimates of how quickly / slowly you may acheive your profit target?
1. to sell for a credit: collect premium 2. the higher the vol and the higher the price of the underlying asset the higher the premium 3. wrong. If you are doing this naked, your objective is the following for selling a naked put spread: to have the underlying end up at expiry above your top strike, or have it fall in between, but where the payout on the top put is less than you collected in premium. 4. This all depends whether you are doing it naked or not. Put and call spreads can easily be looked at as: Ok, I just collected a 1$ on a 2$ wide put spread. I have a 50/50 risk reward ratio. If the market lands above to in the middle of the spread, I make a profit. My maximum downside is 1$ because the putspread is 2$ wide and I collected 1$. Its like gambling on horses or sports (or very similar), except in those you can run a flat book and all possible scenarios are known. 5. As a legger or a spreader, why not. As the market rallies, buy the wing puts, when it falls, sell the closer to the moneys.. (thats how I would roll into it Greeks are purely for risks within the Black-Scholes Framework.. meaning its a very specific way of looking at risks. When you arent delta hedging, or staying delta neutral through other options trades, you are really trading direction/delta and that risk is going to be much bigger than say "theta/gamma/vega".. so BS is kind of a waste. Try looking at break-even analysis....
What option books you highly recommend to read for trading options? I'm looking into the possibility of trading options and haven't started. Thanks.
SHELDON NATENBERG Option Volatility and Pricing then try : The Cottle book (cant remember the title) once u have been trading a bit, try Dynamic Hedging
Here it is on Amazon. http://www.amazon.com/exec/obidos/t...103-3306041-6866217?v=glance&s=books&n=507846 Please read author's review, he provides link to a free (receive by email) book that has been recommended here before... Apparently he has a new book due later this year. Taleb's Dynamic Hedging was scheduled for a 2nd edn, but looks like this is unlikely to happen in the near future (I don't know why, but this has been the blurb on the Wilmott forum - to which Taleb posts once in a while).
Volga, Thanks for explanation. When trying to enter during times of high volatility, I have noticed that intraday price of options changed substantially by hour, went up by 40% then dropped 20% even the price of underlying stayed about the same . Is there any way to get volatility numbers intraday or what is a better way to enter while premiums are high ?
yes, have a direct line to the floor! ;0) all depends on the institutional flows.. of course its best to sell when u know the last 1000 lots of some order are going through..