Wait a minute! About the underlying, when selling otm options, you don't have to be too accurate on the underlying. You don't have to know where it will go, but you have to know where it will not go. That's easier to predict...or am I an idiot.
Would one of you options "pros" like to team up with me ? I will provide the directional call with stop and target and you provide the BEST options trade to maximize the return. I am just curious to see if someone with an excellent knowledge of the greeks can optimize my results and maybe we can learn a thing or two from each other. You must truly have an excellent understanding of the greeks/math though for it to work. Any takers?
i don't know where you're pulling the vol numbers but let's say the numbers are accurate. it's still irrelevant because we are not quitting the game, we are managing a position and a portfolio. if we don't roll into the adjustment, the next trade we make will be back at a negative expectancy proposition. the net IV of the available new position is well below the current market IV so the trade makes sense from a probability perspective right now. we can come up with examples all day where it is better to take the profits rather than roll them into a new trade. and we can come up with an equal number of instances when rolling rather than exiting would be smarter. in the aggregate, what i am suggesting is that when you roll into a positive expectancy position, in the long run all those examples cancel out and the net result is a profitable portfolio.
I wasn't implying that you said ineffeciencies didn't exist, I am merely backing up my case that they do exist, can be taken advantage of by retail traders, and a profitable system for trading can be devised around them. I don't know why you guys have such a hard time realizing there are other ways to trade than text book option plays. There are more ways to trade than the way you folks do at the CBOE. And yes, some of them are even profitable... GOSH! - The New Guy
one of the great thing about options is that you only have to be sort of right to make money.... you can be bullish...bearish ...or you can pick a range where the underlying will go... you can even say that nothing will happen and watch premium decay.... however when you are wrong make sure you have an exit policy in place either rolling ...converting... or exiting your position.... a little common sense helps as well... trade what you see not what you want to see...
Agreed ! In your example you're thinking of closing a short straddle profitably, presumably because you think the profit will be erroded by spot movement. Now, in that circumstance I'd close the straddle, rather than go long a strangle. Why ? Because I'd otherwise be paying a higher vol (the strangle) than I could buy (the straddle). The actual vol figures I used are irrelevant, my point being that strangles are more expensive than straddles.
Boy, this thread is moving fast and furious today. WE're not going to find out who the real traders are, but we'll find out who the real typers are. LOL. I agree with Mike on this point. In the long run, it's always better to roll into a positive expectancy then to get out and initiate a negative expectancy trade. I basically roll every month. Once my position is created, the idea is to create adjustments that add to my expectancy. You can't do that when you are starting a position fresh. If the ATM XYZ straddle today is trading for 5 pts in the mkt and you told me this was cheap according to your pricing model and someone else could roll into this straddle for 3pts, then yeah, that's a good do. It doesn't mean you are guaranteed to make money. It just means you have a positive expectancy trade. The MM's are probably bid 4.60 for the straddle on their markets and they are pricing that so they will make money. If you can buy that straddle for 3.00, that is a good adjustment. I understand that process of rolling and adjustments is foreign to many newbies on this site. It took me a long time to understand it fully so not to worry. Charles Cottle's PDF file, which is available for free on the internet, deals exclusively with the issue of adjustments and creating positive expectancy trades. I suggest all the newbies on this thread download it when you get a chance.
an actual trade.... ebay earnings....tonight aug 35 straddle trading 3.50 aug 32.5 put / 37.5 call trading 1.50 which one did i do....and why i will answer in a minute or too underlying trading 34.78
Absolutely ! But buying a strangle at a higher IV than one could close the straddle for doesn't add a positive expectancy, on the contrary. Perhaps it just wasn't a very good example that DV used to illustrate the point.