Concerning the delta, if the position moves much, upwards for the calls and downwards for the puts, it is interesting to balance the delta, that decreases the output but also protects the account. That-known as it is by initiating the legs separately that one can make this adjustment. I hope that that helps. (Google is for the further information)
To balance the delta. it is enough to initiate an additional position. The proportion: ------------------- One free for five is the normal proportion. Three free per ten still better. (this means You selling 7 against 10) Reason: --------- Covered Position. Made by free (no selling against it) additionnals put or call. In the case or the market would move very extremely. According to the direction and the position taken. That is expensive and decreases profitability. But as this profit is very large, when we initiate the two legs separately. To be comfortable uses more long expiration for covering, buy cheap. (during swing moves) More explanation: ---------------------- f: ex You have 1000 shares; add 10 LEAPS calls - sell against that 17 short term calls , (30-45 days exp) wait the stock move higher before selling short terms calls. Then with the receiving money buy 4 LEAPS put, against that sell short 2 put when the market way down. Buy back every time the short term options at 40% of the price or less if You feel the directionnal moves continue, when a nice move (and swings) replicate again and again. Never short an option below 0.50 and below 20 days expiration... I hope this will helps artes [in french: http://www.dot-circle.net/coveredcall.html ]
What do you do if the stock drops once you open your long stock plus long LEAPs plus short near month calls position? Then you lose more on the long calls AND the long stock than you make on the near term short calls because you haven't got a proper hedge yet. db
You are right, I agree with You there is a lot risks. I suggest to check the fundamentals before initiate position. Entry near the lower part of the swing move. If the market does not go against You, is also more rewards...
This thread seems to have a lot of numbers against it, so maybe here I will get a direct answer. How many of you know what happens in the market when you write, or Buy, an Option. What chain of events do you start the minute you get filled on your trade. Think about it, for the majority do not have a clue as to what happens, and still, they persist to buy and sell Options, and then, wonder as to why it is they lose money. They hear about the BS model, and how to find cheap Options, whereas, they should be doing the exact opposite, and that is, looking for Expensive Options. Again, stop and think. The name of this thread is "Writing options for a living", so, naturally, if you are writing, then you want to take in the higher premiums. But, high premiums carry high risk, and high risk, requires high margin, and high margin, requires a Big Bank Account. So, I hope you are all starting to see what I am saying here, and it really is as simple as ABC, but for some unknown reason to the majority, but known to the few, the rubbish is still churned out for the masses to lap up, and Boy, do they do it well. You don't expect to drive a car in the fast lane, unless you first get on to the Motorway, do you ! RPT
Trading options has nothing to do with buying expensive options or cheap options. You trade an option only when you get paid to do so. When you get paid to trade an option, you hedge away underlying risk. Otherwise if you don't get mostly delta and gamma neutral, you are just trading the underlying (it is nearly impossible to be perfectly delta or gamma neutral. I mean that should generally be your goal. Positive gamma is ok). True options traders don't want exposure to the underlying, they trade volatility, or higher moments like skew. You want exposure to vega and gamma as a pure options trader, and deal with theta. Your theoretical prices tell you when you are getting paid to trade an option or a spread. The model spews out theoreticals. The model has as inputs like volatility, skew and kurtosis, and some models have even more moments. Good models are extremely calibratable through software in realtime. Either the model sucks, or it doesn't. nitro
"cheap" options are a myth. They are priced that way for a reason. The market knows almost all and sees almost all. The price at this minute reflects expectations, value, and is the momentary prism of supply and demand. It is like the low to unusually low bidder on a roofing job. Usually this is the person who overlooked something or made the biggest error in their estimate. The people who think they have it figured out usually strike an iceberg or run aground just when they think they have it figured out.
That is not quite right either. Options have supply and demand just like any other trading instrument. An institution may come in and bid the heck out of a risk reversal and drive the price of some leg temporarily out of whack. An option may be cheap from a price standpoint, and be very expensive from a volatility or skew standpoint. Or vice versa. Only your model and order flow can tell you these things. nitro
The market is not right all the time. If the options were priced perfectly all the time, then no one would buy or sell them really. Options are priced off of the underlying so if we cannot agree on a true fair price for the underlying, the derivative should be no different. The reason we have a market is that different sides disagree with over the future expectations of volatility or direction of the underlying and the prices are under constant buying and selling pressure. The average person cannot claim to know when options are truly mispriced, except for their own models, so we all trade based off our own expectations. Is $0.50 cheap for a call 4 strikes OTM? Relatively cheap for someone because if we all thought it was overpriced or fairly priced there would be no buyers. It is constantly changing.