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Reaver

Why can't you just....

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This may be a silly question...but since I don't know anything about options really...

 

Why can't you just buy a put and a call and then let the loser expire and exercise the winner?

 

I know it wouldn't always be that simple due to fluctuation in price...but I was just curious, as I imagine the probability would be on your side that a trend will end up going in one direction or another enough to justify the losses you'd take in a balancing market....

 

Thanks.

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What you are describing there sounds like a straddle in which you purchase a put and a call where both options have the same exercise price and expiration.

 

Since both put and call are purchased you are long a straddle. While if you sold both put and call options you are short the straddle.

 

A long straddle has limited risk and unlimited profit potential as long as the markets move in either direction. The markets must move sharply in order to realize large gains and is a strategy used when you think the markets will move but unsure of which way.

 

If the markets remain flat, you lose the premium paid for on both the put and call. This strategy involves the assumption that volatility will pick up or is high in order to profit from such moves.

 

Also keep in mind that your gain is the exercise price minus the premium you paid for.

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Are you sure thats a straddle? If you buy a put and call at same strike your essentially buying a futures contract arent you? Or is that when you buy one and sell the other? Options are annoying as hell lol.

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Are you sure thats a straddle? If you buy a put and call at same strike your essentially buying a futures contract arent you? Or is that when you buy one and sell the other? Options are annoying as hell lol.

 

Yes, what I am describing is a straddle. I think what you are referring to is a bull and bear spread strategy.

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I think James is right in terms of this being a straddle. It's been a few years since I traded options.

 

This makes sense Reav playing around volatility - esp earnings. Basically you are saying I think this is going up big or down big, I don't know which one, so I'll own a call and put and as long as prices moves, one will be worth quite a bit and one will be worthless.

 

From there, the key is knowing when to liquidate the winner. If playing earnings and volatility, you need some good timing on the exits - sometimes you need to exit right after the announcement and other times you could hold for weeks.

 

The straddle is a fairly simple strategy and you'd do well to paper trade it first. One piece of advice with options - you now have market makers involved. And it's not as simple as just saying - go long. You have to find the right option at the right price with good Greeks, etc. etc. Long story short - you can buy a call and the price of the stock goes up and you still lose money. Talk about being slapped around. All of your analysis could be correct and you'd still lose money due to implied volatility, etc. It takes a lot of work to take on an options position in my opinion.

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here is an example from Options as A Strategic Investment:

 

XYZ common, 50

XYZ july 50 call 3

XYZ july 50 put 2

 

"If one purchased both the jully call and july 50 put, he would be buying a straddle. This would cost 5 points, plus commisions. If the underlying stock is exactly at 50 at expiration, the buyer would lose all his investment since both the put and all would expire worthless."

 

Basically, to make any money with that straddle you add up the premium you paid and add and subtract it from the underlying. If the stock is between 45 and 55 at expiration you would have a net loss. The kicker is the more volatility the higher the premium is going to be.

To me options are so deceptive and complex that the only way to play them is to be on the other side of that trade so your collecting premium and not paying it out.

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It's funny to me how I can look at market generated data and all the information available as far as profiles cti data from the LDB rotations, etc and it makes sense to me..but I start looking at options and my brain goes numb....

 

I think that's a sign.

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HAHA! Options aren't really that difficult to understand. I think a lot of people make it out to be more difficult than it really is. Sure, there are a lot of different strategies one can use to make money, but in the end its all based on the parent chart and if you can read one chart, IMO, you can read all others. If you're interested in trading options, then PM me...I've got lots of useful info you want it.

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HAHA! Options aren't really that difficult to understand. I think a lot of people make it out to be more difficult than it really is. Sure, there are a lot of different strategies one can use to make money, but in the end its all based on the parent chart and if you can read one chart, IMO, you can read all others. If you're interested in trading options, then PM me...I've got lots of useful info you want it.

 

That's not 100% accurate Tin.

 

As I mentioned above, you can literally buy a call (want price to go up) and the underlying stock and future can go up but you can lose money on your option play! I'll never forget a trade I did a few years back on Boyd Gaming - nice chart, looked great for a long. The stock shot up nicely. My call option however lost significant value b/c of the implied volatility.

 

So, to say that you just need to read the parent chart is misleading. Not only do you have to read the parent chart, you then have to read your option strikes and compare the Greeks, IV, etc. It's not as easy as seeing a buy on the parent chart and buying any call you happen to see.

 

I just wanted to provide that other side of the coin b/c any newbies out there, and there appears to be an influx of them recently, should know this.

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yea, the problem with options is they are more 3d than a stock or future. its not just price and volume, its price, volume and then how the greeks relate to the underlying.

from what i've seen with options alot of people just use them as leverage to the underlying when they would probly be better off even looking into single stock futures. i really wanted to get into options trading a year ago but the more I understood the less I wanted to trade them. I think they are best avoided.

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That's not 100% accurate Tin.

 

As I mentioned above, you can literally buy a call (want price to go up) and the underlying stock and future can go up but you can lose money on your option play! I'll never forget a trade I did a few years back on Boyd Gaming - nice chart, looked great for a long. The stock shot up nicely. My call option however lost significant value b/c of the implied volatility.

 

So, to say that you just need to read the parent chart is misleading. Not only do you have to read the parent chart, you then have to read your option strikes and compare the Greeks, IV, etc. It's not as easy as seeing a buy on the parent chart and buying any call you happen to see.

 

I just wanted to provide that other side of the coin b/c any newbies out there, and there appears to be an influx of them recently, should know this.

 

 

Right, I know that plays can NOT make money when you would *think* they should. I never bought straight up calls or puts...I always sold spreads. Understanding how the option is priced and knowing that the when you buy something because the underlying is going up, the volatility that is pumped into that option you just bought is what you paid for. The underlying can still go up and as time progresses the option call can not make money. All I'm saying, is that I don't think it's as difficult to grasp as some people make it out to be.

 

The most important thing to understand is the volatility and if you're going to BUY premium...you really need to understand that. You want to buy something not when it's going up, but when it's in an accumulation phase. That way the volatility isn't getting pumped in by news just yet, but people "behind the scenes" - so to speak - are quietly accumulating. This makes the premium cheap and then the volatility gets pumped up and the price of the actual underlying may not move at all, but you're in nice profit. I prefer to know when vol is really kicking, and watch the charts for strength or weakness, and sell a spread that's likely to supercharged with volatility so that the underlying won't *have* to do much for the vol to dry up and my premium to stay in my account.

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Tin - I was just referring to reav's question about buying a put and call at the same time. There's obviously a ton of option strategies out there, but straight up buying a call on a stock that goes up will not always result in a profitable trade. To me, that's enough to say no thanks.

 

;)

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yea, the problem with options is they are more 3d than a stock or future. its not just price and volume, its price, volume and then how the greeks relate to the underlying.

from what i've seen with options alot of people just use them as leverage to the underlying when they would probly be better off even looking into single stock futures. i really wanted to get into options trading a year ago but the more I understood the less I wanted to trade them. I think they are best avoided.

 

I think the best vehicles to trade darth are futures or the stock straight up. After trading options and doing all the analysis that goes into just one trade, I found it to be very time consuming and my time was better spent looking for other setups to maximize my time.

 

And I've never been a fan of markets with market makers and/or shady brokers. Hence the reason I do not trade options anymore and have never traded forex (even though I get the forex bug every so often).

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To me options are so deceptive and complex that the only way to play them is to be on the other side of that trade so your collecting premium and not paying it out.

 

I was just wondering why you can't sell an option, delta hedge it, and collect theta(premium).

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I was just wondering why you can't sell an option, delta hedge it, and collect theta(premium).

 

Tricky as the delta changes as the option moves in and out of the money. The trouble with any arbitrage is that arbitrageurs trade risks in similar markets. There are several things that can change the relationships of those risks.

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Anyway, I agree with DarthTrader. There's no sense being on the buy-side of options because of -theta. (Unless you know something, or found a system that averages a good return after -theta)

 

Couldn't you say the same thing for pretty much any system? There is no sense following it unless you know something or it averages a good return?

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Tricky as the delta changes as the option moves in and out of the money. The trouble with any arbitrage is that arbitrageurs trade risks in similar markets. There are several things that can change the relationships of those risks.

 

suppose you sell the option 10% OTM to avoid the biggest delta changes, making your hedging job easier.

 

Sure neutralizing delta is a job... but for the slight inaccuracies you make... won't the collection of Theta be predominant?

 

 

 

I don't know everything about options pricing, but theta seems to me to be a one way street without any trade-offs. Why can't you just isolate it? I'm sure the sell-side on Wallstreet runs delta hedging programs for every option they sell, unless they're making a directional bet.

 

So why can't the average Joe?

Edited by Northern boy

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Sure neutralizing delta is a job... but for the slight inaccuracies you make... won't the collection of Theta be predominant?

 

Well first, when are you going to come back to stocktalk? I miss you posting there...

Second when are you going to put that high powered canadian brain to 2d futures instead of 3d options? Your wasting alot of mental energy here..

Third...

What will kill your idea here are those "slight inaccuracies", namely transaction cost, the fact you can't buy .25 of a contract, you have to buy 1, and the spread if your not a market maker.

Delta neutral strats sound great theoretically...the problem I found is it seemed to put the strat into practice is that I would have to buy an 1/8th of a contract every 20 minutes, forgetting that I would have to transact with no commision and with the spread neutral or in my favor to really sit delta neutral...Even if that could be done at the retail level..the catch is you still have to buy a full contract and not 3/8ths a contract...So then your really taking a complex directional position then if its basically impossible to sit neutral...

If you can accept that then the even bigger rub is there is obviously someone who sits above your strategy with lower commisions, faster execution and most important with vastly more capital who can fractionalize the strategy as far as single contracts go impossibly better than you because of a lack of capital...They can buy 1/16th of a contract at the aggregate of your strategy while you can not..No edge.

Theta is constant, you can't gain an edge with Theta if you want to be neutral.

The other rub is with Vega...you have to bet against those guys mentioned not just on delta, but against your understanding of vega...Thats a total fools game...Even ignorant understanding of vega can get you a Phd from a top university, someone will have it right that you have to beat...its a fools game.

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Well first, when are you going to come back to stocktalk? I miss you posting there...

Second when are you going to put that high powered canadian brain to 2d futures instead of 3d options? Your wasting alot of mental energy here..

Third...

What will kill your idea here are those "slight inaccuracies", namely transaction cost, the fact you can't buy .25 of a contract, you have to buy 1, and the spread if your not a market maker.

Delta neutral strats sound great theoretically...the problem I found is it seemed to put the strat into practice is that I would have to buy an 1/8th of a contract every 20 minutes, forgetting that I would have to transact with no commision and with the spread neutral or in my favor to really sit delta neutral...Even if that could be done at the retail level..the catch is you still have to buy a full contract and not 3/8ths a contract...So then your really taking a complex directional position then if its basically impossible to sit neutral...

If you can accept that then the even bigger rub is there is obviously someone who sits above your strategy with lower commisions, faster execution and most important with vastly more capital who can fractionalize the strategy as far as single contracts go impossibly better than you because of a lack of capital...They can buy 1/16th of a contract at the aggregate of your strategy while you can not..No edge.

Theta is constant, you can't gain an edge with Theta if you want to be neutral.

The other rub is with Vega...you have to bet against those guys mentioned not just on delta, but against your understanding of vega...Thats a total fools game...Even ignorant understanding of vega can get you a Phd from a top university, someone will have it right that you have to beat...its a fools game.

 

lol high powered brain, I can't do math for my life. I'm not saying I'm gonna do it (delta hedge), besides I'm pretty strapped for free "investing cash" since my directional bets from last year went to shit ;).

 

If I knew then, what I know now... Anyway.

 

 

I'm not studying options to try and game from them, I was reading about em because I'm trying to piece a strategy together that exploits noise differences in correlating assets. But it has a hole in which I thought options could fill. Maybe I'll ask your help with it later,...

 

 

The problems you mentioned with delta hedging, regarding contract sizing.... those are only really problems in the futures market are they not? If you're delta hedging an option in forex or stock there's no problem. As for the problem of commissions... play it on a larger time frame... commission is insignificant then.

 

Playing roulette with vega... I dunno... but in theory it's a 50/50 risk/reward to the blind isn't it? It can benefit you as much as it can hurt you. And can't you hedge it with the VIX?

 

 

ps: Isn't Stock Talk full of spam now? UGh... I wish I was betting directional now.... not then... market bottom? i want money for high beta stocks :2c::2c::2c::(

Edited by Northern boy

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...Until I found out about volatility swaps. lol.

 

I KNEW there was an easier way!

 

Their construct and pay off is simple. You arrange a notional amount, a strike (V%), and the pay-out at maturity is: 'notional' * (realized volatility - strike)

 

there's no premiums involved. They just trade your book.

 

Google: "Salomon Smith Barney Exotic Equity Derivatives Manual" to read further about the products.

 

There's: 'Realized', 'Implied', and 'Capped' volatility swaps. If looking to hedge vega, Implied is what you want.

 

Ta-da! :crap: This drops the standard dev on my strategy at least 5%

 

 

ps: Nate, clear your inbox. I can't send you any messages. :p

Edited by Northern boy

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For all the beginners with options out there (like me), from people I trust, I've heard that:

 

1. certain methods of option trading take 20 minutes once per month to set up positions, and then 2 minutes per day to check the positions, if this is true, then we cannot talk about anything time consuming here as you can work in a regular work and trade options at the same time, unlike intraday trading of futures markets

 

2. there are strategies profitable 9-11 months from a year

 

3. you can profit from a chop, the price doesn't have to move

 

As I have only theoretical knowledge at the moment, I cannot stand 100% for what I am claiming here - as I'vem mentioned, yet. Of course, the endless hours of study and paper trading from point 1 are not counted and of course, I might go broke.

 

But for the hell of it, I'm gonna give it a fair try, eager to learn as much as it gets and try the stuff out on paper - this never hurts. One trade that doesn't work out isn't going to abandon this subject in my life. I *might* post my situation a couple of months from now, maybe I will curse the day I first said the word "option", who knows :)

 

But from the uplifting articles I've read about options, I don't want to die without knowing if they'd work for me or not.

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