Options Trading Thread

[Hill Farmer]

RogerM,

Thank's for that. Now I'm trying to get on top of options. Which training sites do you recomend? Thanks.

FG

 

[RogerM]

I think the best place to start would be a good primer book. This one is as good as any, and better than most.

Options Plain and Simple by Lenny Jordan. Published Prentice Hall ISBN 0 273 63878 5

Cheapest I've seen it is online at Blackwells at £19.99 inc delivery, but you could probably get it within a few days from any good bookshop for a similar price.

http://bookshop.blackwell.co.uk


The London International Financial Futures Exchange (LIFFE) site is a mine of information, and gives 15 minute delayed prices on all UK equity and index options for free - which is quite adequate for most purposes.

http://www.liffe-data.com/optionPrices.asp


Most option traders cut their teeth in the UK on the 76 (or so) optionable shares before moving onto the US, where there are over 2200 optionable shares! The equivalent to LIFFE is the Chicago Board Options Exchange (CBOE) which also gives 15 minute delayed prices. The main difference is the contract size (1000 shares in the UK, 100 shares in the US). Lots of useful educational material here.

http://quote.cboe.com An excellen...com/page/education/tco/courses/?sid=100981990


and also :-

<http://www.commodityworld.com/options_strategies.htm

<http://www.numa.com/derivs/ref/os-guide/os-0a.htm

That should keep you busy for a while. )

 

[RogerM]

I'm off on holiday on Thursday for 2 weeks, and don't get back until after the 21st June expiry. So what to do with my 1 x2 ratio call spread on the ftse 100? The current ftse level strike is below the level of the lower strike at 5125. Below this I am am guaranteed a small profit of 20 points per strategy, this being the net credit i received when the strategy was placed on 19th April. But if there is a runaway rally over the course of the next 3 weeks (unlikely I know - but not impossible), I start to lose heavily above 5445 as shown above, and as I shall be walking in the Italian Dolomites I will not be able to monitor my position. So what are the various courses of action open to me?

1. Take the risk that the index will not rally above 5425 - not acceptable in my view. Even if it doesn't happen I shall be worrying that it might.

2. If I close the position, I would get the following :-

sell the 5125 long calls @ 43 = 2 x 43 = 86
buy back the short 5275 calls @ 12 = 4 x 12 = 48

Net receipt = 86 - 48 = 38 points, less dealing costs, and I still keep the initial credit of 40 (20 per strategy) less dealing costs.

3. Two of the 4 short calls are already covered by the 2 x 5125s, so I could buy 2 calls to hedge the 2 short calls that are not already covered. Towards the end of trading on Friday the 5425's were 4 and the 5375's were 5. This would turn it into a butterfly, with unequal wings!

So if I bought the 5375's, the payoff diagram would change to the one shown below. This still gives me a net 15 per strategy, in the event that the ftse100 closes at or below 5125, but there is now a min profit of 65 per strategy above 5175, and 165 points at 5275. For the sake of an extra 1 (£10), the potential return of up to an additional 50 points per contract above 5375 must make it better value. Overall, there is a net credit at all levels of the ftse, so the only question is how much, which will depend on the ftse closing level at expiry. It also means I can go on holiday and leave the position in place without worry!

This, perhaps, shows how flexible options can be in reaching a decision on how to play the market, and how a strategy can be adapted to cater for changing market conditions. It is also something that can be done with a day job, as so long as you can keep an eye on the index on which the strategy has been placed, there is no need to sit glued to a screen all day.

 

[Morris]

Agree about the Lenny Jordan book - very straigthforward.

I got to talk to Lenny at the Olympia show a few months ago, seemed to be a very nice chap, knew his stuff. Pity he had lost his presentation materials though.

I was browsing the book by "Trade Options Online" by George A. Fontanills, which is pretty interesting. This chap is behind some of the strategies used by Optionetics [see my previous post].

Also worth a read are Vic Sperendeo's two books, he used to be an options market maker, he advocates options for the really big wins.

 

[neil]

Options on Futures

Another educational link but relating (eventually) to options on Futures.

The FREE courses on investing are set to include options on Futures. Meanwhile the investing courses are free upon registering on the Bloom berg site.

http://www.bloomberguniversity.com/...wtrWS2-yYe?schedulingId=5000456&mapid=5000595

Bear in mind Futures are risky and not for the inexperienced, a truism that equally applies to options.

Neil

 

[Hill Farmer]

RogerM/Morris/Neil,

Thank's for all the very usefull feedback. RogerM, have a good holiday.

FG

 

[sharpshooter]

www.tradeatman.co.uk

Can give you a full service on trading options with competitive commission rates.

One word of warning - I read a comment about options trading being jsut like share trading. I would treat this with caution-due to the gearing Options trading can be riskier than simple stock buys/sells. I'd suggest that one carefully reads up on options before entering and is very careful as margin is usually the reason that people are forced out of posiitons.

 

[stevet]

the main attraction for options seems to be for people who have lost money trading other ways, seem to latch onto to options as a way to make money, especially if the trade can sound complex - i suspect most lose money

arbitraging options is a real way to make money, but i consider that an "arbitrage" strategy, and not an "option" trade

writing options will work until one big loss wipes out a bunch of little wins

anyone got any real money making strategies for just trading options?

 

[esiotrot]

Good question Stevet
I agree that the reason options are normally sold is to cover existing positions in the underlying stock and to sell naked (i.e. uncovered) options is very risky

While understanding the theory expounded in this thread I must admit I’ve always looked at this in a much simpler way. I look for one big win to outbalance several small loses.

I trade (buy/sell) options for several reasons and with a fairly basic technique.

a. Your investment loss is limited to your original purchase while your potential profit is (relatively) unlimited.
b. The stocks covered by options are limited to heavily traded shares, which allows TA to be reliable.
c. Only a few stocks need be watched because some of the optioned stocks are not very interesting. I regularly watch around 8 or 10 stocks only.
d. Leverage of buying 1000 shares for a small fee makes it very attractive.

My technique is, as I said, quite basic.

a. If the price is trending follow it up (or down)
b. Use trendlines, support and resistance levels, volume and some indicators to look for trend reversals.
c. Set strict stop losses and stick to them. Cut your losses and run your profits not the other way round.
d. Understand that you don’t win every time.
e. Buy at, or near, the money with time to run. Time is the enemy.

Example:
CGNU – around end of April this broke the support at 705p in a steep down trend on big volume. Early May tried to break back above 705 and failed, this looked like a pullback as it resumed the down trend, so on 13th May I checked out the option prices.
July 650 Puts were 18p bid and 23.5p ask. Share price 678
Breakeven as follows:
Buy 1 contract - £235
Buy commission - £15
Sell commission - £15
Clearing fee in & out - £3.60
Total - £268.60
So the bid price had to get to 27p for me to make a profit. What’s the chance? Nice downward trendline - the price needed to drop to around 660 to see a profit. Set a stop loss of 705 at which time the bid would be around 11p if I had to bail out. FTSE was near the top of the Bollinger (and the recent trading range) so was likely to go down and nothing else looking interesting. Look tomorrow (14th) to see what CGNU is doing – opened at yesterdays close then down - so let’s give it a go!!

Despite a few concerns afterwards the price never tested the resistance and after 28th May really started to motor. Today the share price is 571p and the option is 79p showing a profit of £521.

What next? Another good question – still around 36 days to expiry and I get twitchy at less than 20 – so I can hang on for a bit. Unfortunately the drop has not generated a stop loss on the chart such as an accepted high, so is 30p too tight (600p)?

So – I got lucky with that one but recently messed up on STAN; a nice trendline break and pull back but I got in too late with a Call and as soon as it got into profit we had another reversal so I bailed out with a small loss. However I was looking at the wrong scale and another 20 days might have been seen a profit. It really does your mind!

When you get one right you think you have got it licked before it turns round and bites your ….

Currently looking at STAN Puts, AL. Puts, BAT Puts, IMT Puts, LLOY Puts and Calls

How’s that for Stone Age trading??

 

[stevet]

esiotrot

thanks for outlining that, but i was looking more for strategy based trading that specifically utilised a parameter of options to give an edge, whereas you are jappear to be using options to give you leverage

i have never understood the concept of options that says that the downside is limited and the upside unlimited - downside is downside not matter how you look at it, and i would rather use a trading entity with a narrow spread combined and with a stop to control downside

with CFDs nowadays you can get good leverage, though i personally would not use a CFD

i suspect that trading as you do must end up being at best breakeven, as if you are wrong, your costs with the spread and brokerage fees make it expensive to close

am i missing something?

 

[esiotrot]

Stevet
You are correct - I use Options for leverage
Another way of looking at it - is to say I use TA as a tool and options as the vehicle.

The concept of limited downside is two fold: one - the loss is limited by your original investment and two- the use of rigorous stop losses.

I also agree that until you gain experience then breakeven is a fair result. However i think it's been said before that everyone must develop their own trading style. In this business there is no holy grail of a "no loss" trade unless you accept tiny profits but lots of them - and even then..... Seems to much like hard work to me.

No doubt the level two fans can make money but they have to be glued to the screens to read the action. My style is much more relaxed and I probably check the markets a couple of times a day.

Spread is a very annoying fact of life - options are no different but you put up with it. However the way I look at it leverage and spread are the "Swings and Roundabouts"

 

[stevet]

T/A is the only way it is possible to make money trading, but on the trade you described, you have to make around 15% just to break even -

not sure that even the best traders ever, could make money on that basis

if you even managed to break even, let alone not lose your shirt on an ongoing basis, it would be a miracle - i suspect whatever leverage you are getting on options, is only going to multiply your losses over time - but if you are able to trade at the right points, you might find normal leverage on stocks with a narrow spread, will end up a lot more preferable, as you can bale out with a minimal loss if you have it wrong

its losses that make you your money in trading, the winning trades look after themselves, but a profitable P&L is done to controling losses


i'd try the maths on cfds if i were you, you might find it a more attractive trade - certainly could not be any worse!

 

[Morris]

Downside is limited on an options trade, in that the most you can lose is the premium.

Compare that to FTSE futures !

 

[stevet]

losing "only" the premium on a trade is a sure way to end up as a losing trader

losses are the difference between the buy and the sell and the costs -

you can bail out of a futures trade whnever you want, but if done correctly, for a small percentage of your investment in the trade, and if you entered the trade correctly, with a good risk to reward ratio, over time with minimal losses and good profits - you will be profitable

i am sure there are a lot of people who have had their bank accounts eaten up by premium losses, and a lot of happy options brokers promoting the ridiculous concept of a limited loss and unlimited profits - thats why options brokers are brokers and not tradersn - they either know nothing about trading, or know that an limited loss is still a loss

 

[Morris]

How's this for timing - closed FTSE June 5200 puts 22nd May ?

Groan... lesson - when in the money, let 'em run...

 

[stevet]

Morris

This is part of the problem of trading part time, and also the concept of unlimited profits, verses limited liabilty with options

with options, you pay a high spread, which is a real problem to profitability, and you also have the issue of lack of transparency on the pricing of the option, and in your case, the unlimited profits were limited by you closing the trade - hence the problem of consistent profitiabilty with options - the cards are stacked against anyone trading them, except of course, for arbitrage, which is real profitable

but, i hope you closed with a profit anyone, and taking less of a profit is always better than a scratch or loss

 

[esiotrot]

Hi morris
you wrote "How's this for timing - closed FTSE June 5200 puts 22nd May ?

Groan... lesson - when in the money, let 'em run..."

Thats interesting - I know it's long past now but I wonder if you have any notes on this particular trade?

When did you get in? What were your targets/stop losses? why did you come out on 22nd?

Hind sight being the perfect science and we can all look back at a trade we stopped too soon or not closed when we should have done. Trading is all about fear and greed and getting the balance right is the difference between a successful and unsuccessful trade.

This is in no way critical of your trade but I hope to learn something.

I have just closed a very successful position because FEAR overcame my greed!!

 

[Morris]

Got in because I saw resistance on the FTSE above 5250.

Closed because I was worried about time value erosion - this was a mistake, as the option was in the money.

Was my first option trade, so very much an experiment.

Also did a paper FTSE strangle a few weeks back, 4800 put & 5600 call.

Total cost 78, value today 207. Just learning you understand.

 

[Robertral]

Good question Stevet
I agree that the reason options are normally sold is to cover existing positions in the underlying stock and to sell naked (i.e. uncovered) options is very risky

While understanding the theory expounded in this thread I must admit I’ve always looked at this in a much simpler way. I look for one big win to outbalance several small loses.

I trade (buy/sell) options for several reasons and with a fairly basic technique.

a. Your investment loss is limited to your original purchase while your potential profit is (relatively) unlimited.
b. The stocks covered by options are limited to heavily traded shares, which allows TA to be reliable.
c. Only a few stocks need be watched because some of the optioned stocks are not very interesting. I regularly watch around 8 or 10 stocks only.
d. Leverage of buying 1000 shares for a small fee makes it very attractive.

My technique is, as I said, quite basic.

a. If the price is trending follow it up (or down)
b. Use trendlines, support and resistance levels, volume and some indicators to look for trend reversals.
c. Set strict stop losses and stick to them. Cut your losses and run your profits not the other way round.
d. Understand that you don’t win every time.
e. Buy at, or near, the money with time to run. Time is the enemy.

Example:
CGNU – around end of April this broke the support at 705p in a steep down trend on big volume. Early May tried to break back above 705 and failed, this looked like a pullback as it resumed the down trend, so on 13th May I checked out the option prices.
July 650 Puts were 18p bid and 23.5p ask. Share price 678
Breakeven as follows:
Buy 1 contract - £235
Buy commission - £15
Sell commission - £15
Clearing fee in & out - £3.60
Total - £268.60
So the bid price had to get to 27p for me to make a profit. What’s the chance? Nice downward trendline - the price needed to drop to around 660 to see a profit. Set a stop loss of 705 at which time the bid would be around 11p if I had to bail out. FTSE was near the top of the Bollinger (and the recent trading range) so was likely to go down and nothing else looking interesting. Look tomorrow (14th) to see what CGNU is doing – opened at yesterdays close then down - so let’s give it a go!!

Despite a few concerns afterwards the price never tested the resistance and after 28th May really started to motor. Today the share price is 571p and the option is 79p showing a profit of £521.

What next? Another good question – still around 36 days to expiry and I get twitchy at less than 20 – so I can hang on for a bit. Unfortunately the drop has not generated a stop loss on the chart such as an accepted high, so is 30p too tight (600p)?

So – I got lucky with that one but recently messed up on STAN; a nice trendline break and pull back but I got in too late with a Call and as soon as it got into profit we had another reversal so I bailed out with a small loss. However I was looking at the wrong scale and another 20 days might have been seen a profit. It really does your mind!

When you get one right you think you have got it licked before it turns round and bites your ….

Currently looking at STAN Puts, AL. Puts, BAT Puts, IMT Puts, LLOY Puts and Calls

How’s that for Stone Age trading??

Did you buy the LLOY puts?

I took the ride up by going long March 04 calls, nice 122% return

 

[Glenn]

Anyone know the basic IB symbol for FTSE 100 Options ?
I have no hair left to pull out trying to find it.
Thought it was ESX. 8~\

Glenn