Options

[VielGeld]

^ Yes. All time value expires and thus only intrinsic value remains. So Delta = 1 if it's ITM, and 0 if OTM.

 

[rawrschach]

Thanks Viel Geld.

Anyone know if options on IG work like real options? Could be a cheap way to practice before doing the real thing...

 

[tar]

Thanks Viel Geld.

Anyone know if options on IG work like real options? Could be a cheap way to practice before doing the real thing...

Wider spreads with IG , will screw your results .

If you're looking for Indices options like the SPX for example , you can go for SPY ( ETF ) options which is 1/10 the SPX size , but keep in mind that unlike the SPX , SPY options are american style ....

 

[rawrschach]

Thanks tar, any broker recommendations?

 

[tar]

Thanks tar, any broker recommendations?

Nothing specific , check Interactive brokers they have futures , fx , equities and options but minimum account $ 10K , anyway for options any US equities broker will do there're many of them , just compare commissions and fees ...

 

[rawrschach]

Thanks.

Made my first trade this am, daily options on the FTSE.

Short fly

Long x2 6740 @18.25
Short 6730 @11.2
Short 6750 @21.4

By my count I shoud've made £3.90. I lost £8.

wtf is going on

 

[tar]

If that's IG then the minimum is 2 pounds / point as i recall ...

OK you lost on the long put 73 quids ( 2X2X18.25 ) and made on the other 2 = 22.4 + 42.8 = 65.2 , so you lost 7.8 pounds . Assuming you mean short put butterfly .

 

[rawrschach]

crap, i forgot to add the longs twice ffs. Thanks.

 

[VielGeld]

Ok, I'll stop you right there Rawrschach and tell you to stick to demo until you get the hang of it. Options are the last thing you want to experiment with in a live environment.

My previous broker, OptionsXpress, was great for demo'ing. I would recommend them if ThinkOrSwim does not offer demo. However, I would greatly disrecommend them as your execution broker as their fees are exorbitant.

 

[rawrschach]

I fail to take anything seriously in a demo environment. I'm only looking at limited risk strategies and possible naked long options so I should be ok.

 

[VielGeld]

Trust me, stick to demo with options. They have a ton of small quirks that make you slowly bleed to death. I would at least suggest sticking to it until you catch on to these and how they affect your end P&L (especially with more complex options strats). You could otherwise easily see yourself out a couple hundred bucks even on 1 option trades...

 

[rawrschach]

cool, thanks man

 

[Hakuna Matata]

OK so I am up and bored so I will throw in some random bits of $0.02

I don't trade them random12345, and I don't think I would be profitable with them at all. I know the theory, I worked on pricing them in industry, and my experience influenced me to think:

1) Going long options led to overpaying,
2) Selling for premia was not option for me because of the picking up pennies in front of a steamroller principle,
3) Transaction costs were too high, and I'm much more comfortable trading short term (2-3 day holding time max, more typically, much less).

My boss where I worked recommended both those books I mentioned and I found them a pretty good intro.

Rite these things come down to somefing not mentioned yet: VOLATILITY!!
Options are all about volatility. Volatility volatility volatility.
Most of the time, the IV of options is overestimates compared to what it will actually be (like your house insurance, you pay it for peace of mind, and don’t mind that the insurance company make money from you), except when it isn’t, because people underestimate the likelihood of mahoosive moves where you get steamrollered (black swan and ****). But, obviously there’s no such thing as a free lunch, so anything you make by being short vols in the quiet times is lost when the **** hits the fan. This is a very naive way of looking at it but that’s my laymans view (leptokursis, innit).

Ah ok, you trade spot FX mainly right? Do you use any of the knowledge you picked up for hedging bias or is it just not applicable?

You can learn information Risk Reversals and Butterflies. Also if you know the mkt is very long or short gamma, that can help I’m told.

Are they directionally tradeable in the same sense as FX/Commodities/Index Futures are?

I always got the feeling that there was something a little more sinister about them although I expect this to be an emotional bias I have based upon nothing more than tittle-tattle and a genuine lack of understanding.

Would be interested in this too for the record.

Yer, but you gotta know what you’re paying for them to know if it’s worth a punt.

Shakone has it right on the money. Hull and Natenberg are good books, and his bullet points about options have mirrored my experiences.

Common knowledge has it that selling options is superior on the basis of time decay. I find this false as you may have to hold on to the option longer to realize a profit. If price reverses against you, that's it. You're also capping your profits.

Commissions and fees also remain exorbitant despite record-high options volume these days. The spread is the largest I've seen anywhere, even in SPY where you'll witness the highest options volumes. In truth, I find that options strategies have very slim profit margins after all expenses.

That's not to say they can't be awesome sometimes. If you expect a big move, a large change in volatility, or wish to hedge your stocks, options, I've found, are excellent. Purchasing an option intrinsically provides an asymmetric trade whereby you have the potential for unlimited profits and limited downside. Coupled to their non-linear movement, this makes them a good bet for hedging.

But time-decay more or less devalues many options strats. It works against both sellers and buyers alike. So if you're going to play options, I would highly suggest you demo-trade them extensively before going live. They take a lot more experience to be effective with, imo.

Forget about time decay. I remember reading a snake oil thing ont eh web once that was like “will time go forward or backward? FORWARD, OBVIOUSLY, 100% of the time! So SELL OPTIONS TO MAKE MONEY 100% of the time!”.
It’s VOLATILITY you wanna learn about bro, vols mofo.

edit: just realised that my tos platform is ****ing awesome for options and backtesting

yer man TOS is da bomb.

 

[Hakuna Matata]

I stopped there because two of you started talking about ATM / OTM butterflys.

It's VOLATILITY, BOYS! Howard was a plonker 'cos he was SHORT GAMMA and thinking about PROBABILITY OF TOUCHING. You're doin' the same.

If you receive a credit for your spread, you are short options and short gamma. When you receive a debit for your spread, you are long options and long gamma.

 

[Hakuna Matata]

Let me say this as something for you to think about:

If you receive a credit for your trade, you have - net - sold optionality. If you receive a debit for your trade, you have - net - bought optionality.

K?

If you have sold [bought] options, you are saying that you think the market had overestimated [underestimated] the cost of hedging that option. The market thinks it will cost X to hedge, you think it will cost Y to hedge, and what you trade is the difference.