Best Thread The Options edge (Writing Vs Buying)

[SOCRATES]

Soccy baby.....................

Come on now, you know what I think of techies and their analysis, I'm a dyed in the wool Fundie......................

I'm in the process of crunching the numbers on FD.
Anyway, you've your own thread now.

But, of course, if your technical skills can leave mine in the dust, then feel free to add, highlight, any area's that you feel require to be highlighted for a Technical Analysis of the underlying common stock....................in other words make yourself useful.

jog on
d998

ducatti.....please.....Bollinger Bands are for beginners...like for example a child learning to ride a bycicle with stabilisers....have some dignity .....please....ducatti....it is outrageous to mention such things on an advanced thread like this...please....it is embarassing....don't do it.

Added...

It is now 0010, and out of curiosity I have had a look at the chart. No wonder. The chart is Mickey Mouse. Why don't you get hold of a proper chart with a properly scaled volumetric display and accurate X and Y axis and free of all these coloured lines and with the candles tightly packed in a proper sequence and then it would be possible to tell you tomorrow's news today from it, but not otherwise from what you have attached, ducatti, sorry, I must tell you. I am offering you this advice as an act of goodwill, truly. But you carry on with it if you like/

 

[grantx]

Ducati,

An impressive analysis. I'll Copy and Paste that for future reference.

Time value and implied volatility appear to be one and the same - zero time value (maybe a deep itm call trading at a discount) will have zero implied, but an otm call with even a little time value will have an implied.

The calcs are very simple to determine time value and intrinsic value, so in due course I'll look at this in more detail. I suspect the relative moneyness (point or percentage - which?) is a factor in determining amount/degree of smile/skew.

Keep it coming.

Grant.

 

[ducati998]

grant

When evaluating PUTS, it behooves us to break the contract into the component parts;

PUT value = Intrinsic value - Interest rate + volatility value + dividend value
FD pays a dividend, and the current Interest is circa 5.25%
These two inputs will influence the ATM strike at Expiry, thus the intuitive ATM strike, is not the one you might expect on cursory examination.

This is just one further reason that it pays to look at the details.

jog on
d998

 

[ducati998]

Soccy baby

You've missed the point...................what's new I ask myself.

It is not whether my analysis is good, bad, really bad, but that in the assumption of an Options position, in addition to an analysis of the Option, you require an analysis of the underlying contract.

As for it being basic, simplistic, and designed for idiots, hell son, I've got to consider you, CYOF, and andycan.

jog on
d998

 

[andycan]

What happened to the Peanut Post from my pal andycan?

See what I mean, even working with simple basic 1+1 = 2 math, these guy's get it wrong.
Just as well you pulled that post peanut, you were going to get crucified.

jog on peanut
d998

After an esteem member recommended to me via pm to withdraw from a pointless argument with a 'Neanderthal' as he kindly put it, I decided that to argue with a mentally challenged wannabie trader with superficial text book level understanding at best of options (and I don’t mean the chocolate variety).
Is in itself a torture worse than crucifixion thank you for pointing that out Your inability to answer basic questions without reverting back to Tarzans little friend Is amusing Its also evident you lack any understanding how markets works as your analysis Clearly shows



Keep swinging

 

[ducati998]

The last stage of analysis, the Fundamentals;

The capitalization structure of FD is primarily common stock, Bank debt, and Bonded debt constitute only a small % of the capitalization.

Interest coverage is adequate, although not outstanding.

Net Profits are being pumped up and manipulated in a variety of ways;

*Capital Expenditures measured against Depreciation, Cash-flow from Operations has been squeezed, and squeezed hard. This is not a good sign, maintenance on retail properties is an important expenditure.

*Accounts Payable & Inventories are waving a large red flag. They work together of course, and it would seem that the current inventory has failed to have been paid off, and has instead been capitalized, add to that expanding inventories, in a retailer, and you have imminent writedowns, with the possibility of restating earnings due to improper accounting for cost of sales.
Markets don't like restatements, they don't like writedowns on inventory. Net Profits will again be overstated.

*Retained Earnings are growing, but, Paid-in-capital is not far behind, never a good sign when Net Tangible Assets are 50%+ constituted by shareholders capital. Particularly, when they are used to fund acquisitions [Goodwill] that lower the return on assets; down from $2.28/$1.00 to $1.86/$1.00

*Aggressive accounting on depreciation & amortization for Tax purposes, further inflate the Net Profit line.

*Intrinsic Value per share is calculated @ $22.50 - $30.45 per share. With a current price of $39.90 at todays close, there will be no investor support above these prices, and the PUT was sold at a $37.50 Strike

*Short ratio is a tiny 2%. This leaves a very attractive short for Hedge Funds looking for an aggressive play based on Technicals, and or Fundamentals, a double whammy.

*Last, but not least, Insiders have dumped some $50 million of stock. They obviously love their own business at these prices, plenty of air below to go lower.

*In summary, the Options based on IV value, were hardly overvalued. Technical considerations could come into play, low Short ratio, correlation to Index, that is due a pullback at somepoint, combined with poor fundamentals.

Is this trade, the selling of [writing] a PUT on FD, a sensible, rational trade, based on an analysis comprising three areas, none which recommend the trade on any particular factors, at a reward to risk ratio of 1:25

jog on
d998

 

[CYOF]

A question for those who believe that the writer has an inherent statistical edge.

If such an "edge" does exist, then by definition, it must be possible to quantify the size of that edge numerically. Id suggest that if this question cant be answered, then you dont have a full understanding of what your edge comprises.

Is anyone therefore willing to suggest the magnitude of the edge CYOF ?

Zu,

Lets re-cap a little.

The Wizard of ODDS, as he has called himself, Profitaker that is, and duc998 ,are doing nothing more than preventing others from learning what they need to know so that they can always act in thier own best interests.

But, to be fair, and as I have mentioned, Socrates has clearly explained why the BIG AGRUEMENT continues over in the Psychology section, and that is, there are two camps, Fundamentals and TA, whose way of thinking is such, that it will always cause confrontation.

But, even better than that, what I am now beginning to see, is that Wizard of ODDS and 998, will not even answer the basic questions in relation to post#411, and also, my very basic question in relation to what is the most important thing to know about trading Options.

And now you come along with such a silly statement - do you really think that any of us is going to come out and TELL you how to do it for big profits!

THINK AGAIN - and the next time you ask, spend at least 10 minutes by writing down what you are going to say, then read it over many times, and think about my little story about the rabbits and The Little Circle, for remember, I always speak The Truth, and everyone should see by now that The Truth will always be The Truth, and can not be changed no matter how hard we try, and it can not be changed due to the immutable Laws -period.

So, do you now see why this thread is getting nowhere, and why it will quickly die off again when we decide to leave and let all the Inspirational stuff continue.

Now, it may be more beneficial for you to see where you fit in below :idea:

Look > Listen > Learn

Ask > Acquaint > Acquire

Follow > Falter > Fail

Think > Thinking > Thoughtfulness

 

[zupcon]

The Wizard of ODDS, as he has called himself, Profitaker that is, and duc998 ,are doing nothing more than preventing others from learning what they need to know so that they can always act in thier own best interests.

No, they are trying to engage in rational debate, something that you neither understand, nor are capable of. Simply typing MONKEYS in capital letters as a response to a post may pass for rational debate or even razor sharp wit in the circles you inhabit but it dosnt cut much ice here in the real world.

I have mentioned, Socrates has clearly explained why the BIG AGRUEMENT continues over in the Psychology section, and that is, there are two camps, Fundamentals and TA, whose way of thinking is such, that it will always cause confrontation.

No the argument rages because one party is maliciously and deliberately attempting to cause mayhem and destruction at T2W. Anyone who dosnt believe that can take a look at BULLDOZERS lunatic ranting on his own forum.

do you really think that any of us is going to come out and TELL you how to do it for big profits!.

The answer to this question is clearly no, and of course not a single person has even asked you to tell us anything, why the hell would we ask ?

So, do you now see why this thread is getting nowhere, and why it will quickly die off again when we decide to leave and let all the Inspirational stuff continue.!.

The thread gets nowhere towards answering the original question, because YOU refuse to engage in debate, or answer the simplest of questions, or post material or data that can be independently verified. Its quite clear why you avoid these issues, but as Ive said before, your posts are mildly entertaining.

The moderators created a perfectly good thread for the discussion of leprechauns and such in the psychology section, so I suggest that you abide by their wishes and post any further off topic ramblings in the appropriate location.

regards
zu

 

[ducati998]

Just a quick update on the FD trade.
The current ask is $0.35 with plenty of volume

delta [-19.3]
gamma 9.4%
vega 0.029
theta [-0.015]
rho [-0.005]

Thus we can see, with very little loss to the underlying contract, the Option is starting to take on a great deal of gamma risk. This is the danger to the Options trader, that risks crop up in odd places, and they are not always easily managed.

The result of this gamma risk is that the ASK has appreciated by 20% overnight, with a fall of $0.14 on the underlying.

The *writer* if wanting to exit, is a long way underwater already.
Of course, currently there is no requirement to exit, but, do you need to start *managing* this trade?

jog on
d998

 

[Profitaker]

Ducati

I'd say it *depends* on what else you've got running. If you've something more or less equal and opposite then no worries.

 

[ducati998]

Ducati

I'd say it *depends* on what else you've got running. If you've something more or less equal and opposite then no worries.

Indeed, and raises an interesting point.
If, as would be prudent, you hold a diversified position [hedged] then, would you manage;

*each trade individually
*all trades as a total position

If the second, depending upon just how large your total position, adds complexity to the assessment of risk across the total position [portfolio]

jog on
d998

 

[Profitaker]

Ducati

All trades as a total position, always.

The main "complexity" is one of correlation between the component stocks accross a portfolio. The most accurate way to assess the portfolio risk is by monte carlo, but is far too complex and time consuming for my liking. I tend to use a correlation of +1, which would be the worst case scenario when short options, and then run a normal VAR calc. Assessing the risk of rising IV in a market slide isn't easy, so I tend to go with gut feel. Most of my trade are front month anyway, so vega is never massive.

 

[ducati998]

Ducati

All trades as a total position, always.

The main "complexity" is one of correlation between the component stocks accross a portfolio. The most accurate way to assess the portfolio risk is by monte carlo, but is far too complex and time consuming for my liking. I tend to use a correlation of +1, which would be the worst case scenario when short options, and then run a normal VAR calc. Assessing the risk of rising IV in a market slide isn't easy, so I tend to go with gut feel. Most of my trade are front month anyway, so vega is never massive.

*Correlation* is a problem. Hence, I would tend to eliminate correlation through concentration.
I prefer to trade size in a concentrated position, where, through analysis I feel that I have identified a *theoretical edge* and can assess the dynamic risks in real time.

As for IV, I try to work with extremes. Middle of the road IV, is just a 50/50 punt, and I try to avoid those if I can.

jog on
d998

 

[Profitaker]

I would tend to eliminate correlation through concentration.
I prefer to trade size in a concentrated position, where, through analysis I feel that I have identified a *theoretical edge* and can assess the dynamic risks in real time.

I take your point. My only comment would be that the market may not agree with your analysis. For that reason, I'd prefer to have a broad spread. But if the formula works, don't change it !

 

[ducati998]

I take your point. My only comment would be that the market may not agree with your analysis. For that reason, I'd prefer to have a broad spread. But if the formula works, don't change it !

Indeed, and that is precisely the point, the market cannot be in agreement at entry, it is only necessary that we converge at the exit.

The function of analysis *should* be to identify market inefficiencies, whether they be;
*price
*value
*volatility
*time value
*arbitrage
*special events
*risk arbitrage
*other

Once the anomaly has been identified via a quantitative & qualitative analysis, a position can be taken to capitalise on the *theoretical edge*. From the position being initiated, the risks will be monitored based on;

*inefficiency identified
*market action
*future events
*other

Thus, risk can be managed on the primary inefficiency, but monitored and managed for future risks that have a nasty habit of popping up un-invited.

Diversification definitely has its place, and the function is to reduce concentrated risk, it can, on occasion dilute reward. This however is the trade off that is ever ongoing twixt the two.
The correct trade is the one that maximises potential reward, and minimises potential risk.

jog on
d998

 

[ducati998]

FD update;

delta = [-23.3]
gamma = 10.6
vega = 0.032
theta = [-0.017]
rho[-0.006]

From entry the greeks have adjusted;

delta +52%
gamma +32%
vega +28%
theta +30%
rho +50%

gamma & theta that are opposites of each other, are not proportional in their increases. In a leveraged instrument, small changes equate to large dollar changes.
delta is increasing, but does not yet make its presence felt, but, it wouldn't take much to make the delta risk highly dangerous.

The leverage on a written PUT is large, in this case it = 20.5
This is why writing naked is so dangerous, the leverage will blow your account to zero if you let it get away from you.

jog on
d998

 

[ducati998]

Of course the value of the greeks doesn't stop with the analysis of *past* market action.
The greeks are predictive also, as they exist on a curvature.

Therefore, if price of the underlying were to fall to a hypothetical $38.01 by the 31 January, then our risk profile would *theoretically* look like this;

delta [-16.8%]
gamma 10.4%
vega 0.022
theta [-0.017]
rho [-0.003]

Thus, vega has dropped away, thus IV would have remained fairly constant at our *selling price* with delta dropping away as Expiry draws closer.

gamma risk remains, as we are still in the danger zone in this regard. Maximum gamma curvature exists circa 15% [@ $37.50], so there is still scope for it to jump higher.

Fair value of the Option should be circa $0.22, providing a profit of $0.07 should we decide to close the trade based on gamma risk, or we may decide to offset some or all of that risk.

jog on
d998

 

[Splitlink]

FD update;

delta = [-23.3]
gamma = 10.6
vega = 0.032
theta = [-0.017]
rho[-0.006]

From entry the greeks have adjusted;

delta +52%
gamma +32%
vega +28%
theta +30%
rho +50%

gamma & theta that are opposites of each other, are not proportional in their increases. In a leveraged instrument, small changes equate to large dollar changes.
delta is increasing, but does not yet make its presence felt, but, it wouldn't take much to make the delta risk highly dangerous.

The leverage on a written PUT is large, in this case it = 20.5
This is why writing naked is so dangerous, the leverage will blow your account to zero if you let it get away from you.

jog on
d998

Yes, naked trading is asking for it. I wished Socrates luck on his thread and I think that writing does have the edge over buying. Knowing him, he'll make money out of his trades or he would not be sticking his neck out like that. It's not for me, though. I had a refresher this afternoon with John Piper's book "The Way to Trade" Pitman Press. His chapters on Traded Options should be read by newcomers and he says that naked trading should only be done by someone glued to the screen all day. Socrates has three different trades on, now, and he is gassing away on his thread!

Split

 

[SOCRATES]

Yes, naked trading is asking for it. I wished Socrates luck on his thread and I think that writing does have the edge over buying. Knowing him, he'll make money out of his trades or he would not be sticking his neck out like that. It's not for me, though. I had a refresher this afternoon with John Piper's book "The Way to Trade" Pitman Press. His chapters on Traded Options should be read by newcomers and he says that naked trading should only be done by someone glued to the screen all day. Socrates has three different trades on, now, and he is gassing away on his thread!

Split

Four....Five including CYOF's And all of them are showing profits already, I am satisfied to report.

I am able to gass away because I have a complete mindmap of what is happening inside my head, like a video whose speed I can alter to go very fast or very slow or whatever and therefore the question of multitasking is not a problem for me in terms of ongoing visual mathematics, of logging numbers and clocking the relationship that exists between them as they unfold.

But if someone comes into the room and speaks ( to ask a question particularly) , then the spell is broken ~ that's it ~ I now need to get into mode again to be able to lock into that way of thinking which is very special to me. It is as if the numbers talk a language, in phrases, that have meaning, announce imminent developments, give warnings or confirm situations.

It has taken me a long time to train my wife not to interrupt when the warning light is on outside. It is lit when there is something going on, which is more frequent than infrequent, except for weekends and public holidays.

 

[TWI]

Best bet with options is to wait until somebody needs to do something and will pay an above market scew. Take it off their hands covered and manage your way out of the the risk using a good spreadsheet or equiv software and a good broker who you pay a premium to see the biz.