A shout to options traders
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i trade options frequently but i would say the canadian money forum does not have an active option population.
i maintain a number of USD diagonal call spreads, with LEAPs as the long leg of the diagonal, and in addition i sell uncovered OTM puts in both canadian and US securities. I also do basic covered writes plus puts in high-dividend canadian stocks like bank stocks and telcos. In other words one owns the stk and one sells OTM calls and OTM puts. The combination is called a strangle. For this exercise one looks for stocks that trade in a band, preferably a wide band.
i'd describe myself as a medium-complexity option trader. I don't do the 4-legged strategies, the iron flies and condors. I can wrap my fairly rudimentary math around 3 positions but somehow the sense of numerical relationships fails me when it comes to a 4th position.
i maintain a number of USD diagonal call spreads, with LEAPs as the long leg of the diagonal, and in addition i sell uncovered OTM puts in both canadian and US securities. I also do basic covered writes plus puts in high-dividend canadian stocks like bank stocks and telcos. In other words one owns the stk and one sells OTM calls and OTM puts. The combination is called a strangle. For this exercise one looks for stocks that trade in a band, preferably a wide band.
i'd describe myself as a medium-complexity option trader. I don't do the 4-legged strategies, the iron flies and condors. I can wrap my fairly rudimentary math around 3 positions but somehow the sense of numerical relationships fails me when it comes to a 4th position.
I have option traded for more than 20-years, from simple to really complex - simple is better for me these days
Tell us what you are doing, pose a question and see if any option traders on here are able to discuss what you're looking for
BTW, a true option trader thinks outside of the box and does not think like your average stock trader or couch potato or like that Canadian guy who made money on his couple of books and lost it all selling naked puts ... & to put it all in perspective, what is it that you the average option trader wants to achieve as a return on a yearly basis
Take a look at how you would trade the ^VIX
http://finance.yahoo.com/q?s=VIX-X.W
http://finance.yahoo.com/q?s=^VIX
I have used options for over 20 years, covered calls to increase yield, short puts to buy stock below market. Key is to have a broker with very low fees, particularly for assignments. I use Interactive Brokers for options. You are welcome to contact by private message.
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The only experience I have is selling covered calls.
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re short puts in POT. Today india announced it had bought oceans of potash from russia at a price about $200/ton below what POT, MOS & all the other north american potash miners were forecasting ouch. They all plunged.
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here is an excellent yet easy formula for calculating risk of early assignments in short puts:
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If (strike minus stock) is less than the option bid, the probability is high that a short put position won't get exercised.
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because the counterparty - the long holder of the puts - will earn more by selling his put into the market than he would by exercising it.
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by this formula my short puts in POT are ok, at least for the weekend.
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apart from the odd hair-raising episode like october-december 2008 and march 2009, selling puts is a good income strategy for those who can tolerate and manage the risk. Cost base is zero other than tying up part of an account's margin. Gains therefore mount into the 100s of percentages per annum. In these parlous times when interest income is zip and dividend income has gone with the wind, option income, imo, is a huge bonus.
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here is an excellent yet easy formula for calculating risk of early assignments in short puts:
.
If (strike minus stock) is less than the option bid, the probability is high that a short put position won't get exercised.
.
because the counterparty - the long holder of the puts - will earn more by selling his put into the market than he would by exercising it.
.
by this formula my short puts in POT are ok, at least for the weekend.
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apart from the odd hair-raising episode like october-december 2008 and march 2009, selling puts is a good income strategy for those who can tolerate and manage the risk. Cost base is zero other than tying up part of an account's margin. Gains therefore mount into the 100s of percentages per annum. In these parlous times when interest income is zip and dividend income has gone with the wind, option income, imo, is a huge bonus.
I suppose, then again TSE
OT has dropped 20% in the past 30-daysMy advice is never ever be sure that the difference spread (money against the stock or strike price) that you got selling OTM that you will never get called.
Options are a big bucket and not one-for-one against the contracts that you as the individual sold
An example of this is contracts bought and/or sold back in march that could be long, a drop of 10% you could get called immediately once your contracts are in the money (ITM)
All the same good luck to you and I trust that POT will not drop another 20-30% in the next 30-days.
BTW, I understand that Derek Foster got burned badly selling naked puts
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thank you so much. Next time i want unsolicited advice from an anonymous source i'll know where to look.
your remarks indicate you don't understand the probability calc for early put assignments. They sound like they were taken from one of those giveaway handbooks on options.
never heard of derek foster until you mentioned him. Quick run thru google shows why. I don't read this get-rich-quick-n-easy slop. Glad you're familiar with it, though. Has it been helping you.
btw i used to work for o'connor in chicago. A pioneer in post-black-scholes pricing theory, even while myron scholes himself was a minority partner in the firm.
your remarks indicate you don't understand the probability calc for early put assignments. They sound like they were taken from one of those giveaway handbooks on options.
never heard of derek foster until you mentioned him. Quick run thru google shows why. I don't read this get-rich-quick-n-easy slop. Glad you're familiar with it, though. Has it been helping you.
btw i used to work for o'connor in chicago. A pioneer in post-black-scholes pricing theory, even while myron scholes himself was a minority partner in the firm.
You saying that you an expert, if so then you wouldn't mind sharing your knowledge with others on this forum
Are you OK with earlier assignment even if or when a stock drops quickly and the stock continues to drop (you mentioned POT) - what do you do then?
How do you protect yourself on naked puts to make sure that you never get called to make it worth the effort of selling the contracts that you do?
When you sell the OTM naked puts how far out do you go and how long in the calendar do you go - 30, 60, 90 days or longer?
What exit strategy do you use without sustaining a loss?
willing to listen & willing to learn
so what, are you bragging that you're smarter than the average option trader - did you write a book on options trading, if so I would like to read it
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why ask so many questions. After all, by your own confession, you are a master of "really complex" option strategies. I on the other hand am just a humble medium-level trader, as i posted.
shrt put = long stk+shrt call.
one among several trouble flashpoints in shrt puts is lack of margin. A sharp market drop can trigger both assignments and margin calls. Such a thing has never happened to me as all puts are cash-secured. So that's rule no. 1 - stay well inside margin limits. "And keep the wolf far thence/ that's foe to men/ or with his nails/ he'll dig it up again."
shrt put = long stk+shrt call.
one among several trouble flashpoints in shrt puts is lack of margin. A sharp market drop can trigger both assignments and margin calls. Such a thing has never happened to me as all puts are cash-secured. So that's rule no. 1 - stay well inside margin limits. "And keep the wolf far thence/ that's foe to men/ or with his nails/ he'll dig it up again."
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I'm interested in using options but on a most simple basis until I get more comfortable. I'm looking mainly to be able to pick up some stock I'd like to own at a lower price and even make money if it doesn't go to the price I want. This, I understand, would be selling naked puts which would tie up margin.
It would seem, then, that even using Interactive Brokers and their low margin rates, I would need some calculations to determine just how profitable this exercise would be. I'm currently reading Lenny Jordan's book "Option plain & simple" book but I fear it won't be sufficient in explaining how I should analyze all of the factors to determine the most appropriate strategy for this simple manouever.
The other potential is selling covered calls which I haven't explored as much. Since I have a good deal of long positions in the Canadian market in my IB account this is an avenue that seems somewhat simpler since margin doesn't come into play.
Would any of you be able to recommend good sources where I could get up to speed quickly on these two strategies?
It would seem, then, that even using Interactive Brokers and their low margin rates, I would need some calculations to determine just how profitable this exercise would be. I'm currently reading Lenny Jordan's book "Option plain & simple" book but I fear it won't be sufficient in explaining how I should analyze all of the factors to determine the most appropriate strategy for this simple manouever.
The other potential is selling covered calls which I haven't explored as much. Since I have a good deal of long positions in the Canadian market in my IB account this is an avenue that seems somewhat simpler since margin doesn't come into play.
Would any of you be able to recommend good sources where I could get up to speed quickly on these two strategies?
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one of the best little books on options is a short little tract indeed, only about 50 pages. It's free at the montreal exchange. Click publications, guides, scroll down to equity derivatives, click "equity options reference manual."
there are also excellent tutorials on the cboe website, and doesn't IB itself have some good stuff at what they used to call IB college or IB university.
generally, those starting out in options are advised to begin with covered writes, or long stk/shrt call. You're already more than halfway there with your long stk positions.
turning now to puts, these are usually a second-stage strategy. The first thing is to hang with a number of covered calls, just to experience all the myriad tiny details that are involved in options trading.
depending on your experience, i'm not sure if IB will initially allow you to sell uncovered puts. Brokers normally start new options traders off as level ones, who are permitted to write covered calls, buy options, and sell only the options they already own.
i know it sounds very grand in the theory books, about selling puts so as to pick up cheap stock. But there is a strong psychological factor that argues against this. Just ask yourself how you would have felt if, say in the late spring of 2008, you had sold Citibank jan/09 $20 puts. This is an exaggerated example, but i suspect you would have felt extremely unhappy indeed if your counterparty had been able to stick a $2 stock on you for $20.
that being said, i constantly maintain and trade an inventory of short put positions. The purpose is to gain income, never to acquire the stock, although in every case i understand and like the company whose puts i've sold. In a worst case scenario i'd accept stock under assignment with calm and goodwill.
btw, shrt put = long stk + shrt call.
that being said, why wouldn't an investor hold nothing but a ton of short-term fixed income plus a portfolio of short puts. His yield will be the same as if he held gilt-edged stocks and short calls.
answer: because, less often than every decade but certainly within every investor's lifetime, there occurs a watershed breakdown such as the one we've just been through. The rules explode. Trusted strategies, especially the ones enshrined so prettily in the text books, get blown out of the water. So i keep an exceedingly tight rein on my uncovered puts.
there are also excellent tutorials on the cboe website, and doesn't IB itself have some good stuff at what they used to call IB college or IB university.
generally, those starting out in options are advised to begin with covered writes, or long stk/shrt call. You're already more than halfway there with your long stk positions.
turning now to puts, these are usually a second-stage strategy. The first thing is to hang with a number of covered calls, just to experience all the myriad tiny details that are involved in options trading.
depending on your experience, i'm not sure if IB will initially allow you to sell uncovered puts. Brokers normally start new options traders off as level ones, who are permitted to write covered calls, buy options, and sell only the options they already own.
i know it sounds very grand in the theory books, about selling puts so as to pick up cheap stock. But there is a strong psychological factor that argues against this. Just ask yourself how you would have felt if, say in the late spring of 2008, you had sold Citibank jan/09 $20 puts. This is an exaggerated example, but i suspect you would have felt extremely unhappy indeed if your counterparty had been able to stick a $2 stock on you for $20.
that being said, i constantly maintain and trade an inventory of short put positions. The purpose is to gain income, never to acquire the stock, although in every case i understand and like the company whose puts i've sold. In a worst case scenario i'd accept stock under assignment with calm and goodwill.
btw, shrt put = long stk + shrt call.
that being said, why wouldn't an investor hold nothing but a ton of short-term fixed income plus a portfolio of short puts. His yield will be the same as if he held gilt-edged stocks and short calls.
answer: because, less often than every decade but certainly within every investor's lifetime, there occurs a watershed breakdown such as the one we've just been through. The rules explode. Trusted strategies, especially the ones enshrined so prettily in the text books, get blown out of the water. So i keep an exceedingly tight rein on my uncovered puts.
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Thank you very much for pointing me to this bit of free information.
Before I set aside the time to read it thoroughly, what other tools/knowledge should I be accumulating? One of the key things that I don't understand is how to properly value the options prices although there are Excel spreadsheets and calculators. There seems to be often a large gap between the Bid Ask prices on options. I'm sure knowledgeable people have a tried and tested method for quickly discerning value amongst the chaff.
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perhaps you could post an example.
it would save time.
it would save time.
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Here is my interactive brokers review (I have an account) that I wrote a while back which includes commissions/fees.
Am I reading this right?
US options at Interactive Brokers cost USD 0.70 per contract.
Meanwhile at the Canadian banks (TDW, Scotia iTrade) the cost is $9.99 + $1.25/contract.
Example, 5 US equity option contracts:
Iteractive Brokers (IB) = $ 3.50 USD
Canadian Banks = $ 16.24 USD
Originally I had heard some negative reviews of IB. But at those savings, I almost can't go with a Canadian bank.
Anyone else out there with IB? Any negative comments? Any other low-cost option providers that you would recommend.
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