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Let's Trade Options

  • #8,401
  • Apr 26, 2015 1:18pm Apr 26, 2015 1:18pm
Quoting The Fool
{quote} That's it: I should just do the opposite of what I have been doing. I should stop trying to get into low probability, low r:r trades for cheap, and instead, look to maximize my number of winning trades, even if it means I am settling for lower returns.
So, how much does Theta decay go into your consideration of what to get into with verticals? I mean, the TastyTrade dudes seem to beat the Theta decay drum quite a bit, pointing out that there isn't much Theta decay to take advantage of if you go into the "cheaper" strike price options, which would naturally be attractive to a small player like me because, well, they're cheap and they imaginably consume less buying power ... .

For example, here's a trade that they put on in FXE for a .97 credit:

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Theta's currently at .75 which would allow for a good bit of decay, but the buying power erosion is $403.00 ... .

Moreover, from purely a risk/reward perspective, this is one shitty-ass trade:

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So, I gotta assume that the calculation here is that it is (1) a higher prob trade; (2) there's money to be made just from Theta decay. Otherwise, WTF ... ; it would be a totally shitty trade idea ... .
Fireworks are fun ... as long as you don't blow your fingers off.
  • #8,402
  • Apr 26, 2015 11:21pm Apr 26, 2015 11:21pm
Quoting ZebraSquirl
{quote} So, how much does Theta decay go into your consideration of what to get into with verticals? I mean, the TastyTrade dudes seem to beat the Theta decay drum quite a bit, pointing out that there isn't much Theta decay to take advantage of if you go into the "cheaper" strike price options, which would naturally be attractive to a small player like me because, well, they're cheap and they imaginably consume less buying power ... ..
the further out the options are, the less theta is for the options. I have shown Greeks for the Jun puts for the spread shown, and same for the May2 puts, for comparison. Theta gets larger the closer you are to expiry, and this accounts for the steepening of the theta decay curve with time. Also note that theta is higher the closer the option is to atm.

So, if you have a lot of value on an option and a lot of time for that theta to work, you may make money on decay alone, assuming the u/l doesn't move. On the flip side, the more time you are in the trade, the more time there is for things to change and for the u/l to move against you.

On that FXE spread, they have gotten a big credit by getting in a $5 spread with 54 dte. You're right - that's an inefficient trade re: the ratio of buying power impact to credit earned. With 54 dte, the difference in thetas between the $100 and $105 puts is just 0.01 (0.02 - 0.01), so theta will get the trade $1 a day. Also shown below is the P/L for the trade, looks kinda risky to me, just a bullish trade on fiber and I'm not so sure that is wise.
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"If The Fool persists in his Folly he will become wise." - William Blake
  • #8,403
  • Apr 26, 2015 11:39pm Apr 26, 2015 11:39pm
Quoting The Fool
On that FXE spread, they have gotten a big credit by getting in a $5 spread with 54 dte. You're right - that's an inefficient trade re: the ratio of buying power impact to credit earned. With 54 dte, the difference in thetas between the $100 and $105 puts is just 0.01 (0.02 - 0.01), so theta will get the trade $1 a day. Also shown below is the P/L for the trade, looks kinda risky to me, just a bullish trade on fiber and I'm not so sure that is wise. {image} {image} {image}
So, trading options to harvest profits based on the time decay of the options is a solid strategy. It's as risky as anything else, though, and you have to manage those trades wisely. If you're on the right side of the movement of the u/l, that's ideal & you can just get everything & let the options expire with the full credit. If you trade IC's, one side of the trade will finish like that and the other side you have to manage correctly to minimize the loss on that side.

I don't usually do spreads wider than $1. If I screw up and fail to manage out of one correctly when it goes against me, at least I can limit my loss that way....
"If The Fool persists in his Folly he will become wise." - William Blake
  • #8,404
  • Apr 27, 2015 1:00am Apr 27, 2015 1:00am
Quoting StrayDog
What to do, oh what to do with our SPY May bear call spreads... Will leave them for now.
Heavy upside for Shanghai & Hang Seng in Asian Monday. /ES and UST futures up early, too. Everything will be up up up. Ezone indices bound to move up. Hyper dovish Fed this week will bring the punch, and I am expecting I will have to eat shit on May $212/$213 SPY calls.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #8,405
  • Apr 27, 2015 10:43am Apr 27, 2015 10:43am
Quoting ZebraSquirl
So, how much does Theta decay go into your consideration of what to get into with verticals? I mean, the TastyTrade dudes seem to beat the Theta decay drum quite a bit, pointing out that there isn't much Theta decay to take advantage of if you go into the "cheaper" strike price options, which would naturally be attractive to a small player like me because, well, they're cheap and they imaginably consume less buying power ...
Hi ZS... TF replied to your question, I just want to say that pretty much all selling premium plays have a negative risk/reward. Starting from credit spreads, and then to naked selling. Usually hard core premium sellers (like tastytrade crew) sell junk, meaning the most further OTM spreads or single options they can to get meaningful premium. They usually play for 1/3 of the width of the strikes, when credit spreads are traded. But, big thing is IV and IVR... the greater the IVR, you can go further OTM and thus decrease your risk. High IV / IVR can often mean that u/l is in down trend, also... since IV goes up when u/l is going down.

I can see that sometimes - in order to trade more, get more "occurrences" - they are forcing some trades (catch a falling knife and so on). IMO, better to sit tight and do noting, if there is nothing to do except high risk trades. But they got PM accounts and trade small every position, plus have the know-how how to get out of shitty trades...

About theta decay --> there are a handful of things that are 100% certain in life, and this is one of them. It is effective, but the mofo option OR spread just gotta be expensive to sell. I remember one sentence from the Andrew Keen book, his former teacher (or boss) used to tell the trainees all the time: "This firm wasn't built on selling cheap puts..." So, sell high.
Hope is dangerous in this game.
  • #8,406
  • Apr 27, 2015 12:00pm Apr 27, 2015 12:00pm
Quoting StrayDog
About theta decay --> there are a handful of things that are 100% certain in life, and this is one of them. It is effective, but the mofo option OR spread just gotta be expensive to sell. I remember one sentence from the Andrew Keen book, his former teacher (or boss) used to tell the trainees all the time: "This firm wasn't built on selling cheap puts..." So, sell high.
Good points, SDog. I tend to push the downside limit when selling spreads, but I am mindful of that. I rarely do any spreads for less than $0.25 credit. Maybe we can get some US index selling, maybe a few days running? Rotation into China, the Ezone. End of Month? Idk wtf? Anyway, tough trying to sell anything in such a low vol environment.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #8,407
  • Apr 27, 2015 12:11pm Apr 27, 2015 12:11pm
Quoting The Fool
... Anyway, tough trying to sell anything in such a low vol environment.
Yep... and if you do debit spreads, u/l stay still...

This PA today... could be just profit-taking into the FOMC, maybe AAPL disappoint today, so what is good time to trim your longs? Well, ATH!
Hope is dangerous in this game.
  • #8,408
  • Apr 27, 2015 12:24pm Apr 27, 2015 12:24pm
Quoting StrayDog
Well, no dip so far on /CL... I just sold a July 44 put for $0.32 ($320)... was hoping for better price, but pulled the trigger now, on $56.50 June contract.
I sold that put on last Wednesday. Now, with June contract around $57... I decided to close that position and take profit, since I don't like the chart much, thinking there could be some $2 dip (or I am just daydreaming about Oil dipping)... Anyways, I bought it back for $0.21 ($210) now. So, it lost 1/3 of the value in just a few days. Will reload in case of the dip to $55 or could I be so cocky and ask for $54?

Me like taking profits.. like, like... gimme more profits to take...
Hope is dangerous in this game.
  • #8,409
  • Apr 27, 2015 12:33pm Apr 27, 2015 12:33pm
yeah, fingers crossed for another storage build. Need some USD strength to really move down, though. Any day there will be a miraculous deal for Greece, though, & that will support the euro, push down the USD....
"If The Fool persists in his Folly he will become wise." - William Blake
  • #8,410
  • Apr 27, 2015 12:50pm Apr 27, 2015 12:50pm
I remembered one of the tt Rising Star videos, and that guy is doing /CL futures options...
I am watching it right now again. He more than quadrupled his account in 2 years. ( from $7,500 --> $15,000 --> $35,000 ) 6% to 8% every month.
Check out Craig, our rising star

His biggest loss was selling the 105 calls... Looking it now... $105 was miles away...
Hope is dangerous in this game.
  • #8,411
  • Apr 27, 2015 12:54pm Apr 27, 2015 12:54pm
well, 2014 was a call seller's wet dream. Good results, though. I will be happy to just get back in black...
"If The Fool persists in his Folly he will become wise." - William Blake
  • #8,412
  • Apr 27, 2015 1:05pm Apr 27, 2015 1:05pm
An example of what not to do never, ever. Just don't do this.

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Never do Iron Condor with just $1 wide strikes. Not as a ER's play, or ever. Just skip that shit. It has to be at least $2 wide. That is my personal experience, not a recommendation, but I wish somebody told me that in advance.

Why? Comms are going to EAT a lion share of the profits, if you ever see one. Just opening and closing 2 x 4 options... is about 2/3 of the credit she got.
Hope is dangerous in this game.
  • #8,413
  • Apr 27, 2015 1:29pm Apr 27, 2015 1:29pm
Bwahahahahahaha!

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Hope is dangerous in this game.
  • #8,414
  • Apr 27, 2015 2:09pm Apr 27, 2015 2:09pm
I did first ER's trade in this cycle, a short strangle on AAPL, May1 122/141 for $1.14 credit. AAPL is now about $131.50... so $10.50 wide short strikes.
I sold puts for $0.64 and calls for $0.50.

Pretty much like Robyn did... and this lady is a ER's short strangles master

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Hope is dangerous in this game.
  • #8,415
  • Apr 27, 2015 4:10pm Apr 27, 2015 4:10pm
Quoting StrayDog
Never do Iron Condor with just $1 wide strikes. Not as a ER's play, or ever. Just skip that shit. It has to be at least $2 wide.
Do you feel that way about credit spreads, generally? I can see the logic there if you do. Wider spread = wider credit. Bigger risk, also - but if you're spread $2 you have a little room to adjust below the long leg of the spread. Takes more margin, but if you are making up the difference with a larger credit then that's maybe not so bad.

AAPL looking kinda static...
"If The Fool persists in his Folly he will become wise." - William Blake
  • #8,416
  • Apr 27, 2015 9:59pm Apr 27, 2015 9:59pm
inevitable greek dilemma resolution (throw more money at them) rallies fiber 300 pips (?)....FXE May/May4 $110 call calendar @ $0.10 debit.
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"If The Fool persists in his Folly he will become wise." - William Blake
  • #8,417
  • Apr 28, 2015 8:29am Apr 28, 2015 8:29am
Quoting The Fool
{quote} Do you feel that way about credit spreads, generally? I can see the logic there if you do. Wider spread = wider credit. Bigger risk, also - but if you're spread $2 you have a little room to adjust below the long leg of the spread. Takes more margin, but if you are making up the difference with a larger credit then that's maybe not so bad. AAPL looking kinda static...
Yes I do. If you do a Iron Condor with $1 wide strikes for $0.30 credit ($30 credit)... be prepared to pay $12.50 in comms for in/out of the trade in case you did it on high volume u/l, like SPY, QQQ, IWM, or APPL, FB, TWTR...

Risk ---> with $1 wide single credit spread, lets say you collect 30c... on $3 wide spread you collect 90c or $1... the risk is the same if you do 3 of the $1 wide or ONE of the $3 wide... but comms are smaller, AND it is a higher prob trade.
Hope is dangerous in this game.
  • #8,418
  • Apr 28, 2015 8:32am Apr 28, 2015 8:32am
Quoting StrayDog
I did first ER's trade in this cycle, a short strangle on AAPL, May1 122/141 for $1.14 credit. AAPL is now about $131.50... so $10.50 wide short strikes. I sold puts for $0.64 and calls for $0.50. Pretty much like Robyn did... and this lady is a ER's short strangles master {image}
Early close of AAPL short straddle... closed calls for $0.10 and puts for $0.07... Made $0.97 minus comms.
Some juice left on the table, but I have to work...
Hope is dangerous in this game.
  • #8,419
  • Apr 28, 2015 10:01am Apr 28, 2015 10:01am
I closed my SPY bearish call spreads with minimal loss (in for $0.62, out for $0.67), since the price was rejected from support... all this shit was just another BTFD opportunity. And I don't want to risk hopium on dovish FOMC. Call me a pussy, but I don't care . All this looks like a bear trap to me, just look at Naz... amazing.

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Just BTFD... that trade never dies... still no dip on Oil..
Hope is dangerous in this game.
  • #8,420
  • Apr 28, 2015 11:32am Apr 28, 2015 11:32am
Quoting StrayDog
Just BTFD... that trade never dies.....
blink & you'll miss it...
"If The Fool persists in his Folly he will become wise." - William Blake
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