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Let's Trade Options

  • #9,741
  • Aug 1, 2015 1:56am Aug 1, 2015 1:56am
Note difference between FXE and the fiber spot price - the latter closed Fri $1.098x, and FXE closed $107.8x - so there's a 200 pip implied lag, but every 100 pip move in spot is a $1.00 move in FXE
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,742
  • Aug 1, 2015 2:15am Aug 1, 2015 2:15am
So let's say you think fiber is going to break down. The Fed finally lets the hawk fly and fiber makes a break towards parity. Is there a way to combine options with spot to capture that move with a minimum risk? I was looking at FXE diagonals....I want to look at the Sept/Oct1 put diagonal but the Oct1's have not rolled up yet so I am showing a closer time spread to it, a Sept1/Sept FXE $106/$104 puts, as below....
Attached Image (click to enlarge)
Click to Enlarge Name: 2015-08-01_fxe1.png Size: 55 KB
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,743
  • Aug 1, 2015 2:37am Aug 1, 2015 2:37am
the 10-lot diag above goes on for $235, there is no upside risk....but, of course, there is the steep "death slide" risk if the u/l overshoots to the downside. If I look at the death slide slope I see that the worst of it is about $600 lost between $105 and $104. The idea (I am making this up as I go along, so if it ends up stinking, sue me) is I can guard against the death slide loss with an appropriately sized spot short. My first guess is a 0.5-lot spot trade initiated at the same time as the FXE puts diag.

The $235 credit m/l breaks me even on the combo @ $5/pip loss on the spot short with a 47 pip move up - so it's similar to a 47 pip stop loss. If FXE moves down, from let's say $107.8x to $106.65 at expiry for the diag, I'd get the maxP (=$350) for the spread plus the $600 gain for the spot short. If FXE went to $105, I'd be ($245) on the spread but +$1400 on the spot short...........if FXE to $104 at expiry, I'd be ($820) on the diag, but +$1900 on spot......if FXE to $100, I'm at max loss for the spread ($1,750) but +$3,900 on the spot short

....so I can see a 0.5 lot spot short is oversized, and I can look at smaller spot shorts until I find the best fit that eliminates the downside risk of the diag spread. When I sober up, I can figure out how to do this algebraically
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,744
  • Aug 1, 2015 2:45am Aug 1, 2015 2:45am
Quoting The Fool
so I can see a 0.5 lot spot short is oversized, and I can look at smaller spot shorts until I find the best fit that eliminates the downside risk of the diag spread.
A double diagonal/spot combo can be put on if you have the ability to simultaneously run long and short spot trades - and you can judiciously stop out the losing side of the spot pair (at the level of protection provided by losing diagonal leg credit) and let the winning spot trade run risk-free. In the latter case, the spot trades do not have to necessarily be sized just to minimize the death slide risk.....they can be sized to maximize profit of the whole 2-sided combo....should be a way to optimize the sizes of all positions...

The crummy thing about trading diagonals is the whole endgame aspect - small movements in the u/l in the last few dte are really amplified in the P/L (mofo gamma)

---- but if you are protected by a position in a perfectly correlated yet non-time-dependent instrument (spot fiber), you can forget about sweating the endgame....if you are smart and have worked out your sizing, the worst that can happen is you lose almost no money, while the upside can be ,,,, quite nice
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,745
  • Aug 1, 2015 3:01am Aug 1, 2015 3:01am
Quoting The Fool
... The crummy thing about trading diagonals is the whole endgame aspect - small movements in the u/l in the last few dte are really amplified in the P/L (mofo gamma) ---- but if you are protected by a position in a perfectly correlated yet non-time-dependent instrument (
yes, so the pairs trade possibilities are many once you include futures: just a few: /ZB & TLT; /CL & USO; /ES & SPY; /GC & GLD; etc etc etc
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,746
  • Edited 11:22am Aug 1, 2015 3:08am | Edited 11:22am
Quoting The Fool
a Sept1/Sept FXE $106/$104 puts, as below....
regarding the puts diag shown above --- with the accompanying 0.5 lot spot short --- I would just let the diag run --- note that the "death slide" is at its steepest on expiry day ---- the further away from expiry, the shallower that part of the P/L is, so you could let an early runner go and have more protection from the spot short --- just base the spot short size on the worst case loss of the overshoot, that modeled @ expiry
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,747
  • Aug 1, 2015 3:21am Aug 1, 2015 3:21am
put that margin to work on both ends, market can't be two places at once, go dd and double the credit. If you can't run simultaneous long/short spot fiber, you might find a correlated (+ or -) fx pair for the opposing position
Attached Image (click to enlarge)
Click to Enlarge Name: 2015-08-01_dd.png Size: 64 KB
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,748
  • Aug 1, 2015 3:53am Aug 1, 2015 3:53am
I need to see if I can export the P/L data from ToS to Excel, so I can model the above combo with the addition of the linear function of the spot long/short positions --- with the right sizing and spread between all positions, there should be just small dips below $0 on the P/L, with large profit flare-ups on either end, if you get lucky and catch a trend
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,749
  • Aug 1, 2015 5:52am Aug 1, 2015 5:52am
Quoting The Fool
Note difference between FXE and the fiber spot price - the latter closed Fri $1.098x, and FXE closed $107.8x - so there's a 200 pip implied lag, but every 100 pip move in spot is a $1.00 move in FXE
while the trade will be done on FXE the signal would be taken from $XEU from philly index which also represents the spot price, for me the euro is just not ready for the kind of 800 pip plus movement I need for the option contracts I wish to purchase that make doing a strangle trade makes sense
  • #9,750
  • Aug 1, 2015 10:44am Aug 1, 2015 10:44am
red August, baby, a big beater NFP gets the bulls heading for the exits....250k+ will do it, I expect something 50k over the forecast or better....watch the ADP for an early clue
Attached Image (click to enlarge)
Click to Enlarge Name: 2015-08-01_nfp.png Size: 15 KB
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,751
  • Aug 1, 2015 11:16am Aug 1, 2015 11:16am
Quoting Cecil Gee
waiting on Euro, FXE to do a 8 month strangle that should be enough time to take it out of ranges that's been laid down over the last couple of months, FXY the YEN will be the next big move, don't ask me direction cus I don't know or bothered, tha is the beauty of trading options
8 months out is Mar....the long term trades are cool cuz when you zoom out it gets easier (one hopes! ) to see those big moves.....if the Fed settles into its baby steps rate-raising schedule & maybe the BOE follows suit, and the ECB maintains QE, the euro should slide steeply into the new year. The beauty of cheap & wide time spreads is if you are right on direction but the u/l doesn't overshoot your short leg, you can let them ride and then spread again with the remaining time that you have....in the Dec/Mar puts diag shown below, you could close for profit or let the front short leg expire then spread another short against the Mar long....

a 0.2 lot fiber spot short taken at the outset of the diagonal would be all you'd need to cancel the death slide threat (as described above)
Attached Image (click to enlarge)
Click to Enlarge Name: 2015-08-01_FXE.png Size: 54 KB
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,752
  • Aug 1, 2015 11:31am Aug 1, 2015 11:31am
Quoting The Fool
... The crummy thing about trading diagonals is the whole endgame aspect - small movements in the u/l in the last few dte are really amplified in the P/L (mofo gamma) ---- but if you are protected by a position in a perfectly correlated yet non-time-dependent instrument (spot fiber), you can forget about sweating the endgame....if you are smart and have worked out your sizing, the worst that can happen is you lose almost no money, while the upside can be ,,,, quite nice
so this is the next step for me. You can say all you want about non-directional options trading, but you can not escape the fact that the u/l moves, and your trades are a slave to the u/l movement. Even worse, your trades are a slave to time. By hedging time-dependent options trades with non- time-dependent futures or spot trades, you can try to eliminate the harsh time effects that options trades can suffer.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,753
  • Aug 1, 2015 12:11pm Aug 1, 2015 12:11pm
red August....I am on the lookout for more volatility in the Chinese and em equities....em's are likely going to slide on the rumor of tighter USD

http://moneyobserver.com/our-analysi...-market-august

"Internationally, August is not a good month for equities: across 70 world equity markets, it has the second-lowest average monthly returns."
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,754
  • Aug 1, 2015 12:18pm Aug 1, 2015 12:18pm
Quoting The Fool
The $235 credit m/l breaks me even on the combo @ $5/pip loss on the spot short with a 47 pip move up - so it's similar to a 47 pip stop loss.
wrong...(this is what happens when you mix trade analysis & tequila)....this only true if you held the diagonal to expiry - maybe a long time to hold a trade & tie up that margin just to break even
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,755
  • Aug 1, 2015 7:40pm Aug 1, 2015 7:40pm
https://www.tradingfloor.com/posts/d...res--431809581

"This continuous Delta hedging is called dynamic Delta hedging, and the strategy of earning money by going long an option and dynamically Delta hedging is called Gamma scalping. So we make money no matter where spot goes, but what is the catch?"
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,756
  • Aug 1, 2015 7:51pm Aug 1, 2015 7:51pm
to beat the dealer...trade like the dealer

http://www.riskencyclopedia.com/arti...namic_hedging/
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,757
  • Aug 1, 2015 8:16pm Aug 1, 2015 8:16pm
http://www.theoptionclub.com/video/d...ohn-summa.html
http://www.theoptionclub.com/video/a...ohn-summa.html

Inserted Video
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,758
  • Edited 8:53pm Aug 1, 2015 8:32pm | Edited 8:53pm
Seen this mentioned a few times, goes a bit over my head but interesting read still!

http://www.amazon.com/Option-Market-.../dp/0471578320

(The reason I'm not really into options is they are hard to price and the smart guys deal them so the probability of getting a good deal seems a bit low to me, well unless you manage to outsmart the smart guys )

(Of course I've previously written how everything is an option... so the above just means I don't do options in the way most people think about them)
  • #9,759
  • Aug 1, 2015 8:41pm Aug 1, 2015 8:41pm
hey fxjesus,

yes I have that one on the shelf - along with many others I may have time to go back and read someday - looking forward to more reading time this winter....

re: options pricing - there are chinks in the armor and you can find them if you know how to look. Options trading is not easy to learn, but once you learn some strategies inside and out it can be pretty reliable.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #9,760
  • Aug 1, 2015 10:13pm Aug 1, 2015 10:13pm
Trading ISE FX options - Interactive Brokers
www.interactivebrokers.com/download/en/ISE_BPX_Verticals.pdf

http://www.nasdaqtrader.com/Micro.aspx?id=FXOptions
"If The Fool persists in his Folly he will become wise." - William Blake
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