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Let's Trade Options

  • #12,921
  • May 13, 2016 6:02pm May 13, 2016 6:02pm
Hoping a little bit for one of these opex cyclical VIX bounces ... . Most aren't very profound, but it might be enough to reduce my exposure slightly so that I can consider loading some more setups in July now that it's available ... . Probs should have done that yesterday, when VXX dipped sub-15, but thought I'd exercise a little patience and wait ... . Like I said, look away for a little bit, and price in VXX/UVXY ain't where you want any more ... .
Fireworks are fun ... as long as you don't blow your fingers off.
  • #12,922
  • May 13, 2016 6:08pm May 13, 2016 6:08pm
Eyeballed TVIX briefly ... . Looks like it's due for a split, although it appears they waited an awfully long time to do the last one (I dunno, when it went below 1.00?; the rev split was 1:10, after which it looks like it was at 6, 7 bucks). That was only last June ... .
Fireworks are fun ... as long as you don't blow your fingers off.
  • #12,923
  • May 13, 2016 6:08pm May 13, 2016 6:08pm
Quoting ZebraSquirl
Hoping a little bit for one of these opex cyclical VIX bounces ... . .
hey, Rome were not built in one day - every little bit helps. Maybe we can see it base up and then achieve liftoff when tshtf......
"If The Fool persists in his Folly he will become wise." - William Blake
  • #12,924
  • May 13, 2016 6:18pm May 13, 2016 6:18pm
Quoting ZebraSquirl
Eyeballed TVIX briefly ... . Looks like it's due for a split, although it appears they waited an awfully long time to do the last one (I dunno, when it went below 1.00?; the rev split was 1:10, after which it looks like it was at 6, 7 bucks). That was only last June ... .
no R/S - the last split was June 27, 2011 - a 10/1 split ---- but that was 7 months after its inception. Idk, after last Augusts's reset of the ^VIX, it looks like TVIX XIV might be capped for a while in the $30's, maybe even $30....but crazy shit happens, we'll see.....
"If The Fool persists in his Folly he will become wise." - William Blake
  • #12,925
  • May 13, 2016 6:19pm May 13, 2016 6:19pm
sorry, not TVIX.....XIV is my meat.....
"If The Fool persists in his Folly he will become wise." - William Blake
  • #12,926
  • May 14, 2016 12:25am May 14, 2016 12:25am
China industrial production.....
"If The Fool persists in his Folly he will become wise." - William Blake
  • #12,927
  • May 14, 2016 1:46am May 14, 2016 1:46am
Quoting The Fool
China industrial production.....
.....skidding.....
"If The Fool persists in his Folly he will become wise." - William Blake
  • #12,928
  • May 14, 2016 3:14am May 14, 2016 3:14am
So Fool-san, I was going to ask you a bit more about how you've been preparing for the almost-certain volatility spikes which will occur near the end of June, mostly (?) due to Brexit. But after digging around a bit online I've realised I'm in way over my head, and need to get back to basics with options first. In short, I'm probably too uneducated and unprepared for this one, so I'll let it pass and work on getting ready for any future ones instead.

But I am curious as to which instruments you've decided to use for this. I know there are several instruments relating to the VIX, which in turn relates to the S&P500. Trading these assumes that volatility in the FTSE will automatically spread to the US, which is a reasonable assumption of course, but aren't there any better ones related directly to the FTSE and DAX? And what about the pound itself - I suppose it's too much to hope for a volatility instrument that's directly related to the GBP? Or maybe you don't need one, because you can long and short volatility using the GBP options themselves? (I'm still trying to get my head round this, but I believe it's called volatility arbitrage)

I like what you said in the other thread about standing to gain a lot or lose a little, depending on how it plays out. Does this mean you've mostly been buying options in this case, and the money you'll lose is the premium you paid? Or have you been writing them too, and covering yourself somehow to limit the losses?

Sorry for all these newbie questions. The world of options and volatility is fascinating for sure
You reap what you sow.
  • #12,929
  • May 14, 2016 6:51am May 14, 2016 6:51am
Quoting NorthTrader
I like what you said in the other thread about standing to gain a lot or lose a little, depending on how it plays out. Does this mean you've mostly been buying options in this case, and the money you'll lose is the premium you paid? Or have you been writing them too, and covering yourself somehow to limit the losses? Sorry for all these newbie questions. The world of options and volatility is fascinating for sure
I like the idea of writing options but I don't have the account size to do it effectively. I still do trade credit spreads on SPY occasionally, but I have settled on other methods that suit me better. I am mostly setting up bi-directional trades that have high to very high r:r. To catch market volatility ebb and flow I use UVXY, VXX, SVXY, XIV, and VIX. I balance such trades against spreads in the index etf's, SPY, IWM, and sometimes individual names. The thread is full of trades I have made in real-time. Please feel free to stop by and check them out & ask questions, maybe suggest some of your own.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #12,930
  • May 14, 2016 7:21am May 14, 2016 7:21am
Quoting The Fool
The thread is full of trades I have made in real-time. Please feel free to stop by and check them out & ask questions, maybe suggest some of your own.
Thanks for the info. Yes, I see your trades popping up all the time on my profile page but haven't really delved into them until now, purely because option trading has been off the radar and my trading/forum time is limited.

But as part of my homework I should definitely go back and see what kind of volatility trades you've been making (and will make from now). And thanks for the offer of answering my questions and allowing me to suggest trades of my own. Here's hoping I can do that later this year!
You reap what you sow.
  • #12,931
  • Edited 6:34pm May 14, 2016 4:03pm | Edited 6:34pm
Quoting NorthTrader
thanks for the offer of answering my questions and allowing me to suggest trades of my own. Here's hoping I can do that later this year!
You're welcome. People come here from time to time asking questions. Somebody might answer, but usually I will say something like: "try it and find out, post a trade..." ....I'm not trying to blow anyone off, I just know that trading is a real "learn by doing" activity. If someone is really interested, they will try making some trades....
"If The Fool persists in his Folly he will become wise." - William Blake
  • #12,932
  • May 14, 2016 6:57pm May 14, 2016 6:57pm
Actually I do have a couple of initial ideas based on what I know about options already. They don't trade the volatility per se, but rather a big move in the underlying, such as GBP.

The first one is simply to BUY a strangle or straddle. I know that most of the time buying these things doesn't work, and the smart thing to do is to sell them, but I've never had the balls to do this yet. In a quiet market the premiums you receive aren't quite enough, and in a wild market it's just too scary to sell options (yet that's where the money is, because wild markets eventually become calm and the seller keeps the money).

Anyway, buying them is usually a waste of money UNLESS the price moves BIG, up or down. I reckon there's a fair chance of GBP doing that whatever the outcome of the Brexit vote, so why not buy a straddle or strangle on the CME 6B options? Or the ES? Or even the FTSE?

One problem is that 6B options are hideously expensive right now. This makes sense, as whoever is on the other side of the trade wants to make sure they get enough premium to survive the moves. But, as a general question, have you EVER had any success buying straddles or strangles? And what do you think about it in this particular situation? I know I should "try it and see" as you said, and don't worry, I'm not looking for free advice here! I'd just be really interested to here the opinion of an experienced option trader on this strategy in regards to Brexit. Thanks.

My second idea is even better and will come later today.
You reap what you sow.
  • #12,933
  • May 14, 2016 7:17pm May 14, 2016 7:17pm
Hi NT,

I have traded strangles on earnings releases on many names and I still do that sometimes. I will also sometimes play strangles on other scheduled volatility events. Instead of strangles, more often I will do double calendars or double diagonals......this is pretty similar to trading strangles: I am just saving some money by trading the spreads. In the case of calendars/diagonals. the idea could be to put the short option before (in time) the event, and the long option after the event - this is a cheap way to buy into a strangle that is set up such that the long options remain after the event - in order to catch a big move from that.

Anyway, check out the PCLN chart and you can see the cycle of implied volatility around the earnings releases (ER) - the green line is the avg of the implied volatilities of the front month, at the money puts and calls. You can see the ER's in the volume spikes - 4 x per year - the dates of the ER's are known months in advance. You see the iv is rising up to the ER date and crashes right after it? There are some interesting ways to structure options trades to take advantage of the iv rush....then of the share price movement....and/or of the iv crush...all together......I will show some examples......later.
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"If The Fool persists in his Folly he will become wise." - William Blake
  • #12,934
  • May 14, 2016 7:40pm May 14, 2016 7:40pm
Quoting NorthTrader
I reckon there's a fair chance of GBP doing that whatever the outcome of the Brexit vote, so why not buy a straddle or strangle on the CME 6B options? Or the ES? Or even the FTSE?
I don't trade any futures options - I am just trading in IRA accounts and I can not trade them per the SEC. So, I am positioned for a Brexit "leave" win with the volatility products I mentioned above and with SPY options. There are not any better options for me.

If I could, I would load up on long GBP spot fx trades and hedge those with long volatility options trades out to Sept opex.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #12,935
  • May 14, 2016 9:14pm May 14, 2016 9:14pm
I'll have to read up about double diagonals and double calendars, but thanks for the tip. Actually I've never traded individual stocks in my life (only via index funds and futures), so that's a whole new ball game! But of course the principles can be applied to any scheduled volatility event such as Brexit.

And yes, getting into the second leg of the strangle after the price has already moved might be a cheaper option. But doesn't this presume that you already have an idea about which direction it's going to move, before the event? The beauty of a strangle is that you can profit without any clue about future direction - just so long as it moves big.

Quoting The Fool
{quote}I don't trade any futures options - I am just trading in IRA accounts and I can not trade them per the SEC. So, I am positioned for a Brexit "leave" win with the volatility products I mentioned above and with SPY options. There are not any better options for me. If I could, I would load up on long GBP spot fx trades and hedge those with long volatility options trades out to Sept opex.
This is personal and none of my business, but I can't help wondering why you don't take some money and open an account with Interactive Brokers (or whoever) in order to trade futures options? If you're any good at it (and you seem to be), then it could be a smart move.

Also, why would you long GBP if you expect the "leave" vote? Surely GBP would fall in this situation? The long volatility options should be profitable either way.

Have to go out now so I'll tell you about my second idea later. But here's a teaser: backspread
You reap what you sow.
  • #12,936
  • Edited 11:51pm May 14, 2016 10:44pm | Edited 11:51pm
Quoting NorthTrader
And yes, getting into the second leg of the strangle after the price has already moved might be a cheaper option. But doesn't this presume that you already have an idea about which direction it's going to move, before the event? The beauty of a strangle is that you can profit without any clue about future direction
Double diagonals and double calendars are bi-directional...I will show an example with SPY set up for the June FOMC/Brexit combo.

The Jun/Jul $195/$210 double calendar goes on for $2.30 now. You are buying the July $210 calls and $195 puts and selling the June same. If you were to just buy the July calls & puts now, it would cost about $4.50 - so, the point I am making is 1) calendars put you in trades for less money and 2) note the two P/L graphs - one is just b4 Jun opex and the other is in the week after the Brexit vote - so the calendar turns into a strangle after (IF) the short options expire worthless....

keep in mind I am just offering this illustration of a double calendar....there are reasons why I am not taking this trade and why I would not take it now even if I wanted to take it....
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"If The Fool persists in his Folly he will become wise." - William Blake
  • #12,937
  • May 14, 2016 10:54pm May 14, 2016 10:54pm
Quoting NorthTrader
This is personal and none of my business, but I can't help wondering why you don't take some money and open an account with Interactive Brokers (or whoever) in order to trade futures options? If you're any good at it (and you seem to be), then it could be a smart move.
the tax advantages for me to trade in Roth and SEP IRA accounts are YUUUUGE. That is the only reason I need, really. But beyond that, futures options don't offer me anything I can't do with equity options. In fact, there are really only just a few futures options that regularly have as good or better volume than their equity options cousins. I'm not missing anything.

I do have non-IRA brokerage accounts where I can trade anything I want. I just trade equity options in those, too. That tells you what I think about options trading.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #12,938
  • May 14, 2016 11:16pm May 14, 2016 11:16pm
Quoting NorthTrader
Also, why would you long GBP if you expect the "leave" vote? Surely GBP would fall in this situation? The long volatility options should be profitable either way. Have to go out now so I'll tell you about my second idea later. But here's a teaser: backspread
I rather think the Brexit vote will fail. However, I am well positioned for almost any outcome, especially if there is a volatiltiy spike going into or immediately after the vote....

re: backspreads, yes....I have traded them.....I am always trading spreads....the thing is, if you are trading a lot of the same thing (for me: SPY, UVXY, VXX) you end up with lots of SPY options (for instance) across lots of strikes across time, and you can break some spreads to make other spreads - options market makers are doing this with 1,000's of options contracts at a time, all day long - so, anyway, it's good to know about all the spreads so you can slice & dice your positions. There are many ways to skin the cat and the more you understand, the better - but at the end of the day it's just about making money....so, whatever works for you.

I am currently trading lots of butterfly, broken-wing fly, and vertical spreads....
"If The Fool persists in his Folly he will become wise." - William Blake
  • #12,939
  • May 15, 2016 12:03am May 15, 2016 12:03am
Quoting NorthTrader
Actually I do have a couple of initial ideas based on what I know about options already. They don't trade the volatility per se, but rather a big move in the underlying, such as GBP. The first one is simply to BUY a strangle or straddle. I know that most of the time buying these things doesn't work, and the smart thing to do is to sell them, but I've never had the balls to do this yet. In a quiet market the premiums you receive aren't quite enough, and in a wild market it's just too scary to sell options (yet that's where the money is, because wild...
I think we've thrown around various ideas as to how to play Brexit via options here. There is naturally the heightened volatility angle (which I've been working like cheap hired help), but there are also obvious spot forex and currency future angles (personally, I'd opt for spot over the futures; spot's more easily scalable to account size; for example, each Euro future has a notional value of like 1.25 standard lots, and that may be just too big for smaller players to handle). The other choices are the Euro proxy (FXE) and EWU ... .

Naturally, we could see a lot of movement both ways in the Euro and Cable leading up to and following Brexit, but I think the sure thing is that there will be increased volatility, regardless of direction, which is how I'm going to play it ... .
Fireworks are fun ... as long as you don't blow your fingers off.
  • #12,940
  • May 15, 2016 12:09am May 15, 2016 12:09am
speaking of backspreads and EWU - the Jul EWU $16/17 backspread calls gets on for s small credit, protecting the downside....Brit stocks will rally on a Brexit fail, you need to push out past $17.50 to make ne money - I bet it would do that & more by mid-Jul, but to be safer you might look at options further out than Jul....
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"If The Fool persists in his Folly he will become wise." - William Blake
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