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[aligh]

A lot of brokerage in these types of spreads in my experience. Eats in if not a great trade





Linda


On Wed, Feb 20, 2013 at 8:48 AM, Ivey Henderson wrote
What I make of your description is an Iron butterfly..... However, there must be some
puts involved for it to be an Iron. Can't be just calls alone... Two vertical spreads
.....puts and calls sharing the same center strikes
Ivey

[aligh]

Hi Linda, I agree with you. I spent years as an option trader before going all futures, and unless you nail a trade spot on you’ll be paying lots of commissions on these spread trades. Brokers love that, thus the name broker!!!! Once in awhile you can hit a grand slam by pinning a butterfly but most of the time you’ll be giving a little back at a time. Not that they can’t be done with some success but most people don’t know how to trade options even in the plain vanilla long or short sides. They buy a call thinking the market is going up and it works in their favor so they think they are making money but depending how deep their delta is and how much theta they bought they could be losing money. Market moves up 10 points but since you didn’t buy deep enough into the delta and enough theta it moved down 11 points on the call option so in essence you’ lost money but the market call was correct. It gets to be a very complex setup but still useful to those that know the game. Advise is that you should really know what you’re doing when you step into the arena unless you don’t mind getting your legs cut off once in awhile and you only have two. JOptions are good directionally for short term trades only, in my experience as long as I have enough theta. I’ll post up a quick synopsis on how to gauge the Greeks in the next few days for those interested.
Mark

[aligh]

Hi
Here is an important question
If I expect a 110 point drop over the next nine calendar days in ESH3, which put option strike do I buy



I don’t think the ITM would be the answer since my ROI is not maximized given the trade profile.
Yes, I understand delta would be < 1.0.
I, also, know that theta (time decay) will be working against me.
(Any suggestions will be greatly appreciated as I’m taking this trade tomorrow (Quantity = 10
Highest Regards,
William

[aligh]

Sent: Tuesday, February 19, 2013 9:02 PM
I always like to find a way to have the market to finance my position when possible

Especially if I am considering getting directional.... Consider selling a call spread to
generate cash to finance your out of the money puts..... Example: Sell the 1540/1550
call spread for $2.55 credit x10=$2500.00, then go out of the money using a portion
of the credit, to purchase cheap puts, lets say the 1455 puts for $.55 x9= $450.
Leaving you with $2050 of credit.

Now lets make an assumption that the market stays below you short 1540 strike.
Your spread makes money and with 110 point drop. Your puts that were finance
by the market should explode as the market pushed down. This position looks
as if you are short stock.... Both positions make money. So, you are long vega.
You still get to enjoy time decay.... Short premium or volatility gets crushed.

Ivey

[aligh]

Sent: Tuesday, February 19, 2013 8:27 PM
Hi
Here is an important question
If I expect a 110 point drop over the next nine calendar days in ESH3, which put option strike do I buy
I don’t think the ITM would be the answer since my ROI is not maximized given the trade profile
Yes, I understand delta would be < 1.0
I, also, know that theta (time decay) will be working against me
Any suggestions will be greatly appreciated as I’m taking this trade tomorrow (Quantity = 10)
Highest Regards
William

Sent: Wednesday, February 20, 2013 2:22 PM
Hi William
Trade the first 'out of the money' contract -- the one that's closest to the money but just out of it
( a ) If you're right, you'll make good enough money to make the trade worth while
( b ) If you're wrong and you react fast enough, you might be able to exit the trade with at least something left.

The deeper in the money you buy, the less profitable the trade.

On the other hand, if you buy a further out of the money option and the trade goes against you, you won't be able to exit the trade. Your option will be too illiquid. You lose 100% for sure.


And FWIW,

Index options tend to have been overpriced on average ever since the '87 crash. So selling at- or near- the money options and protecting the wings of the trade to limit the max loss is a reliable income generating strategy. This type of strategy tends to make a little money very consistently for long stretches of time but then blow up significantly when they go wrong -- which they always do -- eventually.

Options on individual equities tend to be fairly priced on average when you look at the aggregate of the market. So there doesn't seem to be quite the same degree of statistical advantage to just blindly selling volatility as there is on the index as a whole. This statement will obviously not be true for each individual case. The CBS options you were looking at -- someone just bought 40,000 of those. Most likely they look overpriced from a text book point of view. But if you sell them, you're betting against someone who probably knows something. The market makers demand a premium for those trades for a reason -- if they take them -- and then try to offer some of the trade back out to the unsuspecting public at much less favorable levels.

Oh, and if you just got the bright idea that ( a ) the index options are overpriced on average while ( b ) the individual options are fairly priced on average...so...sell the index options and buy the options on individual equities.

That's the correlation trade.

It's generally not a good idea to enter any of these arb type trades unless you've studied them in depth.

Just my opinions.
Hope they're helpful,
Dan S.

[aligh]

Hi Al
Here is a pretty good options calculator
I Volatility - Options Calculator
It calculates all the Greeks for you
William