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Anyone playing with complex option strategies?

By Peter P following x   2014 Sep 24, 4:20am 8,707 views   26 comments   watch   nsfw   quote     share    


By complex, I mean those with more than one leg, or those requiring hedging/adjustments.

Are you a net buyer or seller of options? Are your strategies mostly directional or non-directional?

1   Strategist   ignore (2)   2014 Sep 24, 6:31am   ↑ like (1)   ↓ dislike (0)   quote   flag        

Peter P says

Anyone playing with complex option strategies?

Be extra careful. The commissions and bid/ask spreads on multi leg option strategies can crucify you.
If you had to ask, you know you shouldn't be playing.

2   Peter P   ignore (0)   2014 Sep 24, 9:28am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Strategist says

Peter P says

Anyone playing with complex option strategies?

Be extra careful. The commissions and bid/ask spreads on multi leg option strategies can crucify you.

If you had to ask, you know you shouldn't be playing.

I have been doing this for over 14 years, although not the past two years.

The market seems to have changed quite a lot since. SPX options used to have terrible bid/ask spreads. Now, the liquidity for the electronically-traded SPXW and SPXpm looks much better.

There were no weekly options. Now people are selling weekly Iron Condors. :-)

The bid/ask spread on multi-leg strategies are not necessarily bad. Because the market-makers are taking less delta/gamma risks, there is less need for hedge, and they may be willing to cut you some slack. Sometimes, a bit inside of mid-point is achievable.

Commissions have gone down quite a lot, now that many brokers charge only one ticket-fee per trade, instead of per-leg.

I want to hear your stories though.

3   Strategist   ignore (2)   2014 Sep 24, 9:38am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Peter P says

The bid/ask spread on multi-leg strategies are not necessarily bad. Because the market-makers are taking less delta/gamma risks, there is less need for hedge, and they may be willing to cut you some slack. Sometimes, a bit inside of mid-point is achievable.

Commissions have gone down quite a lot, now that many brokers charge only one ticket-fee per trade, instead of per-leg.

I want to hear your stories though.

I started writing options when they were first introduced for S&P 100 in the 1980's while I was still in college. I did really well, so well that I ended up putting a down payment of $45,000 on a house before I graduated with a stated income loan. $20,000 of that down came from my parents. In the 1987 stock market crash I went broke. :(
Right now I have Apple and ITB leaps.

4   Peter P   ignore (0)   2014 Sep 24, 9:48am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Strategist says

I started writing options when they were first introduced for S&P 100 in the 1980's while I was still in college.

Ah, the OEX. I heard the pre-1987 options market was the Wild West.

Leaps are great, especially if the options are cheap.

The VIX looks a bit low. Do you think this is because many people are selling options? 14 years ago, very few retail investors were selling options. Now everyone talks about condors and calendar spreads.

5   Strategist   ignore (2)   2014 Sep 24, 9:52am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Peter P says

Strategist says

I started writing options when they were first introduced for S&P 100 in the 1980's while I was still in college.

Ah, the OEX. I heard the pre-1987 options market was the Wild West.

Leaps are great, especially if the options are cheap.

The VIX looks a bit low. Do you think this is because many people are selling options? 14 years ago, very few retail investors were selling options. Now everyone talks about condors and calendar spreads.

I don't know Peter, my strategy has always been to keep things simple.
I do think if you have full confidence in a stock or ETF heading in a certain direction, writing options on the front month can really work well. You would make money even if the stock just hung around.

6   Peter P   ignore (0)   2014 Sep 24, 9:59am   ↑ like (0)   ↓ dislike (0)   quote   flag        

Strategist says

I do think if you have full confidence in a stock or ETF heading in a certain direction, writing options on the front month can really work well. You would make money even if the stock just hung around.

I know. I used to write naked puts.

BTW, for stocks like AAPL, you can even write options on the front WEEK. :-)

In general, I don't like picking directions though.

7   justme   ignore (0)   2018 Jan 24, 5:52pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Bump, anyone else have knowledge of brokers or websites that will create customized option valuation metrics without having to spend weeks having to learn their brain-dead scripting language?
8   Strategist   ignore (2)   2018 Jan 24, 6:17pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

justme says
2. apart from complex methods such as Black-Scholes and implied volatility, does it not make sense also to get a "first order" idea of how expensive an option is by looking at the time value as a percentage of the strike price? Such valuations may only make sense for at-the-money options, but they may be useful for comparing options that have different underlying stocks but may be correlated in some way. Any broker or webs tool that will show such ratios?

All major brokers show the "greeks" Your question should be answered there.

It seems you are trying to create a new personalized options valuation model, that would outperform the existing ones. I'm sure it's possible, but you are up against mathematical geniuses with super computers. If you find one, you will be a billionaire.
PS....keep it simple and find a niche. Wish you the best.
9   Peter P   ignore (0)   2018 Jan 24, 6:29pm   ↑ like (1)   ↓ dislike (0)   quote   flag        

On BART. Let me type a response when I get to a restaurant.
10   HonkpilledMaster   ignore (5)   2018 Jan 24, 6:53pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

I was using Options Xpress for a while, it had some helpful tools but I didn't anything more complex than a straddle.
11   mell   ignore (2)   2018 Jan 24, 6:55pm   ↑ like (1)   ↓ dislike (0)   quote   flag        

Don't want to sound like an unnamed feathered animal, but just follow my biotech stock-tips and you'll be doing well ;)
12   Peter P   ignore (0)   2018 Jan 24, 7:31pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Try ivolatility.com

You might want to focus on:

1) the shape of the volatility surface (3D plot of IV against Delta and time to expiration)

2) the change of that surface over time

3) the relationship between ATM IV and %change in underlying

Unless you are a market maker Greeks won't do you much good.
13   Peter P   ignore (0)   2018 Jan 24, 7:33pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

You may want to take a look at this dataset.

https://www.quandl.com/data/OPT-ORATS-Option-Volatility-Surfaces
That should save you from having to process a ungodly amount of dirty raw data.
14   Peter P   ignore (0)   2018 Jan 24, 7:39pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

If you want to know how expensive an option is, IV is the way to go.

Historical volatility is about the past. Implied volatility is strongly correlated to historical volatility with some adjustments like tails, gaps, and other intangibles.

Academic models like GARCH will not help your trading.
15   CBOEtrader   ignore (5)   2018 Jan 24, 8:14pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

justme says
historical actual volatility.


This is called realized volatility. Realized vol is backwards looking whereas implied vol is forward looking. Comparing the two is useful but not apples to apples.

justme says
1. is there a broker or web tool that will show the implied volatility of each specific option


I use live vol pro, but any options broker software should do fine.

justme says
The problem with implied volatility is that it is, well, implied by the option price.


The price is where it's trading. The price you can get filled for is the only price that matters. Either you want that product at that price or you dont.
16   justme   ignore (0)   2018 Jan 25, 11:51am   ↑ like (0)   ↓ dislike (0)   quote   flag        

CBOEtrader says
The price is where it's trading. The price you can get filled for is the only price that matters. Either you want that product at that price or you dont.


Exactly, and that is why I am looking at valuation measures that one can compare between between different stocks. For example, should one buy puts on SPY, AAPL, NFLX or or NVDA? Some of these options are wildly more expensive than the others, but can you get almost the same result by buying some of the other ones? Similar considerations apply if you want to sell (underwrite) options.

What timeframe and what strike price? One needs to normalize the valuation measures between instruments, and Implied Volatility is just one way to do it, but as I have said and several others have repeated, IV is derived from price, and not the other way around. Hence I do not like that valuation measure.

All: Appreciate the responses, i may have additional questions.
17   justme   ignore (0)   2018 Jan 25, 1:26pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Here is another question I have been pondering: Is each option market-maker just a bookmaker that prices their options and arranges their portfolio according to bookmaker principles, meaning that the "price and odds" they offer always are a reflection of what bets the customers already have bought, so that the bookmaker (the house) never loses? There is of course always an initial problem of filling some orders before one can meaningfully spread the risk across many bets, but still, it seems possible.

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