Option Trading Articles: August 2009

Monday, August 31, 2009

RE: [TheOptionClub.com] Option Spread

What exactly do you want to know? You've described the trade so you must
know what it looks like (butterfly with extra strangle at the wings). You
either enter it as a single order or leg in. since there are basically 6
components you can leg in probably dozens of ways. For instance if you want
to be short the wrangle such as -2 70p/+1 75p/+1 75c/-2 80c, you could start
with the short strangles if you are short term bearish on volatility then
add the long straddle close to expiration. If you are bullish on volatility
you can do the reverse. If you have a strong short term directional bias you
can do a combo, say long the 75 call and short the two 70 puts if you are
directionally bullish. And on and on. [you could even do the trade using
cross expirations such as long front month short the back month if you are
expecting some near term constrained action]

As far as adjustments, it comes down to whether you guess right on any of
the initial legs (or the whole spread if put on as an initial trade). Once
you are in any or all of the position the adjustments follow either a delta
neutral approach or some other preconceived or evolving adjustment strategy.
It's probably the most flexible position imaginable but needs some finesse
to get into for a decent price. Almost all my positions eventually work
toward a long wrangle (i.e. short the atm straddle body and long the otm
strangles) in some ratio or another. I can't say that I ever start with the
whole position as a single order spread but I do leg into it over a few
weeks.

-----Original Message-----
From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On
Behalf Of asdfffg1
Sent: Monday, August 31, 2009 7:12 PM
To: OptionClub@yahoogroups.com
Subject: [TheOptionClub.com] Option Spread

I've searched a very large selection of option trading books, and trader
articles containing entry setups and adjustments for a short and/or long
wrangle. Bairds, 'Option Market Making', which is good, is the only one. For
those who know, any direction towards a magazine article, website, or
trading book, is much appreciated.

------------------------------------

The goal of TheOptionClub is to provide a forum for members to work together
for the purpose of furthering our individual understanding option trading.
All messages and postings, and any materials circulated are provided for
discussion and educational purposes only. No statement contained in any
materials from TheOptionClub should be considered a recommendation to buy or
sell a security or to provide investment, legal or tax advice. All
investors are encouraged to consult a qualified professional before trading
in any security. Stock and option trading involves risk and is not suitable
for most people. There is no guarantee that any information provided is
accurate and, may in fact, be wrong. It is understood that the participants
in TheOptionClub have varying backgrounds and degrees of experience in
option trading, and that regardless of experience each member is considered
a student. As such, any information distributed through TheOptionClub
should be considered with a critical mind and not relied upon as an
authoritative source.

To unsubscribe from TheOptionClub, send an email to:
OptionClub-unsubscribe@yahoogroups.comYahoo! Groups Links

__._,_.___

Messages in this topic (2) Reply (via web post) | Start a new topic

Messages | Files | Photos | Links

The goal of TheOptionClub is to provide a forum for members to work together for the purpose of furthering our individual understanding option trading. All messages and postings, and any materials circulated are provided for discussion and educational purposes only. No statement contained in any materials from TheOptionClub should be considered a recommendation to buy or sell a security or to provide investment, legal or tax advice. All investors are encouraged to consult a qualified professional before trading in any security. Stock and option trading involves risk and is not suitable for most people. There is no guarantee that any information provided is accurate and, may in fact, be wrong. It is understood that the participants in TheOptionClub have varying backgrounds and degrees of experience in option trading, and that regardless of experience each member is considered a student. As such, any information distributed through TheOptionClub should be considered with a critical mind and not relied upon as an authoritative source.

To unsubscribe from TheOptionClub, send an email to:
OptionClub-unsubscribe@yahoogroups.com

MARKETPLACE

Mom Power: Discover the community of moms doing more for their families, for the world and for each other

Change settings via the Web (Yahoo! ID required)
Change settings via email: Switch delivery to Daily Digest | Switch format to Traditional
Visit Your Group | Yahoo! Groups Terms of Use | Unsubscribe

__,_._,___

[TheOptionClub.com] Option Spread

I've searched a very large selection of option trading books, and trader articles containing entry setups and adjustments for a short and/or long wrangle. Bairds, 'Option Market Making', which is good, is the only one. For those who know, any direction towards a magazine article, website, or trading book, is much appreciated.

__._,_.___

Messages in this topic (1) Reply (via web post) | Start a new topic

Messages | Files | Photos | Links

Change settings via the Web (Yahoo! ID required)
Change settings via email: Switch delivery to Daily Digest | Switch format to Traditional
Visit Your Group | Yahoo! Groups Terms of Use | Unsubscribe

__,_._,___

[TheOptionClub.com] Re: what happens when a debit spread expires out of the money?

--- In OptionClub@yahoogroups.com, "paul7313" <paul7313@...> wrote:
>
> credit spreads that expire out of the money give me the money in the spread at expiration, what happens with a debit spread?
>

Paul7313 - I find it best to view credit spreads and debit spreads as very different trades:

Credit spread; since you want both sides to expire worthless, you typically put it on at approx. 4 weeks or less until expiration. This is because time decay starts to really kick in at 4 weeks, and accelerates the closer you get. You would probably sell it out of the money, and you are not really looking for movement of the underlying. Position gamma is negative and theta is positive.

Debit spread; just the opposite. You need to allow plenty of time for your trade to work, usually 60-90 days or more (I prefer LEAPs), and if it's out of the money, you need some movement. Position gamma is positive and theta is negative. The risk/reward for debit spreads is usually far superior to that of credit spreads. However, a good discipline with debit spreads is that you usually exit approx. 3-4 weeks prior to expiration, just the opposite of the credit spread.

Give yourself time to learn the greeks like delta, gamma and theta and it will make more sense,

Theta King

__._,_.___

Messages in this topic (6) Reply (via web post) | Start a new topic

Messages | Files | Photos | Links

MARKETPLACE

Mom Power: Discover the community of moms doing more for their families, for the world and for each other

Change settings via the Web (Yahoo! ID required)
Change settings via email: Switch delivery to Daily Digest | Switch format to Traditional
Visit Your Group | Yahoo! Groups Terms of Use | Unsubscribe

__,_._,___

Re: [TheOptionClub.com] covered calls

carolinaspring66:

If someone already hasn't directed you to the following Yahoo Group, I strongly suggest that you join this group and spend a LOT of time reading through the archives. Once you have done so, you will find the members very willing to answer any questions you have.

justcoveredcalls-subscribe@yahoogroups.com

Bob

----- Original Message -----

From: dneely777@aol.com

To: OptionClub@yahoogroups.com

Sent: Saturday, August 29, 2009 2:59 PM

Subject: Re: [TheOptionClub.com] covered calls

Carolinaspring66,

I apologize for not responding to this question in a more timely fashion. I wanted to have the time to give an adequate and hopefully well thought out reply.

Most of us realize there is no "one size fits all' when it comes to option strategies. There is no one strategy that is suitable for all market conditions. Likewise, there is no single, right way to apply an option strategy that is appropriate for all situations. The trick is choosing the correct strategy for the current market conditions, as well as, the best way to apply that strategy considering the current conditions. The time frame of the intended trade period will also influence your choice of strategy. A strategy that is a good choice for the next few days or this week, may not be a good choice for the month or year. Whether we are willing to give up the stock or wish to hold it longer term will influence our choice of covered call application methods. We also need to understand how, when and why our chosen strategy can be or, should be, adjusted or morphed according to changing market conditions. From my experience with other traders, I find that traders choosing the covered call strategy, either understand options and the CC strategy, or they have been given the impression the CC strategy is an easy and safe strategy to use. The first group knows how and why they are using the strategy. The second group should get their money out of the market until they get a much higher level of option and trading education. The covered call strategy is a HIGH RISK, limited reward strategy. That's not to say it does not have a useful place in the world of option trading, just that you better know what your doing before using it.

There are a number of specific reasons traders choose to use covered calls.  Generally these fall into two categories. One, as a limited hedge and two, as premium collection. Without knowing your outlook for the market or the time frame of that outlook, it is difficult to give advice on your application of the CC strategy to SPY. I can see some value to selling, in the money covered calls as a hedge on a SPY position, that is, under certain circumstances. This approach depends on your market outlook. Selling an ATM call would be in line with a mildly bearish outlook. Selecting an ITM call indicates a stronger, bearish market outlook. I can not argue with that outlook, at least in a short term time frame. Based on my technical analysis last Monday (8/24), I sold a slightly ITM hedge on a long term bullish position. That move has not proven necessary so far but, I have not regretted having a little insurance on this position during the past week. I'm aware we are still in an up trend and I'm prepared to buy back my short call, if needed. As far as selling one month out, maybe that just suits your personal trading style. Looking at your CC trade as a hedge, I only have a mild objection to that choice. My personal preference is to sell front month calls. That way I get a little more benefit from time decay.

Now, looking at your position as a premium collection strategy, I'd say you are off base with your approach. If your main purpose for using the covered call strategy is premium collection, I'd recommend selling front month, ATM calls. This is where you benefit the most from time decay. As a premium collection strategy, it is time that your are selling and profiting from.

The best market for this application is neutral to slightly bullish. In a more bullish market you could select an OTM call. This would allow you profit from any possible increase in SPY price. You're return will be improved, but your upside potential is still limited.  Selling ITM calls in an up trending market, for the purpose of collecting premium, does not make much sense to me.

As I mentioned earlier, there are situations where the CC is useful. However, it is not a strategy that should be a "first choice" or a "one and only" strategy, month in and month out. Knowing a variety of option strategies and the proper application of those strategies allows you, in almost all cases, to make more profitable trades at a lower risk while tying up less cash.

                                                                                                     Dave

-----Original Message-----
From: carolinaspring66 <spring@bbnp.com>
To: OptionClub@yahoogroups.com
Sent: Thu, Aug 20, 2009 9:27 pm
Subject: [TheOptionClub.com] covered calls

I have been doing covered calls on SPY,SELLING IN- MONEY CALLS ONE MONTH OUT.I know I have alot to learn.Could someone give me some advice?

THANKS

__._,_.___

Messages in this topic (74) Reply (via web post) | Start a new topic

Messages | Files | Photos | Links

Change settings via the Web (Yahoo! ID required)
Change settings via email: Switch delivery to Daily Digest | Switch format to Traditional
Visit Your Group | Yahoo! Groups Terms of Use | Unsubscribe

__,_._,___

Sunday, August 30, 2009

[TheOptionClub.com] Re: General ratio spread inquiry

Thanks guys. I appreciate the help

-- In OptionClub@yahoogroups.com, "asdfffg1" <joshuas7@...> wrote:
>
> If XYZ is at 50, and a call ratio spread and put ratio spread are
> created using the same month expiring option contracts, what is this combination called? Is there even a name for it when ratio spreads are combined, or is it simply two basic trades? An example is below. Thanks Guys
>
> XYZ at 50
> Trader buys one Dec 2009 ATM 50 call and sells two Dec 2009 55 calls. The trader then buys one Dec 2009 ATM 50 put, and sells two Dec 2009 45 puts.
>

__._,_.___

Messages in this topic (5) Reply (via web post) | Start a new topic

Messages | Files | Photos | Links

Change settings via the Web (Yahoo! ID required)
Change settings via email: Switch delivery to Daily Digest | Switch format to Traditional
Visit Your Group | Yahoo! Groups Terms of Use | Unsubscribe

__,_._,___

[ConservativeOptionStrategies] debit spread

when the debit spread expires, what happens to the money?

__._,_.___

Reply to sender | Reply to group

Messages in this topic (1)

Recent Activity:

New Members 3

Visit Your Group Start a New Topic

MARKETPLACE

Going Green: Your Yahoo! Groups resource for green living

Parenting Zone: Your community resource for family and home

Switch to: Text-Only, Daily Digest • Unsubscribe • Terms of Use

__,_._,___

Saturday, August 29, 2009

Re: [TheOptionClub.com] what happens when a debit spread expires out of the money?

Almost any such question can be answered just by typing it into Google and looking at the first result (or two.)

http://www.google.com/search?ie=UTF-8&oe=UTF-8&sourceid=navclient&gfns=1&q=what+happens+when+a+debit+spread+expires+out+of+the+money%3F

http://www.schaeffersresearch.com/schaeffersu/options/advanced/debit.aspx

On Sat, Aug 29, 2009 at 2:13 PM, James Fink <jimfink@yahoo.com> wrote:

Credit spreads and debit spreads are the same trade. The only difference is that the credit spread gives you the money up front, whereas the debit spread gives you the money at expiration (assuming the trade at expiration ends profitably).

From: paul7313 <paul7313@yahoo.com>
To: OptionClub@yahoogroups.com
Sent: Saturday, August 29, 2009 10:01:14 AM
Subject: [TheOptionClub.com] what happens when a debit spread expires out of the money?

credit spreads that expire out of the money give me the money in the spread at expiration, what happens with a debit spread?

--
Adam

__._,_.___

Messages in this topic (5) Reply (via web post) | Start a new topic

Messages | Files | Photos | Links

MARKETPLACE

Mom Power: Discover the community of moms doing more for their families, for the world and for each other

Change settings via the Web (Yahoo! ID required)
Change settings via email: Switch delivery to Daily Digest | Switch format to Traditional
Visit Your Group | Yahoo! Groups Terms of Use | Unsubscribe

__,_._,___

Re: [TheOptionClub.com] what happens when a debit spread expires out of the money?

Credit spreads and debit spreads are the same trade. The only difference is that the credit spread gives you the money up front, whereas the debit spread gives you the money at expiration (assuming the trade at expiration ends profitably).

From: paul7313 <paul7313@yahoo.com>
To: OptionClub@yahoogroups.com
Sent: Saturday, August 29, 2009 10:01:14 AM
Subject: [TheOptionClub.com] what happens when a debit spread expires out of the money?

credit spreads that expire out of the money give me the money in the spread at expiration, what happens with a debit spread?

__._,_.___

Messages in this topic (2) Reply (via web post) | Start a new topic

Messages | Files | Photos | Links

Change settings via the Web (Yahoo! ID required)
Change settings via email: Switch delivery to Daily Digest | Switch format to Traditional
Visit Your Group | Yahoo! Groups Terms of Use | Unsubscribe

__,_._,___

Re: [TheOptionClub.com] covered calls

Carolinaspring66,

I apologize for not responding to this question in a more timely fashion. I wanted to have the time to give an adequate and hopefully well thought out reply.

Most of us realize there is no "one size fits all' when it comes to option strategies. There is no one strategy that is suitable for all market conditions. Likewise, there is no single, right way to apply an option strategy that is appropriate for all situations. The trick is choosing the correct strategy for the current market conditions, as well as, the best way to apply that strategy considering the current conditions. The time frame of the intended trade period will also influence your choice of strategy. A strategy that is a good choice for the next few days or this week, may not be a good choice for the month or year. Whether we are willing to give up the stock or wish to hold it longer term will influence our choice of covered call application methods. We also need to understand how, when and why our chosen strategy can be or, should be, adjusted or morphed according to changing market conditions. From my experience with other traders, I find that traders choosing the covered call strategy, either understand options and the CC strategy, or they have been given the impression the CC strategy is an easy and safe strategy to use. The first group knows how and why they are using the strategy. The second group should get their money out of the market until they get a much higher level of option and trading education. The covered call strategy is a HIGH RISK, limited reward strategy. That's not to say it does not have a useful place in the world of option trading, just that you better know what your doing before using it.

There are a number of specific reasons traders choose to use covered calls. Generally these fall into two categories. One, as a limited hedge and two, as premium collection. Without knowing your outlook for the market or the time frame of that outlook, it is difficult to give advice on your application of the CC strategy to SPY. I can see some value to selling, in the money covered calls as a hedge on a SPY position, that is, under certain circumstances. This approach depends on your market outlook. Selling an ATM call would be in line with a mildly bearish outlook. Selecting an ITM call indicates a stronger, bearish market outlook. I can not argue with that outlook, at least in a short term time frame. Based on my technical analysis last Monday (8/24), I sold a slightly ITM hedge on a long term bullish position. That move has not proven necessary so far but, I have not regretted having a little insurance on this position during the past week. I'm aware we are still in an up trend and I'm prepared to buy back my short call, if needed. As far as selling one month out, maybe that just suits your personal trading style. Looking at your CC trade as a hedge, I only have a mild objection to that choice. My personal preference is to sell front month calls. That way I get a little more benefit from time decay.

Now, looking at your position as a premium collection strategy, I'd say you are off base with your approach. If your main purpose for using the covered call strategy is premium collection, I'd recommend selling front month, ATM calls. This is where you benefit the most from time decay. As a premium collection strategy, it is time that your are selling and profiting from.

The best market for this application is neutral to slightly bullish. In a more bullish market you could select an OTM call. This would allow you profit from any possible increase in SPY price. You're return will be improved, but your upside potential is still limited. Selling ITM calls in an up trending market, for the purpose of collecting premium, does not make much sense to me.

As I mentioned earlier, there are situations where the CC is useful. However, it is not a strategy that should be a "first choice" or a "one and only" strategy, month in and month out. Knowing a variety of option strategies and the proper application of those strategies allows you, in almost all cases, to make more profitable trades at a lower risk while tying up less cash.

Dave

-----Original Message-----
From: carolinaspring66 <spring@bbnp.com>
To: OptionClub@yahoogroups.com
Sent: Thu, Aug 20, 2009 9:27 pm
Subject: [TheOptionClub.com] covered calls

I have been doing covered calls on SPY,SELLING IN- MONEY CALLS ONE MONTH OUT.I know I have alot to learn.Could someone give me some advice?

THANKS

__._,_.___

Messages in this topic (73) Reply (via web post) | Start a new topic

Messages | Files | Photos | Links

Change settings via the Web (Yahoo! ID required)
Change settings via email: Switch delivery to Daily Digest | Switch format to Traditional
Visit Your Group | Yahoo! Groups Terms of Use | Unsubscribe

__,_._,___