[ConservativeOptionStrategies] Dr. Joe - Thanks for the information

 

I've spent two days mulling over the diagonal LEAPS paper. Very interesting, and a good presentation of some material that is counter-intuitive for me.

I tend to trade vertical credit spreads and iron condors, usually single month durations, usually on stocks rather than indexes. I've been successful at it, but as you noted in a post, it can be time consuming, since dealing with individual stocks requires some diversification to stay out of trouble.

Since my retirement plan requires 1.25% / month, and I am shooting for 1.5% / month, I think the diagonal LEAPS makes a good conservative anchor for 1/3 to 1/2 of my capital. I can think of some minor modifications to be more investment oriented rather than income oriented, like legging into the LEAPS over time on market pull backs. Makes the accounting a little more difficult, but should make the whole thing a little more profitable.

No real question, just thanks for the clear explanation.

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RE: [TheOptionClub.com] GOOG [was Re: Basic Calendar Question]

 

This is not a "strategy" per se. remember that all I'm trying to explain
here is what causes pinning behavior (and I probably should have changed the
subject header once again). In no way am I trying to recommend a way to
trade on expiration.

What I'm describing is what happens as a "natural" consequence of open
interest at a strike near expiration. If you are long or short that atm
strike from a PREVIOUS position, you will obviously have a keen interest in
what happens during the trading day on expiration Friday and thus be looking
for ways to trade your position to profitability. the long trader is
fighting decay while the short trader is hoping that the last drops of theta
- which are often significant - evaporate. The long trader will be looking
to scalp the remaining gamma while - ironically, I guess - the short trader
is the one feeling the "max pain" as the underlying moves AWAY from the
strike.

Any attempt to ENTER a position like this on expiration Friday requires a
real gambler's spirit along with the finesse (and favorable margin) needed
to play it skillfully. Entering a box or partial box on expiration will
surely be a highly expensive proposition for a retail trader. The bid/ask
spreads will be unforgiving and any chance you have of scalping a profit
will require that you have unbelievable timing and ability to pick
direction. and if you have such market ESP you may as well just play it with
the underlying since that would be much easier and cheaper to trade.

A couple other comments below...

-----Original Message-----
From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On
Behalf Of comedynight2000
Sent: Monday, November 30, 2009 2:57 AM
To: OptionClub@yahoogroups.com
Subject: [TheOptionClub.com] GOOG [was Re: Basic Calendar Question]

Dear Michael: thanks for this interesting post which contains an idea for
expiration trading that I had not considered before. Please allow me to
restate and expand.

On expiration Friday, you appear to be saying that it makes sense to put on
two legs of a conversion or reversal and either lock in the third leg at a
profit after a favorable or, at worst, hold through the end of the day and
exercise before 4pm Saturday. For example, you can buy the stock, and buy
the puts. (Especially helpful if you have a slight upside directional bias.)
If the stock declines, exercise the puts. However if the stock moves up
later in the day, thenn you may be able to sell the calls for a risk free
profit, having locked in the conversion. Is that basically right?

mc- no. what you're basically saying is just to buy calls and hope the
market goes up. again, this is pure short term speculation that if you are
good enough to predict accurately, I salute you.

If so, why not do this as a box since margin requirements would be so much
less? For example, start the position as a three legged box. With the
stock close to 580, say, buy the 570 580 vertical call debit spread plus the
600 put (to protect downside risk). If the stock goes lower, sell the 580
put to lock in the box at a profit. If the stock goes higher, sell the long
call at a profit and short the stock to lock in a reversal (although it's
not clear if this would be at prices better than the market originally
offered.

Mc -the bid/ask spreads on all these trades would probably wipe out any
chance of significant profit unless the underlying somehow sold off
enormously. The trade you are suggesting requires the 580 strike to have a
lot of premium left in it.

Perhaps a third trading strategy would be to buy at DITM gut strangle early
on Friday morning. Then you can sell the short ATM straddle legs against
the long DITM legs as the stock oscillates. Thanks very much, in advance,
for your comments....

Mc - like your previous example you would be generating a lot of premium for
the market makers. And you would likely be making the wrong trades in the
sequence. The premium is going to be the greatest on the straddle at or near
the open so if you are going to sell it, that's the time. That strangle is
meaningless except as disaster protection in the event that somehow during
the trading day the underlying flies outside the bounds of the strangle. In
effect you've described three incompatible trades or three trades that
benefit from dramatically different scenarios: 1) buy atm calls and hope the
stock goes higher to offset the premium paid for those calls (this is a
bullish bet on direction and or volatility), 2) buy an otm put and hope for
a big sell off (this is a bearish bet on an extreme directional move to the
downside), and 3) a short atm straddle (which is of course a bet on
volatility completely dying and the hope for an atm).

--- In OptionClub@yahoogroups.com, "mcatolico" <mcatolico@...> wrote:
>
> Comments below.
>
>
>
>
>
> From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On
> Behalf Of Jack
> Sent: Sunday, November 29, 2009 2:45 PM
> To: OptionClub@yahoogroups.com
> Subject: RE: [TheOptionClub.com] GOOG [was Re: Basic Calendar Question]
>
>
>
>
>
>
>
>
> OK, so you're long 100 calls and the underlying trades up to 80.25. Your
> calls will be worth .25+. Why not sell the calls instead of selling the
> stock?
>
>
>
> Mc -Because you get the same quarter lock PLUS 100 free puts by shorting
the
> stock against the calls. (for those that can't see this , a long call plus
> short stock is synthetically a long put. In the example if the stock
> continued higher the long call would gain in value equal to the loss in
> value of the short stock and at expiration the exercise of the long calls
> would negate the short stock. Conversely that long call plus short stock
> means that below 80 the calls are worthless but the short stock gains
value
> as the stock goes south. Thus, the synthetic equivalent of the long put.)
>
>
>
> If the stock drops to 79.75 and your calls expire worthless, you are short
> 10,000 shares. What if it gaps up Monday (pin risk - cost me $4,000 one
> expiration L )
>
>
>
> mc- you buy the stock back at 79.75 and lock in another quarter. If you
> don't buy it back for some reckless reason (why would you not buy back the
> short stock you sold for no risk at 80.25 with the stock now trading at
> 79.75?), you just exercise the long calls. There is absolutely no reason
to
> be exposed to pin risk unless you are stubborn enough not to buy back
shorts
> at expiration - or sell longs if you don't want to be exercised.
>
>
>
> OK, so it drops to 79.75 and you buy shares - where's your protection?
What
> if it continues to drop, 79.50, 79.25,..
>
>
>
> mc- you don't need protection since you've just closed all your risk: sold
> 10,000 at 80.25 and bought 10,000 at 79.75. (i.e. you've just locked in
> $5000).
>
>
>
> I can understand why stocks would close at the strike with the most
options
> - when they had automatic exercise if .25 ITM. What effect has the penny
> exercise rule had?
>
>
>
> mc- this is irrelevant. It's not the automatic exercise AFTER expiration
> that drives pin behavior. It's deltas PRIOR to expiration that
professionals
> (and smart amateurs) are capitalizing on.
>
>
>
> From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On
> Behalf Of mcatolico
> Sent: Saturday, November 28, 2009 9:09 PM
> To: OptionClub@yahoogroups.com
> Subject: RE: [TheOptionClub.com] GOOG [was Re: Basic Calendar Question]
>
>
>
> For instance if I am long 100 80 strike calls on abcde stock and the
> underlying trades up to 80.25 with less than an hour or two to expiration,
I
> will sell 10000 shares against those calls to lock in the quarter premium.
I
> now synthetically own 100 long 80 puts. If my selling action (and if there
> are a lot of other open contracts at the 80 strike, the selling of many
> others) drives that stock back down to 79.75, guess what, I now buy 10000
> shares to scalp another quarter out of the market. Lather, rinse repeat,
as
> the pendulum wobbles back and forth and the scalps get tighter and tighter
> to the point where I'm scalping 10000 shares for a nickel or ultimately a
> penny.
>

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

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
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RE: [TheOptionClub.com] Market Wizards Example

 

'Or he would buy an ATM fly which captures time premium if the underlying does not move much.  If it did move a lot he would lose on the front month but make a fortune on the back month position.'
 
I appreciate you taking the time to help. If possible, could you give me an example
of his front month and back month fly. I can't picture these two positions vividly.
 
 
 
 
 

 

---

To: OptionClub@yahoogroups.com
From: comedynight2000@yahoo.com
Date: Sun, 29 Nov 2009 16:04:38 -0800
Subject: Re: [TheOptionClub.com] Market Wizards Example

 

The basic idea was to own an "explosion position" in the back month and sell time premium in the front month.  He does not describe exactly what the explosion position so it could have been a straddle, strangle, or short fly which are all nondirectional.  In the front month he says he would scalp premium which he probably means that if an order came in to buy calls, he would quote a little above fair value and sell he would quote a little below fair value.  Or he would buy an ATM fly which captures time premium if the underlying does not move much.  If it did move a lot he would lose on the front month but make a fortune on the back month position. 

---

From: asdfffg1 <joshuas7@hotmail.com>
To: OptionClub@yahoogroups.com
Sent: Sat, November 28, 2009 1:24:39 PM
Subject: [TheOptionClub.com] Market Wizards Example

 

In 'Market Wizard's', Tony Saliba describes a fly strategy, where he bought backmonth flys and would short frontmonth flys to scalp. Does anyone know if the front month fly sold is placed ATM ITM or OTM. If someone is familar with the details, I would very much appreciate some kind of visual, for this setup. Thanks for the help

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[ConservativeOptionStrategies] CC vs diagonal spread w/LEAPs - margin requirements?

 

I've read posts where people like the idea of buying a LEAP (instead of the underlying stock) as their protection when shorting a near-term call. The justification of this is usually that the LEAP ties up less capital.

But what about Portfolio Margin accounts? Is that still true?

The CBOE portfolio margin calculator is "experiencing technical difficulties" right now so I can't enter the positions to check, but I'm curious if anyone knows the PM margin requirements for these 2 pairs of trades:

(1) covered call
long 100 shares of a $100 stock
short 1 near month call on same stock with strike 100

(2) diagonal spread
long 1 Jan 2011 call with strike of 100 (for stock at 100)
short 1 near month call on same stock with strike 100

I believe the Reg T margin for (1) will be higher than (2), which is why people are attracted to using LEAPs. But I'm not sure the PM margin requirement is materially different in the above 2 examples. Does anyone with PM experience know?

Thanks,

MikeS

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Re: [ConservativeOptionStrategies] Re: DLS questions - note Newbies on this site

 

Dr. Joe,   Can you publish your trading plans for short puts with covered calls for us?   Thanks,   BobW --- On Mon, 11/30/09, joe & leigh <gass20@aol.com> wrote: From: joe & leigh <gass20@aol.com> Subject: [ConservativeOptionStrategies] Re: DLS questions - note Newbies on this site To: ConservativeOptionStrategies@yahoogroups.com Date: Monday, November 30, 2009, 12:08 PM   lee, i do hope people read...read. ..my paper before they ask questions... .and i do more than dls.....i have trading plans for short puts with covered calls....drjoe

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Re: [ConservativeOptionStrategies] Re: Let's Get the Site Active Again !!

 

Bill,

 

I would be interested.

 

Scott

---

From: bill ulivieri <uliv2003@yahoo.com>
To: ConservativeOptionStrategies@yahoogroups.com
Sent: Mon, November 30, 2009 2:35:19 PM
Subject: Re: [ConservativeOptionStrategies] Re: Let's Get the Site Active Again !!

 

If anyone wants to become a registered member at www.oldschooloption s.com   I would be happy to extend the free website access of my covered call option analysis and ideas.   There are a LOT of ways to skin a cat, and there anre many diffferent ways to analyze options. I'm not saying my way is the best by any means. It just works really well for me. The site combines technical analysis, relative strength, risk management philosophies and of course, the "best of the best" covered call writes, IMHO.   Regards,   Bill --- On Mon, 11/30/09, joe & leigh <gass20@aol.com> wrote: From: joe & leigh <gass20@aol.com> Subject: [ConservativeOption Strategies] Re: Let's Get the Site Active Again !! To: ConservativeOptionS trategies@ yahoogroups. com Date: Monday, November 30, 2009, 1:22 PM   rfh...my current leaps are iwm and will roll the jan 11 to jan 12 soon next few months or so...the current jan 11 60 strike is 5.8 and the jan 12 60 strike is 8.3 ....i will add the money.....since monthly premiums are about 1 dollar and it extends my leaps for a year...it may be worth it....drjoe --- In ConservativeOptionS trategies@ yahoogroups. com, "drrobhansen" <robhansen5252@ ...> wrote: > > Hi, Dr. Joe. Will you be rolling the leaps any time soon. If you are down 30 or 40% from their purchase price, you won't be getting that many Jan 12 leaps for your money. That will lead to a considerable loss of monthly income, won't it? > > Thanks, > RFH > > --- In ConservativeOptionS trategies@ yahoogroups. com, "joe & leigh" <gass20@> wrote: > > > > bobc....there are no options longer than 2.5 years...in my posts....you misunderstood. ...i said the current leap positions were established 39 months ago....per my dls strategy.... i roll out my leaps when there is about 12 months remaining... ..so my initial leaps have been rolled out so that is where the 39 months come from...hope that helps...drjoe > > > > --- In ConservativeOptionS trategies@ yahoogroups. com, Bob C <bobc0923@> wrote: > > > > > > Dr Joe - Would you mind sharing with the group some of the stocks you are trading with LEAPs that go out 39 months or so?  I never see any LEAPs much past 2 years (Jan 2012 for example now).  Thank you. > > > > > > > > > > > > > > > ____________ _________ _________ __ > > > From: joe & leigh <gass20@> > > > To: ConservativeOptionS trategies@ yahoogroups. com > > > Sent: Mon, November 30, 2009 5:54:06 AM > > > Subject: [ConservativeOption Strategies] Re: Let's Get the Site Active Again !! > > > > > >   > > > M. just like the rental analogy. if you own a home that you rent out how often do you get it appraised? i bought $xxx of leaps (my home to rent) and it generated for me during the 39 months of these particular leaps a maximum of 12,000 one month and during the worst of the market collapse i was able to always generate at least $1000 a month. average over the 39 months ended up as of last month $3000 a month. my leaps are down about 25% which is less than the market. drjoe > > > > > > --- In ConservativeOptionS trategies@ yahoogroups. com, "Research at DCM" <research@ .> wrote: > > > > > > > > Dr. Joe, > > > > > > > > > > > > > > > > Can you share what your results have been? i.e. X% average annual return > > > > for last Y years with the worst monthly loss being Z%? > > > > > > > > > > > > > > > > I'd just like to understand what is possible and what expectations are > > > > reasonable. > > > > > > > > > > > > > > > > Thanks, > > > > > > > > > > > > > > > > M > > > > > > > > > > > > > > > > > > > > > > > > _____ > > > > > > > > From: ConservativeOptionS trategies@ yahoogroups. com > > > > [mailto:Conservativ eOptionS trategies@ yahoogroups. com] On Behalf Of joe & > > > > leigh > > > > Sent: Sunday, November 29, 2009 2:20 PM > > > > To: ConservativeOptionS trategies@ yahoogroups. com > > > > Subject: [ConservativeOption Strategies] Re: Let's Get the Site Active Again > > > > !! > > > > > > > > > > > > > > > > > > > > > > > > jd.....my strategy only uses leaps with at least 0.8 delta and even > > > > higher....drjoe > > > > > > > > --- In ConservativeOptionS > > > > <mailto:Conservativ eOptionStrategie s%40yahoogroups. com> > > > > trategies@yahoogrou ps.com, John Hudgens <jdhudgens2000@ > wrote: > > > > > > > > > > personally, I have completely revised my leaps straegy. I now use a > > > > stock replacement leap. To wit: I only buy leaps which have a delta > > > > greater than .75. If the stock goes up, my leap grows faster than the > > > > short term option and I can afford to buy it back if I have to by either > > > > using cash or rolling the leap up to get cash. If I don't sell a short > > > > term option and the stock goes up, I can harvest cash by rolling the > > > > option.  > > > > >  > > > > > You can buy a $40 stock's stock replacement for less than a third and then > > > > make your rent on that. 50 cent on $10 is acceptable while 50 cent on $40 > > > > isn't. > > > > >  > > > > > Also, a stock replacement leap tends to be rollable out and up much > > > > easier than the less expensive ones. > > > > > > > > > > --- On Sun, 11/29/09, bgupta92@ <bgupta92@> wrote: > > > > > > > > > > > > > > > From: bgupta92@ <bgupta92@> > > > > > Subject: Re: [ConservativeOption Strategies] Let's Get the Site Active > > > > Again !! > > > > > To: ConservativeOptionS > > > > <mailto:Conservativ eOptionStrategie s%40yahoogroups. com> > > > > trategies@yahoogrou ps.com > > > > > Date: Sunday, November 29, 2009, 10:09 AM > > > > > > > > > > > > > > >  > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > Mark, > > > > >  > > > > > I'm sure Dr. Joe will give you the same advice (at least I hope so). You > > > > want to sell calls at the strike that has the maximum extrinsic value. > > > > Usually that is the first strike ITM or OTM. Also you want to sell fewer > > > > calls than you have long calls. His thumb rule is about 8:10 - so about 8 > > > > short calls for 10 long calls. Look at that on a P/L graph and you will see > > > > what he means by uncovered longs. The graph will typically increase at a > > > > steep (relative) rate up to the short strike and then flatter but still > > > > increase at a shallower rate above the short strike. > > > > >  > > > > > Once both the short and the long are ITM your profit comes from 2 areas. > > > > >  > > > > > First it comes from the decay in the extrinsic value of the short being > > > > greater than the decay in the extrinsic value of the long - which is why you > > > > want to sell the short that has the maximum extrinsic value. > > > > >  > > > > > Second it comes from having more intrinsic value in the longs but only > > > > because you have more longs than shorts. If for example you had the same > > > > number of shorts as you have longs, the gain on the intrinsic of the long > > > > will be exactly offset by the loss on the intrinsic of the short. If instead > > > > you have 10 longs and 8 shorts and the underlying moved by $1, the longs > > > > would gain $10 on the intrisic portion but the short position would lose $8 > > > > for a net gain of $2 on the intrinsic. > > > > >  > > > > > If the underlying was below the short strike (i.e. the short strike was > > > > OTM), for every $1 movement of the underlying, the longs would gain $10 on > > > > the intrinsic (same example as above) and a little bit on the extrinsic. > > > > since the short strike is OTM there is no gain/loss on the intrinsic but of > > > > course there is a gain on the extrinsic. Overall, it is the gain on the > > > > intrinsic of the long that is the significant contribution to your overall > > > > P/L which is why the P/L is steeper below the short strike and shallower > > > > above the short strike. > > > > >  > > > > > Hope this helps.... > > > > >  > > > > > > > > > > ----- Original Message ----- > > > > > From: "mark bluhm" <mbluhm2001@ yahoo.. com> > > > > > To: ConservativeOptionS trategies@ yahoogroups. com > > > > > Sent: Sunday, November 29, 2009 11:56:54 AM GMT -05:00 US/Canada Eastern > > > > > Subject: Re: [ConservativeOption Strategies] Let's Get the Site Active > > > > Again !! > > > > > > > > > >  > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > Dr. Joe, > > > > > > > > > > > > > > > I'm sure we are all in the same boat with the LEAPs underwater, i know am. > > > >  I guess that i've messed up in that i've been too afraid to sell options > > > > uncovered and therefore have not been getting the income you have been.  > > > > Would it be possible to share how you pick the strike price to sell your > > > > options and when you decide each month to do so? That would be very helpful. > > > >  > > > > > > > > > > > > > > > I have purchased new 2011 Leaps when the market was low but still own the > > > > OTM 2010 Leaps. I'm thinking of sell these for a big loss instead of holding > > > > on to them to expire while the market is up.  Any thoughts on what to do > > > > with the 2010 OTM leaps? > > > > > > > > > > > > > > > Glad you are back. I'm still liking this system even though the market has > > > > crashed.  It still has a lot of merit. > > > > > > > > > > > > > > > Thanks, > > > > > Mark > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > From: joe & leigh <gass20@> > > > > > To: ConservativeOptionS trategies@ yahoogroups. com > > > > > Sent: Sun, November 29, 2009 7:27:26 AM > > > > > Subject: [ConservativeOption Strategies] Let's Get the Site Active Again > > > > !! > > > > > > > > > >  > > > > > > > > > > Would love for members to post their strategies and post questions for > > > > other members. > > > > > > > > > > I am still trading the DLS and am satisfied considering the worst market > > > > correction in decades. I am trading a lot of naked puts and covered calls. > > > > > > > > > > Someone who bought a second home (condo) in a place like Florida at the > > > > high of the real estate market to rent and generate income....his condo's > > > > market value is probably 40% below his purchase price. I know, I live there. > > > > However, he is still able to generate monthly rent comparable to when the > > > > real estate market was high while he waits for his condo's value to return > > > > to purchase price. > > > > > > > > > > Well my leaps (condo) are well below cost basis. However, my current leap > > > > positions opened 39 months ago has generated about $3000/mo.(rent i > > > > generated). Initially, leaps were generating 8-10k per month and during the > > > > correction I was able to generate at least 1-1.5k per month...averaging over > > > > the time period the $3000/mo. My leaps are about the same % below purchase > > > > price than if I had bought a portfolio of buy and hold. The difference is I > > > > have generated $118,000 in premiums over the 39 months. Where the buy and > > > > hold owner generated no rent/income. > > > > > > > > > > I am finding that selling puts if managed well is easier and less time > > > > consuming than the DLS strategy. > > > > > > > > > > dr joe > > > > > > > > > > > > > > >

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RE: [TheOptionClub.com] GOOG [was Re: Basic Calendar Question]

 

This captures things (I think). But it's really much more basic.

At any point in the life of an option, that option has some equivalent delta
value. As you approach expiration the delta value approaches either zero
(otm) or 100 (itm). Traders choose to hedge or not hedge to some degree at
any point but at expiration the impetuous is to hedge completely as time
goes to zero. If the position has 100 long deltas, you sell 100 delta units.
if it is short 100 deltas, you buy 100 delta units. If the position has no
deltas, then any new delta exposure is pure risk absorption or speculation.

-----Original Message-----
From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On
Behalf Of Ricky Jimenez
Sent: Monday, November 30, 2009 12:05 PM
To: OptionClub@yahoogroups.com
Subject: Re: [TheOptionClub.com] GOOG [was Re: Basic Calendar Question]

On Mon, 30 Nov 2009 11:00:26 -0500, I wrote:

>On Mon, 30 Nov 2009 06:01:05 -0600, "Jack" <jack@jackcpa.com> wrote:
>
>>I understand it the underlying is up a quarter and you short it, you do
not have any risk. If it goes up, you exercise, if it drops, you buy and
close.
>>
>>
>>
>>
>>
>>Now, if it is down a quarter (you still own 100 calls but have no position
in the stock), if you buy the stock ($775,000) you have no protection. If
it continues to drop, you are long stock and long calls. All this risk to
make $2,500?
>
>I hope both you and Michael will forgive me if I butt in here and try
>to explicitly specify the algorithm in question.
>
>1. If you have N long option contracts (underlying multiple = 100)
>ITM by M, sell 100*N shares of the underlying if they are calls, buy
>100*N shares if they are puts. You forego further gains if the
>underlying gets further in the money but lock in a payoff of M per
>share. If you own N straddles, you can do this if either side is ITM
>by M. Goto 2.
>
>2.a. If the options now are OTM and there is very little time before
>expiration (probably broker and hardware dependent), remove the
>position in the underlying. If you own N straddles, this step can be
>ignored, assuming one side will be exercised.
>
>2.b.. If there is sufficient time before expiration and the options
>are OTM by M, remove the position in the underlying. You lock in a
>payoff of 2*M. Then Goto 1. Of course you can choose different Ms
>for steps 1 and 2.
>
>I hope this doesn't lead to more confusion.

The word "payoff" used above is misleading. What I meant was that by
using the scalping algorithm for one iteration, you will have a M or
2*M per share cash credit in your account at expiration. (Note than
when you have a straddle, you start a new iteration when you are in
step 2b of the prior iteration.) The payoff from the position will be
0. The overall profit depends on the prior history before you entered
the algorithm as well as transaction costs.

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

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
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RE: [TheOptionClub.com] GOOG [was Re: Basic Calendar Question]

 

It’s pretty straightforward. You are trading deltas so if you own 100 long calls and the underlying is below the strike near expiration you have in effect zero deltas. if you had not hedged the calls in the first place then therefore there would be no reason to buy stock as a hedge as the stock price declined.  

 

What I’m describing here is the force at work that drives a stock to pin. Generally if there is a large open interest at a strike these options have been delta hedged to a large degree. By that I mean they have been pretty much converted into synthetic straddles (i.e. regardless of whether the options themselves are calls or puts) by expiration. What I described in the simple example is the straight call delta hedge that drives the stock back toward the strike as price rises. The same force is at work on the put side as well.

 

From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On Behalf Of Jack
Sent: Monday, November 30, 2009 6:01 AM
To: OptionClub@yahoogroups.com
Subject: RE: [TheOptionClub.com] GOOG [was Re: Basic Calendar Question]

 

I understand it the underlying is up a quarter and you short it, you do not have any risk.  If it goes up, you exercise, if it drops, you buy and close.

 

Now, if it is down a quarter (you still own 100 calls but have no position in the stock), if you buy the stock ($775,000) you have no protection.  If it continues to drop, you are long stock and long calls.  All this risk to make $2,500?

 

From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On Behalf Of mcatolico
Sent: Sunday, November 29, 2009 7:11 PM
To: OptionClub@yahoogroups.com
Subject: RE: [TheOptionClub.com] GOOG [was Re: Basic Calendar Question]

 

 

Comments below…

 

 

From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On Behalf Of Jack
Sent: Sunday, November 29, 2009 2:45 PM
To: OptionClub@yahoogroups.com
Subject: RE: [TheOptionClub.com] GOOG [was Re: Basic Calendar Question]

 

OK, so you’re long 100 calls and the underlying trades up to 80.25.  Your calls will be worth .25+.  Why not sell the calls instead of selling the stock?

 

Mc -Because you get the same quarter lock PLUS 100 free puts by shorting the stock against the calls. (for those that can’t see this , a long call plus short stock is synthetically a long put. In the example if the stock continued higher the long call would gain in value equal to the loss in value of the short stock and at expiration the exercise of the long calls would negate the short stock. Conversely that long call plus short stock means that below 80 the calls are worthless but the short stock gains value as the stock goes south. Thus, the synthetic equivalent of the long put.)

 

If the stock drops to 79.75 and your calls expire worthless, you are short 10,000 shares.  What if it gaps up Monday (pin risk – cost me $4,000 one expiration L )

 

mc- you buy the stock back at 79.75 and lock in another quarter. If you don’t buy it back for some reckless reason (why would you not buy back the short stock you sold for no risk at 80.25 with the stock now trading at 79.75?), you just exercise the long calls. There is absolutely no reason to be exposed to pin risk unless you are stubborn enough not to buy back shorts at expiration – or sell longs if you don’t want to be exercised.

 

OK, so it drops to 79.75 and you buy shares – where’s your protection?  What if it continues to drop, 79.50, 79.25,….

 

mc- you don’t need protection since you’ve just closed all your risk: sold 10,000 at 80.25 and bought 10,000 at 79.75. (i.e. you’ve just locked in $5000).

 

I can understand why stocks would close at the strike with the most options – when they had automatic exercise if .25 ITM.  What effect has the penny exercise rule had?

 

mc- this is  irrelevant. It’s not the automatic exercise AFTER expiration that drives pin behavior. It’s deltas PRIOR to expiration that professionals (and smart amateurs) are capitalizing on.

 

From: OptionClub@yahoogroups.com [mailto:OptionClub@yahoogroups.com] On Behalf Of mcatolico
Sent: Saturday, November 28, 2009 9:09 PM
To: OptionClub@yahoogroups.com
Subject: RE: [TheOptionClub.com] GOOG [was Re: Basic Calendar Question]

 

For instance if I am long 100 80 strike calls on abcde stock and the underlying trades up to 80.25 with less than an hour or two to expiration, I will sell 10000 shares against those calls to lock in the quarter premium. I now synthetically own 100 long 80 puts. If my selling action (and if there are a lot of other open contracts at the 80 strike, the selling of many others) drives that stock back down to 79.75, guess what, I now buy 10000 shares to scalp another quarter out of the market. Lather, rinse repeat, as the pendulum wobbles back and forth and the scalps get tighter and tighter to the point where I’m scalping 10000 shares for a nickel or ultimately a penny.

 

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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.

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