A Blackswan will wipe out the profit of any strategy. The issue here is that options are a leveraged instrument and hence any sudden movements will whack your account. For example, imagine being in a futures contract with the market doing an overnight 10% dive. Your account will be hurting and potentially liquidating itself. The fact that it happened in opex does not matter. If you want to do a vertical adjust sure you may have problems, but if you cross calendars you might get some of your money back.
The issue with the open being higher than the first bid is actually something to closely look at. I know this cycle I closed my positions ahead of expiration because it was just too close for my taste.
Christian
--- In OptionClub@yahoogro
>
> Also, a Black Swan event in the last week before expiration will wipe out as much as a year's profits and many years of the additional profits gained by holding to expiration.
> Bob
>
> ----- Original Message -----
> From: Tom Sprunger
> To: OptionClub@yahoogro
> Sent: Thursday, March 25, 2010 5:18 PM
> Subject: Re: [TheOptionClub.
>
>
>
>
> > Is there data that shows that the coin toss at the end is biased against you?
>
> It depends on your postion at the end... check out the below and make your own decision.
>
> Here is some data from the last 12 years on how the Settlement value compares to the Cash value for the SPX, RUT, NDX.
>
> This table shows that over 60% of the time for the RUT and SPX the AVERAGE Settlement value is above the value of the Cash Open on Expiry day by about a point.
>
> BUT... because the average consists of a bunch of positive numbers and a bunch of negative numbers which cancel each other out, it is more relevant to look at the Average Absolute difference.
>
> This says that the absolute value of the settlement from the open is almost 7 points for the SPX and about 3 points for the RUT. That's pretty significant in my book!
>
>
> SETTLEMENT VALUE RELATIVE TO CASH VALUE
>
>
> SPX RUT NDX
> Open Open Open
>
> AVE DIFFERENCE Pts 1.17 1.09 1.77
> MEDIAN DIFFERENCE Pts 1.41 0.75 0.87
>
> AVE ABSOLUTE DIFFERENCE Pts 6.79 2.82 6.77
>
> % TIME ABOVE CASH 63.2% 65.3% 55.6%
>
> WHEN ABOVE, Ave AMOUNT Pts 6.3 3.0 7.7
>
> WHEN BELOW, Ave AMOUNT Pts -7.6 -2.5 -5.6
>
> STD DEV of DIFFERENCE Pts 10.7 4.3 12.9
>
> MAX DIFFERENCE ABOVE CASH Pts 66.2 27.7 67.2
> MAX DIFFERENCE BELOW CASH Pts -45.0 -12.2 -62.7
>
> AVE + 1 STD DEV DIFFERENCE Pts 11.9 5.4 14.7
>
>
>
>
> Of more relevance is how much the Settlement value varies from varies from the close on the last trading day (the day before) since this is your last chance to exit.
>
>
> SETTLEMENT VALUE RELATIVE TO CASH VALUE
> PREVIOUS DAY'S CLOSE
> I.e. How much does settlement change from prev day's close
> SPX RUT NDX
>
>
> AVE DIFFERENCE Pts 1.12 1.63 0.56
> MEDIAN DIFFERENCE Pts 1.46 0.90 2.93
>
> AVE ABSOLUTE DIFFERENCE Pts 7.23 3.72 16.57
>
> % TIME ABOVE CASH 62.5% 64.6% 60.4%
>
> WHEN ABOVE, Ave AMOUNT Pts 6.7 4.1 14.2
>
> WHEN BELOW, Ave AMOUNT Pts -8.2 -3.0 -20.2
>
> STD DEV of DIFFERENCE Pts 11.5 6.6 26.1
>
> MAX DIFFERENCE ABOVE CASH Pts 72.8 47.7 97.6
> MAX DIFFERENCE BELOW CASH Pts -45.0 -18.6 -143.2
>
> AVE + 1 STD DEV DIFFERENCE Pts 12.6 8.2 26.7
>
>
>
> This table shows the numbers get a bit larger, particularly for the NDX. There is usually a significant change from the Thursday close to the Expiry on the open the next day. Usually it is a bit higher than the Thrusday close, but there are nasty down surprises as well.
>
> In both cases, note the max differences!
>
>
> Bottom line to me is you need to close your positions the day before expiry, or run the risk of a surprise.
>
>
>
>
>
>
>
> ----- Original Message -----
> From: "Ricky Jimenez" <rickyjim@..
> To: <OptionClub@yahoogro
> Sent: Thursday, March 25, 2010 6:55 AM
> Subject: Re: [TheOptionClub.
>
>
> On Thu, 25 Mar 2010 01:57:35 -0000, "bben1006" <bben1006@..
> wrote:
>
> >Ricky--
> >
> >
> >On each of the days prior to expiry you actually have the option to either close or not the position-all depending on the actual cash and market. However, on expiry you have no choice and you are at the absolute mercy of the settlement print. So the hassle might very well worth it!
> >
> >
> Is there data that shows that the coin toss at the end is biased
> against you?
>
>
> ------------
>
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I'm new to this forum, but what types of trades are we talking about here that wouldnecessitate waiting until exp or the day before to close?
ReplyDeleteGiven the potential deviation in the final print by the settelment value, I agree that it makes sense to close early. However, closing the day before still places you near max loss if trades such as short verticals have gone against you. Given the unfavorable R/R of high probability option trades, wouldn't it make sense to potentially close out as much as a week out. This provides an opportunity to analyze the price to determine your expectations in order to limit loss. Half of max loss may be quite a bit better over time than near max loss.
However, I can see if the trade was entered by selling far OTM options that the reward may be virtually nothing if it is routinely closed early.