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to Rudolf Stricker.
Below are my answers, in capitals, to your comments.
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On Fri, 10 Jul 1998 18:08:05 -0400, you[STAN R] wrote:
>Your question sounds naive but maybe you're not experienced
>with options.
You are right: After about six month of doing some "historical"
calculations on options especially for the german main index DAX, I
started trading some months ago. So I really do not have a lot of
experience, and I'm restricted to day-to-day trading for several
reasons.
>To evaluate options before trading you need selected data,
>such as Historical Volatility, on the underlying and of course
>you should see the Greeks for each position.
Imo, the most important point in option trading is to have an estimate
of the option prices for the next days (and weeks), i.e. the price of
the underlying and its (implicit) volatility. So I concentrated my
effort on this point.
ALLOW ME TO MAKE A DISTINCTION HERE. THE MOST IMPORTANT POINT
IN OPTION TRADING IS TO HAVE AN ESTIMATE OF THE UNDERLYING
STOCK – DIRECTION AND PRICE MOVEMENT.
IMPLIED VOLATILITY,THE GREEKS, ITM PROBABILITY, ARE SECONDARY
IN EFFECT TO THE BEHAVIOR OF THE UNDERLYING EXCEPT IN ONE CASE. THAT IS
WHEN YOU DON'T KNOW WHERE THE UNDERLYING WILL GO
AND THEREFORE ONE MUST PUT ON A SPREAD POSITION.
ALSO DO YOU REALLY USE IMPLIED VOLATILITY WHEN THE
UNDERLYING STOCK HAS ONLY EXHIBITED HISTORICAL (STATISTICAL)
VOLATILITY?
Concerning selection of the "best" option: I did several tests on
options (for the DAX) at different strike prices around the "at the
money" boundary. I got the best results for strikes of about 50 to 100
points "out of money", whereby the difference from "option selection"
is MUCH smaller than the difference from doing a poor or good estimate
for the option prices coming up. So, imo, it doesn't make much sense
for me to play around with Greeks, because the time to buy & sell is
fixed by the option price estimation, and all I have to do is buy 50
to 100 "out of money".
I DON'T FOLLOW THIS REASONING. ARE YOU TALKING ABOUT
50 TO 100 POINTS ON THE DAX? ARE THEY REALLY OUT OF THE
MONEY ON AN INDEX THAT 'S REACHED 6000?
ALSO HOW DO YOU CHOOSE THE OPTION EXPIRATION?
AND HOW DO YOU TAKE LIQUIDITY INTO ACCOUNT?
>A graphic chart of the Profit and Loss of a position is useful
>and very necessary if you're doing Spreads.
Why should I do spreads? If I have an idea, where the prices will go,
imo, spreads do not make much sense, do they? YES THEY DO – SEE
THE FOLLOWNG.
And if I have no idea about the prices coming up, imo, I should stay out
of the market.
DISAGREE.
BACK IN APRIL I WAS FOLLOWING THE HOT INTERNET STOCKS
AND ONE IN PARTICULAR, CMGI, HAD JUST RISEN 40%. WHEN THE
INTERNET STOCKS TOOK A BREATHER. I WASN'T SURE IF CMGI
WOULD DROP PRECIPITOUSLY OR PLATEAU OR CONTINUE ON UP.
INSTEAD OF "STAYING OUT OF THE MARKET " AS YOU SUGGEST
I PUT ON A STRADDLE BUYING BOTH SEPT 45 CALLS AND PUTS.
AS IT TURNED OUT THE STOCK WENT UP TO 70 AND THE STRADDLE
MADE A GOOD PROFIT.
OPTIONS SPREADS HAVE A USEFUL PLACE IN THE TRADER'S TOOLBOX.
ESPECIALLY WHEN YOU'RE NOT SURE WHERE THE UNDERLYING WILL GO.
>All this applies equally to Index Options as well as Equity Options.
>I have experience in both.
>If you're trading end of day and are willing to manually input
>the Option quotes then you won't need proper Data feeds
>(Option quotes, Open Interest, Volume) but if you value the
>latter then programs with proper data feeds are necessary.
At this time, I still get some day-to-day data about (also
international) indices and about option prices at the german option &
future exchange, but I consider to cancel these sources, because I can
find the most important data on the web. And concerning option prices:
At least for the german DAX, imo, it is not necessary to collect
option prices, because those prices (near the money) can be calculated
(e.g. by Excel) with sufficient accuracy using the (implicit)
volatility index data provided with the DAX.
(BTW: Are there any other (main) indices around the world, which also
are accompanied by an appropriate volatility index (like the DAX)?
Would be interesting to extend my option trading to such indices ...)
HERE IN THE U.S. THE STANDARD & POOR 100 AND 500
ARE MARKET BENCHMARKS THAT ARE ALSO OPTIONABLE. WE USE
THE "VIX" AS A MEASURE OF MARKET VOLATILITY AND IT ACCOMPANIES
THE S&P100.
THE S&P500 (SPX) AND S&P100 (OEX) ARE ALSO FUTURES.
WHAT IS THE NAME OF THE VOLATILITY INDEX THAT ACCOMPANIES
THE DAX?
>You need to cut down on the manual, mechanical work and
>spend time on interpreting the evaluations put out by the SW.
I tried some test versions of "option sw" (including MS OptionScope),
but I couldn't find a reason to use these programs. All the "option
calculations" I do is to look at the prices of options I have bought
in a small Excel sheet, which compares the prices for several
potential prices of the underlying vs time (up to expiration) to the
(actual prices and the) prices calculated after B&S, like described
above. Imo, this is enough to get an idea, where to sell, together
with the (by far more important) price estimates.
Any hint where to refine my "strategy"?
YES. YOU SHOULD GET A GRASP OF THE GREEKS . IF YOU
UNDERSTOOD A POSITION'S VEGA YOU COULD DO VOLATILITY
TRADING IN OPTIONS. HAVE YOU HEARD OF THAT?
ALSO YOUR CHOICE OF ITM OR OTM STRIKES SHOULD BE GUIDED
BY THE POSITION DELTA AND IT'S GAMMA. SOMETIMES I FOUND IT
NECESSARY TO TAKE EXPENSIVE STRIKES THAT ARE DEEP ITM IN ORDER TO MAXIMIZE
A SMALL UPTURN IN THE UNDERLYING AND
CLOSE THE POSITION WITH A PROFIT.
ANYBODY CAN TRADE OPTIONS WITHOUT CALCULATING ALL
THE CHARACTERISTICS OF THE POSITIONS. ANYBODY CAN
PLACE OPTION TRADES ON INADEQUATE FOUNDATION AND STILL
BE LUCKY ENOUGH TO MAKE A PROFIT.
BUT NOT FOR LONG.
BTW VAS IST DAT "IMO"?
mfg rudolf stricker
| Disclaimer: The views of this user are strictly his own.
RUDOLF HAVE YOU TAKEN THE OTHER SIDE OF OPTION TRADES
SUCH AS SELLING CALLS OR PUTS?
I HOPE FOR YOUR OWN SAKE THAT YOU TAKE SOME COURSES
IN OPTION EVALUATION AND CONSULT SOME PROFESSIONALS.
YOU'RE OVER-SIMPLIFYING OPTION TRADING AND ARE TAKING
GRAVE RISKS.
AUF WIEDERSEHEN.
STAN
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