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Hi Guy,
I am a writer of options out here in the holy land and would advise you to
take in consideration the psychological effect of "unlimited loss". When you
buy options, you can loose only the amount invested and the effect on your
decision making is much less stressing. Opening a position by writing
options can quickly become very dangerous in case it does not go your way.
The stops should be much tighter (I remember you said you don't have
any...).
In any case, some points of reference:
1. Put/Call stats (at the money) is more important than ever. I don't know
if you can get open positions numbers in real time (here, I cannot) but it
would be great for you as a tool to see what the sentiment is.
2. Invest by delta and not by fix amount of dollars. Meaning that if writing
10 options will give you $100 per point change in the security, calculate
the risk/reward based on this and not write options for $10000.
3. Time is in your favor, but it changes. It is going much faster near the
expiration date than before. So if you want time to work for you should
write near term options. On the other hand, the swings in price and in
standard deviation are the greatest when you approach expiration and here we
return to the psychological effect and the risk you are willing to take.
4. The best options players don't go for a direction but for the volatility.
It demands a lot of capital and a lot of time, but it is the safest.
5. Concentrate on one or two strategies (Spreads, Condors, Butterflies,
Strangles, Straddles, etc...) and learn their pro/cons. It takes time to get
the feeling for the oddities in real trading of these babies.
I hope this helps and the best of luck,
Moshe Shalom
Israel
-----Original Message-----
From: owner-metastock@xxxxxxxxxxxxx [mailto:owner-metastock@xxxxxxxxxxxxx]On
Behalf Of Guy Tann
Sent: Thursday, August 10, 2000 4:38 AM
To: Metastock User Group
Subject: What options to sell?
List,
OK, we've finally determined that we're going to be in the option writing
business as opposed to the option buying business. Our primary reasons for
this are:
1- Time dilution works in our favor.
2- Capitalizes on our SP trading system.
I would like to pose the following question assuming that we want to sell
ITM Calls since we are now short the S&P futures. In looking at the various
Calls available, how would I determine which ones to write (or which others
not listed and why)?
1- SXZLO Dec 2000 1475 Calls @ 88.1250
2- SXMFT Jun 2001 1500 Calls @ 143.25
3- SXZIO Sep 2000 1475 Calls @ 38.00
First, there are a few things that need to be considered. Our trades, on
average, last for approximately two weeks. They can, at times last a month
or two but that would be quite unusual. We would like to maximize the time
dilution factor in our favor and at the same time minimize our whatever
margin we have to maintain. We learned about this the hard way a trade or
two ago when I sold 10 Sep SPX Calls at 46 and didn't impact my trading
account at all while my brother sold August Calls and had to put up margin
of $89,000 for the 10 Calls he wrote.
I guess I better call my Schwab desk to find out what the margin rules are
for trading the near month (you can tell we're futures traders).
Thanks in advance,
Guy
Never be afraid to try something new. Remember, amateurs built the ark,
professionals built the Titanic.
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