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Guy,
If you're sure about direction and want to maximize profit, then I would
sell deeper ITM calls.
The deeper in the money a call is, the higher it's Delta, basically the
point move for every point move of the underlying, in this case the S&P. So
the 1475 Calls will have a lower delta than the 1450s. Let's say the delta
of the 1475 is .60 and the 1450 is .85. So for a decrease of 1 pt. in the
S&P, the 1475 calls will decrease in value by approximately .60 and the
1450s by .85. Of course if you're wrong, the 1450s will INCREASE in value
much faster than the 1475s.
Also, the time value of the options decrease more rapidly the closer you are
to expiration. Therefore, based on this fact alone, you may want to sell
September calls. In addition, time value decreases DRAMATICALLY the week
of expiration. So if you're looking for a short trade, your best option for
capturing decreasing time value would be to sell August calls.
Bottom line, if your're very, very sure about this signal, then sell deep in
the money, August calls. The less sure you are about it, sell longer term
and higher strike price calls.
Just curious... selling calls is considered extremely risky and has huge
margin requirements. Why not buy puts? Based on the above, deep in the
money puts would give you the best returns if you're right. Also, you can
buy longer term puts (Dec.) and time value would not decrease very much at
all on a trade that you expect to be out of in two weeks, as time value
decreases the fastest in the month preceding expiration. Also there are no
additional margin requirements.
One of my favorite option plays are diagonal spreads. In your example, say
you were convinced you wanted to sell the August 1450 calls with a delta of
.85, I would simultaneously buy the same number of 1500 December calls ,
with a much lower delta, maybe .25. This accomplishes several things, 1 -
you reduce your margin requirement to the difference between the two strike
prices (50 pts.) 2- you protect yourself partially against a catastrophic
run-up in price, as price increases, you lose on your short 1450 call but
you profit on your 1500. As price gets closer to 1500 the difference in
delta will not be as dramatic, as the highest it can be is 1.00, so your
1450 short have a maximum increase in delta of .15 while your long 1500
have a max increase of .75. , 3 - If price drops, as you expect, you can
expect approximately a .60 increase in the value of your spread position for
every point that the S&P drops. and 4- you will capture all the time value
of the August calls that you sold by expiration. Again, this is definitely
more conservative, but it works well, especially as you approach expiration
on your short calls.
Hope this helps.
Ed Montero
----- Original Message -----
From: Guy Tann <grt@xxxxxxxxxxxx>
To: Metastock User Group <metastock-list@xxxxxxxxxxxxx>
Sent: Wednesday, August 09, 2000 8:37 PM
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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