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I miscalculated the case where straddles were purchased. Trying again
On Sep 20, 1:35pm, Clyde Lee wrote:
> Subject: OPT - OEX Options -- HH/LL for past few periods
> I would be interested in what interpretation anyone
> would like to make of how to use these percentages
> (point changes) in establishing long and short positions
> of next expiring options.
Summarizing Clyde Lee's table. Here are the OEX percent moves from the
day following expiration to the close 24 days later.
951120 2.2 960422 -1.0 960923 3.0 970224 3.4 970721 4.2
951218 1.8 960520 4.1 961021 3.2 970324 -2.6 970818 -0.7
960122 0.7 960624 -0.7 961118 3.5 970421 -3.6
960220 4.7 960722 -5.9 961223 2.0 970519 9.3
960318 2.7 960819 5.2 970124 4.7 970623 4.5
Here are some OEX options prices taken from Investor's Daily:
OEX closed: 916.46
Price Price% OTM%
OEX 915 Oct call: 23.50 2.560 -0.159
OEX 915 Oct put: 19.50 2.120 0.159
OEX 950 Oct call: 7.75 0.847 3.650
OEX 880 Oct put: 9.13 0.996 3.980
Above, Price% is the option price expressed as a percentage of OEX.
OTM% is the amount the options are out of the money, expressed as a %.
First, let's assume that on each day following expiration, we
can look into our crystal ball, and predict the _direction_
(up or down) of the close of the next expiration with 100% accuracy.
Also, let's assume that options are always priced on a percentage
basis according to our table above.
If we trade the at-the-money options, and predict the direction of
the following expiration with 100% accuracy, using the price
distribution shown above, and we buy either the at-the-money call,
or at-the-money put, we'd find that 15 out of 22 trades are winners
(68% accuracy), and that we'd net a profit of 22.6% of the OEX
index, or converting to the present day OEX price, we'd net $20,684
on 22 trades, trading a single option, or after subtracting out
$50 for commissions and slippage (probably a little low), we'd net
$19,584 or $890/trade.
Note: we're predicting direction with 100% accuracy, and after
we take into account the price of the options, we're only
winning 68% of the time.
Now, let's see what happens if we'd traded the 35 point out-of-money
(about 3.8%) options with 100% accuracy in terms of direction of
the subsequent close at expiration. In this scenario, we'd make
money 9 out of 22 trades, dropping our accuracy down to 41%, and
we'd net a profit of only 3.45% of the underlying OEX index, or
$3162. After subtracting out commissions and slippage, we lower
our profit down to $2061 or $93/trade.
Looking at the options price table above, we see that the ratio
of money risked for the at-the-money options to that risked for
the out-of-the-money options, is roughly 2.9:1, however, the
reward is in a ratio of $19584 to $2061 or about 9.6:1.
Conclusion, although the at-the-money options are more expensive,
they are a much better deal.
Now, let's take a different approach, and assume we won't guess
direction at all, and instead will always buy a straddle
(some call the out-of-the money version a strangle), that is,
both a call and a put.
The at-the-money straddle would make money on only 6 out of 22
trades (27% accuracy) and would return a _loss_ of 26.4% of the
underlying, or $-25294 (after accounting for commissions
and slippage)!
The out-of-the-money straddle (the call and the put are both
approximately 35 points out of the money), wins only 2 out of
22 trades, for a batting average of only 9%. This strategy
loses a bit more money, losing a total of -27% of the underlying,
or $-26265 after commissions and slippage. Although the out-of-the
money strategy is riksing about 1/3 less per trade, the much lower
win percentage, and the distance that the options are out of the
money, results in larger overall losses.
Conclusion: there's a noticeable edge to being a seller rather than
a buyer, given the above options prices and distribution of
monthly returns.
A few disclaimers:
- Noone forces you to hold an option for the full term of the option.
The longer you hold it, the more you give up to time decay.
- Option premiums are not constant. Right now, OEX options are at
high end of their historical range, in terms of implied volatility.
- Monthly return distributions change over time.
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| Gary Funck, Intrepid Technology, gary@xxxxxxxxxxxx, (650) 964-8135
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