|
PureBytes Links
Trading Reference Links
|
Including the bulk of Mike's query below and explaining
the trade in some detail for those wishing to follow:
2 things, Mike:
a/ Look for "cheap" options, I mean the foll by
that:
- Sticker price of the closest OTM call/put is much
less than the avg range of the past 3-5 days. For kicks, let us assume it is 5
points ($500 per 100 shares).
- Current stock price is vey close to Strike price
- in other words, the current stock price doesn't have too much more than what
you pay for the option to reach its strike price where you get in the money.
This ensures that the breakeven point of the synthetic straddle is equal to or
less than the average range it normally moves.
- Ratio in, based on deltas and desired cash
outlay.
Explained the above in computer sequence so you guys
can code it in.
b/ Use this as the core position to trade the intraday
noise against because it is not going to explode all by itself, after all, the
stock is close to the strike because the strike is being pinned so this trade is
swimming against the big player/ floor tide.
1 example from Nov expiration currently on my
sheets - this one is NOT working out so you get to learn from my mistake. 3
others are working fine, so I'll ignore them here but they're mentioned below so
you can compare.
a/ Shorted IBM stock at 99.25 yesterday (REMEMBER THE
ATR IS ASSUMED TO BE $5).
b/ Simultaneously bought 2x Nov 100 calls for
$1.50
This means:
- I need IBM to move down $3 to $96.25 to break even
(twice the amount of premium paid since I'm short half the stock as much as the
long calls represent)
- I need IBM to move up $____________ you fill in the
blank, given my position - on the upside - to break even.
Within that wide 96.25 - _______ breakeven range
I lose money no matter where IBM goes - I do know that the MAX I lose is
the $150 premium paid + the $75 per 100 shares (distance from where I'm short
(99.25) to where my calls kick in (100) ) = $225.
In other words, I have to use the knowledge that
the average intraday range (say $500) is greater than the max loss - and
trade it to make up my max loss of $225 per 100 shares.
The risk? The stock gets "pinned" = paints a narrow
range all day right around 99, as IBM has been doing - AND CONTINUES DOING THAT
FROM THE TIME THE TRADE IS PLACED TO THE TIME IT EXPIRES. Not enough "amplitude"
for me to successfully daytrade within the time available to
expiration.
Now:
If IBM goes up & down 5 points intraday, that 2.25
points is easy to recover. But if it goes up & down 1 point, then it is
difficult if not hairy for I really have no edge in gaming that the next 1 point
will be up or down if the last 1 point was down or up.
The benefits?
If I'm caught short and some buy program kicks it up 5
bucks while I'm not looking, I have a built in stop + automatic long at
__________ which ensures I'm profitable.
If it doesn't rocket up but rockets down, below 96.25
its miller time as prior bar's lows are taken out etc etc. <FONT
color=#000080>I can cover anywhere I want below 96.25, AND RIDE THE CALLS INTO
EXPIRATION FOR FREE.
So - given that I'm leaning long anyway given the extra
calls, i may choose to just take potshots on the short side.
Or - depending on how the day unfolds. play both
sides.
Hey, you never know, someone might take out IBM in a
takeover or something!
The idea is to create a "low risk" zone in a high range
stock and use that range to pay for the cost of the protection, and then ride
the moonshots in either direction.
The $225 max risk? I think of it as working capital and
make it so that a total wipeout on all such trades does not cripple my
account.
-----------
As an aside - I checked out
QQQs but there was too much premium at the 78 strike so I passed. What I did
take and worked was SUNW, EMC and AMAT where all of them moved equal to or
better than their ATRs and I could get the options "cheap" as defined
above.
------------
>I have one question
regarding these synthetic long straddles that you often recommend (buy OTM call,
sell half as much stock or futures). I'm wondering where you see an advantage as
compared to the purchase of a straddle (buy call, buy put). Let us compare,
using last night's EOD prices. QQQ was at 77 3/8.
<BLOCKQUOTE
style="PADDING-RIGHT: 0px; PADDING-LEFT: 5px; MARGIN-LEFT: 5px; BORDER-LEFT: #000000 2px solid; MARGIN-RIGHT: 0px">
Here
is Position-1 showing long 10 QQQ Dec 80 Calls, short 500
QQQ:
<IMG
Now this would be
Position-2, long 5 Dec QQQ 75 Calls and Puts each (long
straddle):
<IMG
Max risk, time decay, deltas
and gammas etc. are approximately the same for both positions - not
completely the same, because there is no fixed strike price for the
underlying, but close.
However, capital commitment
for Position-1 is $ 23,463.00 (short sale margin + option
premium), but only $ 5,190.00 (premium) for
Position-2.
Why should I go for a
position that requires four times the capital outlay?
Kind
regards,
Michael
SuesserottTo
unsubscribe from this group, send an email
to:realtraders-unsubscribe@xxxxxxxxxxx
eGroups Sponsor
<img width="468" height="60"
border="0"
alt=""
src="http://adimg.egroups.com/img/9633/0/_/152424/_/974398111/target(games)468x60.gif">
To unsubscribe from this group, send an email to:
realtraders-unsubscribe@xxxxxxxxxxx
Attachment:
Description: ""
Attachment:
Description: ""
|