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Hello Norman,
I have to say after my attempts and disappointment in being led to
believe options may be a good way to trade, that my final conclusion
was without special computer software and knowledge of volitility ,
they are well and truely difficult instruments to trade.
Overall I do agree with your advice if buying options.
There is the well known saying selling options is a much way to
profit. But it depends on ones account size, otherwise its very risky.
They are not the easy way to trade that many percieve or led to
believe.
No doubt they can have advantages for buying if you hit moves like
October 10th.
If one can predict such cycles where big moves are likely then buying
out of money cheaper options can be a good deal. But overall we know
these moves only occur a few times a year .
Having said that if you had timed the mkt well for the oct low, dec
02 top, Jan 03 top and Mar 03 low, from these points you should have
done well trading options with the right time frame and paying for a
decent price based on how close to the money.
Spreads can be a safer bet, buying say a call, and selling one
simultaniously, OR after a decent move has occurred if say you
bought a call, then sell a further out one after the mkts moved in
your favour for a profit. Then if you can sell one to cover your
initial costs.
Then its a free trade.
But overall I dont think they are easy.
Another good stratagy is to combine with futures.
eg, if on Oct 10th example, prior to this low, you had bought a 7200
put on the dow ..when the mkt was at say 7800... 600 points out of
money at a cheap price,
If you expected 7200 may be the low and you expect the timing to be
specific, then as the mkt hit 7200, you could sell a further out of
money put against your origional 7200 put which you had bought.
So for eg, you may sell a 7000 put. Here you hopefully obtain a
premium to cover your initial cost of the 7200 put you bought, and
HOPEFULLY gain even MORE than what you paid for the 7200 put..
Then at the same time , you look to BUY a futures against the option.
This way you use the option as a type of stop loss.
If you are correct ( like on Oct 10th, you then have a relatively
safe position.
If the mkt did go lower, you can still profit from the options, ( if
you can close out the futures within the right time / price frame.
Obviously if you are right, then your options cost you nothing, and
the futures trade takes care of itself.
Or you may just have chanced buying that 7200 put when the mkt had
been 1000 pts higher for peanuts. Then as the mkt approached it, you
just bought futures at 7400 to 7200. Here you then use the option as
a stop to cover you for the time it has to expiry.
Obviously in that example, you would have to be good at timing and
finding the levels of the mkts.
Pete
--- In realtraders@xxxxxxxxxxxxxxx, "Norman Winski" <nwinski@xxxx>
wrote:
> Dom1,
>
> I hope you don't mind my jumping in. My thinking is that the
more variables there
> are, the more variables there are with which you have to compete or
beat professionals at. Options are a good example of a sophisticated
vehicle which begs for the best state of the art computer and
mathematical models. I was a market maker on the CBOE for 12 years.
I know enough to know that it is very difficult to compete with the
floor professional in options, which is why I now seldom trade
options in favor of the more simplistic futures contracts. Futures
represent mostly a binary decision, will it go up or down, to buy or
to sell, whereas options represent a plethora of variables and
required decisions. The greater the number of variables, the greater
the chance that I will make a bad decision or judgement. So, unless
you have a staff of people to run the computers, do the research,
and the latest option theoretical math model, you are probably gonna
get your butt kicked. It is hard enough to make money in the market
via getting the underlying market right without having to worry about
illiquid options causing wide bid - asks, implied volatility, the
history of option valuation, deltas, thetas and the rest of the Greek
alphabet. Bottomline, I am a strong believer in KEEP IT SIMPLE and
options don't fit my KEEP IT SIMPLE model. That's my two cents.
>
> Regards,
>
> Norman
>
> ----- Original Message -----
> From: dom1_1998
> To: realtraders@xxxxxxxxxxxxxxx
> Sent: Thursday, June 12, 2003 11:42 AM
> Subject: Re: [RT] Minimum price increment
>
>
> On one hand I agree about calculating option prices via the BS
method.
> On the other hand I wonder how much of a difference does it
really make.
>
> The MM decides the B/A prices so they're going to be what they are
> regardless of what the BS model says. Like you said, over price
for
> you, under price for me.
>
> To avoid this guessing game, I wonder if the best method is
buy/sell
> deltas of one to mesh with the underlying.
>
> What do you think?
>
> Dominick
>
>
>
>
>
>
>
>
>
> --- In realtraders@xxxxxxxxxxxxxxx, "Ira" <mr.ira@xxxx> wrote:
> > I hope that your system includes the theoretical price of the
> options and a realistic way of acquiring the numbers to be used
in the
> variables in option pricing. Based upon your reply you are basing
> your bid/offer upon someone else's information, bid/offer. The
> greatest risk outside of price movement in trading options is
> volatility risk. So you had better have a handle on finding the
> volatility of the underlying and being able to compare it with the
> implied volatility of the options. To know whether the bids and
> offers are over or under valued is imperative in trading options.
One
> thing to remember is that your overvalued options might be my
under
> valued option. It is all in the numbers used in the option
pricing
> variables. Good luck in your search. Ira.
> > ----- Original Message -----
> > From: Brendan B. Boerner
> > To: realtraders@xxxxxxxxxxxxxxx
> > Sent: Thursday, June 12, 2003 7:27 AM
> > Subject: RE: [RT] Minimum price increment
> >
> >
> > Ira, thanks for the explanation.
> >
> > I'm asking because I'm developing a system to remain on the
inside
> bid / offer. I want to ensure that if I raise / lower the bid /
offer
> that I do so in such a way the honors the minm price increment
rules.
> >
> > Regards,
> > Brendan
> > -----Original Message-----
> > From: Ira [mailto:mr.ira@x...]
> > Sent: Thursday, June 12, 2003 9:10 AM
> > To: realtraders@xxxxxxxxxxxxxxx
> > Subject: Re: [RT] Minimum price increment
> >
> >
> > The minimum bid is for market makers standing in the crowd
and
> has nothing to do with you, other then the increments of bid and
> offer. There is also a maximum spread between bid and offer that
can
> be made in the crowd. If the bid is $3 then the minimum offer in
the
> crowd, by a market maker is $3 and $3.10. That doesn't stop you
from
> putting in an offer or bid at $3.00 or $3.10. If you put in your
offer
> at $3.10 you are competing with market makers and floor brokers
that
> are holding offers. It used to be, that if you tell your broker
that
> you want your offer in the book, that book orders were filled
before
> floor orders and they were filled in the order booked. What if
the
> bid/offer in the crowd was $3.00 at $3.50? You can put a bid or
offer
> anywhere in the middle in $.10 increments. Whether you would get
> filled or not is another matter, but if your offer was at $3.30 it
> could read $3.00 at $3.30 or a market maker could rest upon your
offer
> and offer at $3.20 knowing that your offer was there if the price
of
> the underlying starts to rise. When you cancel your offer the
market
> might very well go back to $3.00 at $3.50. Your offer was the
market
> makers stop loss.
> >
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