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Here is something to think about. Volatility
varies with the option expiration that you chose. If I am using an option
for a position that should move in 10 days that would be one volatility of the
underlying, If I used the September expiration, that would produce another
volatility for the underlying. The leap would have a still different
volatility. So there are many ways to price options and it depends upon
what you wish to use the options for how you would determine their value.
Most market makers price options with a volatility using the expiration data as
the time. So as time erodes, volatility changes. So fair value to me
may be drastically over or under valued to you. So in effect you can
weight or effect volatility by changing the number of days used.
When they first started printing up sheets of theoretical values in the
early 70s they used a one year volatility for the underlying. Things
changed as time passed and traders became more astute.
<BLOCKQUOTE dir=ltr
>
----- Original Message -----
<DIV
>From:
sire@xxxxxxx
To: <A title=realtraders@xxxxxxxxxxxxxxx
href="">realtraders@xxxxxxxxxxxxxxx
Sent: Monday, February 16, 2004 12:00
PM
Subject: RE: [RT] Calendar Spreads
Mark,I do not know what point of Ira's you are referring
to.It doesn't appear to me that he says anything about theeffect of
volatility on Ray's position. I agree that downsideprice action
would not be good for a covered call position.Also, an increase in
volatility would probably effect the shortcall postion greater than the
LEAP, so you may be right there also.Ira,Thank you for your
clarification, which helped greatly.I asked questions because it seemed to
me, in Ray's #2 positiondiagram, that there would be profit if the
underlying was near the LEAP strike price or above. Therefore, Ray
had 2 of the3 market possibilities in his favor - he would be
profitableif the underlying stayed where it was or moved higher.
Another issue has to do with the edge in options trading
andthe programs used to calculate fair value. I may be wrong
here,but it is my understanding that all models used by these
programstake the current price of the underlying and assume that future
priceaction from that point will be purely random, given the current
volatility.In other words there is no weight given to the "trendiness" of
a market and the effect that may have on future price action.
Whatever affect market trend or fundamentals may have on future option
prices must begiven to it, if it is at all, not by the computer programs
but by theindividual discretion of the MM. Is this your
understanding
also?Neal ------------------------ Yahoo!
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Ira brings-up a good point regarding VOLATILITY and it's effects on
Ray's"not quite a covered call" strategy......if I were Ray, I would
re-run the position P&L with a couple ofscenarios......double the
volatility and take the price of the underlyingdown 10% and the
combination.I think Ray's strats are good except under conditions of
increasingvolatility.....and typically volatility is accompanied by
downside priceaction....I would like to see Ray run similar P&L's
using leap PUTS instead of CALLS,and of course selling a near-the-money
PUT as the cash-producer. -----Original Message----- From:
mr.ira@xxxxxxxxxxxxx [mailto:mr.ira@xxxxxxxxxxxxx] Sent: Monday,
February 16, 2004 10:26 AM To: realtraders@xxxxxxxxxxxxxxx
Subject: Re: [RT] Calendar Spreads I am sorry that you
misunderstood what I wrote or that I wrote it poorly.His position has only
one way to be profitable that is with a stagnantprice. I stated that it is
used as an interest bearing instrument because itappears that he is using
the LEAP as a surrogate for the underlying andselling premium against it
to earn from time decay. Straddles are not my cup of tea
either. I don't like options on bothsides of a position being
a wasting asset. I will use calls or puts andtrade the underlying
against the position. I will ratio back spreadpositions. I
will trade in and out of butterflies and condors. I will useconversions
and reversals to park profits until there is a signal for aprice
move. There are literally hundreds of strategies that are usable
withoptions if you trade them instead of putting on a position that needs
timeto be profitable. Volatility and price are the two biggest
factors in anoptions value. As for an edge, there is very
little edge left in options trading otherthen understanding what you are
doing and having a plan to do it. With allthe computer programs that
give theoretical values for the various Greeks,the overvalued undervalued
buys and sells are very limited. If you have asystem for the
underlying that is successful then you have the basis forprice action and
then options trading. You also will need a program thatwill let you
know what the option value should be. There are ways oftrading
overvalued situations without abandoning the directionalcharacteristic of
options. Hope that this clears things up a little.
Ira. ----- Original Message -----
From: sire@xxxxxxx To:
realtraders@xxxxxxxxxxxxxxx Sent: Monday, February 16,
2004 12:55 AM Subject: Re: [RT] Calendar
Spreads Ira, I guess
you were talking very loosely when you called options
"an interest bearing instrument"? That aside, I was
confused by your post in regards to what your opinion is
of Ray's strategy and how your strategies differ from
his. You say that your use of options is different
from Ray's, since you like to have 2 of the 3 possible
market actions to be in your favor. But then you
admit that Ray's position has 2 of the 3 things in its
favor. I guess that Ray's 2 things are different
from your 2 things. Is that what the difference
is? It seems your favorite strategy is straddles or
something similar. Is this just your preference or are
there some statistics that you are relying on for your
edge?
Neal Yahoo! Groups
Links--------------------------------------------------------------------------------------------------------------------------------------------------------
Ray: Our basic philosophy for the use of options is
different. As shown byyour graph the greatest spread does occur at
the strike. You also look atyour position basis expiration. I
consider options a trading vehicle. Iuse them as a hedge, as a
profit source and not as an interest bearinginstrument. In order to
avoid a loss you will be forced to do somethingwith the short options if
price moves up or down through your zero
profitareas. Options are a directional tool and
that is the way I use them. Thereare three things that can happen to
a stock or future. They can go up inprice, they can go down in price
or price can stay the same. In thisinstance 2 of these are bad for
any long option position and perfect foryour position which is dependant
upon time decay and price stagnation. Iwould rather have 2 in
my favor. I like it when I can make money if theunderlying goes up
or if the underlying goes down. I do undergo a problemif price stays
the same. Two out of three isn't bad though.
May your spread well for you, Ira.
----- Original Message ----- From: Raymond
Raffurty To:
realtraders@xxxxxxxxxxxxxxx Sent: Thursday,
February 12, 2004 11:09 AM Subject: RE: [RT]
Calendar Spreads Hi
Ira, I agree with everything you said,
however I believe that using optionswith different strikes produces better
results. In chart F1 buying 10 F JAN2006 15 Calls (WFOAC) and
selling 10 F SEP 2004 15 Call (FIC). produces anear vertical chart.
In other words, as you pointed out, the profitabilityrange is very
narrow. The same is true using the 12.50 strikes shown in F3.But
buying 10 F JAN 2006 12.5 Calls (WFOAV) and selling 10 F SEP 2004 15Calls
(FIC) the profile produces a profile with a "wider"
profitabilityrange. The trade off is that the total risk is double
(there is always atrade off with options) but losses can usually be
managed. As the man said you pays your
money and you take your chances. Good
luck and good trading, Ray
Raffurty----------------------------------------------------------------------------
Ray: Our basic philosophy for the use of options is
different. As shown byyour graph the greatest spread does occur at
the strike. You also look atyour position basis expiration. I
consider options a trading vehicle. Iuse them as a hedge, as a
profit source and not as an interest bearinginstrument. In order to
avoid a loss you will be forced to do somethingwith the short options if
price moves up or down through your zero
profitareas. Options are a directional tool and
that is the way I use them. Thereare three things that can happen to
a stock or future. They can go up inprice, they can go down in price
or price can stay the same. In thisinstance 2 of these are bad for
any long option position and perfect foryour position which is dependant
upon time decay and price stagnation. Iwould rather have 2 in
my favor. I like it when I can make money if theunderlying goes up
or if the underlying goes down. I do undergo a problemif price stays
the same. Two out of three isn't bad though.
May your spread well for you, Ira.
----- Original Message ----- From: Raymond
Raffurty To:
realtraders@xxxxxxxxxxxxxxx Sent: Thursday,
February 12, 2004 11:09 AM Subject: RE: [RT]
Calendar Spreads Hi
Ira, I agree with everything you said,
however I believe that using optionswith different strikes produces better
results. In chart F1 buying 10 F JAN2006 15 Calls (WFOAC) and
selling 10 F SEP 2004 15 Call (FIC). produces anear vertical chart.
In other words, as you pointed out, the profitabilityrange is very
narrow. The same is true using the 12.50 strikes shown in F3.But
buying 10 F JAN 2006 12.5 Calls (WFOAV) and selling 10 F SEP 2004 15Calls
(FIC) the profile produces a profile with a "wider"
profitabilityrange. The trade off is that the total risk is double
(there is always atrade off with options) but losses can usually be
managed. As the man said you pays your
money and you take your chances. Good
luck and good trading, Ray
Raffurty------------------------------------------------------------------------------
Yahoo! Groups Links a.. To visit your group on the
web, go to:
http://groups.yahoo.com/group/realtraders/ b.. To
unsubscribe from this group, send an email to:
realtraders-unsubscribe@xxxxxxxxxxxxxxx c.. Your use
of Yahoo! Groups is subject to the Yahoo! Terms of Service.
Ira brings-up a
good point regarding VOLATILITY and it's effects on Ray's "not quite a covered
call" strategy......
if I were Ray,
I would re-run the position P&L with a couple of scenarios......double the
volatility and take the price of the underlying down 10% and the
combination.
I think Ray's
strats are good except under conditions of increasing volatility.....and
typically volatility is accompanied by downside price
action....
I would like to
see Ray run similar P&L's using leap PUTS instead of CALLS, and of course
selling a near-the-money PUT as the cash-producer.
<BLOCKQUOTE
>
<FONT face=Tahoma
size=2>-----Original Message-----From: mr.ira@xxxxxxxxxxxxx
[mailto:mr.ira@xxxxxxxxxxxxx]Sent: Monday, February 16, 2004
10:26 AMTo: realtraders@xxxxxxxxxxxxxxxSubject: Re:
[RT] Calendar Spreads
I am sorry that you misunderstood what I wrote
or that I wrote it poorly. His position has only one way to be
profitable that is with a stagnant price. I stated that it is used as
an interest bearing instrument because it appears that he is using the LEAP
as a surrogate for the underlying and selling premium against it to earn
from time decay.
Straddles are not my cup of tea
either. I don't like options on both sides of a position being a
wasting asset. I will use calls or puts and trade the underlying
against the position. I will ratio back spread positions. I will
trade in and out of butterflies and condors. I will use conversions and
reversals to park profits until there is a signal for a price move.
There are literally hundreds of strategies that are usable with options if
you trade them instead of putting on a position that needs time to be
profitable. Volatility and price are the two biggest factors in an
options value.
As for an edge, there is very little edge left
in options trading other then understanding what you are doing and having a
plan to do it. With all the computer programs that give theoretical
values for the various Greeks, the overvalued undervalued buys and sells are
very limited. If you have a system for the underlying that is
successful then you have the basis for price action and then options
trading. You also will need a program that will let you know what the
option value should be. There are ways of trading overvalued
situations without abandoning the directional characteristic of
options.
Hope that this clears things up a little.
Ira.
<BLOCKQUOTE dir=ltr
>
----- Original Message -----
<DIV
>From:
sire@xxxxxxx
To: <A
title=realtraders@xxxxxxxxxxxxxxx
href="">realtraders@xxxxxxxxxxxxxxx
Sent: Monday, February 16, 2004 12:55
AM
Subject: Re: [RT] Calendar
Spreads
Ira,I guess you were talking very loosely when you
calledoptions "an interest bearing instrument"?That aside, I
was confused by your post in regards to what youropinion is of Ray's
strategy and how your strategies differ from his. You say
that your use of options is different from Ray's,since you like to
have 2 of the 3 possible market actionsto be in your favor. But
then you admit that Ray's positionhas 2 of the 3 things in its
favor. I guess that Ray's 2 thingsare different from your 2
things. Is that what the difference is?It seems your
favorite strategy is straddles or something similar.Is this just your
preference or are there some statistics thatyou are relying on for
your
edge?Neal Yahoo!
Groups Links<*> To visit your group on the web, go
to:
http://groups.yahoo.com/group/realtraders/<*> To unsubscribe
from this group, send an email to:
realtraders-unsubscribe@xxxxxxxxxxxxxxx<*> Your use of
Yahoo! Groups is subject to:
http://docs.yahoo.com/info/terms/
Ray:Our basic philosophy for the use of options is
different. As shown by your graph the greatest spread does occur at
the strike. You also look at your position basis expiration. I
consider options a trading vehicle. I use them as a hedge, as a
profit source and not as an interest bearing instrument. In order to
avoid a loss you will be forced to do something with the short options if
price moves up or down through your zero profit areas.
Options are a directional tool and that is the way I use
them. There are three things that can happen to a stock or
future. They can go up in price, they can go down in price or price
can stay the same. In this instance 2 of these are bad for any long
option position and perfect for your position which is dependant upon time
decay and price stagnation. I would rather have 2 in my
favor. I like it when I can make money if the underlying goes up or
if the underlying goes down. I do undergo a problem if price stays
the same. Two out of three isn't bad though. May your
spread well for you, Ira. ----- Original Message
----- From: Raymond Raffurty To:
realtraders@xxxxxxxxxxxxxxx Sent: Thursday, February 12, 2004
11:09 AM Subject: RE: [RT] Calendar Spreads Hi
Ira, I agree with everything you said, however I believe
that using options with different strikes produces better results.
In chart F1 buying 10 F JAN 2006 15 Calls (WFOAC) and selling 10 F SEP
2004 15 Call (FIC). produces a near vertical chart. In other words,
as you pointed out, the profitability range is very narrow. The same
is true using the 12.50 strikes shown in F3. But buying 10 F JAN
2006 12.5 Calls (WFOAV) and selling 10 F SEP 2004 15 Calls (FIC) the
profile produces a profile with a "wider" profitability range.
The trade off is that the total risk is double (there is always a trade
off with options) but losses can usually be managed. As the
man said you pays your money and you take your chances. Good
luck and good trading, Ray Raffurty
Ray:
Our basic philosophy for the use of options
is different. As shown by your graph the greatest spread does
occur at the strike. You also look at your position basis
expiration. I consider options a trading vehicle. I use them
as a hedge, as a profit source and not as an interest bearing
instrument. In order to avoid a loss you will be forced to do
something with the short options if price moves up or down through your
zero profit areas.
Options are a directional tool and that is
the way I use them. There are three things that can happen to a
stock or future. They can go up in price, they can go down in
price or price can stay the same. In this instance 2 of
these are bad for any long option position and perfect for your
position which is dependant upon time decay and price
stagnation. I would rather have 2 in my favor. I like it
when I can make money if the underlying goes up or if the underlying goes
down. I do undergo a problem if price stays the same. Two out
of three isn't bad though.
May your spread well for you,
Ira.
<BLOCKQUOTE
>
----- Original Message -----
<DIV
>From:
Raymond
Raffurty
To: <A
title=realtraders@xxxxxxxxxxxxxxx
href="">realtraders@xxxxxxxxxxxxxxx
Sent: Thursday, February 12, 2004
11:09 AM
Subject: RE: [RT] Calendar
Spreads
Hi
Ira,
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>I agree with everything you said, however I
believe that using options with different strikes produces better
results. In chart F1 buying <FONT
face="Times New Roman" size=3>10 F JAN 2006 15 Calls
(WFOAC) and selling 10 F SEP 2004 15 Call (FIC<FONT
color=#000000>). produces a near vertical chart. In other words,
as you pointed out, the profitability range is very narrow.
The same is true using the 12.50 strikes shown in F3. But
buying 10 F JAN 2006 12.5 Calls (WFOAV) and selling 10 F SEP 2004
15 Calls (FIC) the profile produces a profile
with a "wider" profitability range. The trade off is that the
total risk is double (there is always a trade off with options) but
losses can usually be managed.
As the man
said you pays your money and you take your chances.
<FONT face=Arial
size=2>
Good luck
and good trading,
<FONT face=Arial
size=2>
Ray
Raffurty
<FONT face=Arial
size=2>
<FONT face=Arial color=#0000ff
size=2>
Yahoo! Groups Links
To visit your group on the web, go to:http://groups.yahoo.com/group/realtraders/
To unsubscribe from this group, send an email to:realtraders-unsubscribe@xxxxxxxxxxxxxxx
Your use of Yahoo! Groups is subject to the Yahoo! Terms of Service.
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