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that is one of the reasons that option pricing is
so subjective. What interest rate do you use? Broker loan rate, Fed.
funds rate, 90 day CD rate or some other return on invested capital. There
are numerous variables in finding the theoretical value of an option. The
only point that I am making is that with all of these variables the only thing
that can be defined is risk.
Your answer to volatility could very well be right
for you today, I found that it wasn't during my years as a market
maker. People use Black-Sholes model for stocks and Cox-Ross for
futures and index options. A different model is used for European style
options and American style options. They have a reason for doing that. As
long as the implied volatility of the option is at, or below the volatility I
show for the underlying I am willing to risk my dollars on an option strategy
for the particular condition I am looking at. Under those conditions I
feel that delta, gamma and theta will be close to what they actually should
be. I am also willing to take on the volatility risk associated with the
position if the strategy doesn't already provide for it.
Once again it is the individual trader that makes
his/her own trading rules and lives or dies by them. Being dogmatic
in ones opinion is not right or productive so I always consider someone else's
opinion has merit and I look into it.
<BLOCKQUOTE dir=ltr
>
----- Original Message -----
<DIV
>From:
sire@xxxxxxx
To: <A title=realtraders@xxxxxxxxxxxxxxx
href="">realtraders@xxxxxxxxxxxxxxx
Sent: Monday, February 16, 2004 8:42
PM
Subject: Re: [RT] Calendar Spreads
Ira,I fail to see what time to expiration of an option
has to do with the SVof the underlying, or vice versa. The IV of an
option is a guess for the future.The SV of the underlying is a fact of the
past. What sense does it makefor a MM to use the most recent 30 day
SV for pricing an option that expires30 days in the future? What
sense does it make to use 1 yr SV to price anoption that expires a year
from now? Perhaps there is the assumption thatthe 30 day volatility
would continue for the next 30 days? I would challengethat
assumption (see below).I have pointed out in a previous post that
certain movements of the underlyingdo not show up in the SV calcs that are
being used by option pricing models.This is true whether those market
movements occur in the most recent 30 dayperiod or a 30 day period that
occured 6 months ago. It can vary considerably.There is an edge
to be gained from the correct forecasting of volatility. Many
believe that volatility can be predicted better than price action,
particularly the return to the mean of volatility. Let's assume
that the most recent 30 days shows an extreme abnormal activityin a
certain stock. One would expect then that a return to normal
volatilitywould characterize the next 30 days in the future.
Therefore it makes no senseto me that a trader, much less a MM, would use
the previous 30 days SV in forecasting the option price 30 days from
now. MMs engaging in such a practice could seriously misprice their
options. It is better in my mind to usethe 1 year SV for pricing 30
day options. It wouldn't matter if the 30 dayand the 1 year are
close together, but when the 30 day volatility is twice the1 year, I would
expect a return to the mean rather than a continued
abnormality.NealIra wrote:>You have what I said
correctly. MM usually use time to expiration as the time for
>volatility calcs. The reason is that most of them have large ratio
write >positions, unless things have changed over the years.
----- Original Message ----- From: sire@xxxxxxx To:
realtraders@xxxxxxxxxxxxxxx Sent: Monday, February 16, 2004 5:56
PMSubject: Re: [RT] Calendar SpreadsIra,Thinking about
your post on volatility leaves mesomewhat confused again.You talk
about the volatility of the underlying,but the underlying has only one
kind of volatility - statistical,so are you saying that one trader might
use the SV of the last30 days, while another would use SV of the last
year?So are we talking about traders with differing specific purposes
using different SV of the underlying to get a price for an option,
which may vary considerably from the price given to the option by
MMs?It would also help to know what period SV is being used by the
MMs.Neal ------------------------ Yahoo! Groups
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You have what I said correctly. MM usually use time to expiration
as the time for volatility calcs. The reason is that most of them have
large ratio write positions, unless things have changed over the years.
----- Original Message ----- From: sire@xxxxxxx
To: realtraders@xxxxxxxxxxxxxxx Sent: Monday, February
16, 2004 5:56 PM Subject: Re: [RT] Calendar
Spreads Ira, Thinking about your post on
volatility leaves me somewhat confused again. You talk
about the volatility of the underlying, but the underlying has only
one kind of volatility - statistical, so are you saying that one
trader might use the SV of the last 30 days, while another would use
SV of the last year? So are we talking about traders with differing
specific purposes using different SV of the underlying to get a
price for an option, which may vary considerably from the price
given to the option by MMs? It would also help to know what period
SV is being used by the MMs. Neal
Yahoo! Groups
Links
------------------------------------------------------------------------------------------------------------------------------------------------------------
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.
----- Original Message -----
From: sire@xxxxxxx To:
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 the
effect of volatility on Ray's position. I agree that
downside price action would not be good for a covered
call position. Also, an increase in volatility would
probably effect the short call 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 position diagram, that there would be profit if
the underlying was near the LEAP strike price or
above. Therefore, Ray had 2 of the 3 market
possibilities in his favor - he would be profitable if
the underlying stayed where it was or moved higher.
Another issue has to do
with the edge in options trading and the programs used
to calculate fair value. I may be wrong here, but
it is my understanding that all models used by these
programs take the current price of the underlying and
assume that future price action 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 be
given to it, if it is at all, not by the computer programs but by
the individual discretion of the MM. Is this your
understanding also? Neal
Yahoo!
Groups Links
------------------------------------------------------------------------------
------------------------------------------------------------------------------
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.
-----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 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. -----
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 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. ----- 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
----------------------------------------------------------------------------
-- 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. -----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 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. -----
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 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.
----- 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------------------------------------------------------------------------------
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.
----- Original Message -----
From: sire@xxxxxxx To:
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 the
effect of volatility on Ray's position. I agree that
downside price action would not be good for a covered
call position. Also, an increase in volatility would
probably effect the short call 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 position diagram, that there would be profit if
the underlying was near the LEAP strike price or
above. Therefore, Ray had 2 of the 3 market
possibilities in his favor - he would be profitable if
the underlying stayed where it was or moved higher.
Another issue has to do
with the edge in options trading and the programs used
to calculate fair value. I may be wrong here, but
it is my understanding that all models used by these
programs take the current price of the underlying and
assume that future price action 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 be
given to it, if it is at all, not by the computer programs but by
the individual discretion of the MM. Is this your
understanding also? Neal
Yahoo!
Groups Links
--------------------------------------------------------------------------------------------------------------------------------------------------------
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.
-----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 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. -----
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 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. ----- 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
----------------------------------------------------------------------------
-- 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. -----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 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. -----
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 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.
----- 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
You have what I said correctly. MM usually
use time to expiration as the time for volatility calcs. The reason is
that most of them have large ratio write positions, unless things have changed
over the years.
<BLOCKQUOTE dir=ltr
>
----- Original Message -----
<DIV
>From:
sire@xxxxxxx
To: <A
title=realtraders@xxxxxxxxxxxxxxx
href="">realtraders@xxxxxxxxxxxxxxx
Sent: Monday, February 16, 2004 5:56
PM
Subject: Re: [RT] Calendar
Spreads
Ira,Thinking about your post on volatility leaves
mesomewhat confused again.You talk about the volatility of the
underlying,but the underlying has only one kind of volatility -
statistical,so are you saying that one trader might use the SV of the
last30 days, while another would use SV of the last year?So are we
talking about traders with differing specific purposes using different
SV of the underlying to get a price for an option, which may vary
considerably from the price given to the option by MMs?It would also
help to know what period SV is being used by the MMs.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/
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. ----- Original
Message ----- From: sire@xxxxxxx To:
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
the effect of volatility on Ray's position. I agree that
downside price action would not be good for a covered call
position. Also, an increase in volatility would probably effect
the short call 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 position diagram, that there would be profit if the
underlying was near the LEAP strike price or above.
Therefore, Ray had 2 of the 3 market possibilities in his favor -
he would be profitable if the underlying stayed where it was or
moved higher. Another issue has to do with
the edge in options trading and the programs used to calculate
fair value. I may be wrong here, but it is my understanding
that all models used by these programs take the current price of
the underlying and assume that future price action 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 be given to it, if it is at all, not by the computer programs
but by the individual discretion of the MM. Is this your
understanding also? Neal
Yahoo! Groups
Links
------------------------------------------------------------------------------------------------------------------------------------------------------------
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.
-----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 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. ----- 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 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. ----- 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
----------------------------------------------------------------------------
-- 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. -----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 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. ----- 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 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. ----- 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
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 ------------------------
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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:
<A title=r.raffurty@xxxxxxxx
href="">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>
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