Options 02 (Oct 09 - Dec 24)

[kennynah]

Theta

[kennynah]

let's press on with our discussion on Options trading...

safe to assume that for many of us, Options trading is about Calls and Puts, buying or selling them. if we expect the underlying to rise, we become buyers of Calls and should we anticipate a fall in price, we buy Puts or the savvier ones may consider selling Calls as the alternative. an even more pronounced approach, some of us sell Covered Calls on our Long stocks to generate income. however, in these approaches, we are merely scraping the surface of Options trading.

as i embark on this journey of trading options, and with more experimentations and awareness, i dawned on me and to many predecessors before me, that Options trading contains a whole lot more than just profiting from underlyings' price movements or stagnation.

by now, those who have a vivid interest in Options trading will have understood the basic concepts of Bullish, Bearish or Neutral Options Strategies. for example, a Long Call is the simplest Bullish play, a Long Vertical Put Spread is a slightly more complex limited risks and limited profits Bearish play, a Short Iron Condor is a market neutral play etc...beyond citing these examples, i wont repeat the details here for they have been discussed somewhere within this thread.

the truest form of trading options is, in reality, trading of its GREEKS...ie. trading the Delta, Gamma, Theta and Vega.

going forward, i hope to give focus on discussing specifically on trading Options GREEKS

QUIZ Time

Would anyone care to start this discussion on trading Options GREEKS by suggesting one setup, focusing on any one of the GREEKS? you have a choice to state either Delta, Gamma, Theta or Vega play.

this is getting progressively complicated and so, the prize should commensurate and thus is an all expenses paid trip to Rio De Janeiro (girly company expenses during the trip is excluded )

..

[kennynah]

ok ok...i was too hopeful that we can proceed so quickly ... in truth, option trading can be complicated... it has always been complex for me.... which is also the reason that it interests me... i think we all get bored easily if our endeavours are simple...

so, let's keep this above topic in the back burner first (i've called the travel agency and they have agreed to postpone the Rio De Janeiro trip package).... we shall return to it some time in future...

*******************

for now...maybe we should continue to speak about GREEKS...explore them, tear them apart, dissect them into simpler parts, chew on them, and then perhaps, we have a better appreciation of what these monsters are...and realize they are really not as beastly as they are made out to be....

let's try to be friends with GREEKS....once again...

*****************

in the next post....we do Vega.... how about that?

[teachme]

I have been reading this thread, your blogspot and interview. I seldom make postings to forums as my wife always complain I am spending too much time on the computer and not enough time on the family. But I guess I have to post something to express my thanks to you for your contributions that helped me understand options. The first time I started reading about options, my mind kept wondering off about being naked or being covered. Hmm ... besides being exotic, options can be erotic too. Haha.
I don't understand what you wrote about the more complicated options strategies, but the fault lies with me. I do understand simple long or short option strategies and the Greeks are not so Greek to me anymore. Thanks to you!!
I have always been sceptical about options. The reason I have not tried options is that I am still dissatisfied with my performance with equities, so how can I touch options? If equities are for ordinary graduates, then options are for PHDs.
I think it is easier with equities. In options, one has to care about timing (because of the expiration date), volatility as well as the underlying asset. Even then, the correlation between the underlying asset and the option is not perfect (that's Delta, right? Thank you). In equities, one only has to care about the underlying asset. So much easier.
I do respect people who can make a success out of options because it is much more challenging. May I ask you what characteristics about options that attract you so much to them? Or is it because you are one person who loves a challenge because it is more satisfying?
Some forummers may be wondering, given my scepticism, why spend the time to read Kenny's thread? I see the attraction of buying put options to play the downside due to the non-finite risk as opposed to naked short-selling.
Having you ever dabbled in the put warrants on the Singapore market? I wanted to buy some of them but due to the awareness of my own ignorance, I have not done so. Are there any pitfalls that I should look out for in the local put warrants?

[winston]

Having you ever dabbled in the put warrants on the Singapore market? I wanted to buy some of them but due to the awareness of my own ignorance, I have not done so. Are there any pitfalls that I should look out for in the local put warrants?

Please see the "Warrants" thread in the "Other Investments" section.

[kennynah]

... The first time I started reading about options, my mind kept wondering off about being naked or being covered. Hmm ... besides being exotic, options can be erotic too. Haha.....

wahahaha.....funny....good one man....

I think it is easier with equities. In options, one has to care about timing (because of the expiration date), volatility as well as the underlying asset.... In equities, one only has to care about the underlying asset. So much easier.

i concur with your observation above..

May I ask you what characteristics about options that attract you so much to them?

in option trading, one can structure a risk/reward profile that is suitable for the individual.. in addition, there is no other instrument that can profit from a stagnant market, where price is very ranged bound..

I see the attraction of buying put options to play the downside due to the non-finite risk as opposed to naked short-selling.

Long Put to speculate that the market will weaken is one usefulness of option trading... however, you must understand GREEKS much better before embarking on option trading... eg, supposing ABC is trading $10, which Long Put would you choose:

a) $12 strike (ITM)
b) $10 strike (ATM)
c) $8 strike (OTM)

which expiration month would you choose :

a) one month to expiration
b) 2-3 months to expiration
c) 4-6 months to expiration

do you establish position when Volatility is high or lower than historical volatility?

so, there are many questions to be answered and the reasons of choosing one over another must be clearly understood...

I wanted to buy some of them but due to the awareness of my own ignorance, I have not done so. Are there any pitfalls that I should look out for in the local put warrants?

i think you have made a very wise decision ... I have nothing very much that is good to say about local Put warrants... and Winston is right that you can extract lots of information from the relevant Warrant Thread...



If you are very keen on option trading, please read as much as you can lay your hands on...many people have said that it takes anything from 1-5 years for someone to be very good at option trading.... so, it requires perseverance

[teachme]

Hi teacher,
Here are the answers from your student teachme.

supposing ABC is trading $10, which Long Put would you choose:

a) $12 strike (ITM)
b) $10 strike (ATM)
c) $8 strike (OTM)

I would buy (a).

which expiration month would you choose :

a) one month to expiration
b) 2-3 months to expiration
c) 4-6 months to expiration

I would buy (a).

The goal of buying the put warrants is to short the underlying asset. One does not want to be right on the underlying but wrong on the options. The above 2 choices were made to maximize Delta and minimize the effects from Theta and Gamma.

do you establish position when Volatility is high or lower than historical volatility?

Buy when volatility is low, sell when volatility is high. Take advantage of Vega.

So, teacher, how did I do? If I did well, thanks to you!! If I did poorly, shame on me

[kennynah]

i am no teacher my friend.... i am just as much a student...seriously...

as to the answers... wah.... champion lah.... you are more than acquainted with your GREEKS.... we must have more exchanges on this thread....

in my mind, it is slightly more advantages to be Long a further out expiration month, mainly for one obvious reason, Theta.... theta decay is slower in further out options than nearer month ones...also to give more time for the position to play out...but you are absolutely right that with further out month option, the Delta is smaller as well for ITM/OTM options (ATM delta will always be around 0.5 whichever month expiration), since a favourable move in underlying will derive a smaller gain for those OTM/ATM option value...which is thus not too advantageous for a Long player... so, there are trade offs between GREEKS...

one clear trade off that will always exist, is between Gamma and Theta...they will always be in opposite polarity no matter what...in this sense, it appears to be better off being Short a Call than to Short a Put...reason is, both are +ve Theta and since Gamma will have to be -ve... do you agree ?

[iam802]

If equities are for ordinary graduates, then options are for PHDs.

I have to disagree with the above statement.

Like you, I am no expert and is still learning and working on my consistency.

But, to say options is for PhD, then, in a way we are giving ourselves excuses.

If you start thinking of options as a way to reduce your risk, then ...the next question will be, "Won't you want it to be part of your system now rather than later?"

Just a thought.

[kennynah]

i concur with the above ... just about anyone with some education in statistics and a common flair for mathematics can learn and employ option as a trading/investment vehicle...