Sunday, November 15, 2009

Options Expiry Week

Thursday and Friday left us with a Nuetral position in term of bullish and bearish charts.  This is very interesting going into Opex week.   It means there could be some major fireworks in the early part of the week.  

Just a reminder, for those climbing the wall of worry, or those waiting for an impending crash, Expiry week shows the big fireworks in the first 3 days, and of that, mostly Monday and Tuesday. 

The pros are already positioned by Wednesday.   The retail is still holding those out of the money puts and calls, and "hoping" for a big move at the end of the week.   They have already lost enough money that this last minute "hail Mary" approach seems the only "logical approach".  It is a losing approach.  That is why it is nice to be an option seller, however, you need a real strategy or you expose your account to unlimited risk (Bad---all bad).

I looked at selling calls and puts against positions that I held in UNG (1000 long), UUP (1000 long), and ROST (1000 short).   This is what is called Covered Calls (CC), or the opposite is Protective Puts (PP).   It is a decent way to make money on options premiums.  It requires alot of capital though, holding all those stock positions sure eats up your buying power. 

However, if you are in positions that you believe in medium term, why not earn some extra money buy selling options.

Other bloggers would prefer to sell Butterflys, Credit Spreads, Calendar Spreads, and the Infamous Iron Condor among others.   They state that these can accomplish the same purposes as CC or PP, but with alot less capital.  In almost all cases, the risk is limited (as opposed to unlimited), and so is the reward. 

The complex options can also be modified as the trade progresses to lock in a certain amount of profit, or to further limit the potential losses.  These are not rocket science, but it involves a different way of thinking.   There are some excellent written and graphical guides written by Fujisan who now writes on the Slope of Hope pretty often.   I copy this and print them in color, damn the toner costs, it is worth it.

Another blogger, who recently started her own blog is Anna.  She presents many example of "live" options trades, usually complex.  She like to trade through earnings reports.  She is very helpful too, with specific examples for current events, and she will usually answer questions.
All joking aside, there is something these ladies have, call it female intuition, or just being damn good options traders, but their track records are really good.      

Another point--regardless of how complex you make your options position, if you are not right on direction you will lose money.  Let me clarify that a little, and expand the definition of "direction" to include time.
If you are a seller, you can benefit from Theta Burn (time value of options).  In this case, you could actually be wrong on direction of the stock price, and still overall make money on the Theta Burn.  But you cannot magically manipulate a bad trade going against you by adding some complexity to your trade---it doesn't work like that, there is no free lunch.   You can adjust a losing trade, but there is no silver bullet to turn a bad trade into a good one.

Finally, there is Vega, volatility.  VIX is a measure of overall market volatility.  This can quickly affect option pricing.  Every stock has its own Vega.  If you have bought puts, for example, and there is a big move down...the Vega will increase and the value of your puts will increase far more rapidly than just the amount attributable to the stock price move itself.   So that is good if you own puts, but bad if you have sold puts, since it will cost you alot more to buy them back and get out a trade going against you.

The links above are a permanent part of the links on my blog which is here.  The best way, for me at least, to learn the complex trades is to grab an idea from someone else, review it, analyze the profit and loss and risk profiles using TOS, do a quick check on my Options Workbook book, and then place some small trades.

There are a ton of great blogs out there.  These are awesome tools that were just not available even a decade ago.  I have more links on my blog, and lack of mention here is certainly no attempt to slight the many great blogs out there, just mentioning a few of my favorites.

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