Henngiss & Taxman; Tax you took the words right out of my mouth. What to heck does all that mean? An interesting thing is to look at the same info a week from now and then decide if it told you anything of value. Monday if aapl moves 7 points, none of it is correct, if the move is up or down. Those Greeks and delta's only relate to what has happened. Oh-Oh Greece, just defaulted on it debt.. what now? Absolutely none of that helped and possibly misled you. (just an example) Many traders love to use them and I might be missing a boat?
But like you Tax. I trade three of four times at least every day for 15 years and not once has it helped or was correct. This stuff is a bidding auction. Greeks-theta, beta, Tom Cruise, Tom Selleck. etc --is it a good stock? If so it will go up and the option will make money. If junk and bad news it will go down. For me I always think of large mutual funds and the like. If it helped them a bit they would make money all the time> It is mumbo Jumbo that looks backwards..
But Dave i do like the 575's for aapl next week.
Nicky, you are a thrill seeker...lol good luck
46 comments:
Have a 410 appl jan 2013 put, should I continue to roll up? Been rolling up 10-20 as apple goes up. Trying to play SAFE
Hi luvtpa, I would be very confortable with that play. I would adjust when to roll up by the current news. Meetings such as the coming one on the 7th means that you should sit on it until the stock shows how it is going to react. But staying 130 pts behind the stock should be money in the bank. If someone opened that play right now it will be 30% roi without even rolling up. That is not a bad ROI for 10 months.
Good luck and keep us posted when you roll-up or down. Another advantage is that if held until expiration in 2013, Taxes aren't due until april of 2014
Thanks Jerry,
I like you, you keep me grounded. Thanks for the wise words.
There are people crazier than me. I was reading an article about shorting AAPL. One suggestion was to use AVSPY which apparently tracks the difference between the rate of change of AAPL versus that of SPY. Why not just buy an AAPL put if you think it might drop? This would keep your risk low if AAPL continues to climb. I wouldn't short AAPL though.
What I am thinking about right now is this:
1. If four days of time decay do occur on Thursday and Friday, why not consider selling a put on Thursday morning and closing it on Friday afternoon? If you really do get that kind of time decay, it sounds like a good move. I've never tried this though, but I might look into it on paper for next week.
2. I guess I only had one point here.
Dave
Thanks Jerry, bought your book 10/11,have followed your 20% rule on monthlies with huge success, have yet to play in weeklies.
Hi Dave, I know many that do just that...buy a put on Thursday morn and let it expire on Friday. A Pretty safe play and you can get a 1/2 % a week pretty easy with little stress. If you open them on Tuesday you have an advantage of being to roll for a little more profit but???
For all you newer traders out there, the one thing that is constant is that greed will end in disaster. By greed I mean pushing the envelope of a strike that is to close. If you see that you are getting a high ROI then you are probably pushing the envelope. You can earn 4% a week and then one bad play and you can lose 50% and be set back months when a safer strike place would have made money. Options use leverage and it can be in your favor or the houses.. play safe and stay in the game.
Thanks Jerry,
I have to agree with you. Also, when I make risky trades, I feel so nervous I think I might jump out of my skin. It just isn't worth it, just play it safe and manage risk. There is plenty of profit to be earned without going nuts.
I don't have the ability to create anything new, but what I am thinking about is what happens when you open a position on a weekly when it first comes out. That is on Thursday sometime, do they come out in the morning I'm not sure? If so, I am proposing researching opening a short position on Thursday morning and closing it on Friday. In other words, I would close the position when the option still has a week until expiration. IF I am right, then you would get close to four days of decay while only holding the position for two days. What a deal! I don't know if this is possible, but it intrigues me. Look at what happened to my Mar 9 call. It went from 1.82 to 1.31 in just 24 hours, while the price of AAPL went up by 2.00. It is possible that the IV went down, but I suspect that is not the case. I think the time decay accelerated, just like the article Damo posted suggested. I was looking at the option price equation and volatility and time value are the only fuzzy inputs. If you can tie down volatility somehow, then you can track how the time value changes. This may be worthless information, but it has my interest at the moment. In the meantime, I will stick to the bread and butter of selling safe puts and calls. You have helped me immensely Jerry.
Thank you,
Dave
Dave; thanks for the nice words.
Regarding when new options come on line it is Thursday morn for stocks that offer weekly options.
If i were you I wouldn't get bogged down trying to figure Delta, time decay or IV etc. The purpose of spreads is to capture time decay and knowing how it works is important. However you can't set up a trade thinking it will do such and such. It (the option)will follow what the stock does. There is no script! If you think you will get an eccelerated decay on Thursday and Friday, yes if the stock stays at the same price.
But assuming you have a put option and the stock drops 5 points on Friday morning, your option will go up in price. That premium does not care what you read on any web page regarding the normal decay etc. It will do what it wants to, period. For me I liken all this Greek stuff to someone that drives a car. Do you need to know the power band at such and such an RPM or the internal workings of the rear differential compared to the trans-axel multiplied by the tire size? Sure a lot of knowledge is there but do you consider all that when you get in and start the car and head to the nearest Apple store to buy the new I-pad?
All the newbies read all this regarding all the different formulas and variables and it turns off many would be traders.
As I have said in the book and on the blog many times- KISS method.
Good stocks with an upward trend.
No special news coming -earn's etc
A decent O-I
Decent premiums
No real negative analyst reports
--pull the trigger---
It is that easy.
Jerry
Point well taken Jerry, well taken indeed.
Dave
Dave, interesting idea, I've not looked into it but whenever I've looked at weeklies on their first day (Thursdays) there is no open interest and the bid ask spread is very wide. Keep us updated on your results if you paper trade it.
Damo
Damo,
Good point, I've noticed that about the spread on Thursday as well. I plan to check it out though, and just see what happens. My call this morning sure seemed to act like any other day, dropping ten cents or so right out of the gate, like any other typical overnight I think.
Dave
With AAPL dropping, I'm tempted to sell a put spread, or maybe roll my call down. I probably should just be happy that my short call is very safe now and not overtrade. As far as selling a put spread, I already have plenty of downside exposure in my long leap. Also, as Jerry pointed out, we have the Ipod event on Wednesday. Yeah I convinced myself, I'll sit tight.
I see what you mean Jerry, about the greeks being about history (I think that is what you said). Right now I could roll my call to 560 and bring in $0.87 net. The delta on the 560 is about 3, which a rule of thumb says it has about 3% chance of ending ITM. But 560 is only 30 points above the current price, and only 15 points above the open today. That seems to be more than 3% attainable the way AAPL has been going. But I don't know where AAPL is headed this week.
Dave
Dave
That is why you stay put on AAPL.
I wondered ALL day why AAPL dropped 10-15 points and was chomping at the bit to place some kind of trade, but NO because no one knows what AAPL will do AFTER the announcement. Let the dust settle then trade.
Anybody have any naked puts they are looking at this week, or with March monthly expiration? Damo, what are you holding right now?
Tax,
Thanks for being a voice of reason. I think I should papertrade more, to keep my mind busy. Then I maybe could learn more about what I'm doing right or wrong.
Dave
KauaiTrader, for March Expiry I only opened 2 naked puts, EQIX which I've already closed at a 2% profit and NOV which is not going the way I would like, I still have a a couple of points profit on it and it was down 3% today but if it keeps heading south tomorrow I'm going to close it.
I'm a bit nervous about opening too many naked puts, I want to wait for a decent pullback then go hard.
Naked calls are all go though, I've been hitting NFLX calls hard all month, I've had weeklies each week and I've got some March Expiry also.
I'm already at 4.5% for the month (my goal is 2%) so not going to push too hard from here.
The day trades have been working well which has helped my returns.
Damo
It's funny how AAPL looked so good at 530, now it looks even better at 520. I'll wait until Thursday to decide what to do with my weeklies though.
I looked at playing the earnings for ONTY (yes that is a biotech company). I couldn't quite figure out what to do with it though. I believed it would drop, but I had to protect myself from a huge jump. Basically I wanted to take advantage of the large difference in IV between the April and May options. I'll keep looking for something safe.
Dave
If goog holds over 600, I will get in at 580/570 for friday expiration, I'll keep the position size low since I'll be fairly close to the market price. 600 is likely to hold for a few days at least. I like the time decay on the weeklys but I don't like how sensitive they are to market price. With every good thing there comes something bad.
Dave
Pulled the trigger on some AAPL puts on the close today. Just could not resist them juicy premiums. I liked the price action in AAPL today...17 points off the low of the day. 55 points of cushion, 3 days, juicy premiums, and one hell of a stock. Even if iPad 3 disappoints and the stock pulls back, I think buyers will come in at the 475/480 area to support the stock unless the overall market tanks again (like today) and that's certainly possible. But, I'm willing to "spin that bottle" (borrowed that from Nicky) and play the WOF on AAPL and see what happens over the next 3 days.
Dave, the Weeklys are "sensitive to market price" as you made reference to because of their relatively large gamma component. That relatively large gamma component of the weeklys is why they can absolutely explode up or down in value when price moves.
I sold a lot of puts today on the spike in the VIX...all WOF trades (well, most of them). This has been the right thing to do (sell into the fear) for some time now (many, many winning trades). Maybe I was a little early, but I still have lots of margin left to add many more trades. As a seller of premium, I will always sell into fear. In 2008, I took a little bit of a beating, but every time since then, it has been a very winning strategy.
Dave, I'm curious about your intended trade in GOOG. 580 put has Delta = 8. However, if you look at historical prices, if it decides to go south, probability of a decline below 580 in the next 3 days is actually 23%. Are those still good odds?
Hi Alex,
Thanks for the comment. I am interested in how you came up with a 23% probability of a decline below 580 in 3 days. I'm not saying you are wrong, I just cannot respond thoughtfully without knowing more details. Although, if 23% is correct, then I say no the odds are not in my favor. I just don't see the 23% right now.
Dave
Dave, just to make sure I don't confuse you. This is not probability of a decline. What this number represents is that 23% of all 3-day declines between 2005 and 2012 were greater than 4.12% (the difference between yesterday's close and 580 strike.) Since 4% decline falls probably in the noise category, it can happen any time.
Alex,
You can make sure all you want, but you still have a greater than 23% chance of confusing me, as it is not that hard to confuse me. Thanks for the explanation though, and I think I actually do understand now. I am not aware of this statistic, so it was of no concern to me. It actually still does not concern me, and not just because GOOG is up today. Oh, and I did open the position yesterday.
I believe that I followed Jerry's rules, which are based on sound reason and lots of experience (Jerry's experience, not mine). I think if you follow Jerry's rules you will do well, and you don't really need to know anything else. However, if you are so inclined, you may be able to add some rules of your own that will help as well.
Just make sure your rules are sound as well. For instance, when used properly the RSI indicator can prove useful and is time tested. However, Wells Wilder, the creator of the RSI, also believed that stocks moved up and down based upon phases of the moon. This moon phase indicator has not been time tested and does not appear to have any logic behind it either.
I may be wrong, but I liken the 23% chance (I can't remember what the statistic was now, so I'll just call it the 23% chance) to the risk that must accept anytime you enter any trade. I don't think that a three day decline is any more likely right now than it is any other time, but it could happen. Because declines can happen I plan in advance for them. That is why I close a position when it has lost double the amount it could gain. This will stop me out more often than if I used a more loose stop loss, but I like to limit my losses. If my goal is to make 1% per week, and my stop loss is 1% per week, then I just need to have more than 50% winning weeks than losing weeks to come out ahead in the long run.
Here are some things that were going through my head when researching the GOOG trade, which may or may not help. GOOG had disappointing earnings in Jan, but the stock has steadily increased since then. GOOG popped over 600 in early Feb and has successfully tested that level twice since then. If 600 held yesterday, it looked like a good short term dip to get into. If you look at the bollinger bands, the stock dipped below the band and jumped back over it. RSI is at a reasonalbe level. The fast stochastic looks ok. More importantly perhaps, since the stock dipped, the IV of the options increased and the premiums were looking good. I would have preferred to go lower than 580 actually, but there were no options available for 3/9 expiration. The payout was too high according to Jerry's rules, at 4% for only three days. I really liked the setup though, and I tried to compensate for the high payout by limiting my position. I set aside three times as much of my margin than required, reducing my payout to 1.33%. This may not be logical, but it made sense to me at the time.
Something else I personally like to consider is the historical volatility. The one year, three day histircal average volatility of GOOG is 24%. The three month is 19% and the one month is 13%. My option paid out about 30% IV I believe. This may very well be worthless information, but if GOOG can manage to go just three more days at or below its 30 day HV, then there is almost no chance it will touch 580. Of course, I cannot come close to predicting the future, and that is why I manage my risk actively. I hope this is helpful to somebody.
Thank you very much for the comment. As always, feel free to disagree with me.
Dave
Hi...I sold today weekly AAPL VCS 555-560. Premium 0.09.I think we should wait for safe VPS.
Dave,
thanks for sharing your thought process with us. I don't disagree with you. I was just curious how other traders evaluate risk. I do use money management, but I also try to initiate a position that, from a historical point of view, has a really small chance, or none at all, to end up in the money. If I can make 2.5 - 3% a month this way, this is all I need.
No problem,
Safe always sounds good to me. I have plenty of "danger" in the rest of my life to give me thrills and chills.
Dave
Last August the bear spikes and the capital draw down taught me a thing or two. Wasn't affected by yesterday's ugly bear claws:) Got bunch of aapl credit spread and iron condor for next week and this week ranging from 610 to 415.
I was taking riskier trades last year and was getting 4-5% a month for the first 5 months, then whoop, almost all profits vanished in 2/3 bad trades. So I am humbling learning the craft of accumulating crumbs without giving them back. Either too risky or too fearful and jump ship! No calender spread for me,YET. B'cos Alpha-me didn't like it haha.
Good Trading.
Hi Alex
I also use a similar method with my SPX trades. My approach was to look back in time (40 years actually) and see how many times a drop of 10+% happened in SPX in one week. (answer 4 times). Then I would target a strike price at 10% or more away knowing that the probability of it going ITM in one week was 0.2-0.3%. This coupled with the probability from my Option express platform worked well.
Now that the VIX is low the premiums are not great but I will use it again when the market gets nervous.
Cheers
RHMOPTIONS
@Alex,
I am interested in your analysis. I think I do something similar although I suspect I am putting a great deal more manual work into figuring what you may already know is available. In essence I have a basket of stocks that I keep a 24 month running tally of daily closes. I then figure 1 day percent changes as well as 5 day percent changes. I then look at what the top 5% & 10 % declines are for every 5 day close. I then trade naked puts typically at a decline in the bottom 5% of changes for the prior 24 months. I typically only trade weeklies which is why I mostly use the 5 day change. Can you share what statistic or marker you are using as it sounds somewhat like what I am doing manually. Thanks, BC
BCG,
I do something similar. But I use more historical data, often much more. Especially if a company has been around for a long time. I try to include at least a couple of bull markets and a couple of bear markets. In this respect the last 10-14 years provide all the data I need. I then identify all N-day declines (N is the number of days to expiration of the option I would like to trade), sort the declines by the price change, and assign percentile rank to each decline. For example, for the next week's SPX (1 week to expiration), 95% of all declines were less than 3%. However, the largest 1-week decline was 9%. It's sometimes interesting to compare those numbers to delta. Sometimes they are very close, and sometimes far apart. Besides, companies have tendency to mature over time and change their behavior. Microsoft 2012 and Microsoft 1998 are probably two different companies. It's a judgement call how much data to use for each company.
Hi Alex.
You may want to look at your data. Largest weekly declines were 18%, 12% 11% twice in 2008,1987,2001,2000 respectively. YOUR 9% does have a prob of 99.7% but beware of the 0.3.
Also be careful when extrapolating days beyond mon-friday (week) and monthly. For example option and stock behaviour from thursday to wed is very different than mon-friday. Hence i tend to look at 5days (mon-friday) stats or monthly (open to expiry) rather than extrapolate to 7 days, 3 days etc...daily stats can be misleading since all days in a week are not equal.
Cheers
Rhmiptions
Alex and RHM,
I find your discussion to be very interesting. I too like to look at history to get some indication of possible future activity. The weekly information is easy to get from yahoo and I use that information. I also like to be very careful when using this data, because I have been caught in the trap of thinking the past foretells the future. For instance, apparently there has never been a 20% weekly decline in the SPX. There could be one someday though. Also, if we have a 15% drop next week, does the week after that have a lesser or greater chance of doing the same thing? I'm not sure history can answer that question.
One of the very difficult things to do is to recognize when the rules have changed. We expect things to continue on like normal, so it is hard to see when the fundamentals are completely different, and then adjust appropriately.
On the other hand, in investing there is very little solid ground to step on. You have to use the information you do have, as nebulous as it is, to the best of your ability.
One thing I still don't understand is what advantage SPX has over SPY? SPY is more heavily traded and has lower spreads doesn't it? There must be something that gives the SPX an advantage, what am I not understanding?
Thank you,
Dave
rhmoptions,
You are absolutely correct about SPX. I probably looked at some other ticker by accident and didn't catch it. I've just re-run my program for Puts expiring next week, and it correctly calculated the largest drop to be 18.3% with 95% probability of the decline being smaller than 6%. I also agree that it's the last 1% that eventually gets you if you don't have a plan for dealing with it.
Dave, I agree with you. History is just that, history. But I think it's still better than nothing. When I calculate the declines, I don't use weekly data. I use daily prices, create an N-day window, and shift it one day for each calculation.
On a different topic... Is there anyone who is using TradeStation?
Alex, I'm currently using TradeStation and have been for 2 1/2 years now.
Hi
Dave the problem I have had trying to use the SPY is that the premiums are lousy at the cushion I want but I have on my to-do list to look at this again.
Cheers
RHMOPTIONS
Dave G, I have a couple of questions related TradeStation. We can probably take it offline. Could you email me @
wtc2010-optionwriter@yahoo.com ?
Alex, O.K, will do.
Time for a new post
Anybody doing anything out there.
I'm looking at my usual weeklies and even the April cycle.
NO PREMIUM, everything dried up.
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