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Just finished reading all 538 pages. Thanks to @ron99 and all supporting cast for a really wonderfully gripping read. I hope to add something someday.
As an aside, @ron99 have you ever thought of starting a dairy thread? I know you said it would take many many pages to write down everything you know, but I, for one, and others I'd assume, would be interested in getting the skinny on all of your years of accumulated wisdom in the market. Just a thought.
I've thought about a dairy thread but as that commodity has started to be manipulated like many of the other markets, I don't recommend trading it.
This is all just rumor, but the very large (billions in sales) private company that supplies cheese to restaurants for cheeseburgers (17 of the top 20 in sales including McDonalds) has been manipulating the daily cash cheese market for barrel cheese (the kind used to make american cheese slices) to keep the prices far higher than you would expect so that they receive more for their cheese that they sell to the restaurants. They have even gone as far as threatening other companies telling them to not attempt to take cash cheese lower or they will cut them off from buying from them. They also sell cheese to the gov and that price is also set by the CME cash cheese auction.
Trying to trade something when that is going on is a money losing proposition.
The CME cash cheese market is a daily auction of cheese that only lasts from 2 to 10 minutes. Usually less than 10 semi loads (40,000 lbs each) of cheese trade a day. About 3 million pounds a month. But this sets the price for the 90-100 million pounds of cheese that is sold a month.
So with that small a volume somebody can easily manipulate the price.
Frustrating.
Reports in the last few days say that US milk production and US cheese inventories (+128 mil lbs over last year or +12%) are the highest in history, very bearish fundamentals, yet the CME cash cheese market went up the last 2 days.
I'm finding exiting a strangle to be a very annoying process, it's difficult to know exactly how much profit I'm going to pull out of a trade because of the way the long position decays. With that said, I'm wondering if it's possible to know the price of one option by simply knowing the price of another. For example
I sell to open a p1600 for $8
I buy to open a p1300 for $3
If the p1600 drops to $4 in 20 days, what will the price of the p1300 be? Is there a way to know this before entering a trade?
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
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Not exactly, but approximately yes.
An option price is a function of the Strike Price, Underlying Price, Volatility, Time to Expiry & Interest Rate (& for Stocks the Dividend Rate).
In your example of the 1600P & 1300P, 4 of these 5 are the same for each option. The only one that differs is Volatility, and even that is very similar, and in many occurrences highly correlated.
It is actually very easy to calculate what we call the option greeks, which will give you an indication how much the option price will change due to a change in one of those 5 pricing factors.
Delta - Tells you how much the price will change based upon a change in the Underlying
Vega - Tells you how much the price will change based upon a change in the Volatility
Theta - Tells you how much the price will change based upon moving a day closer to expiry
Rho - Tells you how much the price will change based upon a change in Interest Rates. But this is normally tiny and normally ignored for anything but the largest portfolio's.
So by comparing the delta of a 1600P with the delta of a 1300P you can estimate how much each should move in relation to each other, based upon a change in the underlying price.
I have a simple spreadsheet with all the models on my laptop which I will try and remember to post latter. I also have all the functions programmed up in R, so PM me if you want them.
Option pricing can be a very complicated subject, but the simplest pricing model is a Black Scholes model, and this wikipedia article does a decent job of explaining it.
To get an idea, where the price of the option will be (under the same circumstances as today), I am looking at the option chain at the same strikes, but earlier dates, f.e.
Sep 16th P 1600 is right now about 4.30-4.60 $, what will it be in about 30 days?
I will look at the Aug 19th P 1600 which is about 2.25 - 2.45 $. So the Sep 16th P 1600 will loose about 2 $
Or another example, nearer at your numbers:
Sell to open Oct 21th P 1600 for 8$
Buy to open Oct 21th P 1300 for 2.15$
Compared to
Sell to open Sep 30th P 1600 for 6 $
Buy to open Sep 30th P 1300 for 1.50 $
So the premium will be about 8-2.15= 5.85 compared to 6-1.50=4.50
