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Diving into the lake of Options


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Diving into the lake of Options

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  #1 (permalink)
Pittsburgh, Pennsylvania
 
 
Posts: 563 since Jan 2013
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The purpose of this Journal is to get into option trading, again. A few years ago I traded options with real money, with shall we say, less than stellar results. Since then I forgot lots of things about them, so to refamiliarize myself, I am going to use CBOE's Virtual option trading tool. (go to cboe.com, click on Tools then Virtual Trade) The quotes are from Option Express and delayed by 15 minutes, more on that later.

I am going to trade primarily SPY options. Most of the time directional bets, but I also want to try out straddles and other type of strategies. The style will be quiet aggressive, concentrating on expiring options in a few days, but with good money management. (if such a thing exist)

The account start with 25K and can be reloaded/restarted. I am not planning on it. If it is gone, it is gone. The quotes are delayed, so to keep it real, this is how it is going to work. When I initiate a trade, I will post it. Then 15 minutes later I actually execute the trade, and I will post the fill I got. This way it should be as close to real as it can on a virtual market.

Oh, the best part of the Journal is not just the trades, but the reason behind the trades. I will actually explain why I make a trade. Holding period should be generally a few days, except on days close to expiration when I do intraday swings, but will use smaller size.

Again, the goal is to practice directional trades, trying out a few new strategies, using common sense money management and maybe also to learn something from you guys.

If you guys have any constructive criticism, ideas, don't hesitate to chime in. Anything constructive will be appreciated. I think this is good enough for a starter, and I will explain some of my trades in the next post...

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  #3 (permalink)
Pittsburgh, Pennsylvania
 
 
Posts: 563 since Jan 2013
Thanks: 33 given, 375 received


Well, if this account were at the starting amount of 25K, that would be boring, and you would have to wait until I get into a position. But wait, you are lucky, and you don't have to wait in suspense...

I actually started to trade this account in the beginning of December. Around Christmas I made a few good trades, so the account grew to 30K. I even tried selling both sides although the margin works differently, thus way smaller size allowed. Another reason for this Journal is to getting know better the margin requirements.

Anyhow, last week after 4 days of sideways movement, I was pretty sure we are ready for one last rally, so I went long. Why was I sure? We had 4 dojis in a row on the daily chart (some sort of record) which is usually consolidation, and the previous move should be continued. Sure enough on Thursday the market rallied and SPX went up 12 or so points. Since my calls were just OTM and expiring the next day, they almost doubled. My position was around 10K so I made 9K on it. That took the account up to 39K.

So after about 6 weeks of trading, I am up from 25K to 39K. I paid in "commisssions" (we keep it real, right?) 4.5K and that is already included. That is about 60% return. Usually I risk 1/3, or half of the account...

On Friday we made a doubletop and I also thought that the market would downturn, so I loaded up on puts. Right now I have 200 SPY 148 puts, with the average fill of 0.68. I know buying options before the weekend wasn't very wise, but I wanted to see how much the time decay would be over the weekend. I plan to sell it in 2-3 days, if the market downturn happens....

Edit: Just a note on timedecay. The price is around 0.5 now although SPY is where it was on Friday, so as a note, sell options before the weekend, don't buy them...

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  #4 (permalink)
Luxembourg
 
Experience: Advanced
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The title got me attracted and I kind of smiled because options are not a lake, not even a sea in my opinion; but rather an ocean and perhaps worst... but well this is just me; I do not mean to discourage you neither.

If you want to trade options, it is important you understand where they come from, how they are manipulated and how they are designed for unaware retailers to continuously lose money.

I definitely wish you good luck in your quest and futures.io (formerly BMT) journal; but please understand that options can turn out to be a real scam if you don't understand DEEPLY all the ins and outs, the games, the manipulation and the tricks that institutions do around these instruments.

Few questions that could perhaps lead you in your research and studies on options:
1. who sells the majority of calls and puts? definitely the institutions and market makers; large capital investors/funds, etc...
2. what's the interest of such an offer? they tend to keep the option premium if the call or put expires worthless
3. who buys calls and puts? definitely the small retail investor that doesn't have enough money to buy several lots of shares, and in their opinion options has a limited risk as they only lose the premium
4. what do you think the institutions and all those big guys that sell options will do at or near expiry? they have enough capital to drive the price to a strategically calculated bid/offer at which most of the options they sold expire worthless and they keep the premiums

As an example, last week was optionx (on Friday Jan 18th), and look for instance at AAPL how they closed it at 500$ to the penny, 499.96$ if I am not mistaken... If you were watching the intraday action on Thursday and Friday you would have really enjoyed it! especially if you are an informed trader.
AAPL by the way is one of the stocks that they get to sell lots of options for, due to its high share price that prohibit many small investors in buying multiple lots.
500$ on AAPL was the strike that made most pain, and banged the highest return from both puts and calls... that simple.


Good luck and wish you lots of happy learning and experimenting opportunities

Cheers
Fadi

Successful people will do what unsuccessful people won't or can't do!
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  #5 (permalink)
Pittsburgh, Pennsylvania
 
 
Posts: 563 since Jan 2013
Thanks: 33 given, 375 received


Fadi View Post
but please understand that options can turn out to be a real scam if you don't understand DEEPLY all the ins and outs, the games, the manipulation and the tricks that institutions do around these instruments.

Thanks for the input. One reason why I am using an index option because these kind of manipulations are harder if not impossible. It is rather easy to push a stock around for a bigger player, not so much with an index.

Basicly I will just try to use time decay as an advantage over low volatility days and selling them, and hopefully make some good bucks, when the market is moving. Only problem with the selling is the rather big margin requirement, so size will be small....

About my position: If SPY is at 1473ish by expiration, I will break even. I screwed myself with buying them before the long, MLK weekend, but I was expecting a downgap. Well, live and learn...

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  #6 (permalink)
Pittsburgh, Pennsylvania
 
 
Posts: 563 since Jan 2013
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Pedro40 View Post
The quotes are delayed, so to keep it real, this is how it is going to work. When I initiate a trade, I will post it. Then 15 minutes later I actually execute the trade, and I will post the fill I got. This way it should be as close to real as it can on a virtual market.

Well, I had a suspicion, that there was no delay and the quotes are live. So this morning I have been checking the Chain and it seems to me that they are indeed live quotes and the delay is miniscule only caused by the software. I even did a quick test trade to confirm it, because I thought maybe the chain is live, but the fill is delayed. No, both seem to be live, so there is no reason for me to delay entries and exits, thus I will just post them as I execute them....

I guess it is easier for CBOE because legally they are supposed to delay the quotes, they just don't bother with it...

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  #7 (permalink)
Market Wizard
Chicago, Illinois
 
Experience: Intermediate
Platform: Tradingview
Broker: ThinkOrSwim
Trading: Forex, Stock & Options
 
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Hey man. You are like my brother from another mother. I used CBOE's portal Option Xpress' simulator as well. If my memory serves me right, the quotes when you enter a position are real-time but profit and losses in your position are delayed 15mins...

Anyways, here are my $0.02
  1. Make sure the amount you are practicing with in the Virtual Trader is the same amount you can use IRL. Years ago, I honed my skills with $25,000 in a virtual trading account on investopedia. I then went to my real trading account and had to deal with being undercapitalized for the first time

    Practice skills that you will use in real life. I see you said that you practice risking 1/2 to a 1/3 of your account in a trade. IF you guess wrong two times, or three times, you are broke. It should be more like risking 1/100 or 2/100 of your account in a trade if you want to sustain your capital. Options are volatile enough, you don't need your trading account to be as well


Pedro40 View Post
Thanks for the input. One reason why I am using an index option because these kind of manipulations are harder if not impossible. It is rather easy to push a stock around for a bigger player, not so much with an index.

Basicly I will just try to use time decay as an advantage over low volatility days and selling them, and hopefully make some good bucks, when the market is moving. Only problem with the selling is the rather big margin requirement, so size will be small....

About my position: If SPY is at 1473ish by expiration, I will break even. I screwed myself with buying them before the long, MLK weekend, but I was expecting a downgap. Well, live and learn...

If the volatility is low, then you want to be buying options, not selling them. Low VIX means you aren't getting
a lot of $$$ for the risk that you get assigned a position you sell.

Anyways, interested to see some of your charts and how you look @ the market. Welcome to the board and good luck!

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  #8 (permalink)
Pittsburgh, Pennsylvania
 
 
Posts: 563 since Jan 2013
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Bermudan Option View Post
Hey man. You are like my brother from another mother. I used CBOE's portal Option Xpress' simulator as well.

Hi brother, I have been searching for you for years!!!!



Quoting 
If my memory serves me right, the quotes when you enter a position are real-time but profit and losses in your position are delayed 15mins...

That doesn't make sense, unless the P/L after 15 minutes corrects itself and gives the value shown at the time of trade...


Quoting 
Make sure the amount you are practicing with in the Virtual Trader is the same amount you can use IRL.

Good idea and later on I will probably do it. At this time I am just getting back into the saddle, so any amount will do it.


Quoting 
I see you said that you practice risking 1/2 to a 1/3 of your account in a trade. IF you guess wrong two times, or three times, you are broke. It should be more like risking 1/100 or 2/100 of your account in a trade if you want to sustain your capital.

Well, generally I agree, but the whole idea here is to use the explosive power of options, even if it could lead to self destruction. If I want something less risky, there are always futures available.


Quoting 
If the volatility is low, then you want to be buying options, not selling them. Low VIX means you aren't getting a lot of $$$ for the risk that you get assigned a position you sell.

You are right. What I meant was that when the market isn't moving much (let's say summer doldrums) that is a good time to go for the time decay. When I do options, I want at least 20-30% return on the position, not just a little.


Quoting 
Anyways, interested to see some of your charts and how you look @ the market. Welcome to the board and good luck!

Thanks for the response. I haven't posted a chart here yet, I guess I am just using imgur.com or another image website.

A quick note on the position: It is down by 2/3rd and I made so many mistakes with it that it will be a long list. At this point I probably will just keep it until Friday and if all lost at least the account is nicely back to where it started, so we go from there...

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  #9 (permalink)
Pittsburgh, Pennsylvania
 
 
Posts: 563 since Jan 2013
Thanks: 33 given, 375 received

Well, this position has been humiliating so far, although there is still chance that the market drops enough in the next 2 days. So in the main time, for educational purposes I am going to list the mistakes I made:

1. Bought near expiration options before a long (holiday) weekend. Stupid,stupid, stupid. My only excuse is that I was happy with the previous trade (a big winner) and it was a case of easy come, easy go. Also a bit cocky with my prediction of the market's expected move.

2. Oversized position. Usually I buy 100 options price usually under 1$. This time the first fill wasn't that good, so when later on it was even cheaper, I doubled the position. Even if I had wanted more, it would have been wiser to go for a different expiration put, just in case the downturn doesn't happen that fast.

3. When chance was given, I didn't lighten the position. Yesterday at the low I had a buy signal and the position was just slightly below break even. I could have got out with a small loss or at least sell half to get back to normal sizing, but because this is the first posted position, I let it ride. Pride....

4. No stop loss or plan to exit. I didn't treat it as real money, and since I originally planned to hold it for 3-4 days, I didn't make plans for an adverse move. Sure enough, the adverse move came.

Well, these are the ones suddenly came to my mind. I am sure there will be a few more that I remember later on. Right now I have to decide if the market is going to fall 15 points from the 1490 level by friday's close. I have been expecting a big red day, but it hasn't shown up yet. Since I am using the SPX chart to make decisions, I will be referring to the cash index levels, not the SPY levels. It might be a bit confusing, I know...

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  #10 (permalink)
Market Wizard
Chicago, Illinois
 
Experience: Intermediate
Platform: Tradingview
Broker: ThinkOrSwim
Trading: Forex, Stock & Options
 
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Pedro40 View Post

That doesn't make sense, unless the P/L after 15 minutes corrects itself and gives the value shown at the time of trade...

My live broker delays quotes by 15 minutes. So if SPY 113 puts are tradinga Bid x Ask of 1.15 x 1.17 when i enter the position, I will get filled at market price. However, when I check the P/L page, it will say the price that SPY was at 15 minutes ago. So if SPY 113 puts were @ 1.01 15mins ago, the P/L page would say that I bought @ 1.15 and the 'current' market price is $1.01 for the puts so I am down 13% but it does not apply.

Anyways good luck messing around on the virtual trader

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May 10, 2013


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