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Mark Wolfinger
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Please find our new blog with the same URL: http://blog.mdwoptions.com Continue reading
Posted Jan 29, 2011 at Options for Rookies
This blog has moved. Please visit us at: http://blog.mdwoptions.com Continue reading
Posted Jan 27, 2011 at Options for Rookies
Hello The blog has migrated to WordPress, using the same URL: http://blog.mdwoptions.com Please let me know if you encounter problems (just post a comment) Continue reading
Posted Jan 27, 2011 at Options for Rookies
Steve B, Nothing. They have nothing to do with undervalued stocks - except that a highly volatile stock may drop to that undervalued status more often than a lower volatility stock. Just trying to respond to question. Perhaps that was a bad idea in this case.
Toggle Commented Jan 27, 2011 on Implied Volatility and Beta at Options for Rookies
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I often go into great details in my explanations. Many readers are novices and details help. Please remember that this post is not directed to you. It replies to your question in a public forum. You look at risk differently. You are a stock trader. I couldn't care less about GOOG financials or its future. I only care about the STOCK PRICE and whether it's going to break through (or approach) my short strikes before the next expiration.
Toggle Commented Jan 27, 2011 on Implied Volatility and Beta at Options for Rookies
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Dmitry, You said risk did not increase when markets declined. I choose to disagree. You may believe that a stock becomes 'undervalued' when it breaks support. I strongly disagree and let's leave it there. This is an options blog. HV is always part of IV. It's a staring point. When I was a beginner, I always sold elevated IV and bought depressed IV - based on HV. I learned better, but it took awhile. You do not have to base your vision of risk on what the crowd is doing. However, trading options is nothing like trading stock. Regards
Toggle Commented Jan 27, 2011 on Implied Volatility and Beta at Options for Rookies
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Mark, Isn't using IV (implied volatility) for statistics the same as using Beta as a measure of risk for stocks? I.e., if the stock dropped sharply and it's beta increases, but not the risk, it's actually a better price now. Same here - if the market declines today, does it really mean that tomorrow will be an even riskier day, as told by IV? If not it eliminates the need to trade fewer contracts on high IV times. Dmitry *** Beta and volatility are not comparable. Yes, in a broad sense you can say they measure a stock's volatility and tendency to undergo large moves. But the differences are very significant. Beta MEASURES the PAST volatility of a single stock when compared with the volatility of a group of stocks. IV is an ESTIMATE of FUTURE volatility for an individual stock (or group of stocks). Beta is RELATIVE and depends on the volatility of it's comparative index (SPX or DAX) when we talk about volatility in the options world, it is an independent measure. In other words, beta not only depends on the volatility of the individual stock, but it also depends on the volatility of the group. Not the... Continue reading
Posted Jan 27, 2011 at Options for Rookies
Jeff, Nice. It's great to trade with confidence and have years of experience. You know your system is viable. Congratulations
Toggle Commented Jan 26, 2011 on Probability of Profit at Options for Rookies
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Steve B, He is a rookie who is moving too quickly. He has to slow down and paper trade. Thanks for the encouragement. You know Steve, your thoughts are on the money. However, with higher risk comes higher reward. AAPL is an actively traded stock and that should translate into decent fills. But, not for me. It's a very personal decision. Regards
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Dmitry, These options are cash settled. There is ZERO chance that you will not collect the maximum, if both options finish ITM. Note: VIX options do not expire at the same time as the other options that you trade.
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Dmitry, OK. The VIX call spread SHOULD offset PART of the loss from the put spread that you sold. But - and this is crucial - if you own VIX options that expire in the WRONG month, the gain that you anticipate can be almost zero. When VIX rises, VIX call options do not always increase in value. The VIX index is not the underlying asset for VIX options. Many novice traders have been BURNED by trading VIX options - a product that is not easy to understand.
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Patrick, In general, for a retail investor, the back spread is a terrible idea. Many times the stock will move as you anticipate, and you wind up a loser. It's one thing to lose when your prediction fails, but to lose when you are correct is a big bummer. The back spread is very sensitive to time decay. If you don't get your move quickly, you can get hurt (as your shorts increase in value and your longs move towards zero). If you expect a gigantic move, then the back spread has appeal because you want to own as many extra long options as possible. Barring that specific - gigantic - move, the back spread is best handled by professional traders who hedge the deltas in a way that is too costly and inconvenient for the retail trader. Go naked. Good question.
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Gus, $0.65 credit is not sufficient information. Thus, I'll assume that $1.00 is the maximum value for the spread. That would make the margin $100. You write of $1k margin. Are you referring to doing 10 of those spreads? I'll assume that because if you collect 65 cents for a 10-point spread, it is not a low-probability iron condor. 1) I'm not a big fan of low probability iron condor (LPIC). But that's honestly because of my personal preferences and comfort zone. Traders I respect believe that LPIC are statistically 'better' and produce a higher income over the longer term. I can neither affirm nor dispute that claim. But I believe the is nothing wrong with that trade. 2) The adjustment strategy for LPIC is different. After all, it's highly likely that the position will be in the money (soon), and I've not considered the best adjustment under those circumstances. I suggest a trade plan - pre-trade- to give you a chance to think about the choices before you encounter them Regards
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Jeff, I'm interested in knowing how you calculate the probability of profit for your trades? Do you ONLY consider that probability at expiration? Do you ignore the real-world possibility of making an adjustment? According to your data, MSFT will finish above $27.75 that 58.9% of the time. Is that the calculation you made (ignoring commissions)? Have you considered what happens when MSFT falls to $27 and you choose to make an adjustment? Thanks
Toggle Commented Jan 25, 2011 on Probability of Profit at Options for Rookies
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D, I do not believe they are the same or even similar. More on this topic as soon as I can get to it. A day or two. Thanks for the excellent questions.
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Dmitry, 1) Yes - the goal when legging is to own a position at a better price. When you leg by selling puts first, the potential extra gain is LESS than when selling calls first. 2) If you sell puts first and market falls further, there is NO offset. The rising IV (VIX as you refer to it) INCREASES losses. If the market rises, it take a big rise to sell call spreads with higher strikes to achieve the same premium. First, the move must be 10 points or more - just to make the calls as far OTM as the call spread you wanted to sell earlier. Second, some time has passed, another negative. Third, IV has decreased, a third negative. The move must be > 10 points to get the same premium. It takes a good move to get what you want to get. 3) Yes, SD is valid. Why? Because the IV is the best available estimate for future volatility. It's not going to be accurate because estimates are seldom accurate. But, you must choose a value for future volatility before you can calculate SD. Choose whatever value for volatility that suits. If it is possible to do those calculations, I have no idea how to do that. Besides, each time you made the test, the option choices would be random. It takes many many examples to learn anything from the data. You can find the option data needed from OptionVue. I don't know how much they cost and I don't know how far back the data goes, but you can ask.
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Mark, Can you please provide some in depth info on what would the preferable steps to leg into an IC - by spread - would be? Example. if I open the put side today and next week index moves higher I sell the call side, that's great. But what if next week index moves lower? Roll-down the puts? Take losses and wait for another opportunity? Sell the calls at current prices? My second question is: from your experience, would an IC constructed around 1 standard deviation OTM be really ~68% probability of keeping all the premium (given we do not make adjustments, in plain theory)? Thanks. Dmitry *** In depth discussions are not always possible. That's the stuff of which lessons and book chapters are made. However, I'll offer the major points in enough detail, that it should satisfy your needs. As it turns out, you do not need a lot of information about legging into iron condor trades. Legging into iron condors 1) Here are the major points - everything else on this topic is far less meaningful. I do not like the idea of legging into iron condor trades by selling puts first. It simply doesn't work as... Continue reading
Posted Jan 25, 2011 at Options for Rookies
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Hi Mark, I would like to know how to correctly calculate (and use) the "probability of profit" tool... Everywhere I look amongst the options sellers I read about it, and, behind the obvious, I think it may be an useful tool, but only if correctly understood (and used). Do you calculate it by yourself? Do you trust any site in particular? Thanks, as always Roberto *** Hi Roberto, 'Probability of profit' is not something I calculate. Too many variables are involved (see below). However, these items can be calculated a) Probability that an option will finish in the money (i.e., be ITM) at expiration b) Probability that any underlying asset will move to touch the strike price (i.e., the option becomes ATM or ITM) of any of your short options at any time during its lifetime, even when it does not 'finish' ITM c) Probability that an underlying will move to touch any specific price (presumably your target exit price) at any time during the lifetime of the option. And you can set the 'expiration' date of the option to coincide with your planned exit date - for traders who prefer not to hold through expiration. We cannot determine probability... Continue reading
Posted Jan 24, 2011 at Options for Rookies
Dmitry, In depth discussions are not always possible. That's the stuff of which lessons and book chapters are made. But you don't need a lot of information about legging into iron condor trades. I'll reply Tuesday in a full blog post. Regards
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My Journey to becoming an Option Trader Over a three year period I went from a mutual fund only investor to a stock only investor, to a debit spread option trader and now primarily a credit spread option trader. During this period of time from January 2008 until December 2010 I read various books and subscribed to different services. I made my first investment based upon recommendation from the American Association Of Individual Investors (AAII). I purchased over 30 stocks during January 2008 and it was during this month the market started making some large moves both up and down. I also began a subscription to MorningStar and Investor Business Daily and began watching Cramer and Fast Money TV shows. After about six months I began realizing I did not have enough time to monitor financial news on this many stocks since I still had a day job. I scaled back to approximately 15 stocks but I still lacked a real strategy and a discipline approach to investing, I was continuing to search for a better way to invest and make money. The death kneel for me as a stock investor came in October 2009 when I was invited to... Continue reading
Posted Jan 22, 2011 at Options for Rookies
Tom, Welcome! Selling options (the covered call by force, or the naked put) into earnings news gets the trader exactly what you said: more risk. However, that comes with higher reward potential. I prefer to avoid that higher risk and always recommend that others seriously consider the higher risk before making the play. If you trade small size and if you are a higher risk person, this play is okay. This assumes you have a reason to make a bullish play on the given stock. If you prefer to take less risk, then I would avoid this situation. It's a personal preference. There is (as I like to say) no right or wrong here. Regards Mark
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Hello Gus, I like the advice and recommend it for most stock investors. The problem here is that this trader wants to make big money. He does not want to miss the occasional big rally and would not be satisfied with earning good money by selling puts. He wants to earn BIG money. Selling puts does not satisfy his personal needs. Thanks
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Teaching is an educational experience for everyone involved. There was a time when I believed that when the instructor explained something in simple language and the students did not display looks on their faces that suggested they were completely lost, that all was well. That was a mistake on my part. Many times people are embarrassed to ask questions. And today, with so much education available over the Internet, the classroom can be impersonal. One never knows what beginners are thinking. I hope my friend, SD is not offended by any of today's post. This is a classic example in which he took only the parts of our discussion that he liked (make the trade) and ignored anything about the trade that he didn't like (risk management), or possibly didn't understand. He's here seeking helpful ideas for uncomfortable situations. My comments are in bold. *** Hi Mark: I had an iron condor position on AAPL with a January 2011 expiration: 290/300P; 350/360C. It was very scary. Very scary! That is all you need to know. You do not want to own such positions. Why would you continue to own a position that frightens you? They are frightening for a reason... Continue reading
Posted Jan 21, 2011 at Options for Rookies
Dmitry, Yes. It's viable. But it's important to trade the correct volatility product and be certain the hedge is also viable. There are better products to trade than VIX options. Please see this reply to Al for more details and suggestions. Trading iron condors with short delta is fine. You are near neutral and those few delta work because it adds to your comfortableness with the position. All vertical spreads have limited profitability. Thus, they can never earn enough money to provide true black swan protection. I agree that RUT strangles are costly. The best insurance is going to be the most expensive and the real decision is just how badly do you want to own that insurance and how much are you willing to pay. I confess that I do not own any right now, but my portfolio is smaller than usual and that provides some safety.
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Hello s, Remember these options expire tomorrow (it's Thursday night), so the stock price must change, or they become worthless. The market is not predicting that the move will be within +/- 70 cents. It is attaching a probability to a move of < 70 cents. It is attaching a probability to a move of > 70 cents. Thus, the 'prediction' is never wrong, because it is not a prediction. It is a probability. Many journalists and bloggers get this wrong by stating that the option prices predicted something. It is correct to say (this specific example should be obvious to you because the options are so cheap. It gets more complex with higher priced options) that the expectation is that these two options will remain out of he money once the news is announced. If the probability of a larger move were considered to be 'much more than zero' - then the options would cost a lot more than $10 per contract.
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