Discussion Forum

Among the hardest things to do, is to get rid of prejudices which have a basis in real life misery. My early full time trading was profitable but I was constantly playing catch up from 2003-2005 as the market rise was relentless. This was built on the bogus economics of Dubya Bush and the rampant money printing( helicopter Ben anyone?) It took a long time for this idiocy to filter through to reality,but by 2008 it became apparent that trying to make a 20 mph economy run at 50 mph was not going to have a good outcome. This is STILL not resolved. The debt mountain increases,and only due to low (negative) interest rates do we still have working economies.It’s a global staring contest with debt and we remain cautious as to who will blink first among the prime candidates China, Ems, most of the minor European countries.Markets climb a wall of worry and we trade the market NOT someone else’s economy.

latest prices for the straddle- 147.50 for the call and 39.50 for the put=187, so as our second tranche was closed out leaving a buy price of 166, this is a good profit of 21 (21/166=12.6%) All in a day. Super low risk and nice little turn around even if we’d stuck with the original buy price at 181.5. This is NOT the ‘swing for the fences’ trade-we don’t do that, and the only way that can happen is by buying very cheap puts before a market crash. Yes there are 10,000% opportunities.

*To date trade 11 is a very very modest winner-see update

The trade is into profit at 180 now- of course we could close out half the trade, but we had the chance to buy at 164 which was lucky. This has 3 weeks to go though….

I’d say a ‘failed trade’ in our world is a situation where insufficient analysis had been done. The ‘what ifs’ had not been addressed-like selling naked,it’s uncontrollable, unless you have a rock solid plan- ie close out or adjust when premium goes against you by n%. Letting bad trades run is a twofold killer- it runs you over then comes back to run you over in reverse, by depriving you of the next opportunity. That’s for another post

So, at close of trading the trade was worth 164.We paid 181.5. So a loss to date of 17.5. We can either take on more risk and buy,averaging in, or wait. I fancy doubling up,just sayin’…..

Holding to expiry is a lottery-and when you are short( you have sold options) you have what is klnown as PIN risk- ie the underlying is ‘pinned’ to you. If you had sold some puts in BP, you might have BP stock ‘pinned’ to you.A short call in BP would mean selling the stock. In other words you are forced to buy/sell those shares. Most options expire OTM (out of the money), so they are worthless. The trick is knowing which ones to sell and which ones to buy! That is why you have to grow into trading,you need to develop a trader’s mind.

There is a history of smug traders who just sold puts, considering them overpriced-but I have seen puts go from 3 to 300 in a few days, when the market got too smart and vol spiked up massively. I think this happens at least twice each year, barring the years I was selling calls! 2003-2005- as usual DYOR. Good options trading is about limiting risk,and not paying over the odds. Happy trading

In a normal world I would not be selling anything with volatility at 14%, so please take this with a large pinch of salt. I have a number of December positions and have yet to take January trades,and trade 10 would not be on my list

Pretty sure the dumb money is trying to get that dinosaur the DOW to hit 20,000 by end of year-does it affect the UK ?

Just my take on things- I’m not a good trader,and constantly overlook these sort of things,but today I had time to check Twitter and the chart just looked very worrying for me. The Santa rally/Trump pump is it for real? No way would I be going long-that’s just me,cynical and cautious.

If anyone would like to be a part of the ‘ground zero’ group, you need to let us know.
There is of course no financial commitment but there is a moral one. We do not want half hearted wannabes who expect to be spoonfed. This is for people who will take responsibility for their own actions but of course will be able to get support from the group if they want an opinion.

The above is a personal view on how we can trade options given these conditions- I hate these rising markets when the darker side of me believes Armaqgeddon is only a heartbeat away! Others may be less gloomy. It makes me laugh when the clowns in the media say it has been a good day for the markets when they rise. It’s only good if you’ve sold the stock you bought much lower.Better to rejoice when the market has dropped 50% because you will,as in 2009, most likely make money. The worst investors buy at the top…………………the professionals.Kidding!!!!

fortuitous close out again- the trade is currently 246 to close-not so much fun.

update 226 to close out -that’s a 19% return-actually it’s not as margin required might be more than the 280 taken in.However it’s £540 profit on a one lot- in 2 days. Annualise that Mr. Fund Manager!

Just noticed this is now tarding at 250 to close- 10.7% profit! I am seriously not doing this to wind people up, honestly.

Hi Terrapin, as you say not a great trade because volatility is relatively low and as I type with the market up, volatility has come down to 14.4%. The 6775 straddle is only collecting 253 in premium at the moment.

On Straddles in general what’s your profit target? 25% / 50% / hold to expiration?

with volatility neither high nor low it’s not a nice trade- so let’s see where the market takes us-if it’s a quiet week this may make money but typically I’d be looking to get well over 300 in premiums this far from expiry. This trade has a modest safety net ±4% -you may wish to check a site like Yahoo for the monthly stats the swings can be up or down 10% but settling somewhere in the middle. As always do your own research-it’s fun and it gives you confidence in your own approach

Those are real prices from a free data vendor, I just take screenshots but there is no reason to doubt their veracity. I make no apologies for being such an amateur number cruncher or accountant. You don’t need a Nobel prize in maths- Fisher Black, Myron Scholes and Robert C. Merton did that for us. I thank them every day!
By the way I’d have scaled up all the trades so in real terms your outlay might be £1,000-but consider that it is highly unlikely a butterfly will go to zero in the 2-3 weeks before expiry. I’m the plank that let’s them run to zero in expiry week! I’m the clown who buys shares that tank the day after I bough them- but never again. Learn from my schoolboy errors.Please!

You may wish to look at the work of Charles Cottle-the butterfly guru and all round nice guy who gives away much of his excellent work.

Loving the content. So are butterfly mainly for when you’re not sure which direction a stock is going in, but you know a big move is about to be made?

We will discuss exits( or closing trades) soon but getting heads around concepts is what we need to achieve firstly. It is hoped that our trades are being scrutinised and I make no apologies for being opportunist at closing out ‘paper trades’. It’s just not possible to tailor trades according to other people’s personalities. I’ve met all kinds of traders and I am certain everyone has a different risk profile-it would be fun to get you guys to post how you would have traded these. It is also not possible to show all the variants,though maybe we can do this at some point. I will laugh if trade 8 goes all the way, so please don’t think I’m in any way a guru. I’m just a passionate trader who sees opportunities in option prices.

The Butterfly- options are visual as well as mathematical- and we will get into some of the more exotic strategies, but the butterfly -think of selling the body and buying the wings.
The risk graphs for these strategies along with the strikes are highly suggestive of the names. It will become so second nature you’ll start to construct options trades with random numbers-it’ll get weird I promise!

Thanks Richard- I’m just a regular bloke with 3 ‘O’ levels and no background in finance or accounting,but I’m still a reasonable guitar player!

Thanks for this helpful explanation. I am really enjoying your series of articles – it is the principles that are most useful for beginners. Please do not be put off by the unduly harsh criticism of others.

There is sod all point in “keeping things simple” if by doing so you make utterly incorrect statements and claim them to be fact.

Please show your workings for “trebling your money” beeing the same as “a 300% gain”. If you start with 100 and end with 200.

How much is your gain?

a. 50
b. 100
c. 200

Have you:

a. doubled your money and made a 100% gain.
b. doubled your money and made a 200% gain.
c. failed year 7 maths. Again.

Regarding buffer, marin, returns, I am not “conceptually right”, but FACTUALLY correct. You are peddling 100% nonsense. If you reserve any buffer AT ALL against possible market movement against you, then that is, by definition, being used for that trade and is therefore “capital employed”. It matters not one jot how it is held. You yourself stated that your would only use 25% of available funds against a trade. So if the MARGIN for that trade is 100, then you have to have 1400 in your account and ALL of that 400 is employed. (And you CANNOT use this equity against any other trade). If you wish to base any ROCE return calculations then THAT is the figure you have to use.

But I am getting quite annoyed at your continued inability (I hope) or deliberate unwillingness (I hope not) to understand or acknowledge basic truths and I have wasted enough time here. The above should not need spelling out in such detail for someone who claims to be au fait with Greeks (which are very complex compared to the simple sums above) and experienced enough to teach others; I suggest you go back to doing what you appear to be good at – trading on your own account. If you continue to (try) to educate others here, you will lead some down a completely erroneous path which, when the sh1t hits the fan, is liable (if they believe your claims on rewards and risks) to leave them over-exposed and in deep do-do.

If anyone is having difficulty using the calculator please let us know-we can, at the moment, answer each enquiry individually and the aim is not to look clever (trust me that ain’t on the cards) but to give you a head start in your trading journey. There are NO stupid questions.
When I started trading there was nothing like this- but when you see how the options business has grown in the US you have to question what the heck is going on in the UK.
I might be tempted to say vested interest but I have no desire to create enemies, so let’s say that the financial establishment assumes we are all too stupid to trade financial products-and that applies across the board. The US looks more kindly on its retail traders.

“It’s actually the return on capital employed”

No. It REALLY Isn’t.

“I bought for 3 and sold for 9. Is that not a 300% return on capital employed?”

So, you capital employed was 3. Your profit was 6. That is a 200% return. Worryingly incorrect understanding of incredibly simple concept.

“I base trades on margin at entry and yes it is elastic but for our purposes we always assume only using 25% of an account”

So now, by your own admission, your previous example of 15% return is exaggerated by a factor of four – even without any further caveats.

Paul H

I would like to try the ivolatility calculator, but what is the symbol for the FTSE 100 option? It is not clear at all. Thanks.

It’s actually the return on capital employed, Paul I’m no accountant but that is the fact of the matter- I have no wish to create any kind of illusion these are real numbers, I’m sorry you feel I am pontificating. I do not know how else to say this. There have been 6 trades-some of which were debit trades-and for example one of my own that closed today- I bought for 3 and sold for 9. Is that not a 300% return on capital employed? Time period was 3 weeks, however.I am not annualising as that would be false. I think your Dec RDSB 2000 puts were 56 and are now 34, but margin was big I think. I base trades on margin at entry and yes it is elastic but for our purposes we always assume only using 25% of an account,so a margin call is unlikely with an index. I have not traded equity options for about a decade so cannot recall the margins

I thought you had agreed that your previous statement of 15% per month return was bunkum?

It is not 15% on ROCE UNLESS both of:

the position never moves against you; AND

You allocate 100% of your available capital to the margin for the trade.

Maybe the title of this thread really does say it all, and the Boy Really Cannot Help Himsef – when overstating his returns?

Best I leave it there, I feel, and go read, pontificate and discuss options elsewhere.

Paul

Any of these trades can be done as multiples or in ratios too- a spread can have 1 long, 2 or 3 shorts. A calendar spread can use different strikes so the far month is not so costly-this is called a ‘diagonal’. When you get used to the language you will visualise the trades.
When you start to find a style that suits you, you can say goodbye to all that gut wrenching emotional nonsense from trading forex/futures/stocks. You can construct trades that suit you instead of chasing the market.
Options traders tend to keep quiet about things-very much like insurance companies-they look dull and boring-yet check out their headquarters-they do not operate in a shed. The smart money always wins. Think of yourself as the insurance company first and then the artful trader next.

Paul -we are on the same track, I had no intention of misleading anyone-I’ve been trading options profitably for 16 years. I’m not a good trader, and I’m an even worse author and proof reader,it seems. However I am passionate about options and passionate about an industry that sucks the life out of people’s accounts with bogus claims, outrageous charges for investment advice and appalling returns. Options, in my opinion, are the only trading vehicle that gives people a chance by becoming educated.This site is a stepping stone, a conduit to get people to find their own way. It sickens me that when it comes to money matters people are completely misled. Even worse they give up due to lack of information-such as prices being hidden to the public.
Thank you for commenting and showing a real trade,and yes margin can increase-I cannot find what effect the huge drop on Aug 24th 2015 had, but I think margin may have increased by up to 50%,and my broker had issued a warning about margin calls-something nobody should ever experience- I’ve never come close,thankfully. Naked selling is not for me.

But I can’t edit my reply, so that my incorrect 33p premium and subsequent calc is wrong…I was looking at the wrong price and it should be should be 56p and thus:

56 * 1000 / 20000 * 365 / 32 = 32.0%

Paul

Hmmm…..I had not realised that you were able to rewrite history so that your initial post.

In this case there is no great damage, though the statement is still not completely correct as ROCE is only as stated so long as the position does not move against you. If margin increases at any time during the life of the contract, ROCE will change. Also, given that a prudent trader will only allocate a small portion of his available margin to any single trade, then true ROCE is rather lower than that stated.

However, I have deep misgivings about a discussion forum where posters can go back and change things. You have no intention of doing so, I’m sure – but that’s not the point. The TMF “no amendments”, or the Stockopedia or LemonFool “5 minutes to correct typos” time window are much better in giving readers total confidence that all is kosher.

(For my own calcs, I use the strike price to calculate ANNUAL return, aiming for 20%+ on any single trade eg, prices from yesterday:

RDSB Dec 2000 puts. 33p. 32 days to expiry. Return =

Premium (in pence) times 1000 (shares per lot), divided by strike, times 36 (days in a year) divided by 32 (days to expiry), so

33 * 1000 / 20000 * 365 / 32 = 18.8%

This understates my potential return as it is unlikely in the extreme that RDSB will go to zero – but it works for me to throw up potential trades. And I always prefer to understate and overdeliver than the opposite.

Paul

risk to reward will be about (margin=£1200, credit from sale of options= 7+11.5 @ £10 per point=£185/£1200= 15%.

Oh, dear me NO. The above is either naive, misguided, or deliberately stated to give apparent huge returns.

MARGIN does not, in any way shape or form, equal RISK.

If the FTSE shot to 7100, the loss (unless closing out; at what cost?) would be in the order of £1800 – where then your risk reward?

Nobody has 6 out of 6 winning trades- so let’s see if the market tanks or gets the hots for Mr. Trump’s new model economic miracle. If this trade is a winner I’ll eat my hat or the calorific equivalent in beer!

Well….. today could have got about 45- >100% return- I thank you!
Seriously these are random trades and I pointed out why this was not a good trade-but it’s another chunk of evidence to suggest that even bad trades can make money with options. This is just a freaky market- I do not believe anyone is making considered trades-you cannot factor in all the unknowns,so had I taken this trade, I would have closed out for a very nice 45.

at close the trade was worth 26- I can do no wrong!

failed to look at yesterday’s prices but today after the bounce, the trade is flat at around 21-most unfortunate market action last week and hold the champagne for this week’s roller coaster. So -if you were expecting the bounce today,we may have had it and we’d close out for a small loss -commissions

In ’99 and 2000 I had a share portfolio and I was on a long journey reading the FT. It sang the praises of Invensys- a share I bought. A few days later it was less sanguine, calling it ‘troubled engineering group’ Invensys.The price plummeted.
The pundits are not idiots, they simply do not know what really goes on-so why try to board that train? It breaks my heart to hear so many sob stories about shares-we’ve probably all been there.
I was in the USA when Enron was flying high- I asked why they were selling electricity at below cost price, and nobody seemed to care, now I’m no accountant but…..

At some point in the future we will look back at these early trades and reinvent them, using the prices of the time.
We aim to show how many different ways there are to take the same view. How to optimise the trade rather than trying to optimise ‘or curve fit’ to a trading system.
We will show how you can trade with defined or undefined risk so long as you are aware of the mechanics of the trades.

We would be happy to get prices* within reason, but you can open a demo account with some brokers, like Interactivebrokers IG(spreadbet but you can take the mid price of the spread- if they quote 8-12 it’s probably around 10 in the real market). Other brokers are available Saxo, Berkeley, ADM
* I have screenshots of end of the week prices going back umpty years

Richard, welcome by the way- and you are right to question everything. I hope it is clear, I have posted the closing prices from the 2 puts at the bottom of the article.
I love options because there are so many different ways to trade- and we put these trades up for fun-and we can follow the progress-but honestly 40% profit is good,100% may be on the cards tomorrow. Please feel free to comment, we aim never ever to offend or try to humble anyone. We’ve made dumb mistakes and part of our process is sharing with others,but I will not share my real trades in case anyone gets misled. All the trades here are for fun,using real prices, no smoke or mirrors.

Please would you explain why the trade went into profit? The FTSE 100 did not go below 6946 yesterday, and VFTSE only went up to 17.0. Surely the put you bought was still out of the money? What am I missing?

This trade hit 26 on Monday 31st – a profit of 40%. Cannot seem to pick a loser…….famous last words!

Just to be clear-the above trade assumes we BUY one 6850put and SELL one 6750 put for November expiry. We do not have to stick to one lot-we could BUY five, SELL three or Seven or Ten,or Twenty.This is just a simple one for one debit spread(debit means you pay for it,you OWN it) By starting with a defined risk trade with the potential to make five times as much,we can do a number of twists and turns,including if it looks like losing money. Remember our aim is NOT to lose money.
Just for fun imagine we bought 100 of these spreads -spend £18,500 to make £100,000.
Why would you do that? Well, if you had placed that sort of trade in mid august 2015 or early June 2016……

I think historically VIX hasn’t remain so low for a quarter. The VIX cooled down after brexit and since then hasn’t crossed 17!

UK equity options have variable expiries,and US optionsalso vary-some are settled on the Saturday. FTSE options are simple and it’s easy to remember when stuff happens- it took me about4 years of playing around with equity options to figure out that trading is a process of eliminating as much rubbish as you can. And who hasn’t invested in a stock to watch it plummet the next day? We can fix that.

The UK equivalent to VIX is https://www.google.co.uk/finance?q=VFTSE&ei=IBjOVPhV59nBA4vRgIgK

It’s helpful to look back and see the relationship between market dips and volatility. Nobody seems to get scared when markets rise-this is ironic really,as the higher markets go,the more likely they are to fall. Volatility is way too low and markets are, for my money, not reflecting true conditions-but the world always wallpapers over the cracks,until the crack becomes a chasm,then it’s time to capitalise even more while the dumb money sells at the bottom.