Bullet proof method for trading stock options

sneuhardt posted on 03/18/17 at 04:36 PM

I take it no one has discovered such a method yet? If so presumably everyone would be using it.

Posted by sneuhardt on 03/18/17 at 04:36 PM


joestore posted April 08, 2017 (07:31PM)

That's correct. If you have to ask the question, you are probably losing on your options trades?  I would suggest you start by reading Sheldon Natenburg's Options volatility and pricing.  You see, options are not as simple as the 5 parameters - Price, IV, time to expiration, strike price, and interest rate. Because there is something called skew.  Depending on how wide the bid - ask spread is, if someone comes in with a better bid than the market makers, they will adjust the price of all the options down the chain by adjusting the IV.  Now, depending on the entire market's volatility, that IV, even for a given level of skew, could change from day to day.  That is called curtosis. Skew measures the ratio of bids on out of money calls vs the number of bids on out of money puts.  They asymmetricness.  Curtosis measures the fatness of those tails. whether there are more bids in the out of money options, vs more bids in the in the money plus at the money options.  Because Market makers can manipulate both the bids and asks of each strike all day long, by moving both the bid and ask down or both up, or making the spread narrower or making it wider, or pulling bids once they see someone come in and get filled, the option value can change along with its Implied Volatility.  Because of this, the IV can fluctuate 10%, sometimes 20% from day to day thus making options "cheap" or "expensive".  

Nothing is bullet proof, but if you do covered calls, which is 1 short call for every 100 shares of underlying you own, and you buy more shares each time a solid stock dips, and you sell a call against your 100 shr position each time the stock is say 10% above its 50 day moving average, you are pretty much covering your risk and gaining some alpha that way.  Also if you own a 100 shr long position and you put a collar on it, meaning you buy a put on it when say the stock is 10% above its 50day, and then finance that put by buying weekly or some short term calls every week or each month, you're pretty much getting free insurance and covering the downside of your long stock position.  

As far as outright calls and puts or outright debit and credit spreads, you'll never not be down on paper, and the key is timing, to enter with the best reward to risk ratio and also knowing how much to put on at a time, position management.  You never want to pile on, because I know from experience it makes a stock that's moving all of a sudden go nowhere. Not sure why this is, but I see it happen every time.  You maybe wanna buy 1 to 2 options per day, spread out several hours apart.  If you pile on 10 options at one time, your position that was moving will come to a freeze, as MMs are trapped and they will start to sell vol against the position and also have to short 100 shares for every 1 call option you put on as the Delta 1 desks have to hedge the risk. When they short 100 shares, it depresses the price, so actually your piling on is working against you.  I've also learned from experience, when you feel the bottom is in, you want to wait 3 days after that for the true bottom. If you can wait, then always wait 1 full day.  Because the algos always engineer the price to shoot lower than your first day purchase.  that's why you want to buy a little at a time, and buy more as the price goes in your favor.  You never want to pile on. Never more than 3 options in one day.  It doesn't work. 

joestore posted April 08, 2017 (07:35PM)

*Correction on the collar. I meant financing the put by selling a call. The shorter the duration the call, the more theta you can collect.  So you can buy a 2 month out put, and sell 8 weeks worth of calls to collect 8 weeks worth of theta to more than pay for your put when the price of your stock has made a substantial rally and you want some downside mean reversion protection.  

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