Thanks Gen & Gamma, those are helpful tips. In your experience, are there other companies that are typically more/less volatile than the overall market like Google? Or maybe entire sectors?

I know in your explanations above your referred to the other data about options as being fixed by the Black-Sholes model. How do you use them in that case? For example, how would you determine if the gamma (no pun) of an option is too high or too low, depending on whether you're buying or selling? I can read and understand the definitions of delta, gamma, theta, etc but really struggle with trying to make practical use of the actual values. Or is that getting into the realm where the answer is too specific to the underlying issue to have general guidelines?

This has been an extremely helpful discussion. I've been to options seminars and asked similar questions and they acted like I was looking for the secret recipe for coca-cola.

No, I said (or meant to say) the fixed things are fixed things---regardless of model. We take those fixed things (int rate, dist to strike, days to exp) and feed them into the model. Since they are fixed, they CAN NOT be contributors to mispricing. At some level, then, we ignore them. Intellectually, we know they go into the "soup".

Without getting into a complete instruction manual; For the most part, delta, gamma, theta are items you take into consideration as you build your play to help your odds, control your outlay (and thus risk, on a long) and control or at least evaluate your risk/reward. If you are speculating, with a market opinion, this stuff helps you pick a strike and month. If you are hedging, you evaluate these things sort of differently. If an option has a delta of .43, say, then being short 2 of those opts could act as a hedge for 1/.43 = 232.5 long shares, within certain limits.

For some examples; delta is generally taken (over and above its actual meaning, which is the change in option value per point of underlying movement) as roughly your odds of the option finishing ITM. You are looking at several strikes. You want one that has 23% odds of success? Or 54%? (Of course, the higher-odds one will almost cost more to buy, thus will lose you more if it loses) Delta and gamma cannot be "too high"..they are what they are based upon the relationship between the strike and the current price of the underlying. If you're trading a thin issue, you might see a bid-ask spread of 30 cents. You look at an option that costs 15 cents to buy. That option has to like triple before it can overcome that big a spread. Is that likely? What size move would be required to produce that?

You are looking at another strike, you see theta is .04 a day. This can give you an idea of when the option will lose, say, half its value, when you might consider bailing if you're wrong. You think the stock/underlying will move as you project within 20 days. But the option will inherently lose 80 cents over that time, no matter what the stock does. So, suppose the opt doubles 18 days from now, but has lost 72 cents of value? Does your math still work?

There is no one right way to do this, it has to do with your taste buds, the amount of experience (or, self-confidence, delusional or not) you have, and your appetite for risk, your style, and your appetite for how often you want to watch the market. In general you just want get as many of these factors working in your favor as you can. If you can. Sometimes you can't. Most beginning options traders like covered calls. Most experienced opts traders hate them. I liked vertical spreads for a while, now I don't. Some folks like deep ITM calls and puts, some like barely OTM options. Some like way the hell OTMs which are lottery tickets. Some think they can nail the time frame of projected movement pretty accurately and buy front-month options (those usually get smoked) and there are those who have little faith in their ability to nail a move so they buy LEAPs and give themselves up to 2 years. The LEAPs are usually pretty expensive, so they tie up capital.

But there are several really demonstratably wrong ways to do this, chief among them is to overpay. One way is by buying protective puts (out of fear) on long stock you own but see falling for some reason. You buy puts, late, reflexively. They have blown up in price because everybody wants them and the underlying's vol has exploded. So, you badly overpay for them. In essence, you will have locked in a loss, not much different than selling out of of panic. The puts shrink in value, the stock recovers, then you dump out of the puts at a loss.

You are basically trying to proportion the frictional effects of all this crap clawing at the value of your option against the reasonable expectation of what can be expected from the underlying. If you overpay for an option that has to triple to produce a profit when the underlying is a slug, your chances of success are probably very low. If you sell an option when the implied vol is very low, you are being undercompensated for the risk you take on.

Thanks again, Gamma. Those examples are very helpful. Appreciate the knowledge sharing from all..

if you really believe it.. do it.. long puts on the tza's for extra leverage...buy the puts and report back in 6 months..

Quote:

if you really believe it.. do it.. long puts on the tza's for extra leverage...buy the puts and report back in 6 months..

I did, as I mentioned on the last page I bought AUG 120, OCT 100, and DEC 99 SPY puts on Thursday, several contracts of each, just a few hundred dollars invested.

I'm not familiar with the TZA.

One other question for you guys ... are there certain times of the day or month that are best to buy / sell? Do options tend to get cheaper before or just after OPEX? And I've noticed the bid always seems to disappear near the close, both days I've owned the options they traded pretty well all day, but then at the close the spread widens out significantly and the bid collapses a bit. I wonder if this is typical?

with tza is 3x spy short... if your right at least your gonna get paid

No, TZA is the 3x IWM short.

Sorry, off subject....Where can you find the history and status of your donations to the ticker?

Swag: Control panel, donate.

Today Spain and Italy announced short-selling bans, including derivatives.

If U.S. regulators were to do this at some point (as in '08) does it affect options?

Possibly. A seller of options will often short to hedge.

Ok, thanks Gen ... but the demand for puts (and ability to buy them) will still be there? (since I'd be trying to sell them)

I'd also think that if put writers can't hedge, the premiums would be higher? It would make sense for higher asks if the risk is greater ... does the normal supply / demand model work in this case or is that irrelevant?

Thanks again.

Edit:
I'd be selling them to close of course, not writing them.

Well the demand will be there but you'd have a hell of a time hedging them. And selling naked PUTs is a great way to ruin yourself, especially if they're PUTs on an index.

Single-name PUTs on very low-priced stocks (e.g. selling GE PUTs @ $5, as I did during the crash) are a different matter as your risk is limited to $5. But selling index PUTs is an effectively-unlimited-risk act, and if you can't hedge it and something goes wrong.....

Incidentally this was the cause of a very large number of blown up people in both '87 and 2000.

Why is selling a put better than selling a call? (I'm looking for a two-word answer but any spirit-of-the-answer will be accepted. So why then is the skew "the way it is" in Equities? Don't sell naked puts sell more naked puts...

Quote:

Incidentally this was the cause of a very large number of blown up people in both '87 and 2000.

YEP

Pat: It's only "better" in the sense that a naked PUT can only lose the strike in money. If sold on a low-price underlying (e.g. the GE $5s) that's all the risk you're taking.

A sold call of course has no fixed risk. A sold put on an index or high-priced underlying may as well be unlimited-risk -- it isn't of course, but for all intents and purposes it may as well be.

Zero barrier (or in rates the par-barrier). Is mathematically less risky to sell a put- though in practice? Maybe not so much! Log-normality approaching the barrier makes the put even MORE attractive. Add the negatively correlated put-skew? You'll always find a put-seller.

That's true. Shiny pennies laying on the ground are always attractive, but the question becomes this: "Are you feeling lucky..... punk?"