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  4. In July we made a switch to how we managed signals from the strategy. We didn't change the signal generation but we changed how we traded them. We were dealing with problems where even when we got the direction right we often lost money due to how far out of the money we had to trade the options to avoid taking too much risk. In July we decided to trade at the money options and then spread them to get our risk to the right size. So the long option was always at the money and the short was placed to reduce our delta exposure to the correct level. Since that change we've had a 64% win rate versus 45% before the change. Granted, it was also a great couple of months for trend following in that time but the early results are promising.
  5. RapperT

    Welcome to Steady Futures

    Signals coming, stand by
  6. Earlier
  7. Michael C. Thomsett

    Put/Call Parity - Two Definitions

    When traders use different options with the same net price (whether long or short and involving calls or puts), the degree of net debit or credit differences often defines potential profit or loss. If the two sides are at net zero difference, the position is at parity. The bid/ask spread defines a series of options in terms of how popularly they are being traded, and how expensive or cheap they are. A very narrow spread is the result of a high volume of trading, but everyone has seen examples of very wide spreads. Invariably, this is found when little or no active trading is going on. This reveals that traders know the current pricing of the option is not a good deal. That usually results from a combination of moneyness and timing to expiration. The more remote the possibility of profit, the less reason there is to make a trade at all. And this is reflected in the bid/ask spread. When the net spread is identical (at parity), what does it mean? This is seen when a bid price is reduced by the trading fee, and the offsetting ask price is increased. An example of parity: Bid price 1.15 and trading fee is 0.05. Net is 1.10 ($110). Ask price is 1.05 and trading fee is 0.05. Total is 1.19 ($110). The net of both sides is identical; under this simplified definition of parity, the net debit or credit is zero. This applies, for example, in a synthetic long stock trade. With a 60 strike, the following positions are possible: Buy 60 call, ask 1.25 plus trading fee = 1.30 Sell 60 put, bid 1.35 less trading fee = 1.30 For the trader of the long synthetic, the positions starts out at parity, so there is no debit or credit. As the underlying price rises, the long call matches point for point and the short put loses time value, eventually expiring worthless. If the underlying declines, the long call loses value and the short put gains value. As this occurs, the appreciated short put represents a point-for-point net loss identical to the decline in stock. The advantage here is that the trader can roll out of the put and delay exercise. The same comparison works for a synthetic short stock trade. Parity occurs when the net of a long put and a short call is zero. Parity as a trading ides matters because setting up a trade with a net credit provides flexibility for profits, but a net debit means more points must be earned before breakeven and profit become profitable. This argument works not only in synthetic trades but also in any straddle or other offsetting combination trade. The more complex definition of parity considers the present value based on European style options. Exercise is allowed only at or close to expiration date. The purpose of this is to determine whether the calculated parity justifies the trade. The farther away the expiration date, the greater the impact of present value. The formula for the complex version of parity is: ( C + X ) ÷ ( 1 + r )t =P + U C = premium of the call X = strike R = interest rate t = time to expiration P = premium of the put U = underlying price This formula might seem complex for what could be a small difference between he two sides. But when working with many contracts on each side of the trade, and when expiration is distant, calculated parity becomes a determining factor. It applies in arbitrage trading with options and with any strategies designed to set up riskless profits. For most options traders, especially those working with relatively short-term expiration cycles, reliance is on rapid time decay (for short trades) or time management (for long trades). Parity defines the practicality of such combinations for calculating the likelihood of profit, a form of arbitrage in the extreme short term. The advanced method is appropriate for larger block trades and in cases where long-term options are used as part of contingent buy or sell forms of risk management. It is inaccurate when applied to American style options unless those options are kept open to last trading day, which happens only in a minority of cases. The present value calculation also fails to take dividends into account, which will distort the outcome when traders hold the underlying in addition to trading options. This distinction between a spread and parity is important in another way as well. Many pricing calculations of options are based on the mid-point between bid and ask. This makes no sense. No traders – buyers or sellers – ever trader at the mid-pint. They either buy at the ask or sell at the bid. Thus, the mid-point is always an inaccurate version of “price.” Premium value should involve separate calculations, one based on big (for sellers) and another based on ask (for buyers). This misguided application of mid-point often is used in calculating probability. As a result, probability is always misrepresented as a detriment to one or both sides of a trade. A fully accurate report of probability would be based on two calculations, and only when both sides are at parity would the result be realistic. Calculation of parity in its simple form is good enough for most people. When variations such as time positions are closed, whether dividends are earned, and the degree bid/ask spread and its effect on probability, are also considered, parity becomes a more complex issue. In its most simplified form, it defines the net difference or similarity between net bid and ask. For calculations of probability, the mid-point is a complete inaccurate measure in every case, whether options are at parity or widely divergent. Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs on his websiteat Thomsett Guide as well as on Seeking Alpha, LinkedIn, Twitter and Facebook.
  8. RapperT

    Welcome to Steady Futures

    Signals will be a bit later this am
  9. Should I place all my contracts at one strike and expiration, or split it up for diversification? Should I wait until expiration as my natural exit, or roll early? Should I handle winning trades the same way as losing trades? Should I only sell enough contracts to be fully cash secured, or use leverage? In this article, I’m going to address the question of choosing strikes based on delta, while keeping the other variables constant, in order to show some historical performance comparisons of SPX put options from 2001-2018. Whenever I make trading decisions, I always remind myself of a couple quotes from W.E. Deming… “In God we trust, all others must bring data.” “Without data you’re just another person with an opinion.” Assumptions held constant for the following backtests… Product: SPX Period: 2001-2018 Entry: 30 DTE Exit: 80% of credit received, or 5 DTE, whichever comes first Position Sizing: 100% notional/cash secured (no leverage) Collateral yield: 0% Commissions and slippage: Not included Based on those assumptions, here’s the data for trades placed at different deltas. Key observations: Higher risk has historically resulted in higher reward…As strikes move away from at the money (ATM), volatility and annualized returns both decline. This is what we would have expected to see in a world of not perfectly, but highly efficient markets. Sharpe Ratio’s increased with out of the money (OTM) options. This is what I find most interesting and worthy of further discussion. Why would there be higher Sharpe Ratio’s with out of the money options, and is there any opportunity based on this data? Research from AQR has come to similar conclusions that Sharpe Ratios tend to increase the further out of the money an option is sold. This might be for the same reason that we see a linear decrease in historical Sharpe Ratios for US treasuries the further out on the yield curve you go (i.e., comparing Sharpe Ratios of 1/2/5/10/30-year treasuries): Aversion to and/or constraints against the use of leverage. If you’re an investor who is unwilling or unable to use leverage, your only choice to maximize expected returns is to sell the riskiest option (ATM) and buy the riskiest treasury bond (30-year). This being a common theme among market participants can create market forces that impact prices. But if you are willing and/or able to use leverage, you could simply lever up OTM put options or shorter-term treasury futures to your desired risk level, and get paid more per dollar risked. Isn’t that the objective…the most gain with the least pain? Of course, risk cannot be eliminated…only transformed, and leverage creates risks of its own and should be used responsibly. Unfortunately, it too often isn’t. As I wrote in a recent article, excessive leverage is the number one mistake I see retail and even occasionally “professional” investors make. In our Steady Momentum strategy, we sell OTM puts and lever up to around 125% notional to give us a similar expected return as ATM puts with slightly less volatility. We also collateralize our contracts with short and intermediate term bonds instead of cash, as collateral ends up being a significant portion of total returns with put selling strategies. Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios.
  10. RapperT

    Steady futures

    I added % return to the post
  11. Kim

    Steady futures

    Under Steady Futures Trades forum
  12. 4k de Bernie

    Steady futures

    Hello, I do not find anywhere the monthly results (statistics) of Steady futures. Thanks. 4k de Bernie
  13. Windeon

    Frequently Asked Questions

    Great Thanks
  14. TrustyJules

    Frequently Asked Questions

    STO - Sell to open BTO - Buy to open
  15. Windeon

    Frequently Asked Questions

    Could you explain 'STO and BTO' terms used in put writing strategy?
  16. Kim

    What Can We Learn From UBS YES Lawsuit?

    The issue is not the strategy itself. The strategy is fine, and has a long term hedge (you have to manage it property of course). The issue is placing your whole portfolio into the strategy. The issue is that gurus like tastytrade continue recommending their followers to trade gamma negative strategies only. No matter how you defend/roll/adjust those trades - in case of big market move, you are guaranteed to lose money. The only question is how much. That depends on your skills, level of leverage, the size of the market move etc. But the losses are guaranteed if you have negative gamma only strategies in your portfolio.
  17. TrustyJules

    What Can We Learn From UBS YES Lawsuit?

    Such investor offerings tend to have 'risk mitigation ' strategies that call for moving the centre of the condor or like tasty trade advises reducing the span gradually till it's an iron fly to keep profit potential. In the see saw of late 2018 both those IMHO stupid methods would have ripped you.
  18. Such lawsuits are common and typically lack merit because offering documents are properly drafted to protect the companies involved and disclose the risk. I find it unlikely that the documents were not properly drafted. For instance, in one of the few actual UBS documents I could find on UBS’s yield enhancement strategies provided “yield enhancement strategy products are designed for investors with moderate risk tolerance who want to enhance the low to moderate return typically generated in a ‘flat’ or ‘sideways’ market.” That’s a great description for trading iron condors. So, if the documents were fine (most likely, but you never know), what was the issue?Most likely overzealous brokers pushed the strategy without really understanding the risk profile. My takeaway from reading about this is two part. First, investors typically don’t understand options, and the media certainly does not. Most advisors do not either. For instance, the media has called the strategy used by UBS a “leveraged, esoteric options strategy.” Iron condors are neither esotericor typically leveraged. They are the definition of a defined risk option strategy. A profit/loss graph of an iron condor looks like: There is a maximum loss on any single trade that can be controlled based on the strikes and premiums received. UBS’s strategy purportedly used iron condors on the S&P 500 index, the NASDAQ, and other “primary” market indexes – so volume should not have been an issue. Other writers have demonstrated their ignorance of the strategy. One popular critique of the UBS strategy reads: “The problems with YES began in 2018 with violent fluctuations in the S&P 500…The most volatile period was between October and December 2018, during which time the market declined 20%--then followed by a rebound of 12% through January 2019. The violent swings caused the premiums of both the put and call side of the iron condor strategy to spike, leading to losses on both sides of the trade.” But this is practically impossible. An investor can’t experience losses on BOTH sides of the graph (in effect doubling the losses), unless the traders are idiots. The only way to have that happen is to close out one half of the trade for a loss, in the hopes that the profits on the other side will increase, but then the market whipsaws back, thus causing losses on both sides. Of course, at this point, the strategy is no longer an iron condor. It’s a simple vertical spread: The odd thing about this critique is that even vertical spreads have loss limits. Let’s say the UBS traders had a maximum loss rate of ten percent. A structured iron condor can have a max loss of ten percent the same as a vertical spread. If the traders are trading to profit from time decay across multiple indexes, risk could be further controlled through the use of reverse iron condors that have a profit and loss graph of: In the event of a large move, such a position could help offset losses. (There are other ways to protect against such a move as well – anything from simply buying long dated out of the money puts and calls to trading volatility instruments). The problem with a normal iron condor in a low volatility market is that traders do not receive a very high premium for the risk they take. In order to get a 1% or 2% return per month, UBS traders would have to be taking risks that were outside of the “moderate” or “low” range. Traders probably started taking chances they shouldn’t have. Much of the media has commented that the UBS traders “compounded” their results by trying to “make up” for losses after blowing up trades. (Who of us hasn’t done that?) Traders make trade adjustments or open new trades on the prediction that either (a) the price will return to the mean or (b) the price will continue moving. It appears the UBS traders made the bet that the price would continue moving, and instead it reverted to the mean. Of course,when traders do that, they are no longer trading risk defined iron condors. They are making directional market bets – bets that if wrong, make the situation worse. What can we, as option traders, learn from this? Trading is as much psychological, as it is methodical, even for supposed professionals. Losses will occur and decisions will be made trying to “make up” for losses rather than staying within stated trading guidelines. This is a mistake. Plan trades, plan for what happens when the trades go wrong, and when they do go wrong, stick to the plan. Sure you might occasionally “fix” what went wrong, but more often than not, you’ll likely make the situation worse; The general public views option as “high risk” investments. They are not, when handled properly. In fact, as option traders know, options can be used to mitigate risk. Try to combat the disinformation when you can; Don’t trust plaintiff class action lawyers. I personally do not understand all of the class type legal advertising that exists because of the strategy. By all accounts, all UBS agreements require FINRA arbitration of individual claims. This greatly decreases the profit potential for attorneys, unless the client lost hundreds of thousands of dollars (in which case the client is probably not calling Saul from the internet for the case). Strangely, that is what can currently be seen. Christopher Welsh is a licensed investment advisor and president of LorintineCapital, LP. He provides investment advice to clients all over the United States and around the world. Christopher has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Christopher has a J.D. from the SMU Dedman School of Law, a Bachelor of Science in Computer Science, and a Bachelor of Science in Economics. Christopher is a regular contributor to the Steady Options Anchor Trades and Lorintine CapitalBlog.
  19. mustafaoe

    Backtesting with ORATS

    Thanks for the detailed answer I will it give a try
  20. Please note: Today and tomorrow are the last days when it will be possible to register as beta tester.
  21. TrustyJules

    Pinning Down the ‘Option Pinning’

    Despite cheaper brokers trading fees remain an issue and the lack of large capital excludes arbitrage or strategies heavy on margin. The retail trader is not defenceless in the face of this massive financial world – his key advantage is that he trades small volumes. This means that on most instruments execution is fast and on excellent prices. The retail investor can therefore focus on events like earnings, option expiries and construct strategies that make us of gaps that cannot be exploited by the professional investor. Augen – and he is not alone in studying the phenomenon – points to the strange concept of pinning as a potentially exploitable event for the retail trader. This article examines some of his ideas and places them in the context of today where the markets have changed somewhat from the time he wrote his books. What is Option Pinning Actually? The subject has been the subject of extensive learned academic research which will not be repeated here. In essence it is the phenomenon that certain stocks gravitate towards the strike price of an option on the Friday of the expiry of that option. This simple visual sets in greater clarity what is meant than any long winded explanation: Figure 1: APPLE 17 March 2017 Expiry The Y-axis is in dollars representing the amount that the stock was trading away from a strike price. The X-axis represents the number of minutes since trading started (a total of 390 minutes). The ‘gravity pull’ of the option strike price usually starts gaining in strength around 15.15 PM just about 350 minutes into trading and has its apex 15 minutes before the bell. These are approximations as you will see there are many ways in which a stock pins. The figure given here is particularly clear and should be taken as an extreme example. To get an idea of how extreme the case is – here is a different way of looking at the same chart but now with bars marking the times that the stock crossed the strike price: Figure 2 Apple 17 March 2017 – Crosses The stock basically traded freely for most of the day and in the last half hour was drawn to the strike where it then hovered over or under in the last minutes of trading. How to exploit pinning? The option strategy There are a number of ways in which pinning can be exploited, in the interest of brevity this article restricts itself to the following strategy (note that this was for analysis purposes and is not a trading recommendation – it can be obvious the pinning strike would be elsewhere): Opening the position between 12-12.30 when there is a lull in trading; Deciding that the closest strike to the stock at that moment will be the pinning point – which we will call S (S+1 will be one strike higher and S-1 a strike lower) Opening a position that looks like this: o OB 1 C @ S-1 o OS 3 C @ S o OB 2 C @ S+1 The position is closed 10-15 mn before the bell. Some leeway needs to be allowed because the options will flip-flop in the last minutes; The position is never allowed to go the expiry and except in obvious cases (strikes far out of range) always closed 10-15mn ahead because pinning sometimes ‘let’s go’ in the last minutes. The S+1 options are there to reduce margin requirements and not strictly necessary. The author usually trades in 10/30/20 and the total margin requirement will be around 1500-2000$ for Apple at the time of writing. The strategy ensures that there is a buffer upwards if the stock is higher than S and a considerable way down if the stock is lower than S. Overall it produces a broad range of profitability with excellent opportunities to decide ad hoc to close the position. Oftentimes it’s tempting to wait till the very last minute to get the absolute best price but internet glitches, widening spreads at the close and a last minute adverse move can thwart such greedy moves. As a rule its best to take good money off the table when it presents itself as these positions can reverse fast. What stock? Which brings us to which stock to choose for pinning? Augen points out that highly liquid stocks are required with very liquid option positions. He points out AAPL, BBY, MA, FDX and GS. To make a long story short, whilst there is some case to be made for FDX in particular and to a lesser extent MA, the one stock that really stands out as pinning more than others is APPL. Figure 3 MA expiry 8th June 2018 As one can see the MA stock pinned for half the day but gradually rose away from the strike at the end only to pin in the very last minute. This is far more difficult to exploit than AAPL. An explanation of strategies for the other stocks would be more complex and the data manipulation is not easy. It requires obtaining minute by minute O/H/L/C /V data for each stock over the period of the option expiry. This is very data intensive and rather a pain to work with. All data used was collected by the author from public sources and pertains to 03/2017-09/2017 and 03/2018 - 03/2019. It is verified and corrected (for errors) data from a major financial institution. Does Option Pinning Always Occur? The first caveat of our conversation has to be this one. Does pinning always occur as Augen seems to aver or have things changed since his time? The latter point is often made by today’s criticasters of Augen judging his information to be out of date and no longer relevant. Whilst no analysis has been made of the strategy to predict pinning earlier than midday Friday, as a general rule (much depends on how much distance to the strike price is deemed a pin, for the purposes of the article 40c was deemed to be the cut off because otherwise usually it’s hard to make a buck doing a trade) one can say the following: Pinning as described by Augen occurs 50% of the time; There is a slight bias in favour of pinning on the 3rd Friday expiry compared to other Friday expiries but the difference is so small that it could be insignificant given the limited sample size of 18 months; When pinning fails very often (but not quite always unfortunately) the stock ‘pins’ halfway between two strike prices. This latter point is something that Augen has not noted but that is quite apparent from the ‘failed’ classic pins that have been found in the last year. Consider the following figure: Figure 4 Apple 15th March 2019 Expiry (straight line at the end due to DST differences) Actually the stock pinned pretty well between minute 200 and 300 – but if you opened the strategy at that moment you would have lost your shirt when the stock moved to midway between S and S+1. This phenomenon is a nuisance for the classic S-1/S/S+1 strategy proposed as the position would have lost substantial money, in the example above around 1000$ or near 75% of margin. It does not always end in disaster because for example the expiry below would have ended with a wash. Figure 5 AAPL 5th May 2017 expiry What’s worse is that there really seemed to be no way to predict this as the stock seemed well behaved having gravitated already towards the strike price. When the above mid-pins – for lack of a better word – occur the volume at S and S+1 even right at the bell is enormous. Whereas for the S strike price this may be expected, when normal pinning occurs the S+1 strike is usually near 0 when the bell is about to be rung and volume is minimal. A plausible conclusion – based on nothing more than empiric observation – is that pinning is occurring but that the forces driving pinning (winding and unwinding of major positions by large financial traders) have become more sophisticated. Some more statistics A more detailed examination of the 18 months of data examined for AAPL reveals the following: In some instances it was impossible to determine at the suggested point between 12-12.30 where the stock would go as it was midway between two strikes. In those cases it was decided not to open a position. The overall losses and profits are estimates based on the stock price and not actual back-tests. The column with the ‘all Fridays’ results seems more reliable and shows that a 6% return would have been obtained every month on average which is a very nice outcome. Nevertheless there are considerable ups and downs in the trades. The above results are not ‘twiddled’ the process of trading was mechanical even when there could have been obvious moments to bail with profit from a trade that turned unprofitable, these should be balanced out somewhat by trades that would have been stopped at a loss but that ultimately would have made money. The psychology of playing a pinning trade The author has tinkered around with many pinning trades over the past year and a half. As a conclusion it can be said that the psychology of the trade is very important. The positions will very frequently move very fast in good and bad directions. Here several conflicting motivations vie with each other for supremacy in the trader’s mind: Augen advises to aggressively stop out of losing positions. This must, however, be offset against the inevitable vagaries of market movement. A pin can occur in a yo-yo fashion as well as in the straight plunge down example given at the beginning; In the author’s experience all positions will trade at a loss and at a profit at least for part of their short life time. The worst thing to do is to reverse the position continually as you are then sure to be chasing the wrong movement of the next 30mn of the stock; By contrast opening at midday and walking away until 15mn before the end is also inadvisable because good profits can be lost and major disasters of 100% loss scale cannot be avoided in the last minutes of trading (which might have been avoided otherwise). And so as usual fear and greed play havoc within the trader’s mind. Neither a strict discipline nor being ‘on the ball’ all the time seems to be effective. So here are a few do’s and don’ts based on experience: Avoid reversing/adapting positions more than once. If you got it wrong – get out regroup and don’t double down. If you do you , you will lose a LOT; When opening the position be patient. Paradoxically the best moment is not when the stock seems perfectly positioned at the bottom end of a daily movement on a strike (or the reverse);it is unlikely to stay there and so opening when the stock is on a daily/hourly high or low is inadvisable. It is better to do it somewhere in the middle even if the credit for the short options is less attractive; Take profits – the author bails at 30% profit but any reasonable target is good. The market will always have a moment where things will be better but profit is profit and what you have in the plus can be wiped out in a minute; Cut unacceptable losses only if it really seems hopeless. Sometimes a Trump-Tweet or something else will set the market on fire and justify intervening. Frequently however major losers turn out to be winners in the last 10 minutes. It’s nerve-wracking but necessary to sometimes sit it out and accept that a 50% loss could end in 75% when – if your pinned strike wins out eventually – could also have been a winner. What does pinning hold in store in the future? Pinning is alive and well – it is the strategies required to come out a winner that require studying. Augen already offered several strategies and with the mid-pin now occurring frequently some strategy to exploit it needs to be devised. Well behaved AAPL tends to trade between 2-10% away from its pinning price. FDX also pins but the spread is much broader – here is an example from April 2018: Figure 6 Fedex 19th April 2018 expiry An active (day) trader would have seen multiple opportunities to trade FDX here as the stock moved away and then back to a strike price. The number of strike price crosses of FDX is also superior to that of AAPL. Here is the corresponding figure: A word of warning is that the charts show when the stock converges on the strike price. If it crosses one it can be going in a straight line to the next strike price. FDX is notoriously mobile and therefore getting your strategy right at the right moment makes all the difference. It seems plausible that here too strategies can be developed that would work but it seems that every stock requires its own approach.
  22. ORATS_Matt

    Backtesting with ORATS

    As the owner of ORATS I can speak to the benefits of our backtester: Near end of day data back to 2007 with excellent greeks and theoretical values. Highly customizable backtests including the ability to select from many traditional options strategies, overlay with stock, change leg relationships, set price levels, set delta or OTM% levels. Exit strategies including stop loss, stop profit%, delta level, percentage of strike difference. View results with Sharpe ratios, win%, see all trades and download CSVs. Ability to combine backtests in different weightings. Ability to run multiple symbols. Ability to enter based on indicators like volatility levels or IV/HV. Ability to use outside entry and exit dates. Ability to trade around earnings and investor conferences. Many more.
  23. mustafaoe

    Backtesting with ORATS

    Hi, I know that some of the members using Orats for backtesting. I am currently using CML TradeMachine. In general I am fine with CML TM but there are always some data issues that looks good from first view but sometimes it is simply not the reality. I am asking the experience with Orats? What are the advantages of Orats vs. CML Trade Machine?
  24. Kim

    Intermittent Server Issues

    Yes, we are looking for a new hosting company.
  25. ex3y7s

    Intermittent Server Issues

    Site is having connectivity issues again. This seems to happen biweekly; any thought to upgrading/changing your host?
  26. Mark Wolfinger

    Holding Positions into Expiration

    Buyers Option buyers understand the pain that the passage of time inflicts upon them. I’ve always believed that the major goal for all option owners is to sell the option as quickly as feasible. When buying an option, the trader has some objective in mind, and most of the time it’s a change in the price of the underlying stock. Less often it may be based on an expectation of an increase in the option’s implied volatility. If either of those expectations comes to pass quickly, the option owner stands to profit. Once that anticipated event occurs, it makes little sense to hold onto the option. You had an idea, it came true, the market responded. Whether the response was better than you planned (good news), or worse (sad news), the event is over, the market has moved, and there is no reason to own the option. As I said, that’s my belief. Many option traders, especially the inexperienced, are often unsatisfied with the economic result (loss, or profit is too small) and hold, looking for the market to validate the original premise. Because the event is over, holding becomes a wager that the news wasn’t fully digested the first time, but that it surely will be enough to affect the stock price in the immediate future. Clinging to that hope day after day, the position is held, until it eventually expires worthless. If the option is in the money, all time premium erodes, and the option owner may no longer have a profit. Holding into expiration is a difficult thing to do, especially as you watch the value of your option decay. What keeps those holders married to their options is the fact that a decent stock move can change the option’s value by a large amount in a very short time span. Once the option value has shrunk to almost nothing, it pays to hold in the hopes of a miracle. The problem is that these options should have been sold much earlier. Sellers Option sellers are on the other side. The passage of time is most welcome. If the stock doesn’t make an unfavorable move, the option – slowly at first, and then more rapidly – loses its value and the market price moves towards zero (for out of the money options) or parity (The option’s intrinsic value) for options that are in the money. This time the question is not when to salvage as much premium as possible, but rather it’s when to repurchase the short position to lock in the profit and eliminate risk. As the price of the option is decreasing, it seems natural to hold onto the short position, at least for just one more day. And that good idea can result in problems. When holding for that one extra day worked so well yesterday, it’s natural to anticipate that holding for another day is likely to bring a similar result – an increase in profits. When the option is out of the money in the morning, the probability is that it will remain out of the money when the market closes for the day. That makes it an attractive proposition to maintain the short position. When a trader thinks that way, there is seldom any incentive to exit. It seems ‘obvious’ to hold and make more money. Risk is ignored, with the eye trained squarely on the theoretical time decay for the day. We all recognize than an option with a two delta is going to finish in the money one time out of 50, or approximately once every four years. That’s much more frequent than ‘never.’ With so little to gain, why take the chance? It’s important to gauge just how bad it can get, if this position turns on you. The problem for most traders is that they estimate neither the potential loss nor the likelihood of that loss. When the market has been dull and moving quite slowly, it’s even easier to think that way. But just as the option owner gets pretty good gambling odds when holding a soon-to-expire-out-of-the-money option, the trader who is short that same option is taking a big risk (with a high probability of winning) to gain a small amount of money. I’ve been there (Chapter 5) and understand the temptation. But the potential loss does not justify taking that risk. Let somebody else have the last $0.05, $0.10, or even more for those almost, but not quite ‘worthless’ options. Yes, pulling the trigger is difficult, but over the longer term, you will be a happier, less stressed trader. NOTE: I am NOT recommending that you pay cash to repurchase options that are 10% out of the money when it’s two days before expiration. I am referring to placing bids ($0.15 or $0.20) to buy options or option spreads when at least three weeks remain before the options expire. I’ve been able to repurchase spreads @ fifteen cents with as much as seven weeks remaining before expiration. I know that’s a good deal. How much to bid depends on your portfolio. If you have sufficient insurance that a major move will not hurt, there is no incentive to bid more that your comfort zone dictates. I maintain insurance, so fifteen or twenty cents is about all I’ll bid for one month options. But, when I lack insurance, or when a big market move represents a real financial threat, I bid more. My top bid, when risk was present was about one penny per trading day remaining before the options expire – with a $0.35 limit. I did that when markets were more volatile (2008-9). Today, my top bid is $0.25. It’s your money and your comfort zone, but there should be some price – no matter how low – at which it’s a good idea to buy back those ‘cheapies.’ If your commissions are so high that you avoid these trades, you must look into using a less costly broker. Taking extra risk because trading expenses are high does not make sense. Placing a good ‘til cancelled order with your broker is a good 'set it and forget it' routine, but I don't recommend it. You may forget the order has been entered and that can be a problem. If you work full time and cannot watch the position closely, that's a different story and I recommend a ‘good for the week’ order that can be reconsidered each weekend. If you learn to enter an order to purchase those apparently worthless options, ask yourself: Which would make you feel worse i) Not exiting when you know you should, and occasionally losing real money? ii) Exiting and seeing the options expire worthless It’s that psychological factor at play again. If you know taking a specific action could induce feelings that hinder your ability to function efficiently, then for peace of mind, avoid the choice that could result in those feelings. Remember, if you simply learn to ignore what happens after you exit a trade, there is no danger that this will occur. Hold or exit As expiration approaches and you are facing a ‘hold ‘em’ or ‘fold ‘em’ decision, I recommend making the best decision, with everything being taken into consideration. If holding and losing extra money represents an unhappy outcome, but folding, only to see the market ‘behave’ would be so upsetting as to hinder your trading, you would be in the bad position of being forced to take extra risk – just to avoid that ‘devastated’ feeling. Advice: consider making adjustments by reducing position size. By the time it becomes necessary to exit, the position may be small enough that exiting at the market top (or bottom) won’t feel so bad. Obviously it’s best not to be hurt by losing decisions, but the truth is that every trader cannot do that. Trading involves much decision-making. Do the best you can (sure, try to develop skills that allow you to make even better decisions), but learning to live with those decisions is a skill worth developing. This post was presented by Mark Wolfinger and is an extract from his book Lessons of a Lifetime. You can buy the book at Amazon. Mark has been in the options business since 1977, when he began his career as a floor trader at the Chicago Board Options Exchange (CBOE). Mark has published seven books about options. His Options For Rookies book is a classic primer and a must read for every options trader. Mark holds a BS from Brooklyn College and a PhD in chemistry from Northwestern University. Related articles Trader Mindsets How Much Can I Earn With Options? Trader’s Mindset: Oblivious To Risks Managing A Losing Trade Learn First. Trade Later Adaptability And Discipline Maybe The Market Will Turn Around Trader’s Mindset: Always Collect Cash The Art Of Trading Decisions Managing Risk For More Than One Position My Philosophy On Options Education Trade Decisions: Risk Or Profits?
  27. Thanks. As I see there’s quite a lot of discussion here but was looking into see if I try out the website first hand. Appreciate the quick response.
  28. Officially no there is no trial. You could subscribe 1 month and see how it goes. Note that my service is used my multiple members of this forum to place live trades and as such it has proven to be reliable. Making a single bad trade will probably make you lose more than the cost of 1 month. Kind of the penny wise, pound foolish type of thinking. However, from time to time i do make an exception to provide a trial if you have a specific feature you want to test.
  29. @Djtux Do you have a trial for your service? Thanks!
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