I will be the first to point out that I made an idiot of myself on this thread. It was dumb of me to jump into a product that I did not even know the workings of. Also, even though I am familiar with “the greeks”, I showed my lack of experience by failing to actually apply what I know by not assimilating that they, of course, change predictably as the strikes change in relation to ATM. …soooo dumb …SMH at myself.
for this reason I think I deserve to redeem myself by rewarding my impulsive insight to start my short position “in case things get worse”. I wrote that spread at a strike of 2050 back in the “good old days” of last Thursday when we were looking at 1970. yea me!
Alright, I’m done. promise I won’t become one of those obnoxious post-all-my- trades trolls. Just wanted to redeem myself this once.
Also, thanks to anyone who is “hard on me”. I have a shortage of people around who are willing to kick me in the arse from time to time.
What kind of spread was it pure price or a calendar spread? I seem to recall there was fairly limited downside on the price, but perhaps the vol did something weird.
A trader’s maxim is that the worst thing that can happen is to make money on your first trade, because it breeds overconfidence and you stop looking at risk seriously. If you didn’t lose too much money and you learned how things can go wrong, consider it a not-too-expensive lesson on how things work in the real world.
The big advantage of options is that by doing appropriate baskets, you can specify your maximum risk and loss, exploit that, and if it limits your upside too much, that’s probably a sign that you shouldn’t do it
Right Bchad. Specifically it was a plain price spread exp. February. I recieved a $150 premium for a $500 dollar spread. Since then I have added to the position, making it neutral, but adding downside risk. I wrote a put spread same exp. @ 1830. I recieved a $90 premium. Now my max loss on the whole trade is $260. If the S&P will *kindly* stay between 1830 and 2050 I make $240. However, after today 1870 looms. I fear if we break that we my blow past 1830 without looking back! What I like about options is even in that event I have the choice of rolling my short put spread (hopefully at additional premium) and waiting for a recovery. At worst I am losing $260 … and if we blow by 1830, *only* losing that is a bit of a win in itself. Tomorrow I would like to hedge this risk by buying a cheap (
One thing about options is that it is entirely possible to lose 100% of your investment. If you are selling/writing, you can lose more than 100%. That’s one big reason why they are considered risky even though in some contexts they seem safe because the downside has a specific limit. If you invest in stocks, losing 100% of your investment doesn’t happen nearly as often, so you have to understand you are in a different risk world where your previous experiences in other securities are of limited use.
So frequently, option newbies think “This stock isn’t that risky, how can buying an option on it be,” but they forget that the stock can move a bit and then they are out 100% of their investment. That doesn’t mean that it can’t be a good risk-adjusted bet - it just means you have to watch your position sizing carefully. And if you are on the short side of an option, it’s pretty much always advisable to cap your maximum loss to something you know you can handle (it can hurt, but you still have to be able to handle it).
Two books that helped me were The Bible of Options Strategies by Guy Cohen, which has a nice format that discusses which strategies are riskiest and what situations they work with, etc… It’s very structured and useful when you’re starting out. I can’t remember the second off hand, but looking at Amazon, I think it was probably Understanding Options by Michael Sincere, which now has a second edition. It has more examples of case uses for specific strategies. The first book looks at the combos and says what situation calls for them, the second tends to take situations and then tells you what combos suit. The second was better for the intuition of what to use, the first was better for understanding exactly how a particular combo behaves.
To be honest, I’ve stayed away from options because I didn’t feel I have the right instinct for them, but I think that I know enough of about the rest of the markets that I should reconsider that today.
Tomorrow I would like to hedge this risk by buying a cheap (
Please don’t trade the VIX. If there’s one constant in the professional options trading world, it’s to stay away from trading the VIX, VIX futures, or even worse, VIX based ETFs. It’s a derivative of a derivative of a derivative and is the most complex risk management tool there is.
Example: VIX can spike from 25 to 30, but VIX call options decline in price to what appears to be less than intrinsic value. Why? It’s a European option and the VIX is a 30 day implied volatility, but those calls are x days from expiry, and although spot VIX might be 30, future VIX might have declined. And so on, and so forth. It makes my head spin. Don’t trade VIX.
^^yea, I’ll take that advice! Again, I knew that futures were probably factored into these option prices and that they are European style options, but failed to put this informatin together. None of this stuff sinks in until I actually have positions to manage.
Part of me is excited to have the chance to try and maneuver one side of my SPX strangle. This is where doing it in paper trade is not ideal because I don’t trust the fills on complex trades like this. My ability to widdle down my max losses will be in my ability to roll a spread for more credit when it is already in the money. That is an experiment I have to do for myself. This is a potentially expensive way to learn, but I am keen on defining my max loss now. …*sigh*, I learned the hard way last year what exploding delta feels like when you are short and naked
