That’d be lovely, but I don’t trade $100mn positions. Not yet anyway.
My point is, there are some things which are relatively predictable in the market - for example, the way you shoulder in a massive position will require big pools of liquidity. It’s not outsmarting so much as following where and how big money moves. Knowledge of day trader operations is always a good thing in my opinion.
You keep assuming that I don’t get it. I do. We just apparently have different ways of defining exposure and risk. Semantics.
Rhody, I agree there is chatter everyday, but I strongly disagree that it’s not important. I guess it comes down to whatever you find useful. Similarly, I can’t for the life of me see any correlation between option vols and impending moves in the market, but I know other traders swear by them.
I am not saying or assuming you don’t get it. What I am saying is what you are getting is not the tip of the iceberg…it is the tip of the tip of the iceberg !!!
You get it…but when you see what you get against what you should get…
EXPERT
Ah.
Now imagine if you trade a structured options strategy and you don’t need margin…
Is that 100mln position too far fetched now ???
EXPERT
I thought I got it, now I know I don’t get it.
I thought that the bottom line with options was you can take directional or volatility views on the market. Or both, but ultimately, you’re taking one or the other. Have I missed something?
And another quick question, you obviously know a lot about options. Does something like Dynamic Hedging prove an easy read to you? Because I don’t mind admitting, it nearly killed me off, and the formulas were way beyond me. If the kind of thing you’re talking about requires that kind of mathematical nouse, I will never breathe the word options again.
I didn’t say “not important”. I said it almost never amounts to anything. To the extent that the talk influences trader actions then it’s influential - of course. It’s like saying that a central bank is seen buying.
My point is that the idea that a large volume of open options a certain strike will draw price close to that strike as expiry nears - which is the basis for the chatter due to the delta hedging assumption - almost never actually plays out. I used to cover the forex options market, so I saw this stuff day in and day out.
As for the vols, remember that implied vol is an expectation of future volatility. It’s based on the cummulative guess by market participants. That makes it just as subject to error and the impact of news events (or lack thereof) as any other form of expectation setting.
That is almost always the first realisation to greater learning. It is only when one starts to think they know it all that they stop learning. It is when they know that they will never have enough time to know it all that everyday brings a new adventure.
The thing about options is not really about taking a view on the market but allowing the market to give you the opportunity. Too often traders try to outsmart the market and fight with it. The market was there long before you came along and long after you have gone, it will still be there. Nobody beats the market. Those that are bent on doing it are embarking on a foolish adventure.
If however, you are willing to wait for the market to bring untold fortunes to your doorstep, it will accede to your will AT ITS OWN TIME.
Smart and correct use of options will allow you to have the market deliver the goods whenever it deems the right time. What it means is…you do not need to figure out where it will go, what it will do. You just wait for the market to do what it wants to do and go where it wants to go.
In doing so, it will reveal to you a window of PROFIT, not a window of opportunity but a window of profit. You take this profit and open up another window of opportunity and wait for the market to deliver yet again…the market WILL NEVER FAIL you.
With options, you could work a directional view, you could work a market neutral view and you could work a volatility view…now if only it could make coffee too, it would be perfect !!!
Knowing a lot about options gives no benefit and as a matter of fact, I do not know as much as it seems. Those that write books on it know a lot more about options than me…they know all the glamour terms, all the exotic names, concepts and strategies but they cannot bring it to the market for the market will make fools out of them.
I cannot do the mathematics involved nor will I attempt to. I only know, understand and have worked the core concepts to the point that it is not even 2nd nature…it just flows within my blood. I have lived and breathed options longer than I care to recall and only because it continues to be a bright new adventure for me everyday. The maths I use is simple…easy to visualize, easy to fathom.
Does something like Dynamic Hedging prove an easy read to you?
It really doesn’t matter. It is easy actually but more importantly is what can it do for me ? How to use the knowledge one has, little or vast, is far more important than how much knowledge one has. Working with options require a mindset shift, one that is radical and almost completely opposed to what a “normal” trader would have.
Most traders coming into the option world think in terms of trading the options, ie…buying it when it is low and selling it when it is high. That would prove to be a fatal error 100% of the time.
When you trade options, you must TRADE the UNDERLYING MARKET !!..not the individual option.
The options are priced to the underlying MARKET and increase or decrease of it’s value comes from the MARKET move against a constant that is ever present…Option Decay.
Understanding how these two work will give you an advantage ALWAYS because you are relying on a CONSTANT in the market…something that is predictable, ever present and behaves exactly the same ALL the time.
EXPERT
Of course loads of options pros will no doubt disagree there and will talk endlessly about arbing price discrepancies, complicated methods requiring super computers, and all that. Some of them are even in the Market Wizards books.
One of the things I’ve always loved about the options market is how the various types of traders all think the others are complete morons. Those who only sell them think buyers are idiots. Those who spread trade thing directional trades are rubes. And of course Taleb things anyone who sells an option should be examined for mental deficiency. 
When you trade options, you must TRADE the UNDERLYING MARKET !!..not the individual option.
In other words, options are the vehicle by which you trade the market, not the market you trade. Hmmmm…That kind of sounds like what I said I do - use options to play the stock market, albeit in a relatively simple fashion.
YES.
Options are just the tools for the craftsman to use to attain quality of his profession.
For the trader, the measure of quality is consistent, predictable profitability.
Like I said, you have already got it in the first place but you may not have even realise what awaits you… the true depth of what is it you have really got in your hands.
EXPERT
Thanks everyone for all your responds and discussion. Any idea where we can purchase options?? Trying to get as much information out of the seller too. Thanks again:)
PIP SQUEEK
You would need to find a house with the inhouse knowledge to provide market making for options.
SAXO has a good platform and offers round the clock, close enough to 24 hrs a day anyway.
I could contemplate doing a tutorial if there is enough interest.
EXPERT
I converted some funds using XE website. When I converted the funds I was told that I have 30 days from the day to use that rate(locked in). I was curious of how they did this before because of the movement in the market and if someone doesn’t pay them, but now I believe they use options. any ideas??
Many of the strageties and concepts of Options I still do not understand, there is not that much information on the internet either that I could find.
I am still very eager to learn. Any suggestions on books or other sources of options knowledge???
Kind Regards,
PIP SQUEEK
I would be very interested. sign me up:D
YES. They could use an option to give themselves the edge on the hedge or they could use a forward contract on the spot.
There is a lot of information on options on the net and even in books but generally the information is of not much use to a trader because whilst it is technically and factually correct, it does not provide utility information ie… I tell you exactly what it is, how it works…how it behaves and what should happen when and why or how, correct formulas correct maths but don’t ask me how you use it because I only know what it is and how it works but I don’t know how to use it.
So what you need is the actual utilisation aspect of it. What to do after you did what you were supposed to do and what more importantly to do after you DID NOT do what you were supposed to do.
I am contemplating doing tutorials with hands on options trading with a SAXO demo account…watch, monitor the results…get amazed, pee in your pants…jump for joy…the works and when you find it works well enough, consistently enough then trade individually or maybe even form a pool.
That comes later, let’s see if there is enough interest to do something out of this.
EXPERT
Expert: OK, having read what you wrote, I’ve got two simple questions.
Q1: I frequently take directional views on the market. It works, although obviously there are losing trades. Say I’m long, why would I hedge myself on the downside with an option? I’ve got a stop loss for that.
Example:
I’m long 1.3000 on EURUSD
SL is at 1.2900
I could buy an OTM put on EURUSD with strike at 1.2900 to cover me if it fell beneath 1.2900 but to what end?
I could instead have my SL in place and a sell order at 1.2900 if required. The only advantage would be if the price is going to criss-cross through 1.2900 several times, making the transaction costs of me getting in and out the market more than the cost of the option. Given that the options are priced on underlying volatility, I could only gain if the volatility was actually greater than I anticipated.
Q2: You and pipsqueek are the same person, so what’s your agenda?
Interesting Rhody, I’d read before that you used to cover the options market, but conversely, I do find the levels play out. Whether or not that’s through delta hedging or other specs presuming delta hedging who knows…
And yes the implied vols are an expectation, but if it has zero predictive powers, then I can’t see what the point of following it would be?
Finally on this note, how about risk reversals? Have you found them to be of much use?
Ok firstly PIPSQUEEK is PIPSQUEEK and I am I… so I don’t where you got that idea unless you are saying we originate the same IP address which I doubt is the case even if we are in the same country and using the same ISP.
I am from Singapore and I do believe PIPSQUEEK is not from Singapore.
Ok…back to more important matters.
We look at the bigger picture rather than just a focus on to the way you trade and as to why to use an option rather than a stoploss.
You are long on the EUR/USD at 1.30 because you think the EUR/USD will appreciate. You could be 100% right or you could be 100% wrong or a variation of anything from 0 to 100%
Obviously if you know you are 100% correct, there will be no need for a stoploss at all. You are willing to have your stoploss at 1.29 because at that point you are willing to concede you were 100% wrong, in other words you are betting 100 pips that you are 100% correct or willing to bet 100 pips anyway that you will be correct. That is a fixed point for you…at 1.29, cut…admit defeat, fight another day. The most that you will lose is 100 pips as long as it touches 1.29 the first time. Your loss is capped at 100 pips.
The one thing that you have not factored in here is this…how long are you willing to wait for the possibility of it touching 1.29 ?? One week ??..two weeks ?? Maybe open ended.
Let’s say we take a 2 week timeframe and bought a 1.31 PUT. I just checked the valuation and it would cost 196 pips. Now you were willing to risk 100 pips with a stoploss so this would not do having to fork out 196 pips for a protective PUT correct ??
Well…wrong. Herein lies a hidden advantage actually there are 2…but let’s look at this first. Your spot at 1.30 is covered by a PUT at 1.31 so in effect, you have locked in an intrinsic profit of 100 pips, no matter where the market goes !!!
If you paid out 196 pips for a locked in profit of 100 pips no matter what outcome, your maximum loss no matter what is 96 pips, 4 pips less than if you hit stoploss in your case.
Now lets say you did hit stoploss. In your case you would be out of the market and out of the pocket 100 pips.
With a structured option strategy here, you could EXCEED stoploss and you are still only 96 pips down MAXIMUM…advantage…you STILL have your position…you are NOT stopped out. What happens if the market goes to 1.28 and recovers back to 1.33 ??
In your case, you would be a spectator once it pips 1.29
In the second case…Market delivers a profit !!
Third advantage, small but still good to have. If you are correct anyway and the EURO went up from the word Go !!..Your spot appreciates at FULL delta and your PUT depreciates at HALF delta…you make twice on your spot what you lose on your option.
Now if we could get it to make coffee too…sigh !!
EXPERT
Interesting, but in your example above:
With the 1.31 PUT you say 100 pips is locked in. Two questions:
FX Options are European so no exercise or assignment before expiration.
If option expires with Market at 1.30, no action is needed exercise at 1.31 offsets spot at 1.30
EXPERT