The way I see it, there are three main strategies when utilizing options (ya, I know, I'm really generalizing here and many of these strategies overlap.)
1) Hedging strategies
You own or have an interest in the underlying. You are protecting a position, or are trying to gain additional income via this option strategy.
2) Directional strategies
You have a uni-directional bias of the underlying. You may be utilizing options to gain more leverage than you could vs. owning the underlying.
3) Volatility strategies
You prefer delta neutral strategies. You have a directional bias in the volatility of the underlying.
My own preference, thus far, is to utilize 2) directional strategy.
However, I am also trying to collect premium dollars over time.
My ratio of selling short (puts and calls) vs. buying long (puts and calls) is about 2 to 1.
Therefore, my strategy is to collect more premium dollars than I pay out.
Where do all of you option traders fit within these classifications?
- atrp2biz. It sounds like you use Volatility strategies.
- humble_pie. It sounds like a lot of your positions are hedged against the underlying that you actually own and you gain premium dollars from your option positions. For example, you have mentioned diagonal spreads in the past. In that case, you are attempting to take advantage of the time decay, via a spread, to gain premium dollars.
- Argonaut. It looks like you are similar to me in the use of directional strategies.
I'm curious what your strategies are.
Last edited by avrex; 2012-02-21 at 12:07 AM.
Depends on which portfolio.
The prominent one I discuss on CMF is high theta burn. Also known as writing options. Also known as writing with certain conditions that needs to be met to create a high theta decay.
Last edited by Causalien; 2012-02-21 at 12:25 AM.
avrex: Since I foolishly gambled away the money won on GRPN with LKND I've decided to change strategy for the mean time. Buy-and-hope-something-happens has become sell-and-hope-nothing-happens. Will be keeping a number of put credit spreads open that are comfortable and easy enough to keep an eye on.
Perhaps as the contracts expire I may leverage some of the returns into a directional bet, to use the house's money against itself so to speak. June is a bit of a cutoff in my mind right now for keeping credit spreads open, as summer tends to be the selling season.
well, that didn't take long. Argo we already had this conversation did we not. In the long run it's the option sellers who ...
avrex i do different things, perhaps not a good idea to try to nail folks into categories esp folks one has never even met.
yes quality canadian stocks w significant eligible dividends plus short strangles. For US stocks in non-registered account, no stocks, nothing but long-life diagonal or (rarely) vertical spreads. Most are call spreads, but a few are put spreads. One objective among others is to avoid fully-taxed US dividends by transforming them into favourably-taxed capital gains.
i also have mono-directional bullish plays both US & canadian but these are always short naked puts. I'd never be one to buy a plain call. If somehow fatally seized with a bullish lust to buy a long call, i'd wrestle the craving under control by turning it into some kind of spread configuration.
& i trade some small caps that have no options at all.
Neutral and volatility strategies are not necessarily synonomous. For example, both calendars and butterflies are neutral, but calendars are long volatility while butterflies are short.
Possible rule for trading spreads, needs more analysis:
Net Credit Spread: Keep the spread tight, with higher number of contracts.
Net Debit Spread: Keep the spread long, with lower number of contracts.
Also, keep your friends close and your enemies closer.
Also, keep your friends close and your enemies closer.
lol i first heard that from a local politician who i swear is going to be our next mayor, although it's many years off.
Thus far, I have only traded options on the US markets.
I was recently wondering, if there were suitable option candidates on our Canadian TMX exchange.
Back on Feb 23, I grabbed a snapshot of the TMX option action, and just now, have had a chance to analyze it.
I decided that I would be only interested in a security, if it traded over 500 contracts in a day.
By my definition, this demonstrates a reasonable level of liquidity.
In total, there are around 240 securities on the TMX that offer options.
Of those, only 38 securities traded over 500 contracts on that day.
Of those, I noticed that 10 of those securities, actually provided more liquidity/volume, if you went to the US markets instead.
i.e. if currency isn't an issue for you, go to the US market instead.
Here's a list of those 10, and their interlisted US ticker symbols.
Code:Feb 23 Interlisted Ticker Company Sector Volume Ticker ------ ----------------- ----------------- ------ ----------- ECA.TO Encana Corporatio Energy 1074 ECA RIM.TO Research In Motio Information Techn 1154 RIMM AEM.TO Agnico-Eagle Mine Materials 657 AEM ABX.TO Barrick Gold Corp Materials 1647 ABX G.TO Goldcorp Incorpor Materials 2088 GG K.TO Kinross Gold Corp Materials 976 KGC PAA.TO Pan American Silv Materials 531 PAAS POT.TO Potash Corporatio Materials 643 POT SLW.TO Silver Wheaton Co Materials 1529 SLW YRI.TO Yamana Gold, Inc. Materials 1383 AUY
Possible Option candidates
Here are the remaining 28 securities, that in my opinion, are possible option candidates for trading on our Canadian TMX exchange.
Code:Feb 23 Ticker Company Sector Volume ------ ----------------- ----------------- ------ THI.TO Tim Hortons Inc. Consumer Discreti 527 AAV.TO Advantage Oil & G Energy 604 ATH.TO ATHABASCA OIL SAN Energy 682 BNK.TO BANKERS PETROLEUM Energy 566 BIR.TO BIRCHCLIFF ENERGY Energy 1852 CCO.TO Cameco Corporatio Energy 774 CNQ.TO Canadian Natural Energy 917 COS.TO CANADIAN OIL SAND Energy 807 CVE.TO Cenovus Energy In Energy 586 HSE.TO HUSKY ENERGY INC. Energy 1562 PRE.TO PACIFIC RUBIALES Energy 649 PBN.TO PETROBAKKEN ENERG Energy 673 SU.TO Suncor Energy In Energy 11941 TLM.TO Talisman Energy I Energy 525 UUU.TO URANIUM ONE INC. Energy 1021 BNS.TO Bank Nova Scotia Financials 652 BMO.TO Bank Of Montreal Financials 1419 CM.TO Canadian Imperial Financials 910 IGM.TO IGM FINANCIAL INC Financials 748 MFC.TO Manulife Financia Financials 1091 RY.TO Royal Bank Of Can Financials 1377 TD.TO Toronto Dominion Financials 929 BBD-PB.TOBOMBARDIER Industrials 971 FM.TO FIRST QUANTUM MIN Materials 1153 OSK.TO OSISKO MINING COR Materials 518 TCK-B.TO Teck Resources Lt Materials 3564 BCE.TO BCE, Inc. Common Telecommunication 546 RCI-B.TO Rogers Communicat Telecommunication 685
For each candidate above, on the day of the trade, you'd need to drill down to a specific strike price to see if the volume and bid-ask spreads warrant a possible trading position.
p.s. I've only discussed individual companies above. As far as ETFs are concerned, XIU is the only product, with the necessary volume, to be a candidate for options trading.