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Option Volatility & Pricing: Advanced Trading Strategies and Techniques?
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Since you are into equity research. Here are some suggestions.
Write cash protect puts on stocks that you have done the research on. For example if you think Disney is a buy at $105-110. Sell a put for disney with a 35-45% delta 30-45 days out (should be around 105-110 for an Oct monthly. This is imo the most efficient way to collect that sweet sweet theta premium.
Of you can write covered calls on stocks you own. Same idea, 30-45 days out, 35-45% delta.
There two strategies would imo be the safest ones.
There are so many options strategies you can use. You mentioned that stocks rarely move beyond 2SD anyways. But I believe the tail end risk is more than what a normal distribution might suggest, so you definitely don't want to write naked puts and get wiped out. But in a bull market, you can always write monthly put spreads just outside of the 1-2SD monthly expected move depends on your risk appetite.
My favorite strategy back in Feb/March was buying weekly SPX strangles at the 1SD weekly expected move. It was quite profitable when the VIX was high.
edit: another strategy if you want to take advantage vega. Sell an ATM straddle for a stock the week of the earnings, But protect yourself with another strangle a few weeks out when the vega impact is less.
But I would read natenberg first. There are just so many strategies out there, should learn the basics first.
Look to sell options only in premium rich underlyings (IV rank > 50). Sell around 45 days until expiration. Close between 25% to 50% of max profit. Make sure to roll to defend positions (look to roll around 20 DTE). Sell the 30 delta options, and look to collect 1/3 the width of a spread. If you really want to be a big dick player, beta weight your portfolio to SPY, and keep it delta neutral.
Edit: I got a lot of PMs concerning more information to this approach. Both TastyTrade and OptionAlpha are great resources to learn, and spell out this approach further. Other, more in depth, sources to consider are Option Volatility and Pricing and Options, Futures, and Other Derivatives.
> current stock's price right?
No. If you own 300 shares, you can create 3 options. Think of an option is a legal contract where, depending upon the contract, someone has a CHOICE to force the buying/selling of the underlying shares.
So, you own 300 shares. You can create up to 3 options. But you only want to create 1 option in this example, for 100 shares.
Now, when you create the option, you can choose at what price you want the option to become "in the money" which basically means the option is worth >= $0.
In this case you are SELLING someone else the choice for them to purchase shares, at or before the expiration date, at or above the strike price.
You pick the strike price when you create the option.
If the current price right now of a stock is $100. You can pick any strike price, at, below, or above $100. A strike price of say, $90 - $110 is called "around the money" for selling a call. A strike price at or below the current share price is called "in the money". A strike price above the current price is called "out of the money".
So lets say you're selling a call for a stock currently at $100. The options expiration date is 30 days out. And the strike price YOU CHOOSE is $120. That option will only execute IF the stock price, within the next 30 days, goes above $120. Since the person you are selling the option to has the OPTION to buy it at $120, they don't necessarily always execute their option to. They want to make as much money as possible. So if in 1 of the 30 days, the stock price of the option hits $120.01, technically the buyer can cash in and force you to sell your 100 shares. Netting them 1 cent per share, or a grand total of $1. However, they wont because their break even cost is the strike price ($120) + cost of trade (lets just say $5) plus the cost of the option (lets say 10%). So their break even price would be $132.05. ((strike price * 1.10) + $5/100 shares)
Now, if they don't execute the option within that time period (30 days) you get the option price (10%) netting $10/share and you keep the shares. Option prices vary wildly depending upon time to expiration (the longer the option lasts for, the more expensive, because the greater chance it has of reaching that price) as well as how deep in the money or out of the money it is. There are other factors, as we get deeper into theoretical values for instruments. Things like time decay, the fed funds rate, volatility, etc are all used for a "basic" model of calculating the theoretical value of such a contract. But thats a more advanced topic.
If you're selling far out of the money options, most likely you'll make maybe 1-3%, depending.
This is also why people on /r/wallstreetbets can yolo SPY calls/puts 3 days out for like $10. Because the chance of it reaching in the money is slim to none. But sometimes happens.
The guy that taught me options wrote a really great book called Option Pricing & Volatility. I suggest this book. The first 1-3 chapters goes over the real basics of options.
I have all his teaching materials laying around somewhere, if they're not copyrighted maybe I can scan and share.
Also just a small disclaimer, I might've gotten some of the terminology wrong. I always get the whole buy/sell put/call twisted when commenting on the fly on my phone.
How about Option Volatility and Pricing by Sheldon Natenberg?
https://www.amazon.com/Option-Volatility-Pricing-Strategies-Techniques/dp/155738486X
Yeah, they are facts and it would play out if shit. It's the "if shit" that creates expectations. How many times have we seen, over the years, the controllers-of-the-market succeed in keeping the prices where they need them to be in order to avoid catastrophe? A lot.
There will be shares to buy, the MM shares still exist and there are tons of shares the recycle during the trading day, every day. Otherwise the market would open and we'd see literally nothing happening in Time and Sales and the price action in the chart would look like this: --------------
It would flatline.
Now, the fact that there's little retail selling would mean that the share price would go through the roof, and the MM shares are the ones that would be sold to those needing to hedge or cover. I don't know what the current MM float is, as of Friday 4pm (I forget AH hours range at the moment), but it would be pulled from that.
Another thing to consider, which I haven't thought about in a long time, haven't needed to.. but in addition to everyone's favorite new term "gamma squeeze", there's also the phenomena of 'pinning'. I don't recall enough to speak to it with any fluency right now, so I'll just post a google search:
Read up on the various pinning scenarios; what causes them, their impact, etc.
I wish I could remember all of the shit I studied when I was learning options, but I jettisoned what I didn't need, but I still have the impressions it left on me enough to do some quick reads to get up to speed when I need to.
One thing I do know from experience is to not expect anything to go the way I want it to, so I stopped wanting / hoping.
You probably know all of this and the above, but for others, I'll post the resources I used when I was actively studying:
I haven't checked if this the most recent edition, nor whether this is the cheapest. This is a serious read:
Options Volatility and Pricing
All six of Simon Gleadall's Series of 6 books
- Option Greeks for Traders: Part I : Delta, Vega & Theta
- Options Market Making
- Trading Implied Volatility: An Introduction
- Option Gamma Trading
- Option Volatility Trading : Strategies and Risk
- Losing Money With Options: Advanced Techniques
That's a good start. You'll find reasons in there that will explain those moments when the underlying doesn't do what we want / expect, why options prices don't do what we / want / expect, etc, etc.
Again, I'm sure you know all of this stuff, but I stand by what I said: we need to be judicious with how much people get hyped up. Most people aren't as savvy as you are and won't know how to parse the implications / probabilities.
"But what if he ends up being right??"
So what? That's what we hope for, for sure. It ultimately doesn't matter if OP is right, but to some, possibly many, it would matter if he's wrong. Why? "Cool, I can't wait until tomorrow morning when the market opens and it rips... shit.. well, damn.. ok, maybe tomorrow! I'll see even more evidence that I'm closer to being able to quit my job and help people, financially! I've waited for so long! My life is about to change!! fuck yeah! I'm going to call [insert loved-one / friend's name here], this is so awesome!!"
Imagine being in the Vietnam war and being told weekly, "alright boys, look at these data points about the war, we're probably for sure maybe definitely going home this week!!! This is the week!!! ^(if the following things happen) BUT THEY DEFINITELY FUCKING WILL!! FUCK YEAH!!!
I could expand on that example long enough where it would cover most of the range of emotional experiences.
https://www.amazon.com/Option-Volatility-Pricing-Strategies-Techniques/dp/155738486X I think this is what you want
Sorry...thought I was under r/options...i meant search on r/options
Here is one: https://www.amazon.com/Option-Volatility-Pricing-Strategies-Techniques/dp/155738486X
if you're more into the hedged and iv-rv side of the options business, this is a must-read as well: option volatility and pricing
if you masturbate to advanced calculus and ito integrals, this is the book for you hull derivatives
Is this the correct link to the book?
https://www.amazon.ca/Option-Volatility-Pricing-Strategies-Techniques/dp/155738486X
I actually bought a book that has a focus on trading volatility if you're interested in learning more: https://www.amazon.com/gp/product/155738486X/ref=ppx_yo_dt_b_search_asin_title?ie=UTF8&psc=1
You can read this book: https://www.amazon.ca/Option-Volatility-Pricing-Strategies-Techniques/dp/155738486X
And apply for this group: www.predictingalpha.com
If you do these two things you will be ahead of 95% of retail traders already!
read "Options volatility and pricing" book
https://www.amazon.com/Option-Volatility-Pricing-Strategies-Techniques/dp/155738486X
it covers most of it
If you code, then write an option pricing calculator and play with it.
This is the standard book for new hires at most prop shops:
https://www.amazon.com/Option-Volatility-amp-Pricing-Strategies/dp/155738486X
Start with Options & Volatility Pricing by S Natenberg as an intro: https://www.amazon.com/Option-Volatility-amp-Pricing-Strategies/dp/155738486X
I don't know if this is entry level but Option Volatility and Pricing is a classic.
http://www.amazon.com/Option-Volatility-amp-Pricing-Strategies/dp/155738486X
Decent read, learned a lot more than I knew 2 months ago.
i am in HFT so most of my perspective is in in very short term risk. I pay attention to the big picture and put on a long term options play on the occasion. stats are important because they are real, like gotta live in reality
i incorporate automated strategies, and use my discretion clicking with my mouse to provide liquidity in futures markets
Yes i trade options on futures, or better put futures on options. I sell premium which is the value of the time until product expiration and volatility. so i trade futures on these positions to manage my deltas. here is a book that is a must read for trading options: http://www.amazon.com/Option-Volatility-amp-Pricing-Strategies/dp/155738486X
i encourage doing as little as one push up every morning, to making a rule to always remember someone's name when you first meet them (maybe repeat the name everytime...). karate and MMA are good examples of classes to start. The key is starting a routine to take seriously and forcing yourself to stick to it. That translates into the trading arena but sticking to your rules in that environment, whatever they be about stop loss or trading numbers
i drink coffee and think about yesterday
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