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On Sep 28, 4:00pm, Mr. Troy Kelley wrote:
> Subject: Re: REALTRADERS digest 559
> Traders,
>
> I need some tips on options trading. I have a OEX system that produces, on
> average between 3-6 OEX points per trade. So when the delta of the option
> is 1, I can expect a 3-6 point move in the option.
>
> The question I have is whether to by in-the-money or out-of-the money options.
A lot depends upon whether you're trading intraday, or holding positions
for multiple days. As a general rule, I've found that 5 pt. in the money
OEX options gave the most bang for the buck. Keep in mind that liquidity
(bid/ask spread, slippage) can be a big factor on options that are either
too far out of the money, or even, too far in the money.
> It would seem that the percentage move of out of the money options is greater
> than in the money. So an out of the money option would move from
> 3 to 6 or 9, instead of an in the money option that would move from
> 20 to 23 or 26. The percentage move of the latter is not as great.
Not really. The deltas are pretty close on a percentage basis. Here's
the results of a simple pricing model (based on McMillan's book), using
the date set to 10/13/97 (last week of October expiration), OEX 913.62
(Friday's close) and implied volatility set to 23.82 ($VIX at the close
on Friday).
Oct Nov Dec
call 930.00 2.56 17.62 26.00
delta 0.22 0.43 0.47
delta% 8.7% 2.5% 1.8%
theta -0.62 -0.31 -0.25
theta% -24.4% -1.8% -1.0%
call 925.00 3.81 19.75 28.25
delta 0.30 0.47 0.50
delta% 7.9% 2.4% 1.8%
theta -0.75 -0.31 -0.31
theta% -19.7% -1.6% -1.1%
call 920.00 5.50 22.06 30.62
delta 0.39 0.50 0.53
delta% 7.1% 2.3% 1.7%
theta -0.88 -0.38 -0.25
theta% -15.9% -1.7% -0.8%
call 915.00 7.69 24.50 33.19 <<-- at the money
delta 0.49 0.54 0.55
delta% 6.4% 2.2% 1.7%
theta -0.94 -0.31 -0.31
theta% -12.2% -1.3% -0.9%
call 910.00 10.31 27.12 35.81 <<-- In the money
delta 0.59 0.57 0.58
delta% 5.7% 2.1% 1.6%
theta -0.88 -0.31 -0.25
theta% -8.5% -1.2% -0.7%
Above, the model predicts a delta of 0.49 for the 5 days til
expiration at the money option. If you follow the Delta% row and
the Oct column, you see that on a percentage basis (5.7%, 6.4%,
7.1%, 8.1%) that a 1 point move in OEX translates into roughly the
same percentage move in the in the money, at the money, and out of
the money strikes. Where things get interesting is when the OEX
moves a lot (say 10 points) ... this causes the deltas of the out
of the money options to increase. However, the 3 to 6 point moves
that you mentioned aren't that large, so I'd expect the above table
to show the expected result.
I think the more important percentage number is theta%, especially
during the last week of expiration. Out of the money options are
dropping in value at -24% a day, versus -8.5% per day for the in
the money option. If you're hold across multiple days, this
might be an issue.
>
> Also it would seem that the deltas of in vs out of the money options is
> different. The in or at the money options seems to approach a delta of 1
> during option expiration week more quickly that the out of the money options.
> Is this correct?
They approach a delta of 1, but not as quickly as you might like.
>
> Right now I am waiting to trade only during option expiration week, and I
> usually only buy at-the-money options. Is this an appropriate strategy given
> that I can expect between 3-6 OEX points per trade?
Intraday, perhaps.
However, that 3-6 point move in OEX is quite small. The tricky thing
with OEX options is as the market goes up, implied volatility (ie, $VIX)
goes down, so the market can move up, and you're calls can still _lose_
value. Also, the options have a tendency to lead the OEX, and a lot
of the price movement is already in the option, before you make your buy.
I'd suggest that you get access to real-time quotes (or bug your broker),
and follow the moves in the _options_ you're interested in, and not the
underlying OEX. Also, noted here by Dr. OEX and others, is that the
OEX options tend to follow the moves of the S&P future more than they
follow the cash OEX (with the possible exception being the last few
days of expiration week), so you may want to see how your trading system
works on the S&P future.
--
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| Gary Funck, Intrepid Technology, gary@xxxxxxxxxxxx, (650) 964-8135
|