XJO (ASX) What are my Options?

Originally posted by Orwell ↑

Hi Zonetrader, I really appreciate your thoughts and the detailed reply.

Much of what you say aligns with my thinking but with a few new ideas in there. Gamma I had ignored for the moment but thanks for the tip on how to think about it. Open Interest I found hard to apply on stocks as the market is a bit thin anyway, but thanks for the tip for Index options.

Karen of Tasty does wide Index Short Strangles on three major indices in the US, set about 2 Standard deviations from the money. It appears a very profitable strategy but risky. I think she made her big money during the GFC years when volatility was exceptionally high. But it wouldn’t surprise me if she blew up her account if another 1987 style market crash occurs. For me I’ve decided its too risky to do Naked Options due to potential outlier events that will occur on all markets, particularly with current distortions around the world. I wonder how many forex traders had equivalent naked type positions over the Swiss Franc in recent days. A better approach appears to be wide wings on those types of trades, with the long position just giving some insurance against outlier events. See Tasty’s “Big Boy Iron Condors”

Butterflies are interesting but I heard they were lower probability of profit trades. Also not the starting point for me I don’t think but will get to them. The key to Options trading of all types seems to be to get to a level of competence to be able to adjust positions properly as you allude to with your Butterflies, by putting on additional positions. I’m not there yet.

My understanding is that Option traders are generally all about trading volatility, rather than direction. However I have a well-developed technical/charting approach and will always take a directional view and so I think I can use this to get closer to the money with selling strategies and maybe make it work. But I’ve been surprised at how hard it is to find viable positions with reasonable risk reward. It sounds like that’s a shared experience.

My conclusion so far with Options is firstly, that you need to be expert in this not just competent, through paper trading or whatever, before you can be profitable. Secondly its about finding trades with small edges and margins to scratch out a return rather than any easy low hanging fruit.

The other understanding I have with Options is money management is even more important than with other forms of trading I’ve done. Written positions to be 2-3% of portfolio only and diversified, uncorrelated positions as much as possible. Lots of small position to allow the probabilities to work in your favour. Nevertheless I can see how you could creep lots of small gains and then wipe it out with a big loss.

Anyway, lots of thoughts here on all this. Really great to hear the experiences of another trader trying to do this on our market.

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Orwell - I think one needs to be an expert firstly in keeping out of trouble with options. That means knowing exactly where the risks are.

I've seen people get hurt leaving a long option to expire because it's almost worthless (or because they have forgotten about it) and then it gets assigned because of auto exercise at expiry and the find they have a very large stock position on their hands and if the market is in a down trend, it can be far more costly than the small debit risked when purchasing the call option. That's on individual stocks and, again where index options remove that risk of owning stock.

I've seen people hurt holding in the money short calls on ex-dividend day where they find their short call has been assigned and they are then required to pay the dividend. It's explained HERE.

That's just a couple of doozies I can think of right now but knowing how to keep out of trouble is extremely important. There are enough challenges to make a profit without unnecessarily losing significant funds!

Butterflies are a lower probability of profit, however, they can be useful at times. They can be legged in and the strikes can be altered in all sorts of ways. The main aim of the butterfly is to capture theta decay, however, it certainly does have a narrow range of profit. I don't always put the entire position on. More of this later as I have to go out for a while now...

Originally posted by Neo ↑

Hi Orwell,

I don't trade options but I listen to Tasty Trade virtually everyday. I don't think TT's core strategies will work on ASX options because of the lack of liquidity, their whole philosophy is based around selling high IV( because it's mean reverting) in efficient markets, with penny wide spreads*. Tom and Tony wouldn't dare touch ASX listed options. You need to setup an account with TD or IB, and trade liquid US underlines.

Have you looked into ratio spreads? I think they could be suited towards traders with more of a technical bias, as opposed to trading solely off probabilities/ number of occurrences.

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Neo, I did trade US options with Think or Swim for a while, but found the night time trading just too difficult when other responsibilities didn't allow for sleep during the day. I find XJO options more liquid than Aussie stock options.

Yes ratio spreads can work well and again, like Orwell said, IV is an important factor and even more so with ratio spreads, imo.