Expensive put options

RFMontraz · Post by **RFMontraz** » Fri Sep 17, 2004 12:05 am

Opmtrader that's an interesting link (as usual).

It would be interesting to see a chart of his intra-month performance anyway. As he writes only front month OTM options, my guess is that he really has to sell [b]A LOT[/b] of them in order to achieve those returns. He also claims that he NEVER went in the money prior to option expiration. How? Does he buy back all that stuff when it gets close? Or he just prays?

Anyway that's food for thoughts...

opmtrader · Post by **opmtrader** » Fri Sep 17, 2004 12:07 am

On the website it says:

"He writes the options shortly after the expiration of the previous months options, generally 100+ handles away from the market, with four to five weeks left until expiration. This is the equivalent of approximately 700 Dow points. If the market comes within 40 to 50 handles from his strike price, he’ll buy an option, creating a credit spread, effectively limiting the risk and margin requirements for the trade. "

Now which one of you big boys wants to backtest this strategy for us?

RFMontraz · Post by **RFMontraz** » Fri Sep 17, 2004 12:15 am

"he’ll buy an option, creating a credit spread"

Still, he claims that he never went ITM anyway. As he doesn't buy back the options that he has written but he just buys options with lower strikes, the fact that the black swans didn't get him could be still attributed to sheer luck. Having said that, it's difficult to imagine something worse than 9/11 for put writers with a week to go. Can't say that I'm not intrigued...

opmtrader · Post by **opmtrader** » Fri Sep 17, 2004 12:43 am

"it's difficult to imagine something worse than 9/11 for put writers with a week to go"

Tell me about it... first trade of my formal trading career.

Johnny · Post by **Johnny** » Fri Sep 17, 2004 9:34 am

OPM, that's an interesting link. And also the other ones on the other threads. Good job.

dadeto · Post by **dadeto** » Fri Sep 17, 2004 10:04 am

I dunno, but from Aug expiration 2001 to Sep 10 2001 the Indu and the SP lost 6% and the NDX around 10%. So may be the guy was lucky to cover just before Sep 11 only because the indices had already fallen a lot...

Or he was on vacation

RFMontraz · Post by **RFMontraz** » Fri Sep 17, 2004 10:31 am

Dadeto I'm taking a look at the S&P500 (cash index) chart just now.

It shows that on the 17th Aug01 the index was trading around the 1160 level. On the 21th Sep 01 (basically lowest level in recent history) it was trading around the 965 level. That's -16% in 4 weeks and a lot to handle.

It's unlikely that the guy bought back the options before the 10th or that he was out of the office: his system should rely on making money on the theta of that stuff especially during the last couple of weeks before the expiry and, as he seems a systematic trader, it should keep him in the market at any time, holidays or not.

BTW OPM when we were asking about CTA's average accounts etc. This guy started off in May00 with just 12,000 dollars. That's an humble (and IMHO inspiring) start.

dadeto · Post by **dadeto** » Fri Sep 17, 2004 12:18 pm

Yes, and on sep 10 it was trading around 1090. Which is in the -6tish %.

The site says: "He writes the options shortly after the expiration of the previous months options, generally 100+ handles away from the market, with four to five weeks left until expiration. If the market comes within 40 to 50 handles from his strike price, he’ll buy an option, creating a credit spread"

How many points/percents are 100 handles? He says it is approximately 700 Dow points which is between 6 and 10% for the period jan 00 to today.

It is very likely then that he bought a downside protection, don't you think so?

And the vacation part was a joke Party

RFMontraz · Post by **RFMontraz** » Fri Sep 17, 2004 12:41 pm

Yes I think so.

My point is that to make it worth it he always needs to sell a [b]big[/b] amount of options (compared to the funds under management). By his own admission these options are, at least up to a certain point, unhedhged. The market moves lower and all of a sudden his options are only 2/3/4/5% (whatever) OTM with 2 weeks still to go (10/9/01). His delta is getting bigger, waiting to explode. The question is: what does he do now?

1) Buys them back: ok but given the amount of options written this will be quite painful anyway, he won't just lose 3% of his equity

2) Buys lower strikes: he would have gone bust or suffered a huge loss (because of the leverage) anyway in Sep04 as his orignal ops would still expire ITM

3) Starts delta hedging or "superhedging" the position: superhedging could be the way out, with disastrous consequences if the market bounced back and his ops expired OTM (this didn't happen from the 10th to the 21th Sep01)

4) A mix of 1), 2), 3)

Anyway my point is that if he just bought back the original options or bought lower strikes his performance would have been much worse than -3%. (the fact that I don't get jokes anymore is another story).

dadeto · Post by **dadeto** » Fri Sep 17, 2004 1:34 pm

I don't have a pricer. Can you try the price of a put spot at 1160, strike 1040, 28 days to go, vol at 35 vs the price when spot is 1090 with 14 days to go? Just to have an idea...