Australian (ASX) Stock Market Forum

Options Trading/Covered Call Education - Recommendations?

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makteb said:
@Seeking Truth

Depending on your appetite, risk management and your margin capabilities, you can get into a stock position by selling naked puts collecting some premium and if you get assigned, you own the stock you wanted. Of course you need to calculate the size of your assignment, and of course after fees whether the premium is worth it.
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Beats having a limit order, may as well make some premium while waiting for the stock to get to your chosen price. Assuming the return is viable.
 
zac said:
Having traded options for years now, I struggle to find a community of options traders, especially in Australia.
I'm going to go out on a limb here and say most people are not profitable (or unable to beat the index). Early in the piece I did trading courses and kept in touch via chat site/social media with several others. Most people stopped and weren't doing well or weren't happy with the results and a lot made losses.

My theory on this now is that it's like being back at school, all of us had the same teacher, same education, same books, same tuition, same amount of time, yet in a class of 30 there was mixed results.

I do follow options traders in the USA and they have been by far profitable. While some years they didn't beat the S&P500, I did note they were consistent year after year and they had some form of protection should the market decline. The best example I saw recently was a seasoned covered call writer in March lost only 5% although the market declined over 25%.

A former wall street trader provided a supposition that if all you wanted to do was beat the Index, then write covered calls deep out of the money against the index earning no more than 1% premium per month against the index, ie SPY, $SPX. This was insightful, however, you'd have been hard-pressed doing that from October through to mid-Feb. 6 to 10% p.a. above the index, in my opinion, is a nice return, yet most would laugh at that.
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That is the truth of it, especially CC writing.

Risk Vs rewarded. The BiiiiiG returns require commensurately more risk and at the end of the day, unless you're a market maker, or know those skills (D neutral in massive size and hedging as you go), you're still having to pick direction.

The big risk nobody thinks about, apart from the Greek risk everybody should know about, is "contest risk". That is the costs of placing trades... brokerage, spread, slippage, and in Oz options this risk is extraordinarily high, relatively speaking.... Ozzie RTs are as cunning as sh1thouse rats and also because of our lack of sufficient liquidy can take you to the woodpile and have their way with you.

Compare the construction of a synthetic long Vs the going long the underlying stock to illustrate my point on contest risk

In today's straight up, CB manipulated markets, buying stocks with an appropriate trading plan is easier and more profitable.

If, the CBs ever get the hell out of the markets (haha won't happen now) I would go play, but for the moment, apart from scrounging a few percentage points on bottom drawer holdings via collars or CCs, *at appropriate times* it ain't worth the effort Vs risk.

FWIW
 
In other words, options shine in sideways markets, in directional markets straight delta is more profitable and the best and most efficient way to get delta is by trading the underlying.
 
Wayne,
Thanks for your awesome insight.

Sitting on a long position with the banks pumping cash in has been a good strategy.
I have a portfolio of stocks and I probably will always still write calls as well.

Most of my trader buddies are doing well with just going long at the moment.

By way of example on a junior gold miner ETF I entered a PMCC last night with expiry of 10 July and slightly ITM. This one is more a defensive play and by close of trade this morning I already missed out on nice capital gain (had I not written a call).
For me its about taking the guess work out of the market and making an income regardless.

For the most part I've probably proved why this strategy would perhaps overwhelm some. My trade will potentially have me missing out on lots of capital gain on expiry which will make many think "what now."

So definitely risk and reward to consider. In my CC portfolio I'm happy with how I manage the risk vs reward. I don't hit 4s and 6s but get the singles.

I also have a portfolio where I'm only long.

With the PMCC (ie simulated long position) my ROI will be ~18%. (ROI isn't typical, vol has created the opportunity)

As for Aussie options, I definitely wont touch them for all the reasons you and many others have said.
 
zac said:
Wayne,
Thanks for your awesome insight.

Sitting on a long position with the banks pumping cash in has been a good strategy.
I have a portfolio of stocks and I probably will always still write calls as well.

Most of my trader buddies are doing well with just going long at the moment.

By way of example on a junior gold miner ETF I entered a PMCC last night with expiry of 10 July and slightly ITM. This one is more a defensive play and by close of trade this morning I already missed out on nice capital gain (had I not written a call).
For me its about taking the guess work out of the market and making an income regardless.

For the most part I've probably proved why this strategy would perhaps overwhelm some. My trade will potentially have me missing out on lots of capital gain on expiry which will make many think "what now."

So definitely risk and reward to consider. In my CC portfolio I'm happy with how I manage the risk vs reward. I don't hit 4s and 6s but get the singles.

I also have a portfolio where I'm only long.

With the PMCC (ie simulated long position) my ROI will be ~18%. (ROI isn't typical, vol has created the opportunity)

As for Aussie options, I definitely wont touch them for all the reasons you and many others have said.
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You can play with ratios and/or roll strikes when prudent, on your short call with your pmcc FWIW. Have a think about that if you haven't already.:xyxthumbs
 
wayneL said:
The big risk nobody thinks about, apart from the Greek risk everybody should know about, is "contest risk". That is the costs of placing trades... brokerage, spread, slippage, and in Oz options this risk is extraordinarily high, relatively speaking.... Ozzie RTs are as cunning as sh1thouse rats and also because of our lack of sufficient liquidy can take you to the woodpile and have their way with you.
Click to expand...

i don't actually think it's all that bad in what i've taken to referring to as the "big six" - ANZ, BHP, CBA, NAB, RIO, WBC, if you don't go beyond 3 months and stay within 25-75 delta or so. even on the weekly contracts which you wouldn't think have much liquidity, i've gotten a lot of near-mid (within 2 ticks) fills on those.

it looks nasty when you flip open the market and see a 0.66/0.95 on a front month ATM staring right at you, but then you try to trade into it, get filled at 0.80, and wonder to yourself, if they're prepared to give me 0.80 for it, why didn't they just show a better spread to begin with?

outside of the "big six" and definitely outside the ASX 20 it gets a lot worse though.
 
Sharkman said:
it looks nasty when you flip open the market and see a 0.66/0.95 on a front month ATM staring right at you, but then you try to trade into it, get filled at 0.80, and wonder to yourself, if they're prepared to give me 0.80 for it, why didn't they just show a better spread to begin with?
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Hmm,

I often wonder about this myself, is it in case they get hit with size ?

Regardless the volume offered on the bid/asks has been pretty lean post covid.

Observation >> I've been messing around with IC's on a well known US oil services company, although the indicative spread prices are narrower, get better fills at the mid on our ASX equivalents, dunno could be that particular underlying, it been pretty volatile of late.
 
The spreads in Oz are normally wide, a characteristic of options in Australia for various reasons. Despite this and from your experience and a few others, an offer placed at least in the middle of the spread generally executes...has been my experience too. When I want in on a trade particularly selling a put, I make it a little more attractive for the MM.
 
There is no way that RTs will offer a market without having some sort of a notional spread. How wide the *actual spread is, ie the actual bid or offer that the RT will take in reality, depends on lots factors as said above... but there will be a spread.

The underlying market is of course dynamic and constantly moving, as will the option spread. Therefore the market can move into your bid or offer. Of course it can move away from it as well and this is when the RTs know if they have a sucker in the depth, depending if the trader starts chasing the quote.

This is can make for interesting times when you're just trying to get the hell out of Dodge on a position.

Of course it all depends on what and how you trade, and becomes less and less of an issue the more liquid a market is. Hence why this issue is virtually non-existent in the American options markets. Because of the liquidity and number of participants, it is far more transparent.
 
cutz said:
I often wonder about this myself, is it in case they get hit with size ?

Regardless the volume offered on the bid/asks has been pretty lean post covid.
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they do seem to have reduced the volumes on the spreads they're showing the market recently, but they'll quite happily take on more than that. the spread i posted above was from an actual trade i did last month, selling BHP ATM covered calls. from memory it was showing 0.66x25 / 0.95x25 at the time, yet they still bought my 48 contracts @ 0.80 pretty much instantly.
 
Sharkman said:
it was showing 0.66x25 / 0.95x25 at the time, yet they still bought my 48 contracts @ 0.80 pretty much instantly.
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The US options market still has quite a spread on options. Certainly the further out in time you go.
I always get filled at the midpoint of the spread, however, it pays to make an order past the midpoint and ratchet it back in until the order is filled.

Particularly for this reason as you say Sharkman. (When my order is filled instantly I know I didn't try hard enough for a better price)

While I've not traded Aussie options, I imagine it would be similar.
 
zac said:
The US options market still has quite a spread on options. Certainly the further out in time you go.
I always get filled at the midpoint of the spread, however, it pays to make an order past the midpoint and ratchet it back in until the order is filled.

Particularly for this reason as you say Sharkman. (When my order is filled instantly I know I didn't try hard enough for a better price)

While I've not traded Aussie options, I imagine it would be similar.
Click to expand...

for the sake of brevity i omitted the details of the usual process i follow in that earlier post. i usually start around halfway between the mid and my side of the spread and move it in a tick or two (or four in the case of CBA/RIO options) every few seconds, whilst constantly watching the spreads the MMs are showing the market, until i get filled or it gets to the point where i'm not willing to cross any more of the spread.

so for that BHP trade i probably would've started by offering around 0.87 or 0.88 and moved it in from there. by "filled instantly" i meant that when i transmitted the update to move it in from 0.81 to 0.80, with the market showing 0.66/0.95 at the time, it was hit immediately.

it's a fair bit of clicking around so it's a bit of a hassle, but i go thru it on every trade for that very reason - occasionally you do get filled on your side, and squeaking out a few extra ticks per contract here and there can easily add up to hundreds of $ over a year's worth of trades. i had one of those pretty recently actually (https://www.aussiestockforums.com/threads/nab-national-australia-bank.1093/page-33#post-1075584), though i kinda messed up that trade for other reasons.
 

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