Sunday, January 22, 2006
So, you want to be an options trader part 2!
2 fortuitous things happened this week. One, when I wrote the first part of this I didn't know the options expiration Friday was going to be a blowout day and two, I for some reason that escapes me, saved my 15 page printout of the option prices from the cme that I used to create examples of the trades. What does that mean? It means we can go back and recreate several good examples of trades you could have placed before a 23.5 point drop in the S&P and then we can look at the effects of a High Vol (volatility or Vega for you newbies) market dump and puke (as us daytraders call em!) and a Vix spike. These should be good examples of some of the risk involved in trading, which is why I'm going to do this for you. This way you might be able to avoid one of these in real life!
OK, lets start with the prices. I saved the pit-trades prices as of 1/17/06 as off 3:30 ct. Closing prices, or settlement. I also printed out the closing prices from Friday, 1/20/06. This will be a good example of price action with very little time decay involved since it was only 3 days difference. Remember the concept of holding all things equal? Well, were going to show just how dangerous the other stuff is! It can be very dangerous.
I've suddenly realized that this is going to be a really long post so I'm going to break this up into segments, which will make it easier to write and for you to printout and study, one block at a time. I'm going to stop here for this one and write one post on calls, on on puts, and then a summary post if you want to look at them in pairs (call spread with a put spread, some people call then condors, iron condors, etc... which are really just made up of the subcomponents of straddles, strangles, bull spreads, bear spreads, cow spreads, cow pies, cow patties, etc... some of these are real names but it gets to the point of being ridiculous because no one calls any of this stuff the same thing. Don't get caught up in the names!).
OK, lets start with the prices. I saved the pit-trades prices as of 1/17/06 as off 3:30 ct. Closing prices, or settlement. I also printed out the closing prices from Friday, 1/20/06. This will be a good example of price action with very little time decay involved since it was only 3 days difference. Remember the concept of holding all things equal? Well, were going to show just how dangerous the other stuff is! It can be very dangerous.
I've suddenly realized that this is going to be a really long post so I'm going to break this up into segments, which will make it easier to write and for you to printout and study, one block at a time. I'm going to stop here for this one and write one post on calls, on on puts, and then a summary post if you want to look at them in pairs (call spread with a put spread, some people call then condors, iron condors, etc... which are really just made up of the subcomponents of straddles, strangles, bull spreads, bear spreads, cow spreads, cow pies, cow patties, etc... some of these are real names but it gets to the point of being ridiculous because no one calls any of this stuff the same thing. Don't get caught up in the names!).
