Good day to you and your family!

Please join us in discussing some of the options writing strategies here based on Pros, Cons, Repair, Time Decay , Volatility and any related opinions.

Short Straddle: ATM options writing

e.g. underlying instrument ABC is trading at $50. Short straddle is constructed by selling a 50 call and 50 put. Normally front month.


Short Guts: ITM options writing

e.g. underlying instrument ABC is trading at $50. Short Guts is constructed by selling a 45 call and 55 put. Normally front month.

Short Guts+Short straddle: ITM and ATM options writing

e.g. underlying instrument ABC is trading at $50. Short Straddle and Short Guts are constructed by selling a 45 call, 50 call, 50 put and a 55 put. Normally front month.

Please join everyone in expressing your views freely. You will find everyone learns faster this way and discover the essence of options writing. For your great efforts, allow us to reward you with a small token of appreciation of S$0.10 per discussion!

START NOW!

Any commentary or illustration generated in this forum is provided for educational purposes only. You must decide your own suitability to buy or sell options. This is neither a solicitation nor an offer to buy/sell stocks or options. Commission was not taken into calculation. Note: You have to know the risk of options writing before execution, especially naked call/put writing, bull/put spread, covered call writing, short straddle, short strangle, short guts, short/long iron butterfly, short/long winspreads and short/long box. Forum participants have to exercise responsibility and sincerity in message posting.

how does one profit if say on expiration day ABC is $54 or $56? what adjustment must be done to profit? thanks

is there any free calculator which shows the profit and loss chart by keying in all these trades?

Dear Winben,

We apologise for the slow reply because we took a long break during Chinese New Year holidays. If you celebrate CNY, we wish you and your family a very prosperous new year.

Your questions:
"how does one profit if say on expiration day ABC is $54 or $56? what adjustment must be done to profit? thanks"

We use the example of short guts: Sell 45 call and sell 55 put when the underlying at $50.

If on expiration day, the underlying is $54, this is what we called the perfect selling because both short options are in the money. The short call will short (-100) shares into the account, short put will buy (+100) shares into the account. You will see a clean sheet on Monday, the short guts is gone and all time value is collected. The profit is the maximum time value you calculated at the time of constructing the short guts.

If by expiration, the underlying goes to $56. The short call will assign -100 shares, the short put expires worthless. On the following Monday, you will see -100 shares in the account. That means you shorted the underlying stock. You could reconstruct the short guts by buying back the -100 shares, then sell call and sell the put again. This time, the strike price will probably be 52.50 call and 60 put because the underlying is at $56. You could sell front month (March), or sell into back months (April, May, June).

One should not try to let the underlying moves near the strike price on expiration day. If the stock you mentioned moves to $55 on expiration day, you could buy back the 55 short put (sure for a profit), and sell into next month, at high strike price. This is called roll forward and roll up.

Thanks a lot for your questions. $0.20 for your efforts!

Dear Trader,

Thanks for posting your question.

The calculation is quite straight forward. If the total time value (not the premium) from both short options is $300, that means the short guts is protected $3.00 up and down. The break even is 42 and 58 for the 45-55 short guts.

When the underlying moves nearer to the one of the strike prices, due to delta increase for the other deep in the money options, one will see a temporary loss due to delta. Once the options expires, or once the rollover is done, you will get the profit as soon as the time decay overcomes the delta.

Thanks a lot.

Etradehome.com

Any commentary or illustration generated in this forum is provided for educational purposes only. You must decide your own suitability to buy or sell options. This is neither a solicitation nor an offer to buy/sell stocks or options. Commission was not taken into calculation. Note: You have to know the risk of options writing before execution, especially naked call/put writing, bull/put spread, covered call writing, short straddle, short strangle, short guts, short/long iron butterfly, short/long wingspreads and short/long box.

Thank you everyone, I learned so much from the questions and answers.

JK

Hi there,

I remember Sun talking about the January effect in the class. From Yahoo basic chart, it seems the entire January was on the slide. I wonder it will be the scenario for the entire year.

Yahoo Finance reported today "Job growth is faltering, consumer confidence plunging. The fallout from the worst housing slump in a quarter-century grows. Wherever you look, the signs are unmistakable that the economy is in trouble."

Singapore Straits Times also reported nig and loud about the recession and trouble.

I always in doubt when every media is trying to talk about the same thing. It seems the market makers will be happy if everyone is buying outs, short selling or doing anything bearish (follish move?).

I am not saying I am going bullish now. At least the last minute reversal last Friday did not make me a true bear right now.

But again, I will still go neutral and adopt short guts and iron butterfly to go non-directional. It is alright if it goes up or goes down.

I do not think the market will go strong and fast on the upside because there were so many resistance levels on the upside, one of them is the pschological resistance. On the downside, there is always risk. So I am writing $5 to $10 down for sufficient protection.

Anyone to share my view?

Have a great March!

Hanz

hi

I did not trade stocks options becos I always fear that the stock I picked will be the next enron or worldcom.
What if you write $10 down and it happen to be the next enron or worldcom?

Do not tell me to do research on stocks to make sure financially they are strong. I know of many US listed company account book look good but in actual it is a empty shell.

There is many more company in US that ended like enron / worldcom but are not reported.

Any views?

hi dave,
so thats why u prefer to trade futures right? :)

hi

I trade options on futures. I sell options too but not on stock options because stock options has a higher chance of going to 0 (there is no way to roll or adjust a options if the stock is going to 0). Index futures options has a lower chance of going to 0. If index really does goes to 0, many other stock will be going to 0 too :)

hi all,

Tnank you Mr Sun for you posting on short guts techniques. Its' excellent and exactly what you taught us in class !

Eugene

Hi WinBen, how are you doing in your trading?

hi etradehome & everyone,

what are the advantages of selling ITM (short guts) as opposed to selling OTM?

is it becos selling ITM gives more time value than OTM if both are same distance from strike price? time decay faster for ITM option than OTM?

any other advantages of selling ITM than OTM? Margin lower? higher liquidity?

any disadvantages of selling ITM as opposed to OTM?

many thanks in advance. cheers

***
hi etradehome & everyone,

what are the advantages of selling ITM (short guts) as opposed to selling OTM?

is it becos selling ITM gives more time value than OTM if both are same distance from strike price? time decay faster for ITM option than OTM?

any other advantages of selling ITM than OTM? Margin lower? higher liquidity?

any disadvantages of selling ITM as opposed to OTM?

many thanks in advance. cheers
***

sell ITM is short gut selling OTM is short strangle.
I am a strangle seller so for me OTM is better.

Short guts and short strangle, I have not really compare margin before. Anyone know which has lower margin assuming same strike same month ITM and OTM?

As far as I know liquidity for OTM and deep deep ITM has not much liquidity I would say it is about the same.

Selling OTM is easier for me to understand my position, selling ITM harder to understand the profit / loss and the rolling, that is just me.

In term of time value I find it almost the same in the ES Futures Options. ITM and OTM. Although Sun mention that ITM has more time value as compare to OTM. But not for the ES Futures Options as far as I am concern.

ES - Emini S&P 500 Futures Options

from what i know, i think itm options require a higher margin while otm options a lower margin.

did a quick lookup, yes, futures options like ES does indeed has higher time value options which in a way make it attractive as a candidate for option sellers like us. :)

i think the more obvious difference between short guts and short strangle is that short guts in a practical sense will require a seller to do more roll over than a short strangle seller.

however, correct me if i am wrong, for short guts, the roll over effect gives the seller a "good" feeling that its a profitable type of roll over, while in short strangle, the immediate effect is a "loss" type of feeling. of course, the common thing between them is that only rolling out into further month with sufficient time value will actually repair the damage (delta damage in short guts; obvious damage in short strangle) in the two strategies.

keep the sharing going. :)

ky

Hi WinOption, Dave and KY,

It was a very good online Q&A session. For the excellent contents there, $0.20 for each of you.

We also shortlist KY's comment for the June's 'Posting of the Month' for its short, precise and accurate posting.

Anyone to share?

Etradehome.com

Hi Winoption,

OTM options writing requires lower margin requirement. That means you can sell more contracts with the same amount of money. Here is the example:

Take SPY as example. SPY is at $135 now.

Selling 130 call (ITM) ties your margin up by $3400.
Selling 140 call (OTM) ties your margin up by $2200.

But if you look closer, the difference is not that big. Only if you sell much further out of the money, such as 150 call, the margin will drop to $1200. At 150 call, the premium is only $0.10. Not worth doing at all.

I personally prefer ITM call and put selling because the margin requirement is not as high as we thought. I have the tendency to sell more contracts when it comes to OTM options writing. ITM options writing is my No.1 strategies, I use OTM options selling occasionally whenever a stock gaps too much in the opening minutes.

I also agree with KY, the rollover and repair in ITM options writing gives you a nice feeling. I bought back the options at a profit, only to lose temporarily on delta.

Thank you!

Hanz

I think it is a misconception that a lot of people think that the margin is higher for ITM and OTM options. In general because of the put call parity and the way SPAN margin work (I am referring to futures options and not stocks options) the ITM and OTM margin is almosts similar.


It is also not true that selling OTM will allow you to sell more contract.

OTM has no intrinsic value thus the margin is low and premium is low
ITM has intrinsic value thus the margin is high and premium is high too

when you sell a ITM options even thou margin is high but remember you collect a lot of intrinsic value and this is added back to your trading capital.

If you work it out the margin is almost similiar

Good point there Dave. More intrinsic value in options selling will add on to the 'equity with loan'. I forget about this point.