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jamesleo1

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jamesleo1 New Contributor

jamesleo1

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Hey! I have tried my hardest to read as much as I can about this before posting but im stuck. please help

Lets Say the FTSE100 is trading at 7110. To buy a call at 7110 is 20, and the spread is 5. To buy a put at 7110 is also 20, and spread is also 5 (I am trying to straddle)

Now as soon as I buy both of these I am -£5 -£5 = -£10 profit/Loss

I expect that if the market moves up 15 Points, My Short is now -£20 (the maximum I can lose), and my Long is now £-5 + £15 = £10. 

If the market moves back down 15 Points I expect to be back to -£10 profit/Loss again

This does not seem to be the case.

What happens seems somewhat random, With me starting out at -£10 P/L and ending up at say -£20 P/L. How can this happen If I straddle both "at the money" and my strike price is the opening price of the trade, given that both options have the same price and spread?

I know that the various "greeks" determine the opening price for an option, do they also control how much the option moves during the trade? can they change during the trade?

 

Edited by jamesleo1
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Kodiak Valued Contributor

Kodiak

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Posted (edited)

Read this

https://www.investopedia.com/articles/optioninvestor/03/021403.asp

"For example, if an at-the-money call option has a delta value of approximately 0.5 - which means that there is a 50% chance the option will end in the money and a 50% chance it will end out of the money - then this delta tells us that it would take two at-the-money call options to hedge one short contract of the underlying. In other words, you need two long call options to hedge one short futures contract. (Two long call options x delta of 0.5 = position delta of 1.0, which equals one short futures position). This means that a one-point rise in the S&P 500 futures (a loss of $250), which you are short, will be offset by a one-point (2 x $125 = $250) gain in the value of the two long call options. In this example, we would say that we are position-delta neutral."

 

 

 

Edited by Kodiak
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CharlotteIG Respected Contributor

CharlotteIG

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Posted

@jamesleo1 When buying a call/ put your maximum risk is the premium you put down. In the case below: 

18 hours ago, jamesleo1 said:

Lets Say the FTSE100 is trading at 7110. To buy a call at 7110 is 20, and the spread is 5. To buy a put at 7110 is also 20, and spread is also 5 (I am trying to straddle)

If you're buying a call at 7110, and the price is around there it means you're buying at the current price. Your break even point is 7130, (Strike + premium) if the market expires above that price you're in the money. If the price settle out of the money, the maximum you can lose is 20 x bet size. 

 

If you're buying a put at 7110, and the price is around there it means you're buying at the current price. Your break even point is 6990, if the market expires below that price (Strike -Premium) you're in the money. If the price settle out of the money, the maximum you can lose is 20 x bet size. 

 

Lets say you were doing £1 per point. If the market were to settle at 7110, you would lose the £20 on each, but if market settles either above 7150 or below 6970 you will lose £20 on one side but it would be outweighed by the profit on the other side. 

^ Settling at 7150 you would have a £20 profitable position, but the lost on the other side (max loss of £20) ^

 

It's not about spread it's about finding the break even point using the price you paid for that option at the time. Below you can find some diagrams showing you how to work out break even points. 

 

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image.png

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Let me know if you need anything else clarified. 

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dmedin Super Contributor

dmedin

Posted
Posted

@CharlotteIG So what is the essential difference between

1) Buying a call/selling a put (betting on the price going up)

2) Selling a call/buying a put (betting on the price going down)

 

So if I think the FTSE 100 will go down by 100 points by February next year, what's the difference between selling a January 2020 call and buying a January 2020 put 🤔  I mean the margin requirement is much larger for the put ... so I'm not sure why you would choose that over selling a call.

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CharlotteIG Respected Contributor

CharlotteIG

Posted
Posted
19 minutes ago, dmedin said:

@CharlotteIG So what is the essential difference between

1) Buying a call/selling a put (betting on the price going up)

2) Selling a call/buying a put (betting on the price going down)

When buying a call/ selling a put you're betting on the market going up. If you're buying a call you have limited risk. The maximum you can lose is the deposit (premium). You've bought the right but not the obligation to buy at a certain price.  Selling a put has max risk losses if the market hits 0. 

When buying a put or selling a call, same principle applies.  If you're buying a put you have limited risk. The maximum you can lose is the deposit (premium). You've bought the right but not the obligation to sell at a certain price. If you're selling a call all you can win is the premium from the buyer no matter how low the market goes. If you're selling a call all you can win is the premium from the buyer no matter how high the market goes. Meaning selling a call has unlimited losses

 

The margin when buying a call/ put is the maximum loss. The margin when selling put/call is the margin for the underlying market.

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dmedin Super Contributor

dmedin

Posted
Posted

@CharlotteIG If I sell a put, my maximum gain is the difference between my deposit and 0, but my maximum loss is unlimited and can potentially exceed my deposit.

If I buy a call, my maximum risk is my deposit but my maximum gain is unlimited.

So why would anybody choose to sell a put instead of buying a call?!!!  Or have I misunderstood this ... i.e. nobody would initiate a position by selling a put, but the option to sell a put is there for those who initiated by buying a put?

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CharlotteIG Respected Contributor

CharlotteIG

Posted
Posted
3 hours ago, dmedin said:

@CharlotteIG If I sell a put, my maximum gain is the difference between my deposit and 0, but my maximum loss is unlimited and can potentially exceed my deposit.

If I buy a call, my maximum risk is my deposit but my maximum gain is unlimited.

So why would anybody choose to sell a put instead of buying a call?!!!  Or have I misunderstood this ... i.e. nobody would initiate a position by selling a put, but the option to sell a put is there for those who initiated by buying a put?

@dmedin- I luckily have a run down of the risks and rewards when selling a puts :D 

 

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Some people will sell calls/puts if they believe they're sure of the outcome so they can receive the premium. Buying calls though have limited risk and potentially unlimited profits. 

 

 

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CharlotteIG Respected Contributor

CharlotteIG

Posted
Posted

More of a trade idea from IG analysts with options article includes: 

  • A note about options
  • Oil daily options trade idea
  • Oil weekly options trade idea
  • Oil monthly options trade idea

https://www.ig.com/uk/news-and-trade-ideas/oil-options-trade-ideas--daily--weekly-and-monthly-option-200217

 

These aren't to influence your trading but inform you of the opportunities at IG. 

 

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Caseynotes Honoured Contributor

Caseynotes

Posted
Posted
2 minutes ago, CharlotteIG said:

More of a trade idea from IG analysts with options article includes: 

  • A note about options
  • Oil daily options trade idea
  • Oil weekly options trade idea
  • Oil monthly options trade idea

Oil options trade ideas: daily, weekly and monthly option

 

These aren't to influence your trading but inform you of the opportunities at IG. 

 

Hi Charlotte, can you check this link, it just goes to 'page not found', same as the link tweeted by IG Squawk.

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CharlotteIG Respected Contributor

CharlotteIG

Posted
Posted
45 minutes ago, Kodiak said:

Any reason why we cant use limit orders (take profit) on options? IG Europe options platform (i know the difference with Nadex)

https://www.nadex.com/learning-center/educational-resources/videos/market-limit-orders-what’s-difference

This is something we offer on a Barrier option account for IG Eurpoe. I will let the options desk know it's something clients in the UK would be interested in. 

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dmedin Super Contributor

dmedin

Posted
Posted (edited)
3 hours ago, CharlotteIG said:

A news story may have been posted so you will need to select 'See more news' 

image.png

 

 

So the gist of what Serge Berger says is that he's risking $800 to make $200 but there's a much higher chance of actually winning the trade.

That's like setting a spread bed or CFD contract with a very distant stop, and the probability of you hitting your profit target is much higher than the market actually falling that far.  (For example going long on DJIA with your stop 10,000 points below and your target 2000 above.)

You're risking a bigger loss but there's far less chance of you actually incurring that loss.  (If you do, however, you're screwed and you'll be enjoying a homeless life on the streets of cheery Britain  At least the vile weather will kill you off quickly and put you out of your misery.)

That's why these tight stops and constant in and out positions on a short time frame are so hateful.  You get stopped out over and over and over again because the odds are heavily against you.  The one saving grace is that you don't lose as much money.  But that's just death by a thousand cuts.

Edited by dmedin
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vialdave

vialdave

Posted
Posted (edited)
On 12/12/2019 at 19:55, CharlotteIG said:

@jamesleo1 When buying a call/ put your maximum risk is the premium you put down. In the case below: 

If you're buying a call at 7110, and the price is around there it means you're buying at the current price. Your break even point is 7130, (Strike + premium) if the market expires above that price you're in the money. If the price settle out of the money, the maximum you can lose is 20 x bet size. 

 

If you're buying a put at 7110, and the price is around there it means you're buying at the current price. Your break even point is 6990, if the market expires below that price (Strike -Premium) you're in the money. If the price settle out of the money, the maximum you can lose is 20 x bet size. 

 

Lets say you were doing £1 per point. If the market were to settle at 7110, you would lose the £20 on each, but if market settles either above 7150 or below 6970 you will lose £20 on one side but it would be outweighed by the profit on the other side. 

^ Settling at 7150 you would have a £20 profitable position, but the lost on the other side (max loss of £20) ^

 

It's not about spread it's about finding the break even point using the price you paid for that option at the time. Below you can find some diagrams showing you how to work out break even points. 

 

image.png

image.png

image.png

 

image.png

image.png

image.png

 

Let me know if you need anything else clarified. 

image.png

image.png

 

 

within IG Markets, if a Put Option is in the money at expiry, what is the process to close the trade properly? ie. do I need to buy the underlying asset? and then exercise the put?

or, can i just close the position?

or just let it expire for the profit?

thank you

 

Edited by vialdave
adding extra part
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CharlotteIG Respected Contributor

CharlotteIG

Posted
Posted
2 hours ago, vialdave said:

 

 

within IG Markets, if a Put Option is in the money at expiry, what is the process to close the trade properly? ie. do I need to buy the underlying asset? and then exercise the put?

or, can i just close the position?

or just let it expire for the profit?

thank you

 

We close the option early which is the expiry in the get info section. You can leave it open until our expiry or you're welcome to close it early at the reflect p/l. 

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dmedin Super Contributor

dmedin

Posted
Posted (edited)

Here's a wee paraphrased snippet from Schwager's 'New Market Wizards'.

Call options can be summed up as: a small probability of making a lot of money in exchange for a high risk of losing a small amount of money.  (So in my opinion that's a bit like buying a lottery ticket.)

Put options can be summed up as: a high chance of making money in exchange for a small risk of losing a huge amount of money.

Edited by dmedin
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