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Option traders: how are you determining/allocating risk per trade right now?

wtf_dude

Well-known member
Hey all,
Going to be making my risk allocation a tad more aggressive in this environment.
Basically, I just want to know how you guys are allocating your option risk right now.

Ex: on LONG options, if you hypothetically risk 1% of a portfolio for one trade

Is 1% how much you would lose if the option expired completely worthless

OR

would 1% be the amount you lose if your option stopped out?

Any feedback on longs, shorts, spreads etc, is greatly appreciated! Thanks
 
Percent of the whole account. I feel like you should be prepared to loss the whole debit of the contract.

That being said with short day trades I don’t use a “hard stop loss” but inside get out as soon as a trade goes against me. With commission being so low or zero in some cases there is no point in holding on to a trade that is red. Keep losses small. Guess this all depends on the type of trading you do.
 
Percent of the whole account. I feel like you should be prepared to loss the whole debit of the contract.

That being said with short day trades I don’t use a “hard stop loss” but inside get out as soon as a trade goes against me. With commission being so low or zero in some cases there is no point in holding on to a trade that is red. Keep losses small. Guess this all depends on the type of trading you do.
I've always been stop based (to my demise) without paying enough attention to probability of touching. So I think im just going to start switching out. So you're closing out just as soon as you see red at all or like if a support breaks? Seems the support and stop hunters are out in droves right now
 
I assume when you take a position there is an assumption of what's going to happen next. Its not that I close as soon as there is red it's just when what I expect to happen doesn't then I get out and revaluate. My biggest loses come when I hold on fingers crossed. Yes, sometimes price will come back, and you will have regrets. But this is about the long game. Keep your powder dry. There will be more trades to make.

Don't trade like this...

Practical note: Check out The Strat, Robintheblack on twitter. It's how I have been trading(for not that long). And it's the only way I'll trade moving forward. Haven't seen a lot of success with spreads. Have about 60 stocks in my watchlist. Things I know that have tight spreads or are liquid. I'm usually out a trade in under an hour. Buy calls or put at the nearest expiration or monthly depending on their spread and volume.
 
@wtf_dude - I strictly only use 1% or less of portfolio, - enter on 5 min chart, and exit on same 1 min chart, - I watch $DJI, and SPY if they are going in the same direction I placed my call or put, then I let that override my 1 min chart. I call it "manual override" and ride it a few bars if the trade is going against me because MM's will push it against your trade, that's why I never use stops, a Pro WS trader taught me that and how they will clean-up stop loss orders.

It's more of a mental game, if it's a runner, I lock in 25% to 50% gains and exit, sometimes hold 1 as a YOLO or swing.

If all is going against me on 1 min, $DJI, SPY, - I usually exit at -25% to -30%. loss, there's always another day to fight.

Of course my stubbornness may kick in and ride it out, then it's a 50/50 coin toss, everyone has emotions to deal with, and I like to close EOD, but may keep a loser for a swing - I prefer to scalp actually.
 
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Risk is always a question of perception. Stops on options can be tough as the underlying spread can widen out and suddenly a so-so trade becomes a loser.

One idea to consider is to hedge using the underlying, with fractional shares and no commiss, it lets you hedge actively. Just a thought.
 
@wtf_dude I had to add margin to accounts so I can always do vertical spreads. I never set a stop loss of any sort on options because those have a tendency to bounce down so I must be happy to lose 100% of the position which has never happened over the past several years.

I have a tendency to set the close at 75% max profit if it moves in the next couple days but if it tends to steadily profit I loosen to get more.
I have a tendency to close way before I get x10 profits except for some calendar vertical spreads where the options I sold expired and it was open to take ridiculous profits. Large profits also occurred when I closed my VIX calls awhile back. (y):love:

So the moral to my story is lotsa small positions with tiny MAX loss and lotsa chances to close with profits.

I wish I understood Volatility better my brother because I choose the dates and strikes around Volatility & (Volume/Open Interest)
 
@wtf_dude Hey Mobius just wrote this today! Saw it on the thinkscript lounge on my phone. Mobius says that he inverses this new Volatility script he's been working on to see volatility

Code:
15:46 MTS1: yuw
15:53 Mobius: Johnny - This is another example approximation method using  Bjerksund Stensland

# BJERKSUND AND STENSLAND Fair Value Approximation
# Mobius
# V01.01.2020

declare lower;

input strike = 40;
input series = 1;

def DOW = getDayOfWeek(getYYYYMMDD());
def DTE = if DOW == 1
          then 5
          else if DOW == 2
          then 4
          else if DOW == 3
          then 3
          else if DOW == 4
          then 2
          else if DOW == 5
          then 1
          else DTE[1];
def c = close;
#def Strike = Round(Close(period = "DAY")[1], 0);

def rate = if isNaN(close("DGS10:FRED"))
           then rate[1]
           else close("DGS10:FRED");
def Div = if isNaN(DividendsPerShareTTM())
          then Div[1]
          else DividendsPerShareTTM();
def DivYield = if !isNaN(Div)
               then Div / c
               else 0;
def IV = (if isNaN(seriesVolatility(series = series))
         then IV[1]
         else seriesVolatility(series = series)) / sqrt(DTE);
def r = ((rate - DivYield) / sqr(iv));
def moneyness = (strike - Floor(close)) * .08;
def y1 = (1/2) - r + sqrt(sqr(r - (1/2)) + ((2*r)/sqr(IV)));
def call = ((strike/(y1-1)) * power(((y1-1)/y1)*(c/strike), y1));
plot data = call - moneyness;
addLabel(1, "Strike = " + Strike, color.white);
# End Code

15:54 Mobius: Another method would be adjusting IV for various projections of price at expiry.
I haven't worked with it yet... It is in thinkscript lounge if you roll back to earlier today
 
@MattATM - Mobius writes lots of interesting stuff, but with zirp/nirp, I'm not sure sure what benefit looking at interest rates is.

Personally, I focus more on gamma and not IV/HV or even VIX due to the ability of large MM to move them at will. Anyways, congrats on the killer trades you had!
 
but with zirp/nirp, I'm not sure sure what benefit looking at interest rates is
Ha ha ha you are extremely right! With interest rates institutions can print currency like there is no tomorrow...
Buuuut Derivatives & Securities remove currency from circulation so my favorite Bacon Burger doesn't cost $50! Yet anyway! :giggle:🍔🍻
 
@MattATM - Mobius writes lots of interesting stuff, but with zirp/nirp, I'm not sure sure what benefit looking at interest rates is.

Personally, I focus more on gamma and not IV/HV or even VIX due to the ability of large MM to move them at will. Anyways, congrats on the killer trades you had!
Dude Matt! Thanks for this, Ii think the lounge is for VIP members ? and I haven't signed up for it yet. I'll definitely check this out today

Cody, the interest rate is used in the Bjerksund Stensland option model to help approximate the theo. cost of options for stocks that have dividends.
 
I haven't signed up for it yet. I'll definitely check this out today
I haven't done anything yet still wrapping up other chores... We can work with Volatility later... @codydog is right we need to keep a couple volatility models around...

What I was trying to say Cody is that the powers that be enter derivative trades from inside of institutions that they do not like and LOSE on PURPOSE!!! They cannot throw their hands up and say oh well we had a good run, they have to burn that cash up to prevent hyperinflation. More trades lose than win sometimes and when the loses are printed $ that no one will miss so be it...
 
@codydog and @wtf_dude
I am not skilled enough to understand this but I think many have noticed that if all of the $ that is sitting in forgotten accounts earning negative interest were to escape all at once real goods on the street would cost way more overnight... https://demonocracy.info/infographics/usa/derivatives/bank_exposure.html

That is the other side of derivative trading remember if the FED banks are money printers than the derivatives are a cash incinerator. Cash that has gotten dirty in a war somewhere or whatever has to be gotten rid of...
 
@wtf_dude Hey Mobius just wrote this today! Saw it on the thinkscript lounge on my phone. Mobius says that he inverses this new Volatility script he's been working on to see volatility

Code:
15:46 MTS1: yuw
15:53 Mobius: Johnny - This is another example approximation method using  Bjerksund Stensland

# BJERKSUND AND STENSLAND Fair Value Approximation
# Mobius
# V01.01.2020

declare lower;

input strike = 40;
input series = 1;

def DOW = getDayOfWeek(getYYYYMMDD());
def DTE = if DOW == 1
          then 5
          else if DOW == 2
          then 4
          else if DOW == 3
          then 3
          else if DOW == 4
          then 2
          else if DOW == 5
          then 1
          else DTE[1];
def c = close;
#def Strike = Round(Close(period = "DAY")[1], 0);

def rate = if isNaN(close("DGS10:FRED"))
           then rate[1]
           else close("DGS10:FRED");
def Div = if isNaN(DividendsPerShareTTM())
          then Div[1]
          else DividendsPerShareTTM();
def DivYield = if !isNaN(Div)
               then Div / c
               else 0;
def IV = (if isNaN(seriesVolatility(series = series))
         then IV[1]
         else seriesVolatility(series = series)) / sqrt(DTE);
def r = ((rate - DivYield) / sqr(iv));
def moneyness = (strike - Floor(close)) * .08;
def y1 = (1/2) - r + sqrt(sqr(r - (1/2)) + ((2*r)/sqr(IV)));
def call = ((strike/(y1-1)) * power(((y1-1)/y1)*(c/strike), y1));
plot data = call - moneyness;
addLabel(1, "Strike = " + Strike, color.white);
# End Code

15:54 Mobius: Another method would be adjusting IV for various projections of price at expiry.
I haven't worked with it yet... It is in thinkscript lounge if you roll back to earlier today
Is there an updated code to this script? I’ve applied it to my charts and can’t get it to plot anything.
 
@MattATM - Mobius writes lots of interesting stuff, but with zirp/nirp, I'm not sure sure what benefit looking at interest rates is.

Personally, I focus more on gamma and not IV/HV or even VIX due to the ability of large MM to move them at will. Anyways, congrats on the killer trades you had!
You need to include Volatility (IV) or Series IV more in your research. HV perhaps is or isn't useful as the MMs usually never achieve HV because dynamic hedging squelch's vol in the markets daily with the new 0DTE. Most of the moves are manufactured as the Fed is now tightly correlated through over-night repos through banks to move/manipulate (mm) the price action. Hedging daily is the MMs bread and butter. Watching Volatility regimes is a good way to know which direction and using OI and Volume on the options chains (Gex) to know how far.
 

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