Monday, November 12, 2012

Nikkei 225 Option

Option trading is highly a risky, sophisticated and complicated instrument to most traders but it also provide a good source of passive income for the professional traders.

I do not encourage anyone to follow what I am doing for Acc FAT8030, it's my attempt to move away from scalping and experiment on other strategies based on my money management parameters and expected returns.

Nikkei is trading at the price of 8700 at the moment, decided to take a short 8500 Dec put at the price of 90 expiring in a month time. Will be collecting a premium of Yen 45,000 and will know what's the margin requirement for this trade tomorrow. Intend to hold this trade till expiry. Effectively I will lose money if the Nikkei plunge below 8410 after factoring the 90 points premium.

I have decided to trade the Nikkei Option because of the liquidity though I will need to pay interest on the Yen margin required for this trade. It's unfortunate that there is no liquidity in the Simsci option as my capital is in Sing Dollar and I wouldn't incur any interest charges.

Nikkei contract at the price of 8500 is worth Yen 4,250,000 (8500 x Yen 500), converted to S$ at the rate of 0.015399 is equivalent to S$65,446.00 worth of 225 Japanese Blue chip stocks.

Can I sleep over this position? Yes, definitely and soundly too though I have a slight leverage of holding a Nikkei 225 contract at 8500 over my capital base in this account. I will be collecting the premium of Yen 45,000 or S$693 upon expiry of the contract in December. In fact I would be most happy if the Nikkei will to come off since I have only utilise a small portion of my margin.


coconut said...

i'm also interested in option trading but rarely do so.

if i'm you, i will use my premium received to short (or long) the 225 for short term trading.

while your short option gives you time advantage to hold, your premium received definately gives you an edge over random movement at the present moment.

your edge is 2 to 1 (2 lost to 1 win)on your immediate trade as long as you are certain you can protect any losses on your option to the down side!

coconut said...

why you may ask, whats the advantages?

seller of option usually at the advantage side cos market usually goes side way most of the time.

like wise as short term trading, prises usually goes side way most of the time and it is this time of random up and down movement that, with the extra capital you received, only when you have gain extra and can protect any losses through time decay on the option, can you take advantage of.

so i guess the key here is not about the short term trading per se or the option trading but the combination of option and short term trading and the ability to protect the option until it expired?

Pravin said...

There is a fiscal cliff looming in December/January. If nothing comes up then market will react many days before Jan 1. I think shorting the put is not the best idea here. I would go for buying the call and puts here. If fiscal cliff gets resolved there is a good upside (also markets do well end of the year) and if it doesn't a lot of downside.

coconut said...

many traders says that trading is a long term or long run affair, in another words, in the long run if we comes out ahead, we are fine.

i agree with that but trading itself is never about the future (or the pass). no body can tell what the market will do or react, tikam and you win so you will be a happy man.

trading itself has to be at the never ending present. only the present count. and if you can see clearly you have the advantages at the very present moment, take it or you will lose it.

Pravin said...

Yes of course, trading is never about a single trade - it is about many trades taken with over a long period of time. Those who get the riches or lose everything in one trade - were actually not trading. But I do believe trading has to be done in a context, it cannot be isolated from what's out happened in past (patterns are always in the past) or what's about to come. For example - Nikkei fell from level of 9000 to 8700 (today) since Obama was re-elected. Now there could be many reasons for that, but one of them was the fiscal cliff. Now imagine what would happen if an agreement is not reached. I certainly see Nikkei falling to 8200-8000 level. It would only be helped by ultra-easing policies of BoJ. At the same I see it coming back at least to 9000 if a deal is reached. I am no 'fundamentals' guy - but it's always good to know what news is important for the market. I respect FatTrader and have attended his seminars, but on this trade I would like to be on the other side.

coconut said...

there is a good reason why the pro mainly use short option rather than long option to make their bread and butter, unless it is meant for a hedge or protection on another position.

to trade mainly option on the short side also required excellent skill on risk control and thats what they are good at, taking risk and then control it.

coconut said...

if a trader can make lots of money in 3 years in a roll but blow it in 1 trade, i will still consider him as a good trader.

he is very good in making money ofcos which a good trader should be. only thing is he is lack of some element of risk control or self control, that is it. if he can improve that, wow lan, i want him!!

coconut said...

ofcos ofcos, we don't need to agree with fat at all and still be ok.

2 trader can be at the opposite side of a trade and both can still be making money or both can lose money.

Pravin said...

I like this line - 'taking risk and then controlling it'. But don't you think controlling risk takes a lot of mental capital which could rather be used for looking other low-risk high-gain opportunities?

coconut said...

got such thing as low-risk high-gain opportunities?

controlling risk does take a lot of mental capital (haha i like that) but you can mechanised it once you are proficient.

market is just about efficient but not good enough for me, a little off, just a litle is what i'm looking for.

coconut said...

mental capital, why i never thought of this word before haha.

ya, i'm rich! mental wise haha.

Fat88Trader said...

It's good that we have different view of where the market is heading. What happen if the Nikkei will to crash to 8000? How much will I be affected? What am I going to do?

My estimate loss if the Nikkei come down to 8000 is about S$3,157. I am mentally prepared to hold this position for the longer term, that's why I am not too worried about it. I have only use a fraction of my capital as margin.

As for Pravin, are you going to put your money down to buy the Nikkei put and call options? You need to act on your ideas and see whether it work out for you.

Fat88Trader said...

I have yet to come across any "low-risk high-gain opportunities"

Do share with us here, Coconut and I will sell everything to take out this opportunity of a life time.

coconut said...

yayaya, i will

Pravin said...

Thanks for your messages. After 5 years of trading experience (with a day job) I still consider myself a novice, so please excuse if I say something silly ;-)
Most of my low-cost opportunities are related to events. For instance the Australia's RBA, BoJ meeting, FED reserve meetings, ECB meeting. Of course not all meetings - but some where a major decision is expected, or market is anticipating something huge and doesn't get or vice versa. It's kind of playing with volatility, bias being non-directional. I am still working this out strategy - I will let you know in this thread if I see something happening.

Pravin said...

FatTrader, I do not trade options so I may not actually take the opposite side of your trade. But I will take it when the fiscal cliff decision is 'near enough'. I will be doing it in the US index futures as they will be ones affected the most. Nikkei has a good correlation with US indices but that would be like a second derivative.

coconut said...

one thing though i like to add is that, a win is never a win, its a opportunity to open new front. with the win it always gives us more "room" and confident and thus a slight edge over the longer term.

your ratio is 3 to 1, but my ratio is max 2 to 1 and i can double my money with a max lost of 1 with higher probability of winning and yours can't double with a max lost of say 3 but much higher probability of keeping your premium, hello! ( but i'm yet to figure out whats the real advantages)

the idea is the same as trend following or not to cut the profit prematurely. obsiously we can't trend follow our short put (haha short put) but we can re-position (hence position trading) our trades going the opposite direction.

we yum the premium and with the premium we should go further, in this case short (not long) the 225 when it bound, not to protect but to yum further short term fluatuation.

i always belief if we win, don't stop until we hit a substantial lost or drawdown. and in order to profit and still have control, we have to keep our positions "tight".

coconut said...

no worry pravin, we are all quite silly any where, saying something that has no actual experienment to prove it.

price is my only indicator, they never lagged behind like all indicators and news. i'm aware of the news but not affacted by it, if i'm on the wrong side of the trade against the news, it will be too late to do anything but cut losses. they don't means much to me.

Fat88Trader said...

It's ok Pravin, do share if you come across what you think is maybe a lower risk opportunity for us to discuss here. No harm.

I took this trade based on my own strategy in money management. My friend told me I need to put the money to good use and get into some asset class as our money keep depreciating.

As the capital base for this account is rather small, there will be some leverage when I enter into futures contract, it's fine with me, I am used to the risk.

Important thing is that, I am mentally prepared to hold S$65k worth of Japanese stock at the price of 8500.

I seldom trade options, once in a while, so it's a good opportunity to test my new strategy and concept. I am not in a hurry, I have a year to see whether how much I can make doing longer term strategies and sleeping over it.

Pravin said...

Coconut, totally agree. How much I win/lose is important but equally important is how many times I win/lose. I am kind of risk-off person, highly risk averse but at the same time alert to pounce upon good opportunities when they arise. This mental equilibrium is difficult to maintain but that's my goal. As it is said, we should stick to strategy that that suits to our psychological profile. A very big HIT to my account will cause enough emotional damage to keep me out of game for a long time. So I try to avoid that. Losing an amount which is 'ignorable' keeps me alert and observant of the market action/sentiment/flow - which will offer good opportunities.

coconut said...

its so funny that our minds can confuse us when we are trading/investing or in life as well.

we are so afraid of being cheated of $50 but have no problem buying a $200,000 car haha.

in trading, we are so afraid of a single trade but we can close our eyes buying expensive stocks and hold them especially when they all went down without a blink of an eye haha.

no offends, i'm facing the same problem.

Fat88Trader said...

Who are you offending? All of us have mental block sometime, somehow when our mind is not at peace. So not to worry.

Let's see how the trade work out over time. Will definitely put in more trades when I find that the risk is worth taking.

coconut said...

that is a good start, at least you are not too worry about the potential losses.

i happen to lumb all my money into one "pot", be it living expenses, property, stocks or trading just one amount that i'm fully aware of.

taking a few trades or what ever my strategy call for, no problem, buying those expensive stocks, maybe when they become "cheaper", buying that expensive car, no way haha.

Bala C said...

Naked Option Writing especially on Nikkei is not advisable.

Can cover the put writing with a put buy a couple of strikes away, like buying insurance also will reduce the margin required substantially.

Pravin said...

wow! The election announcement gives a huge boosts to Nikkei. What's the strategy now - wait till expiry or sell more puts?

city said...

thanks for sharing...

Unknown said...

Just a note where we've had discussions on futures option spreads from Singapore if anyone's interested. Our Facebook pages has a few posts that may be of interest or if you want to share more on Nikkei options which I'm interested on hearing more.