any option sellers

Just wondering about executing the option credit spreads.

When you guys initiate the trade do you use market orders for 2 legs or wait for a limit order to be filled on the spread (one commission versus 2)?
 
Quote from NPTrader:

Hi All:

I have been selling volatility for a couple years, and have formalized my strategy over the past couple of quarters. Since November 1st, I have earned .7% compounded on a weekly basis. A $1 investment has returned 23.87% vs. SPY's 5.41%. These returns are on a portfolio that is around $1.2M in value currently.

I use IB with a portfolio margin account.

Here are some assumptions I use:
1) Equity indexes do not crash to the upside.
2) Be paranoid of crash risk.
3) Avoid spreads of all kinds, butterflys, iron condors
4) Try to stick with options on indexes, futures for tax benefit
5) There is always more time and premium - it is your friend
6) Always make sure that I have 12 months without a need to withdraw capital to recover from any shifts in underlyings.
7) Volatility is a friend.
8) Understand fundamentals and technicals for ideas, but believe generally that most price action is entirely random.

Here is some of what I do - kind of in a rambling fashion. Over the past couple of years, I have come up with a sophisticated chart of margin requirements for various underlyings. To avoid over leveraging myself, I only open up the number of puts or calls against an underlying such that in a worst case situation, I have enough margin to avoid a margin call and give me a chance to roll or move the position such that IB should never have to auto-liquidate.

It turns out that the maximum margin required for a contract is ATM right at expiration. So, I have modeled a variety of commodities, indexes, bonds, etc. to find out exactly what IB's worst case margin requirement would be in a highly volatile market - assuming they don't change the margin arrays.

Given some margin that I have allocated to a position, I can then determine the maximum number of puts and calls I could ever open up. Even though at the time I open the positions, I could open additional, I am looking at a situation where my excess liquidity approaches zero as the underlying moves towards my strikes at expiration.

For example, I allocate about 50% of my margin to indexes, either SPX or RUT. RUT has a 9.32% margin array with IB at expiration. So, for an $800 strike, I would assume around $8000 / contract opened as my margin reserve. If I actually opened up $800 RUT calls right now for June 15th, the actual margin reserve would currently be around $5000, so I have $3000 as buffer.

I then set a target for my returns. I look for around 1% / week return for my margin committed. I like to go 60-90 days out against my underlyings to give a wide range of movement. For example, right now I have Jul 19 RUT puts at $650 and calls at $850 opened. I tend to open these positions around 8 - 12 weeks away from expiration. If I am committing $8000 of margin to this position and there is 8 weeks til expiration, then I am looking to generate 8% * $8000 = $640 of income from the opening trade for 1 contract.

Since I am paranoid about flash crashes and losing my portfolio value along with my belief that markets rarely crash >5% to the upside, I open up the maximum number of naked calls given my calcs and only open 20% of the puts. Opening about 20% of the available puts means that if I don't ever roll, I can sustain a 50% drop in the RUT before my portfolio value hits zero. And this assumes I never roll, earn any additional income, or reduce risk. In the case of commodities, I am more concerned with a price spike up - say an Iran attack on oil, so would be more cautious on the call side.

Given the total number of contracts that I can open, I then seek out the right strikes and premium to achieve my 1% / week target. I can bias the strike selection based upon whether I believe the market is mid term bullish or bearish.

If an underlying stays relatively range bound over the first 4 weeks of the trade, then I will have captured about 75% of the total profit in 1/2 of the holding period, close out the positions and move on to my next 8 week trade. If the underlying is trending, then either my calls or puts are under pressure and showing losses. I have a simple strategy, which is if the underlying gets within 5% of my puts, then I immediately roll out and down. Even at 5% margin of safety, I find that I can roll out a month, down 5-8% AND still pull in another month's premium. With calls, I will wait for a 3-4% margin of safety before I roll. Any time I roll, I tend to take 5% of the contracts off the table - just see those as losses as a way to free up some more margin and to breathe more easily at night. Even though I didn't roll 5% of the contracts, even after the roll with the additional premium, my cash position has increased and I am still earning good income.

I have backtested these philosophies against 2008 - 2009 and would have been able to ride the wave down. There would have been a significant draw down of capital for about 6 months, but would have broken even after around 7 months, with the remainder of 2009 showing some strong gains - with the two years combined generating around 15% compounded.

I apply this method to a variety of underlyings. Right now I have oil, silver, cattle, TLT, and the dollar index. I also reserve about 5% of my portfolio for high IV equities such as GOOG, AAPL. I do about 50-60% of my margin on RUT / SPX, 5% on cattle, 10% on bonds, and blend the rest.

I never - ever - ever do spreads. There are a number of reasons:
1) 2x the commissions.
2) Rolling ITM spreads almost always costs a debit, vs. rolling ITM naked calls / puts earns income.
3) It can be hard to roll a 4 legged order to get a fill - but rolling naked puts / calls is only a two legged order. Important in case the market is moving fast.

I tend to find that simpler is better and more profitable...

Enjoy and stay profitable....
More...

Thanks Man! Really helpful
 
Quote from NPTrader:

Hi All:

I have been selling volatility for a couple years, and have formalized my strategy over the past couple of quarters. Since November 1st, I have earned .7% compounded on a weekly basis. A $1 investment has returned 23.87% vs. SPY's 5.41%. These returns are on a portfolio that is around $1.2M in value currently.

I use IB with a portfolio margin account.

Here are some assumptions I use:
1) Equity indexes do not crash to the upside.
2) Be paranoid of crash risk.
3) Avoid spreads of all kinds, butterflys, iron condors
4) Try to stick with options on indexes, futures for tax benefit
5) There is always more time and premium - it is your friend
6) Always make sure that I have 12 months without a need to withdraw capital to recover from any shifts in underlyings.
7) Volatility is a friend.
8) Understand fundamentals and technicals for ideas, but believe generally that most price action is entirely random.

Here is some of what I do - kind of in a rambling fashion. Over the past couple of years, I have come up with a sophisticated chart of margin requirements for various underlyings. To avoid over leveraging myself, I only open up the number of puts or calls against an underlying such that in a worst case situation, I have enough margin to avoid a margin call and give me a chance to roll or move the position such that IB should never have to auto-liquidate.

It turns out that the maximum margin required for a contract is ATM right at expiration. So, I have modeled a variety of commodities, indexes, bonds, etc. to find out exactly what IB's worst case margin requirement would be in a highly volatile market - assuming they don't change the margin arrays.

Given some margin that I have allocated to a position, I can then determine the maximum number of puts and calls I could ever open up. Even though at the time I open the positions, I could open additional, I am looking at a situation where my excess liquidity approaches zero as the underlying moves towards my strikes at expiration.

For example, I allocate about 50% of my margin to indexes, either SPX or RUT. RUT has a 9.32% margin array with IB at expiration. So, for an $800 strike, I would assume around $8000 / contract opened as my margin reserve. If I actually opened up $800 RUT calls right now for June 15th, the actual margin reserve would currently be around $5000, so I have $3000 as buffer.

I then set a target for my returns. I look for around 1% / week return for my margin committed. I like to go 60-90 days out against my underlyings to give a wide range of movement. For example, right now I have Jul 19 RUT puts at $650 and calls at $850 opened. I tend to open these positions around 8 - 12 weeks away from expiration. If I am committing $8000 of margin to this position and there is 8 weeks til expiration, then I am looking to generate 8% * $8000 = $640 of income from the opening trade for 1 contract.

Since I am paranoid about flash crashes and losing my portfolio value along with my belief that markets rarely crash >5% to the upside, I open up the maximum number of naked calls given my calcs and only open 20% of the puts. Opening about 20% of the available puts means that if I don't ever roll, I can sustain a 50% drop in the RUT before my portfolio value hits zero. And this assumes I never roll, earn any additional income, or reduce risk. In the case of commodities, I am more concerned with a price spike up - say an Iran attack on oil, so would be more cautious on the call side.

Given the total number of contracts that I can open, I then seek out the right strikes and premium to achieve my 1% / week target. I can bias the strike selection based upon whether I believe the market is mid term bullish or bearish.

If an underlying stays relatively range bound over the first 4 weeks of the trade, then I will have captured about 75% of the total profit in 1/2 of the holding period, close out the positions and move on to my next 8 week trade. If the underlying is trending, then either my calls or puts are under pressure and showing losses. I have a simple strategy, which is if the underlying gets within 5% of my puts, then I immediately roll out and down. Even at 5% margin of safety, I find that I can roll out a month, down 5-8% AND still pull in another month's premium. With calls, I will wait for a 3-4% margin of safety before I roll. Any time I roll, I tend to take 5% of the contracts off the table - just see those as losses as a way to free up some more margin and to breathe more easily at night. Even though I didn't roll 5% of the contracts, even after the roll with the additional premium, my cash position has increased and I am still earning good income.

I have backtested these philosophies against 2008 - 2009 and would have been able to ride the wave down. There would have been a significant draw down of capital for about 6 months, but would have broken even after around 7 months, with the remainder of 2009 showing some strong gains - with the two years combined generating around 15% compounded.

I apply this method to a variety of underlyings. Right now I have oil, silver, cattle, TLT, and the dollar index. I also reserve about 5% of my portfolio for high IV equities such as GOOG, AAPL. I do about 50-60% of my margin on RUT / SPX, 5% on cattle, 10% on bonds, and blend the rest.

I never - ever - ever do spreads. There are a number of reasons:
1) 2x the commissions.
2) Rolling ITM spreads almost always costs a debit, vs. rolling ITM naked calls / puts earns income.
3) It can be hard to roll a 4 legged order to get a fill - but rolling naked puts / calls is only a two legged order. Important in case the market is moving fast.

I tend to find that simpler is better and more profitable...

Enjoy and stay profitable....
More...


Thanks for sharing your ideas and method.

I have an a/c with IB and it is portfolio margin a/c. May I ask following questions?

1. I try to keep cushion at 65-70% level . Is it reasonable?

2. Is there anyway I can find out the margin used for individual positions. I can try to adjust positions which have high margin requirements. - which can improve my cushion. (even endofday)

3. I sell weekly and monthly options on ETFs and Index options, Mostly I use iron condors, vertical spreads and strangles. How can I improve on my methods?

4. Sometimes I use 3x bull ETFs like FAS, TNA. I understand that for option positions my liability is to buy or sell 100 shares per position. Is there any danger in using these underlyings?

Thanks for your comments or from anybody else as well. Much appreciated.
 
Quote from luisHK:

Could anyone here post a link to Libertytrading returns over several years ?
More...

I have asked them and they say that they do not publish or quote trading results since they only have individually-managed accounts which have varying results depending on risk instructions etc.

However if you look at some of the earlier Youtube "optionsellers" videos there are one or two informal testimonials.

From listening to their (now discontinued) weekly phone updates, I can tell you they have had significant periods of losses. However Cordier is very disciplined in cutting losses and diversifying.

Of course if any of their clients could report their results here, that would be great and I would very much like to see that also.
 
I hoped as a CTA we could find Cordier's performance published somewhere... Do you know wether him stopping the weekly update has to do with poor performance in this market ?

Besides I (re...)ordered today "Trading Options to Win: Profitable Strategies and Tactics for Any Trader " which you recommended. It seems to be dealing mostly with selling FOP so i'm looking forward to more input on the topic. Cordier's book is interesting but short and very much one sided , I hope Jonhston will give a more balanced view athough from the reviews on amazon he looks favorably biaised to selling commoditities FOP as well.
 
You must log in or register to reply here.
Back
Top