any option sellers

Quote from luisHK:

Regarding "Trading Options to Win", I'm only 70 pages in the book but it strikes me as following blindly the orthodox models - I'll read further but wouldn't feel confortable selling otm options on random walk calculations only.

Any feed back on the issue ? Does Johnston later take into account shortcomings of the model in calculating small probabilities event ?

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He does go on to explain that he trades mainly on the basis of seasonal patterns.

I think one needs to build up one's own personalized approach. These books are good inputs to this process - to see how others approach it.
 
Quote from Brighton:

Re the comments/questions about Cordier:

On the Big Mike forum, look up Ron99 and a long thread about selling options. He said he was a Cordier client for a couple of years and did very well, but recently quit. In the 'flat' years, Cordier's clients still lost 20%+ according to him because of the very steep commissions. I think the commissions are $75 RT per contract which is 19% of a hypothetical $400 option sale, and an even greater percentage if that option is bought to close when it has 5% or 10% of original premium remaining.

I'm getting those numbers from Cordier's book. If he practices what he preaches, then he's getting equivalent to "2 and 20" without taking any personal or firm risk. Now, maybe he sells a lot of $500 to $800 options and the steep commissions don't take such a big bite when the trade works, but to get that kind of premium he's selling closer to the money, longer term, or in some v. high volatility markets.

FWIW, minimum investment for new clients is back down to $100K, from a minimum of $250K (and suggested $1M) a little over a year ago. I've read most of his book but I've never been a client. I must be on a list; I still get the occasional "option seller" email update.
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I have been following his weekly updates (now discontinued) and newsletters for quite a few years.

All of his clients lost most of their money in the PFG collapse. That is why he lowered the account minimum as he starts up over again with a new clearing firm.

He does look for at least $500 credit on each position. He sells 3 to 4 months out (sometimes up to 5 or 6). He does not sell close to the money.

The $75 fee per round trip is a common way of charging for many CTA's. It is true that it may not be as favorable as 2/20.

Personally, and I think this is true of most here, I am not interested in having money managed by him, just in learning from him among many other sources.

I can see right off that one big limitation that affects him more than us is that he has to be always in the markets. On the other hand, he does diversify very widely and takes losses quickly.

Another limitation that he has that we do not is that, as you point out, he has to receive fairly large credits to be able to cover the fees. This means that he has to sell further out in time than we might.
 
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....
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Any feedback how you're performing in this bull market ? I sold a few strangles, mostly monthly but some weekly and 60days, over the last few months with 2%otm calls on ES and up to 5% on RUT but the calls have been on fire, even more when selling on higher VIX days (dips).

Today woke up just after market open and the pnl column was showing
-19K, I've seen worse but a triple expresso and neutral pnl is better for breakfast. Also it's particulary frustrating to lose a fair bit while the market is rather quietly trending upwards.

With 5 calls for 1 put it must be even hotter, did you adjust your strategy lately ?
 
So call sellers, is everyone rolling or just letting calls expire itm before opening new ones (which I'm doing). I opened a bit more calls than puts entering May on worries of market pullback and May's mtm Pnl doesn't look cute.

Anyone else has feedback on Atticus proposition, with 2 or 3synth puts for 24 short puts, the rationale does make sense :

"So short a 2-lot synth and you retain nearly half of the credit at 830 RUT. The rationale is that the skew is bountiful, so why not hedge as OVER HALF of that credit is due to asymmetry (risk-reversal prem on put strike)? "

It does make sense plus Im a bit reluctant to open new naked puts or strangles right now ( I follow other strats besides short premium, pretty new to those but the loss this month is significant enough for me to feel it - if the market had crashed rather than ramped up, the pain would have been worse, so I take note)
 
Quote from luisHK:

So call sellers, is everyone rolling or just letting calls expire itm before opening new ones (which I'm doing). I opened a bit more calls than puts entering May on worries of market pullback and May's mtm Pnl doesn't look cute.

Anyone else has feedback on Atticus proposition, with 2 or 3synth puts for 24 short puts, the rationale does make sense :

"So short a 2-lot synth and you retain nearly half of the credit at 830 RUT. The rationale is that the skew is bountiful, so why not hedge as OVER HALF of that credit is due to asymmetry (risk-reversal prem on put strike)? "

It does make sense plus Im a bit reluctant to open new naked puts or strangles right now ( I follow other strats besides short premium, pretty new to those but the loss this month is significant enough for me to feel it - if the market had crashed rather than ramped up, the pain would have been worse, so I take note)
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Just make sure you have enough capital to sustain your drawdowns. That's all you need.
 
I'm pushing up some DITM sold calls and buying OTM calls (a few weeks ahead) to limit losses as we continue to grind up. I have that feeling that we are going to fall off a cliff at some point - if only temporarily. I think the selling will be panicky when it finally starts and I want to be short some DITM calls when it gets going.

We are really in this bulletproof stage here. WMT missed this morning and guided down 5%, jobless claims were way up, CPI was negative and housing starts missed badly...and none of it matters today. This will continue...until it doesn't.
 
Quote from ktm:

I'm pushing up some DITM sold calls and buying OTM calls (a few weeks ahead) to limit losses as we continue to grind up.
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Thanks, I'm trying to understand your position. What is the point to be short ditm calls with little to none extrinsic value ? Do you feel it's a better way than a long put to profit of a sell off ?
 
Quote from luisHK:

Any feedback how you're performing in this bull market ? I sold a few strangles, mostly monthly but some weekly and 60days, over the last few months with 2%otm calls on ES and up to 5% on RUT but the calls have been on fire, even more when selling on higher VIX days (dips).

Today woke up just after market open and the pnl column was showing
-19K, I've seen worse but a triple expresso and neutral pnl is better for breakfast. Also it's particulary frustrating to lose a fair bit while the market is rather quietly trending upwards.

With 5 calls for 1 put it must be even hotter, did you adjust your strategy lately ?
More...

hey Luis...I know what your feeling! I'm also selling monthly strangles...but have been buying slightly otm call spreads (trying to leg into them) on the weekly's to help with the digestion issues in the am. Its VERY difficult to try and keep as close to delta neutral in a market that "seems" so irrational...I can't imagine a 5/1 call to put...that has to have changed or my guess is the broker will close it out for him:(
 
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