Best Bullish Options Strategy: Buy Calls, Sell Puts, or Other?

K

Kensho

Buying Calls:

It seems that a long call option suffers two headwinds: theta decay + volatility decrease. Of these two headwinds I think volatility decrease concerns me most since the best buying opportunities are when IV is highest.

Selling Puts:

With selling puts theta decay + volatility decrease is a tailwind but risk is unlimited.

Bull Put Spread:

Sure you can limit the risk of selling puts by buying a further OTM put but then the profit is really small compared to the risk. If you have to sell 5 bull put spreads just to collect enough premium as one naked put then IMO aren't the two strategies just as risky?

I'm a newbie trying to learn.
 
Risk is limited to zero, not so with calls.

There are tons of eq overlays on the inst. side doing short puts. There is nothing wrong with a pure portfolio of naked ATM (30-50D) short gamma. Don't leverage beyond RegT margin (50%) and limit it to stocks you wouldn't mind owning for a year or two.

Sell 2* upside in OTM (20-30D) calls if you get assigned shares. You're then short the upside synth straddle. You can always convert to a delimited position by buying deep wings (synth fly).

There is a ton of flexibility in what you can do once assigned, provided that you're not blown out on shares from the outset. Don't trade biotech, micro, etc. Best to limit it to blues and big-cap tech like AAPL, GOOG and PCLN (careful there).

The Jan3 AAPL 530P are 2.44 mid and 12 cents NBBO. $10k per under RegT to short one. 2.4% return and 5% OTM. If the shares rally then you get even more aggressive on the next roll. Go ten days to two weeks out each time.

Say the shares are put to you at an effective 525... you sell the two week 560 call at 2.70 or the 565 at 1.90. Or the straddle(s) at 5.40 or 3.80 respectively. Go further out when assigned to allow for mean-reversion. Don't be overly concerned with the vol-line, as you're looking to accumulate "free" inventory. You approach it from the mindset of it being a dividend. If you leverage you will eventually get reamed on assignment and the roll that's too close to ATM. Keep it conservative.

Anecdote: There is(was) an old-timer at the CBOE who retired from IBM at the VP-level (not a board member). He went to the floor in retirement to manage his vol-position around the stock he received from 20-25Y on the job. The guy wrote calls opportunistically on his shares; synth straddle writes, flies, etc. Made so much that he established a book in other names doing the same. He always traded around a physical position, not terribly efficient, but ended up leaving the floor at ~65 or so with something on the order of $150MM US from an base at inception of $2-3MM.

Edit: He made $150MM pre-tax.
 
Quote from drownpruf:

Risk is limited to zero, not so with calls.

There are tons of eq overlays on the inst. side doing short puts. There is nothing wrong with a pure portfolio of naked ATM (30-50D) short gamma. Don't leverage beyond RegT margin (50%) and limit it to stocks you wouldn't mind owning for a year or two.

Sell 2* upside in OTM (20-30D) calls if you get assigned shares. You're then short the upside synth straddle. You can always convert to a delimited position by buying deep wings (synth fly).

There is a ton of flexibility in what you can do once assigned, provided that you're not blown out on shares from the outset. Don't trade biotech, micro, etc. Best to limit it to blues and big-cap tech like AAPL, GOOG and PCLN (careful there).

The Jan3 AAPL 530P are 2.44 mid and 12 cents NBBO. $10k per under RegT to short one. 2.4% return and 5% OTM. If the shares rally then you get even more aggressive on the next roll. Go ten days to two weeks out each time.

Say the shares are put to you at an effective 525... you sell the two week 560 call at 2.70 or the 565 at 1.90. Go further out when assigned to allow for mean-reversion. Don't be overly concerned with the vol-line, as you're looking to accumulate "free" inventory. You approach it from the mindset of it being a dividend. If you leverage you will eventually get reamed on assignment and the roll that's too close to ATM. Keep it conservative.

Anecdote: There is(was) an old-timer at the CBOE who retired from IBM at the VP-level (not a board member). He went to the floor in retirement to manage his vol-position around the stock he received from 20-25Y on the job. The guy wrote calls opportunistically on his shares; synth straddle writes, flies, etc. Made so much that he established a book in other names doing the same. He always traded around a physical position, not terribly efficient, but ended up leaving the floor at ~65 or so with something on the order of $150MM US from an base at inception of $2-3MM.

Edit: He made $150MM pre-tax.
More...


When did he do this ? Could he have done this in the last say 5 years as well ?
Thanks
 
Interesting story about the ex IBM guy. It seems there are lots of people and hedge funds selling puts and selling covered calls. And I understand that 90% of all contracts expire worthless but I thought it was a zero sum game?
Where are all the HFs strictly buying calls?
Wouldn't Warren Buffet simply been better off it he bought calls vs. selling puts in 2008?
Wouldn't Victor Niederhoffer been better off buying calls instead of selling naked puts?
Is buying calls that risky and that inferior to selling puts?
 
Quote from trilogic:

When did he do this ? Could he have done this in the last say 5 years as well ?
Thanks
More...

92-09, so effectively no. He had a book of 12-15 names by that time and a decent portion was earned in the bubble, but this includes being carried out in the crash in 2008. He had close to 200MM at the peak and the stress of managing a book like that got to him. He's truly retired now and I trade a piece of his book, but not in the put writing strategy.
 
Quote from Kensho:

Interesting story about the ex IBM guy. It seems there are lots of people and hedge funds selling puts and selling covered calls. And I understand that 90% of all contracts expire worthless but I thought it was a zero sum game?
Where are all the HFs strictly buying calls?
Wouldn't Warren Buffet simply been better off it he bought calls vs. selling puts in 2008?
Wouldn't Victor Niederhoffer been better off buying calls instead of selling naked puts?
Is buying calls that risky and that inferior to selling puts?
More...

Buffet bought the top of the mkt. Vic bought the top as well; both shorted index puts. The difference was that Buffet had the terms and no mark to mkt.

Anyway, I am not going to propose buying vol in this capacity. I knew another guy at Peak6 in 1999 that put his retirement assets (most of his net worth) in INTC 90-strike LEAPS. He was a top-performer and lost his entire savings on those calls. The point is that diversification would've resulted in the identical outcome.

I'll assume you're not trolling and that it's simply a naive question.
 
Quote from drownpruf:

92-09, so effectively no. He had a book of 12-15 names by that time and a decent portion was earned in the bubble, but this includes being carried out in the crash in 2008. He had close to 200MM at the peak and the stress of managing a book like that got to him. He's truly retired now and I trade a piece of his book, but not in the put writing strategy.
More...

What are some of the strats today in options without necessarily owing the physical or stock, that have a reasonable risk/reward given you can be all levered up if you like. Thanks.
 
drownpruf said:
Risk is limited to zero, not so with calls.

There are tons of eq overlays on the inst. side doing short puts. There is nothing wrong with a pure portfolio of naked ATM (30-50D) short gamma. Don't leverage beyond RegT margin (50%) and limit it to stocks you wouldn't mind owning for a year or two.

Sell 2* upside in OTM (20-30D) calls if you get assigned shares. You're then short the upside synth straddle. You can always convert to a delimited position by buying deep wings (synth fly).

There is a ton of flexibility in what you can do once assigned, provided that you're not blown out on shares from the outset. Don't trade biotech, micro, etc. Best to limit it to blues and big-cap tech like AAPL, GOOG and PCLN (careful there).

The Jan3 AAPL 530P are 2.44 mid and 12 cents NBBO. $10k per under RegT to short one. 2.4% return and 5% OTM. If the shares rally then you get even more aggressive on the next roll. Go ten days to two weeks out each time.

Say the shares are put to you at an effective 525... you sell the two week 560 call at 2.70 or the 565 at 1.90. Or the straddle(s) at 5.40 or 3.80 respectively. Go further out when assigned to allow for mean-reversion. Don't be overly concerned with the vol-line, as you're looking to accumulate "free" inventory. You approach it from the mindset of it being a dividend. If you leverage you will eventually get reamed on assignment and the roll that's too close to ATM. Keep it conservative.

Anecdote: There is(was) an old-timer at the CBOE who retired from IBM at the VP-level (not a board member). He went to the floor in retirement to manage his vol-position around the stock he received from 20-25Y on the job. The guy wrote calls opportunistically on his shares; synth straddle writes, flies, etc. Made so much that he established a book in other names doing the same. He always traded around a physical position, not terribly efficient, but ended up leaving the floor at ~65 or so with something on the order of $150MM US from an base at inception of $2-3MM.

Edit: He made $150MM pre-tax.
More...

Correction: he started with $10MM in shares.
 
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