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Conservative Options Strategy
- Thread starter yucca_mtn
- Start date
No trades today.
That only means that my trading account, on display here, is pretty much fully invested. It does not mean there are no good trades today. Today and yesterday, I found a few good positions that I used in other accounts.
As an example for today, I found NOV JAN 55/60 @ 3.75. The stock was at 80.0 at time of trade, down about 60 cents for the day (closed at 83.15). I also found MOS JAN 70/75 @ 3.9, with the stock at 118.9, up 3.6 for the day (closed at 123.7). I usually don't like entering spreads on an up day (especially with high P/E), but felt this is so deep that it justified a slightly lower yield and entering now. This spread is ((119-75)/119) is 37% deep ITM). And the sector is still trending up.
I won't be listing trades I make for other accounts, as a rule. Just wanted to make the point to seek and ye shall find.
**************************
Once or twice a month I do an evaluation of my spreads: I determine the maximum value of the spreads at full maturity, assuming 100% success, to determine the maximum value of my account at some future date. I just add up the maximum expected return from all positions.
Today my maximum value (calculated for 100% success) of all my spreads = 203,500.
the present value of all my spreads (from my statement) = 164,376
amount remaining to be earned (at 100%) = 39,124
to determine the average max yield = 39,124/164376 = 23.8%
Since my spreads roughly average about 6 months till expiration, I'm happy with these figures. I'm on track to reach my targeted goal -- for today anyway.
That only means that my trading account, on display here, is pretty much fully invested. It does not mean there are no good trades today. Today and yesterday, I found a few good positions that I used in other accounts.
As an example for today, I found NOV JAN 55/60 @ 3.75. The stock was at 80.0 at time of trade, down about 60 cents for the day (closed at 83.15). I also found MOS JAN 70/75 @ 3.9, with the stock at 118.9, up 3.6 for the day (closed at 123.7). I usually don't like entering spreads on an up day (especially with high P/E), but felt this is so deep that it justified a slightly lower yield and entering now. This spread is ((119-75)/119) is 37% deep ITM). And the sector is still trending up.
I won't be listing trades I make for other accounts, as a rule. Just wanted to make the point to seek and ye shall find.
**************************
Once or twice a month I do an evaluation of my spreads: I determine the maximum value of the spreads at full maturity, assuming 100% success, to determine the maximum value of my account at some future date. I just add up the maximum expected return from all positions.
Today my maximum value (calculated for 100% success) of all my spreads = 203,500.
the present value of all my spreads (from my statement) = 164,376
amount remaining to be earned (at 100%) = 39,124
to determine the average max yield = 39,124/164376 = 23.8%
Since my spreads roughly average about 6 months till expiration, I'm happy with these figures. I'm on track to reach my targeted goal -- for today anyway.
Today's activity:
SOLD: 3 TEX JULY 45/50 @ 4.9
stock at 71.5, net profit 224.4
BUY: 4 FCX NOV 80/85 @ 3.85
stock at 114.85. expected gross profit = 460
Working off the paper loss in PMI with covered calls:
BTC 3 PMI JUN 7.5
STO 3 PMI SEP 7.5
(diagonal spread gross credit 195 + profit 53 on june calls)
****************
From my last post, I talked about the calculated value "average maximum yield", and it was 23.8%.
To finish that thought:
A value of 25% is theoretically perfect, assuming six month average expiration. Correct reward vs. risk for my methodology.
A value of more than 30% would mean that the value of my spreads has decreased to the point that overall portfolio risk is too high, and that defensive risk management moves are needed. These defensive moves might involve reducing high risk positions by taking some losses, or selling spreads that are getting short in timevalue at near breakeven (in other words spreads that aren't making any money and just tying up cash that I can put to better use elsewhere), or taking early profits by selling some profitable spreads - then taking the cash from these spreads and moving it into new spreads that meet my risk tolerances more closely. If the account is down that much, that probably means there is good buying opportunity somewhere in sectors you trust.
A value of 18-20% or less means the opposite - I'm sitting a little too long on some spreads that are profitable and are offering diminishing rates of return. In other words I should try to cash in profitable spreads early and buy new spreads that will offer higher yields per month. Sometimes the market won't let you do that, there is no point in closing out spreads that are earning something if there is no good entry point for newer spreads.
Another fun viewpoint is the thought of earning about 39,000 in about 120 working days (six months) = $325 per day earnings potential. (grin!) Think about all those scalpers out there who risk 50k on a daytrade to earn $100. I saw a trade yesterday where a guy bought and sold 4000 shares of a $70 stock (280k at risk), came out with a $360 profit and he was happy. His life is definately more exciting than mine.
SOLD: 3 TEX JULY 45/50 @ 4.9
stock at 71.5, net profit 224.4
BUY: 4 FCX NOV 80/85 @ 3.85
stock at 114.85. expected gross profit = 460
Working off the paper loss in PMI with covered calls:
BTC 3 PMI JUN 7.5
STO 3 PMI SEP 7.5
(diagonal spread gross credit 195 + profit 53 on june calls)
****************
From my last post, I talked about the calculated value "average maximum yield", and it was 23.8%.
To finish that thought:
A value of 25% is theoretically perfect, assuming six month average expiration. Correct reward vs. risk for my methodology.
A value of more than 30% would mean that the value of my spreads has decreased to the point that overall portfolio risk is too high, and that defensive risk management moves are needed. These defensive moves might involve reducing high risk positions by taking some losses, or selling spreads that are getting short in timevalue at near breakeven (in other words spreads that aren't making any money and just tying up cash that I can put to better use elsewhere), or taking early profits by selling some profitable spreads - then taking the cash from these spreads and moving it into new spreads that meet my risk tolerances more closely. If the account is down that much, that probably means there is good buying opportunity somewhere in sectors you trust.
A value of 18-20% or less means the opposite - I'm sitting a little too long on some spreads that are profitable and are offering diminishing rates of return. In other words I should try to cash in profitable spreads early and buy new spreads that will offer higher yields per month. Sometimes the market won't let you do that, there is no point in closing out spreads that are earning something if there is no good entry point for newer spreads.
Another fun viewpoint is the thought of earning about 39,000 in about 120 working days (six months) = $325 per day earnings potential. (grin!) Think about all those scalpers out there who risk 50k on a daytrade to earn $100. I saw a trade yesterday where a guy bought and sold 4000 shares of a $70 stock (280k at risk), came out with a $360 profit and he was happy. His life is definately more exciting than mine.
Thanks for posting your thread. I have enjoyed reading it and it is very well written.
I have been running a similar strategy. My biggest problem was that although I was successfull about 90% of the time, it would be the one or two big losers that would almost detroy all the gains from the other trades.
It seems like these strategies work well in bulish or flat markets but can really struggle in a declining market. Since you are holding so long, what steps to you use to protect against catastrophic losses? Do you use some form of stop loss order (mental) or do you find yourself riding the spread down into negative territory in the hopes of a comeback?
Was this the strategy you were using when you doubled your money? How were your returns during the correction earlier this year? What percentage of your spreads are profitable overall would you say?
Thanks aain for your post. Nice to read a decent thred for a change without a bunch of bashing. Lets hope it holds up!
I have been running a similar strategy. My biggest problem was that although I was successfull about 90% of the time, it would be the one or two big losers that would almost detroy all the gains from the other trades.
It seems like these strategies work well in bulish or flat markets but can really struggle in a declining market. Since you are holding so long, what steps to you use to protect against catastrophic losses? Do you use some form of stop loss order (mental) or do you find yourself riding the spread down into negative territory in the hopes of a comeback?
Was this the strategy you were using when you doubled your money? How were your returns during the correction earlier this year? What percentage of your spreads are profitable overall would you say?
Thanks aain for your post. Nice to read a decent thred for a change without a bunch of bashing. Lets hope it holds up!
Quote from Chris311:
Thanks for posting your thread. I have enjoyed reading it and it is very well written.
I have been running a similar strategy. My biggest problem was that although I was successfull about 90% of the time, it would be the one or two big losers that would almost detroy all the gains from the other trades.
It seems like these strategies work well in bulish or flat markets but can really struggle in a declining market. Since you are holding so long, what steps to you use to protect against catastrophic losses? Do you use some form of stop loss order (mental) or do you find yourself riding the spread down into negative territory in the hopes of a comeback?
Was this the strategy you were using when you doubled your money? How were your returns during the correction earlier this year? What percentage of your spreads are profitable overall would you say?
Thanks aain for your post. Nice to read a decent thred for a change without a bunch of bashing. Lets hope it holds up!
Well the whole point of this thread is to answer all the questions you have asked. And it will take some time, and the answers will develope as the thread progresses, I hope.
But here is a start:
If you throw a bunch of darts at a list of stocks and open DITM bull spreads on them at a cost of $4 looking to close them at $5, and HOLD them till expiration, the odds are pretty close that 80% of the spreads will close successfully and 20% will totally fail leaving you with zero profits and zero loses - because the 20% that lose will wipe out all of the profits from the winning spreads.
Now suppose you decide that when a spread loses $1, you will close it and take the loss, hoping that only happens only 20% of the time. It doesn't work. Even really good spreads will often drop $1 and then recover, and if you have closed them out you have taken unneccesary loses. So basically there is no pure strategy that puts the odds in your favor. Trust me on this, I've lived in Vegas over 30 years.
So, in my opinion, we beat the odds by using a winning methodology. We find the right sectors. We find the right spreads. We time our entries as best we can.
When the spreads get in trouble, this is the time to go to work.
Emotion is our enemy, reason is our friend. The decisions we make are a little complicated and cannot be summed up in a cookbook formula. In a nutshell we look at each position individually and make a decision about the likely near-term future. If we think the present turndown is panic, or short-term and fundamentally still sound, we tough it out by holding on or rolling a leg. If we think something semi-permantly bad has happened, we reduce the position or close it out and take a loss. Generally the time to make these decisions is when the spread has lost that $1 I mentioned. And once the decision is made to continue holding a position, it is constantly up for review as we monitor the position closely.
Now integral to the success of this strategy I think, is we use the money we raise from these risk management moves to take advantage of the low in the market to open new spreads. This is a lot easier said than done. Remember, it is tough watching your account dwindle minute by minute right before your eyes. Those of us who are prone to panic, this is the perfect time to panic. And IB has this "Liquidate All" button that tempts you to end the madness. Don't do that. Just suck it up and buy, buy, buy.
Now for the good news! Out of hundreds of positions I have held, I have only had total losses on two of them. One I don't remember, and the other is getting totally snookered on NTRI last year. I'm still pissed about that one.
To answer other questions:
Stop loss orders have never worked for me.
And this DITM strategy is almost evry position I've had since Jan06. So THIS is the strategy that I used to double my money.
Before Jan06, I was learning about options and trying out other things like covered calls, etc. In Jan06 I closed out a few remaining positions, consolidated other broker accounts into IB and started fresh with exclusive DITM Bull call spreads.
Quote from ethos:
Is there a software that can keep track of a spread portfolio? I'm using TradeStation and it is a nightmare to try to figure out spread p&l since all options are shown separately.
I tried using a spread sheet and documenting every little move and every result. Total waste of time, too much data to enter. I now use the statements from IB and let them calculate my FIFO REALISED GAIN or LOSS. But I want to track the "position history" of a complicated spread that I have rolled, so I now use handwritten notes on my worksheet that I printout from the "ACCOUNT" screen in IB. Very handy and very easy to configure.
Can you cut and paste the TradeStation data into a spreadsheet then sort by position?
Thanks for the reply yucca,
I agree with what you are saying. I guess my biggest concern is just the overnight catastrpohic blowout on a given spread. Thats what scared me off of my strategy. Something like a Bear Stearns collapse could really cripple a strategy like this cause it happens overnight or over a weekend and there is no time to get out or make adjustments. I guess this is where diversification comes in. It just seems that since the gains are pretty much capped at the begining, there is not that 1 or 2 stocks that go to the moon that offset the bad ones like you would have in a conventional buy and hold strategy. Keep in mind I am not knocking your strategy but rather just having a discussion as it is very much along the lines of what I was doing previously.
When you speak of rolling a leg what exactly to you mean? Are you saying sometimes you may hold on to the call you own, buy back the call you sold, and then sell a call further off in the future?
I agree with what you are saying. I guess my biggest concern is just the overnight catastrpohic blowout on a given spread. Thats what scared me off of my strategy. Something like a Bear Stearns collapse could really cripple a strategy like this cause it happens overnight or over a weekend and there is no time to get out or make adjustments. I guess this is where diversification comes in. It just seems that since the gains are pretty much capped at the begining, there is not that 1 or 2 stocks that go to the moon that offset the bad ones like you would have in a conventional buy and hold strategy. Keep in mind I am not knocking your strategy but rather just having a discussion as it is very much along the lines of what I was doing previously.
When you speak of rolling a leg what exactly to you mean? Are you saying sometimes you may hold on to the call you own, buy back the call you sold, and then sell a call further off in the future?