Conservative Options Strategy

Chris311

I think you answered your own question. Diversification is a major safety tool. When used correctly. I ceased diversifying into sectors that I don't beleive in, just for the sake of diversity. I diversify within the sectors I like. And weight my sectors according to my confidence level. Big positions in things I like and small in those I don't feel so sure of. But that is the only protection from the catastrophic hit. Like NTRI, it was one position out of about 35, I made bad choices and it made a nice dent in my profits, but not to a serious degree.

I've had other hits to, but I weathered them because of the inherent protection of the DITM spread. Almost all of the losses are contained.

But I feel your pain. My account is large enough that I can diversify. Smaller accounts are a lot more challenging because you can not afford the diversity of a larger account. So a bad position in a 10K account with only 5 positions is a lot harder to deal with. No help for it, just you must be more carefull than the other guy. But you can also scale a position to one spread. That amounts to 20 spreads in twenty different stocks if you want to go that way. That's pretty good diversity.

The rolling I do is all vertical, in the same month. I don't ever do calendar spreads because I do not understand them well. I roll one leg of a spread on rare occasions when I feel putting more money into a wounded spread is worthwhile. There are more complicated moves, but generally they are few, affecting less than 5% of your positions. Too complicated a subject for right now.
 
when u put these on for 3.70 and they get to 4.20 cuz they are close to exp,u can buy an out of the money put for a dime,say u are long 55/60 call sprd and exp is 6 weeks away, u can buy 50 or 45 puts for .05 or .10 and in a catastrophe they will rise against your sprd loss,most of the time it won't happen but if it does u have insurance,i assume u are getting out of these sprds 10 days to a week before expiration, if the sprd is at 4,30 so u can make .70 or lose $5, u see the logic
 
ammo - Thank you for your post, and clarifying your earlier post. Excelent idea. I don't think I would be inclined to use it routinely for protection against unforeseen events. But most damage to an individual stock comes during the time of an earnings report. A bad earnings report can not only devistate a single stock, but bring down the sector it is in also. Maybe buying put protection a week on each side of earnings report day might be viable. Have to think about that. Wouln't cost much if you if you only held the puts for a short time and then sold them, or like you said, buy current month puts.

The events we fear are the single stock disaster, sector collapse, general market downturns, and clicking the wrong button in our trading platforms. (Ever buy 15 spreads when you meant to buy 5?) Oh, and don't forget keeping adaquate margin in your account. A single stock disaster is the smallest danger to a diversified portfolio. Sector collapse is the worst. A market downturn is generally a buying opportunity.


I keep little mantras in my head:

"Don't speculate." If I'm making a plan that REQUIRES a stock to rise (or fall) to be successful, I'm doing the wrong thing. Similarly, I don't speculate that a damaged sector will recover.
"Is this position still a DITM spread? If not, why am I still in it?" And I better be able to answer that question with a logical response.

"Am I in the right sector?" Do my most trusted information sources still support the sectors I'm in. Have there been any fundamental changes recently? I was in financials and housing during the boom, like everybody else. But I had good information that I trusted, that I should get out of there - and I did get out of those stocks before I got badly hurt. I was out a long time before the sectors collapsed.


There have been a lot of times I have sold a perfectly good DITM position (for a small gain or loss), because I lost faith in the company and felt I would rather put that money elsewhere. I still call that risk management.

Chris311 asked me how my account held up during the March lows this year. Well I mentioned in an earlier post that my account dropped from a Late Dec high of 194K (or therabouts) to a march low of about 164K. But my major sectors were sound as a rock. I did what I said to do in yesterday's post. I sold this and that, and bought as much as I could of the good stuff (still buying the DITM spreads, NOT speculating by buying ITM or ATM and waiting for a bounce). By April my account had gotten back to Dec levels, and by May I was at new highs again.

He also asked when would I just cut losses and run. I don't know. It's a scary question.
 
another play for the 2nd half of this year might be to buy deep in the money put sprds for the same afffect,i will be buying the spx1450,1400 sep put sprd if we ever get back up to 1440,1450
 
Today's activity.

SOLD: 5 WY OCT 50/55 @ 3.70
stock at 62.40, net LOSS of 159

Good example to my post earlier today. I haven't been in the position very long. Today the stock dropped over $5 on news of proposed corp actions. High volumn day, with steadily decreasing price all day as investors thought about it. And the stock was down from my entry even before today. I paid $4 for the spreads. I'm not in love with this stock, have no strong convictions about its sector. Getting out of a 5 spread position for 159 loss sounds good to me. I'll happily find a better place for that money soon. Although still DITM, I just don't like the thought of worrying about this position for the next six months. Consider the protection I got from my strategy - the stock dropped a lot and my position only lost $30 per spread.
For completeness, I would like to tell you what the stock price was when I bought the spread and when I bought it, but too time consuming to go through statements to find out - and it does'nt really enter in to the decision to sell it.
 
There were no trades on Monday June 2.

Today's activity:

SOLD: 5 NOV AUG 45/50 @ 4.85
stock at 84.2, net profit 561.00 (hit a GTC order)


BUY: 3 EWZ JAN 75/80 @ 3.75
stock at 97.6, comm=5.28
(wanted to add to my 5 spread position, now have 8 EWZ JAN 75/80)


BUY 5 NOV JAN 55/60 @ 3.94
stock at 84.5, comm= 7
(replace the position that sold, still like the stock although this bull energy run is getting a little long in the tooth. I do expect a correction like everybody else, but don't know when, and this is a deep spread with lots of time to recover from near-term correction. If correction occurs several months from now, I will have gathered some time-value revenue for a cushion. Theoretically.)

SELL 3 PAAS OCT 25/30 @ 3.40
stock at 32.9, net LOSS 83.40
(reduce exposure from 10 to 7 spreads, for small loss. Still 10% ITM, but feel better now.)

BUY 4 PAAS JAN 20/25 @ 3.95
stock at 32.7, comm = 5.6
(I like PAAS at 20/25 spread. This stock has tracked the silver ETF (SLV, which doesn’t offer options) very closely, and has a reasonable P/E. To me this kind of looks like a way to leverage a precious metal, with a pretty good amount of safety.


NOTES:

Recently IB started to allow GTC (good till cancelled) orders for spreads. Wasn’t available last year. So I started using them to sell off spreads that were near max value. Then today I realized that this might not be such a good idea. If some calls get exercised early, and I don’t cancel the GTC sell spread order involving those calls, that could be a bad thing. Especially difficult to track if you have several accounts. So, I think I better cancel my GTC orders and stick with day orders, for the most part.

**********
The comments in this thread are meant to illustrate the kind of monitoring/thinking/consideration I believe is needed for this type of portfolio. Whether or the not the decisions are correct is debatable.

I don’t think I have made the point yet in this thread, that this type of strategy is NEW. I mean it is only recently a viable strategy. Several years ago, before the deep-discount online brokers were available to the unwashed masses, the retail commission structure just would not support this kind of trading. The commissions would eat too deeply into the smaller profits. So none of the books written more than several years ago would spend much printer’s ink discussing this topic, and certainly would not cover this strategy in depth. So this is the main reason I’m writing this stuff. I think this is an under-used strategy that would have much wider appeal if more people were exposed to it. So, in a nutshell, this methodology is not well known, and I am kind of making it up as I go.
 
Quote from yucca_mtn:



I don’t think I have made the point yet in this thread, that this type of strategy is NEW. I mean it is only recently a viable strategy. Several years ago, before the deep-discount online brokers were available to the unwashed masses, the retail commission structure just would not support this kind of trading. The commissions would eat too deeply into the smaller profits. So none of the books written more than several years ago would spend much printer’s ink discussing this topic, and certainly would not cover this strategy in depth. So this is the main reason I’m writing this stuff. I think this is an under-used strategy that would have much wider appeal if more people were exposed to it. So, in a nutshell, this methodology is not well known, and I am kind of making it up as I go.
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To be honest the strategy is not NEW as bull call spreads have been around since the beginning of options. Even back in 2000, retail commissions, though higher than they are now, were still decent for someone buy 5 spreads and holding for months and months. Someone like Mr. Stock would charge $14.95 a side plus $1.95 a contract. Not cheap for spreads but not a deterrent from doing so.

You overlook the hundreds of people who trade options for a living and market makers and institutions who trade all types of strategies.

Basically you are buying a deep ITM call which can act as a replacement for a long stock position and selling a short call against it. Since you are long a call instead of the stock it does not have the downside risks covered calls do but reduces the risk to the debit paid. If you sell the calls in different months than the long calls purchased you have a diagonal spread. Other variations are buying the long-term ITM options and selling front month options month to month looking to collect premium along the way unless the stock moves too far up.

Best of luck in your endeavors but be careful about following Columbus' proclamation of discovering America.
 
Quote from yucca_mtn:

I don’t think I have made the point yet in this thread, that this type of strategy is NEW. I mean it is only recently a viable strategy. Several years ago, before the deep-discount online brokers were available to the unwashed masses, the retail commission structure just would not support this kind of trading. The commissions would eat too deeply into the smaller profits. So none of the books written more than several years ago would spend much printer’s ink discussing this topic, and certainly would not cover this strategy in depth. So this is the main reason I’m writing this stuff. I think this is an under-used strategy that would have much wider appeal if more people were exposed to it. So, in a nutshell, this methodology is not well known, and I am kind of making it up as I go.
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What's to cover? It's a deep itm short gamma vertical. Retail has been trading these things for 30 years. The books will cover butterflies but not a simple vertical? It's equivalent to a short put spread of the same-strikes. I was trading verticals in 1984 when I was 18yo at Paine Webber, Schwab and Lafferty.
 
Quote from optioncoach:

To be honest the strategy is not NEW as bull call spreads have been around since the beginning of options. Even back in 2000, retail commissions, though higher than they are now, were still decent for someone buy 5 spreads and holding for months and months. Someone like Mr. Stock would charge $14.95 a side plus $1.95 a contract. Not cheap for spreads but not a deterrent from doing so.

You overlook the hundreds of people who trade options for a living and market makers and institutions who trade all types of strategies.

Basically you are buying a deep ITM call which can act as a replacement for a long stock position and selling a short call against it. Since you are long a call instead of the stock it does not have the downside risks covered calls do but reduces the risk to the debit paid. If you sell the calls in different months than the long calls purchased you have a diagonal spread. Other variations are buying the long-term ITM options and selling front month options month to month looking to collect premium along the way unless the stock moves too far up.

Best of luck in your endeavors but be careful about following Columbus' proclamation of discovering America.
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The commission structure you mentioned did exist, but it was a little more daunting to a newby (like me) than you imply. That type of commission structure and like Optionetics too (I think) was not friendly to a small player just starting out with a small account to play with. It forced him to be a little less DITM than I strive for, and it favored a larger position than he would be comfortable with, and it discouraged diversification, and it affected his management decisions too much. All this made DITM spreads a lot riskier and much less desirable than they are today. And I think not so suited for small investors as this strategy is today. Anyway that was the point I hoped to make.

Sure Pros had the commission structure to put on these DITM spreads. I kind of doubt that their investment goals and management style would fit a small investor like me. They aren't the "retail" crowd I was talking about.

Also, coach, you imply that the DITM Vertical Bull acts like a covered call. "you are buying a deep ITM call which can act as a replacement for a long stock position and selling a short call against it." I've heard this before and I see your point, but I can't agree. I maintain that the DITM vertical bull spread is not like a covered call, or an OTM vertical bull spread, or like any of the other ITM,ATM, DOTM vertical bull spreads. The methodology is just very different for each type. I don't think you can manage a DITM bull spread like a covered call, or any other kind of spread. The different types of spreads all have different investment goals, different stock selection criteria, different entry and exit requirements, different risk tolerences, different management choices. And more.

For the record, I did not, and Columbus did not, discover this strategy. However, I think I am striving to develop or least improve on, a proper methodology for a very specific type of spread, through trial and error, and experience, without a huge amount of support from literature or peers. I may also be full of beans.
 
Quote from yucca_mtn:

However, I think I am striving to develop or least improve on, a proper methodology for a very specific type of spread, through trial and error, and experience, without a huge amount of support from literature or peers. I may also be full of beans.
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There is no proper methodology. You're undertaking high probability at the expense of risk/reward. It's as old as sin, or at least as old as the option markets. Every option text covers verticals. You're expecting option pros to roll over in glee simply because you've become infatuated with a 5 or 10:1 risk in a garbage vertical. The same strike short-put spread is identical as it's the missing components to the box-arbitrage, and you're likely to see more retail-interest in deep otm puts than deep itm calls. Good luck.
 
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