Conservative Options Trades

danshirley,

I assume your "annualized %" takes into account Capital Used?

I've been using the Options Oracle software, and I find it very useful.
Is there anything similar or better, I can pay for [or free]?
Or even a website.

thanks
marc
 
Questions:

Annualized Yield = (P-L/(Capital Used))*365/(Days to Expiration)

I use OptionsOracle plus the trade building tools at OptionsXpress.

"Do you use some sort of fundamentals screen to select candidates for these trades? "
Yes
I have a list of stocks that are candidates for spreads based on fundamentals plus the graph. I respond to news events on trade candidates (usually earnings but sometimes other events) by placing spreads when the event makes it likely that the stock will be stable over the length of the spread. e.g. a good earnings report with upbeat projections on a fundamentally sound stock usually means the stock price will be stable at least until the next earnings report... and if the projection is really good perhaps beyond. This will alllow me to place a spread to take advantage of the stable stock price that I expect should follow.

In order to select a strike price for the spread I look primarily at support and resistance levels on the graph.

e.g. if I can get a 15% annualized yield on a bull put spread with strikes below the lowest point on the 5 year graph of a fundamentally sound stock that has just had a positive earnings report and projection... I will probably take that trade.

"implied/realized ratio is not in favor of selling"

I don't care.

I don't even look at volatility. I look at how much money I will make on the trade, how much I could lose and the probability of the trade being successful. I want an average annualized yield greater than 12% on my portfolio as a whole, and I want a probability greater than 90% when I can get it.

The bottom line for me is the expected yield:

Expected Yield = Sum: (Probability of the event)(P-L of the event) summed over all possible events and then divided by the capital used.

For probability I use the log-normal probability estimates that are produced both by options-oracle and OptionsXpress . (they are always very close)

Since the sum on the expected yield calulation would have an infinite number of terms requiring integration of a known function, and there is no known function I use a 3 point approximation of the expectation: Complete Success, Complete Failure and a third point half way between the two.

Note: Sometimes I will take a trade that does not give the required expected yield because I believe the news event changes the future expected distribution of prices and the expectation calculation is thus invalid for predicting future performance... and yes I know it's really never completely valid in a matematical sense but there are degrees of appropriateness.

note: this is the last time I will ever go through this. 90% of traders lose money on their accounts and wash out. If you need this level of explanation you probably are not adequately prepared and shouldn't be trading... and I don't want to contribute to your losses.
 
Quote from danshirley:

NWN:
Trade:
With NWM at 45.88
Sell the Dec 45 put for $185 with the intent of being put and subsequently selling covered calls and collecting dividend.
The CC is anticipated to yield 4.3% annualized plus a dividend of 3.8% should give an annual yield of 8.1% total.

The yield on the naked short put is 185/4315 = 4.3% in 227 days or 6.9% annualized.
More...
Quote from sle:

I am trying to undestand the logic of these trade (the thread caught my attention) and how you come up with the stocks to sell puts on.
More...
Whatever the logic, and I'm not saying that it's a bad trade, there are some omissions in the analysis.

The put won't be exercised as long as it has div. factored in. So you wouldn't expect assignment until after the Oct. ex-div. and the put is ITM - or in the unlikely event of a substantial interest rate spike. The div. is almost 1% per Q.

The yield calcs make some odd assumptions - especially the CC yield assumes assignment and then selling some strike for ?.

Regardless, the theoretical R/R is low reward, high risk - if you have some conviction about the stock holding up for the rest of the year - then that might be a good reason for the trade. If you have some opinion as to the min. value of the stock, then you might assume a better R/R. Nat. gas is tricky, though.

The div. may very well support the stock price and considering that it is factored in the put, there isn't much time premium there.
 
Quote from danshirley:
note: this is the last time I will ever go through this. 90% of traders lose money on their accounts and wash out. If you need this level of explanation you probably are not adequately prepared and shouldn't be trading... and I don't want to contribute to your losses. [/B]
More...

There's nothing wrong with asking the logic behind a trade. There are many kinds of option traders and the logic isn't always obvious. You don't have to answer, but thanks for the explanation.

I don't think that you have to worry about sle being adequately prepared.
 
Quote from danshirley:
Questions:
If you need this level of explanation you probably are not adequately prepared and shouldn't be trading... and I don't want to contribute to your losses.
More...
I doubt anything you say here would contribute to any P&L in my book. In any case, I was merely trying to understand why you are calling "Conservative Options Trades" what in my world qualifies as naked put selling. The logic that you use is unusual (and I would say somewhat wrong), but maybe it's yet another way of looking at it.
 
I have all the regular posters on ignore so I can't reference their posts exactly but two 'points' were made when I read the thread without signing on (at least one challenging my use of the 'conservative' label) that were so far in left field that I want to address them for the normal folks that may not have the regular posters on ignore...yet.

1. someone said 'natural gas is tricky' or something to that effect. NWN is not natural gas in that sense. Look at these two graphs:

http://finance.yahoo.com/q/bc?t=5y&s=NWN&l=on&z=l&q=l&c=ung&ql=1

http://finance.yahoo.com/q/bc?t=5y&s=NWN&l=on&z=l&q=l&c=&ql=1&c=^DJI

NWN "stores and distributes natural gas ".
http://finance.yahoo.com/q/pr?s=NWN+Profile

They don't mine it, own it and suffer the price decay of the gas itself. That puts utilities like NWN in a sweet spot because the low price of natural gas increases the use of it which means more income from storing and distributing it. This was the whole point of choosing NWN for that trade. I believe that point was made in my first reference about NWN's recent earnings. But then the regular poster probably didn't read the reference.

2. Someone also said the strategy (i.e. selling DIM puts) was "high risk/ low reward". This is how selling puts is often characterized by people who talk the talk but do not think the think.

Compared to what??

Life is high risk/low reward... I could get run over any day... should I stay at home and hide??? It depends on the probability of my getting run over...what I gain from going out... and how careful I walk.

The short put compared to owning stock :
NWN............STOCK..........Short Put
35...............(1108)...........(796)
40................(608)............(300)
45................(108).............200
50..................392..............200
55..................892..............200

YES if you repeatedly run these trades over time the higher yield on the stock at higher prices will compensate for the higher loss at lower prices... but the restricted price behavior of NWN make this difference academic... and you would have to run for about 30 years to see the difference. At the high probability prices 40/45/50 the short put is a more 'conservative' choice.

I don't see selling the put as any more 'high risk/low reward' than owning the stock. And didn't I make the point clearly enough that the purpose of selling the put in the first place was TO GET PUT so that I could sell calls and collect dividends?

I got $200 for my short put on NWN. Thus my cost basis for NWN when and if I am put will be 45-2 = $43. Much better than buying the stock at its current price.

AND if you look at the history of NWN

http://finance.yahoo.com/q/bc?s=NWN&t=5y&l=on&z=l&q=l&c=

The probability of seeing anything above 50 or below 40 is nill... so that expected values are favorable... and constrained enough that the anticpated yield from the subsequent CC is a high probability.

Natural gas is 'tricky' but natural gas utilities are not. Selling puts has the same downside exposure as buying the stock and is no more 'high risk/low reward' than owning NWN (a very conserative stock) in your portfolio.

I am sorry to take up more space with these 'issues'... I don't usually pay any attention to the regular posters... as I say, they are all on ignore... I will try to keep to posting trades in the future.
 
EOG:

EOG Resources, Inc., together with its subsidiaries, engages in the exploration, development, production, and marketing of crude oil and natural gas primarily in the United States, Canada, the Republic of Trinidad and Tobago, the United Kingdom, the People's Republic of China, and the Argentine Republic. As of December 31, 2011, it had a total estimated net proved reserves of 2,054 million barrels of oil equivalent (MMBoe), of which 517 million barrels (MMBbl) were crude oil and condensate reserves, and 228 MMBbl were natural gas liquids reserves; and 7,851 billion cubic feet were natural gas reserves. The company held approximately 572,000 net acreage position in the oil window of the Eagle Ford Shale Play near San Antonio, Texas. EOG Resources, Inc. was founded in 1985 and is headquartered in Houston, Texas.


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http://www.investopedia.com/stock-a...E-CXPO0511.aspx?partner=YahooSA#axzz1umLkJbUL

http://investing.money.msn.com/investments/financial-statements?symbol=EOG


http://finance.yahoo.com/q/ks?s=EOG+Key+Statistics

http://finance.yahoo.com/q/bc?s=EOG&t=5d&l=off&z=l&q=l&c=

http://finance.yahoo.com/q/bc?s=EOG&t=2y&l=off&z=l&q=l&c=

http://finance.yahoo.com/q/bc?s=EOG&t=5y&l=off&z=l&q=l&c=

Trade:

Jan '13 65/60 bull put spread for $30
Yield = 30/470 = 6.4% in 251 days or 9.3% annualized
Prob = 94.9%
Expectation = .949(30) - .025(470) - .026(235) = 27.0 - 11.7 - 6.11 = 9.19

<Not a recommendation......For my own use only>
 
 
 
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