Critique my strategy

[murray t turtle]

Open an account A: Buy 100 shares of SPY
Sell 1 at the money call for a +-1.5% yield. Duration 30 days.

Open an account B: Short 100 shares of SPY
Sell 1 at the money put for a +- 1.5% yield with a 30 day duration.

Purpose: Harvest the time value of the options. Mimic an iron condor without having the theta decay of the long options.

Costs: Transation costs: a few bucks here and there at Interactive. Not that important
imo.
Borrow costs: 0.45% at Interactive Brokers.

Scenarios: SPY goes up 10-20% a year: You will have to from time to time. So you need a bit of extra cash to buy the shares back in account A. In account B the puts expire wortless.
Spy goes down 10-20% a year: vice versa.

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Looks fine; but be sure to research what happens to try to close puts or calls position, in 1987 type market. I used a market order once on closing some QQQ calls,usually use limit order , had a lot of trouble , but got a great price/great trend, market order. BUT i could have gotten smashed, same for you.Good question , CK .Sure ,it may or may not happen again?? Wisdom is profitable to direct

 

[markuzick]

As mentioned by others, this is no different than selling naked straddles; the underlying positions are just superfluous expenses. Selling straddles is generally considered a long term profitable strategy, but with the potential for terrible draw-downs so that money management requires only taking tiny positions. It's probably wiser to hedge your short straddles with long strangles (Iron butterflies) so that you can know your total risk per spread, giving you a better handle on how much money is prudent to spend on a single trade. I've head that it's best to use 40 - 80 days until expiration and to sell winners when they reach 25% of maximum potential profit.

 

[drcha]

As mentioned by others, this is no different than selling naked straddles; the underlying positions are just superfluous expenses. Selling straddles is generally considered a long term profitable strategy, but with the potential for terrible draw-downs so that money management requires only taking tiny positions. It's probably wiser to hedge your short straddles with long strangles (Iron butterflies) so that you can know your total risk per spread, giving you a better handle on how much money is prudent to spend on a single trade. I've head that it's best to use 40 - 80 days until expiration and to sell winners when they reach 25% of maximum potential profit.

I am in agreement with markuzick. You can profit from short straddles in the long term, but you must do certain things:

1. Be prepared for terrible months (including stretches of several terrible months in a row), therefore...
2. Trade small, and buy some wings--so now you have butterflies as markuzick has wisely suggested. The wings don't have to be very close to the short strikes. As long as you have some kind of wings you can avoid getting crucified if you manage your money correctly. No matter what you do, you will still have trades with 100% losses. So, a small fraction of your money is best for this. Options are like alcohol: a little might be good for you; more is not better.
3. Have a strategy (set of indicators) for exiting all trades when the market is bad. Even though butterflies are supposedly neutral, they should still be considered a fair-weather strategy. You don't want to be messing with these in a time like 2008. For example, here are two simple rules that could be used as filters/indicators for getting flat: UL below its 4-wk MA OR VIX >25. You don't have to use these rules exactly, but you should use some sort of rules, and you should backtest them.
4. Choose an underlying with liquid options.
5. There are a lot of ways to manage these (see David Caplan, Larry McMillan; not sure whether the people on Tasty Trade can be believed since they clearly want to get people to trade more). But, you don't have to manage them, and it might be better not to. I'm not sure whether any method of management is necessarily superior.

 

[drcha]

Also, here is #6 which I forgot:

Try to get into the trade under favorable conditions (UL down and volatility up).

It is my firm belief that butterflies are only profitable when trades are correctly timed. If you put them on monthly and blindly without regard to these factors, your expected return is going to be around zero.

 

[mushinseeker]

Drcha.. agree w you on the timing of the flies. I am a "disciple" of John Bender who posited that the money in options is made by predicting a stocks prob distribution and using options to harness that model. The issue w naked straddle is even though it has a good prob of profit your first trade could be your last. There are spreads that you can start with and have a string of losers and still have enough in capital to recover. If your losing month(s) happen to be your first months.. you are done.. and I can't afford to be done...

 

[ironchef]

Also, here is #6 which I forgot:

Try to get into the trade under favorable conditions (UL down and volatility up).

It is my firm belief that butterflies are only profitable when trades are correctly timed. If you put them on monthly and blindly without regard to these factors, your expected return is going to be around zero.

Your statement is true not just for butterflies but in general, for a non professional trader like me.

I experimented with many different strategies and found whenever I traded any methods mechanically, blindly, none of them were very profitable. To make money, I had to have a correct opinion on the underlying.

Regards,

 

[ironchef]

If your losing month(s) happen to be your first months.. you are done..

That might be the best outcome for most small mom and pop traders.

 

[mushinseeker]

2 floor trading addages- "Risk not thy whole wad" and " Your first loss tends to be your smallest loss" . 2nd one should be of particular interest to premium selling on low IV regime. It works a lot till it does'nt and when it does'nt look out below...