What are some of the stocks that you have traded in the past?
You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
Have I just been lucky?
- Thread starter nln1972
- Start date
What are some of the stocks that you have traded in the past?
Ok bearing in my mind that I traded options like once in the past decade ( I bought deep in the money DIA puts at ~270.0) that I hate the product and truly suck at it - the one thing that I really like about this strategy is turnover. The trader is achieving leverage in 2 ways - the first way traditionally by just margining the account and the second by flipping the portfolio 52 times/year - much like ZARA flips its inventory many times a year on the same capital base.
The criticism that you've been selling prem in a bull marker is legitimate - that may be 70% of the reason for your success and selection is 30% - but that doesn't mean the strategy is flawed. It simply means that you must be always aware of the macro backdrop. For example, it looks like we shifted into bear mode ( we remain just barely below 200 SMA ( neutral actually) so you may want to simply consider the same dynamics but from the call side. If we do indeed shift into a multi -month bear selling resistance should work just like buying support did.
The criticism that you've been selling prem in a bull marker is legitimate - that may be 70% of the reason for your success and selection is 30% - but that doesn't mean the strategy is flawed. It simply means that you must be always aware of the macro backdrop. For example, it looks like we shifted into bear mode ( we remain just barely below 200 SMA ( neutral actually) so you may want to simply consider the same dynamics but from the call side. If we do indeed shift into a multi -month bear selling resistance should work just like buying support did.
You have a real edge: You managed tail risks much better than I (many of us).I am using margin.
Multiplying out this deal as a hypothetical though, I see the risk as $10/share, so $1k, excluding costs. Let’s multiply that by say 15x stocks = $15k. I do 10-20 week, depending on whether I can find stocks where the 2SD is near a support level.
So, week by week, I’m risking say $15k on a current NLV of $90k. The risk then is not so much huge crashes but rather multiple of them happening throughout the year. Sustained ~5% week on week declines (like Dec) are actually fine. I guess this works with the right market vol characteristics and not others. Just so happens that the past 2 years have been fine.
To state the blatently obvious, this seems to work only with the right stock selection, where there is support. In the aapl example that $0.50 put is an arbitrary price. Arguably whether there’s support or not shouldn’t make a difference - the price should reflect odds of hitting the first put. Perhaps I should run a backtest picking a random set of stocks 2SD out and see if there’s a difference.
Appreciate the feedback though.
So here's the spread I've been doing for just over 2 years now:
- Identify 10-20 stocks where the 2 S.D. put is close to a support level
- Sell a weekly put for each stock, one week out, typically for ~$0.40 (usually a 95%+ win rate)
- Depending on the stock this can be between 5-15% OTM
- Buy the ~$0.05 put for protection (this has been hit 11 times in ~1500 trades)
- Collect the ~$0.35 premium
I keep running the max loss scenarios and it still seems to be an acceptable risk, given the probabilities.
IB margin reqs for options this far out are usually pretty much the same as margin req. for the underlying stock, so I would be OK if every stock was assigned.
I can't help but feeling that I've just been lucky but even the Feb 18 crash didn't dent performance. The stats on the trades have played out pretty much as you'd expect but still the performance is great: +37% in Yr1 and +29% in Yr2.
Have I just been lucky?!?
nln1972 yes you've been lucky, but yes it's a sound strategy for certain types of traders.
I have no time to trade atm, but last year was testing vertical credit spreads, bull put and bear call and it looked very promising. Different parameters though, I was testing 6wks to expiry, closer to money on sold leg and a narrower spread. It's very profitable - if you're correct enough times!.
The edge is not so much in the option pricing, but in your ability as a technical analyst. The setup I was using suited my skills, with enough margin for error and ability to close out the trade early without much damage if one was going against me. (Your weekly durations don't give this latter opportunity).
In Ironchef's example you are risking (AAPL 165 - 155 x 100) $1,000 per trade to make $35 (exact maths not relevant).
So ($1,000/35= 29) you have to win 29 times for each $1,000 full loss to breakeven (as adjusted for trades you close early, which with weekly duration say nil).
You are using a crude form of technical analysis in support levels, combined with a bit of distance to current price relative to the weekly duration and working long side of the market only with your puts.
You need to simply monitor your win rate, which you can do so confidently with the high number of trades being done. But that's where I think you've been lucky. I suspect (from very limited info-apologies if misreading) that your technical skill is not sophisticated enough to maintain a sufficient win rate to make this strategy sustainable long term. You probably wont 'blow up' but rather find that your profitability will grind down over time e.g. a persistent bear market or high market volatility would make it hard for your approach.
Your strategy has suited the current market phase. I think you'll eventually need to adjust the trade parameters with longer durations and some call side spreads to keep it working. (Or bank some profit regularly instead of reinvesting and just walk away from the table when it stops).