Introduction and backround. I think I have a good backround to have success

[ironchef]

With a 1.2M bank roll and proper money management, option selling (not naked) but done in the form of a vertical call spread and a vertical put spread is a reliable income stream.

Illini Trader,

I am not trying to argue or debate the relative merits of selling options. I am just curious if you ever compared your trading outcome to certain benchmarks like buy and hold SPY or the underlying stocks? If so, how much did your method beat the benchmark? When I did put write and call write I was not able to beat my benchmark.

Best wishes.

 

[Illini Trader]

That would be me, I assume?

Thanks for the smiley face. I appreciate that.

 

[Illini Trader]

Illini Trader,

I am not trying to argue or debate the relative merits of selling options. I am just curious if you ever compared your trading outcome to certain benchmarks like buy and hold SPY or the underlying stocks? If so, how much did your method beat the benchmark? When I did put write and call write I was not able to beat my benchmark.

Best wishes.

Thanks for a straight out question and comment. I have been through the ringer on this thread and it is not even my thread. I am not promoting this as a capital accumulation method that is better than indexing, futures trading, or pattern daytrading. It will not fare well with any good ET trader as far as total return.

The reason it works is intuitive. What is the riskiest trade on the planet? Buying out of the money options that are beyond the market makers expected move for the underlying stock. So what is the safest trade on the planet. Selling those options (within a spread).

On any individual trade the risk/reward is not good. You may be risking $420 to make $80 so you have to be mindful of the amount you have at risk at any one time. Max losses are rare but they do happen.

The weekly options expiration make this an income generator and well suited for the PM as he has 1.2M. The learning curve is short and he actually has the odds in his favor. I did not start a thread promoting this; I simply responded to the PM that this is the best for him right now in my opinion. Gee Wizz, he could blow his account trying to learn to trade futures. It is hard.

Trading this way the PM would not need to risk out more than 75K in plays in any one week. Very comfortable trading with a 1.2M account. That would be 150 option plays; say 15 stocks with 10 iron condors each. He needs to learn how to manage the trades that get into trouble but there are ways to do that.

 

[Turveyd]

had I started with options.. probably would have happened to me too! My first big losses were with the lovely ES.. over-trading like a mad man playing a video game..

I was on trend for about 4 months, I'd turned 2K into 20K but spent 14K thinking I had it made, thankfully, I went 100% puts, figuring 1 more down wave, I should of been 33% Calls as insurance but no broke my rules and blew up.

 

[ironchef]

Thanks for a straight out question and comment. I have been through the ringer on this thread and it is not even my thread. I am not promoting this as a capital accumulation method that is better than indexing, futures trading, or pattern daytrading. It will not fare well with any good ET trader as far as total return.

The reason it works is intuitive. What is the riskiest trade on the planet? Buying out of the money options that are beyond the market makers expected move for the underlying stock. So what is the safest trade on the planet. Selling those options (within a spread).

On any individual trade the risk/reward is not good. You may be risking $420 to make $80 so you have to be mindful of the amount you have at risk at any one time. Max losses are rare but they do happen.

The weekly options expiration make this an income generator and well suited for the PM as he has 1.2M. The learning curve is short and he actually has the odds in his favor. I did not start a thread promoting this; I simply responded to the PM that this is the best for him right now in my opinion. Gee Wizz, he could blow his account trying to learn to trade futures. It is hard.

Trading this way the PM would not need to risk out more than 75K in plays in any one week. Very comfortable trading with a 1.2M account. That would be 150 option plays; say 15 stocks with 10 iron condors each. He needs to learn how to manage the trades that get into trouble but there are ways to do that.

That is actually a very good answer for me thank you. I asked the same question to the fellow who introduced me to options trading and his answer was actually similar: He really did not care to compare his results to any benchmarks, to him he had an internal rate of return that he aimed for and as long as he met that expectation he was happy.

He has been trading options for over a decade, trading through the dot com and 2008-09 periods, never had a negative year. His trades were 100% puts/calls writes and he only wrote options on one stock throughout all these years.

Why didn't I do the same? I like to compare my trades to a benchmark and found I could not beat my benchmark just by writing options.

Regards,

 

[Illini Trader]

His trades were 100% puts/calls writes and he only wrote options on one stock throughout all these years.

Very interesting that he only used one stock. He apparently found one that stays within its expected range on a very consistent basis.

 

[sle]

What is the riskiest trade on the planet? Buying out of the money options that are beyond the market makers expected move for the underlying stock. So what is the safest trade on the planet. Selling those options (within a spread).

-- What do you think is "market makers expected move"? Or, what in your opinion constitutes a tail?
-- Why do you think these things are so expensive (at least in your perception)?
-- If it's such a bad trade to buy these tails, who are the buyers and why are they buying it?

Why didn't I do the same? I like to compare my trades to a benchmark and found I could not beat my benchmark just by writing options.

It really depends on how exactly are you comparing these trades. I would imagine that risk-adjusted, option selling will come on top.

 

[Illini Trader]

-- What do you think is "market makers expected move"? Or, what in your opinion constitutes a tail?
-- Why do you think these things are so expensive (at least in your perception)?
-- If it's such a bad trade to buy these tails, who are the buyers and why are they buying it?

I use Thinkorswim from TDA and on each option expiration chain they show the volatility % and the expected move (plus or minus) of the underlying stock to the expiration day of the option. I attached a sample for CELG to illustrate.

Options have time value so with only 3 days left till the Mar 31 expiration it is amazing what people will pay for the opportunity to buy what I have called on this thread a lottery ticket. Who buys them? Well certainly no one on ET. It is the amateurs that are enthralled with with idea of getting a 10 bagger in three days IF they pick the right stock and IF they pick the right direction and IF they get a big enough move for the stock price to catch up with their strike price and IF it keeps going from there to exceed what they paid for the option and then make a profit.

Well they have THREE whole days for this to happen so surely they will get lucky right? Unfortunately for them sometimes they do and so they keep coming back. Just take a look at a few option chains for the March 31 expiration. See what strikes contain the most volume and open interest.

 

[sle]

I attached a sample for CELG to illustrate.

If this was an index, I can see why you would think it's rich and there is a good reason for it (systematic risk and banking regs), but a pharama stock, really? I will quote here:

I'm always quite amused when someone on ET thinks a certain options trader is paying a 'ridiculous' premium... and then I look at what stock it is in, and find out it's a Pharmaceutical...

Anyway, I don't get why you think these tails are expensive? it's 20% vol ATM, spot on with trailing 3m realized. The strikes from 120 to 130 are pretty fairly priced, by most measures (my actuarial model actually says the call strikes are a weak buy).

Out of curiosity, how long have you been trading options?

 

[JackRab]

@sle I assume you misquoted me?

EDIT. I see... it's actually on topic! Thanks for pointing me to this thread...