McMillan's Strategies

J

JS11374

I just finished reading "McMillan on Options." It's a very insightful book. In it, he outlines a strategy that tries to identify pre-merger/acquisition stocks through looking at options trading volume on that specific issue. I was wondering if any of you has every tried this strategy. It sounds like it's too good to be true. Being able to identify stocks before they announce a merger is every's dream....

Thoughts/rants/suggestions/directions....

Thanks.

JS
 
McMillan has some good points. There is much to be said about option volatility for no apparent reason (rumors). A portion of my trading is based on that very same premise.

A good example these days is SONS. They were rumored to be a takeover target in early November before they started to move up. Even when the stock was relatively flat, the options were VERY expensive. In these cases, it doesn't matter whether they get bought or not as you can make so much from selling the premium. This is a wonderful game to be sure.
 
That's an interesting point. One school of thought says that you buy these options with extraordinarily high IVs, because they are ready to explode; the other school says that you should do covered calls on them because if they explode, you got the premiums, and if they implode, you are somewhat (note, not really fully) protected from the drawdown. Both makes sense theoretically... but which one is more useful in real world trading?

Ktm, what's your win/loss/drawdown like on your selling of high IV options? What kind of spreads do you use?

JS
 
I employ a few strategies that are loathed by the trading community...like averaging down and adding to losing positions. Believe it or not, I have a very high winning percentage - but only because of the options.

My goal is to buy/write for a minimum profit of 15% a month. Keep in mind I only do this with about 30% of my portfolio. I will do a good bit of fundamental research on the company before entering a position since I may wind up owning the stock longer than I wish. The ideal situation is to be called away the first month with a profit.

I will buy the underlying slightly OTM with 3-6 weeks til expiration, then immediately write the calls. I let the stock get called if I can. If I'm below the strike at expiry, since my basis is lowered, I look to write again or write puts at the next lower strike and/or accumulate more underlying at a price that will significantly lower my basis (or all 3).

An example that went bad:

On 11/8, bought underlying INET for $9.10 as it looked to be breaking out and had good fundamentals. The Dec 10C was only .50 so I thought I'd wait. Two weeks later it moved closer to 10 and I wrote the Dec 10C for $1.00. That's almost 21% (minus comm) in about 7 weeks. INET quickly moves over 11, then ARCA buys REDI and questions arise about INET's competitiveness, so INET drops. Today it sits at $7.50.

Since the fundamentals are very solid, I'm happy to buy more at a lower price. Now sell the Jan 7.50 put for .60 to effectively double the position. Now my basis is $7.50. If I want to be conservative here, I can write the Jan 7.5 for .60. At Jan expiry, I either own twice as much with a basis of $7.20, or I have a profit of .60 (6.5%) in about 10 weeks...still not bad considering the stock (at 7.50) went almost 20% against me. Since I'm thinking INET will make a strategic acquisition, I'll write the 7.5 puts now and hold off to write the 10 calls later when it moves up...hopefully.

I usually play stocks under $15, (less downside) and that are exhibiting high IV and have decent fundamentals. Options writing is a truly wonderful game.

Good Luck.
 
Not sure I understand you write puts against a long position that in the example you give might go down in case it makes an acquistion? Why the long position in the underlying, you can have the stock put to you and see another loss on your long underlying position ?
 
Speaking of which, is there a place you can get historical volume data on options (not series, but all the option series) traded on a particular stock? I haven't seen any.
 
duffer,

I do write naked puts about half the time, usually on higher priced stocks when the technicals appear to indicate the stock has bottomed. I usually write with about 5-6 weeks left with a fishbowl forming.

Kicking,

Writing the naked puts when I own the long is a way of averaging down. Getting put to reduces my basis with more stock, while retaining premium just lowers my basis. In INET's case, they have over 700 mil in cash and the concern is that they are losing share and margin. An acquisition in this case of stock and cash would greatly increase their outlook and certainly pop the stock IMO. Anywhere near $10 and I'm out (selling front month calls). Any other time, you are right - the acquirer would drop on the news. INET is selling for under 10X Free Cash Flow with ROE approaching 15% near term...much lower and Warren Buffett will be nibbling on this. The cheap Jan 7.5Puts reflect the unlikely continued dropping of the stock.

 
JS,

I get historical options data on QCharts. The data is correct most of the time. I don't know of a free svc with the same info, but there's probably one out there somewhere.
 
Does anyone here trade butterflies? I am thinking of looking for expliding IV's and then selling the most expensive straddle and insuring them by buying the wings to form the fly. I plan to sit and wait and hopefully collet premium as the IV's regresses to the mean IV. HAs anyone one that with reasonable consistency?
 
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