My selling options strategy. *Newbie*

[maae10]

Here is my strategy, perhaps you can shed light on where the potential pitfalls are.

I have been trading for about 7 years, and buying options for roughly three years now. After reading a little about selling options I realized I can get the same returns or perhaps a little lower returns but with much lower risk.

I am not a technical trader, I'm a stock picker. I follow individual stocks and industries. Because I only follow 10-12 stocks there were many times where I found there wasn't really anything for me to do. Selling options helps me get past that as I can now bet that the stocks will have no significant movement.

My basic rules are:

Never have one position take up more then 15% of the portfolio

I am always spread into at least 4 different industries (Tech, Auto, Retail, Financial, Conglomerate etc..)

I generally have bull positions but at least 20% of my positions need to have a bearish slant.

If I find myself at a 100% loss on any given position I sell no matter what.

Your thoughts and advice are appreciated.

 

[El OchoCinco]

You have not outlined any option strategy here.

And a 100% loss on a naked option position means your account is wiped out so be careful of doing anything until you understand what it means to sell options naked.

 

[MTE]

Quote from maae10:

...After reading a little about selling options I realized I can get the same returns or perhaps a little lower returns but with much lower risk...

If I were you I'd read a bit more, actually a lot more, about selling options and options in general as you obviously lack some knowledge in this area, to put it mildly.

 

[showyouwang]

There's no real edge in selling naked options. I have found a use for covered calls in swing trades where essentially I figure I would sell anyways.. that way I'm getting paid to wait

 

[maae10]

Quote from showyouwang:

There's no real edge in selling naked options. I have found a use for covered calls in swing trades where essentially I figure I would sell anyways.. that way I'm getting paid to wait

What about if you think the stock is going to stay where it is?

Quote from optioncoach:

You have not outlined any option strategy here.

And a 100% loss on a naked option position means your account is wiped out so be careful of doing anything until you understand what it means to sell options naked.

Account is wiped out? The position is wiped out, not the account.

On stocks I don't expect to move, my strategy is to sell both calls and puts with the strike price as close as possible stock price or I'll sell a call slightly higher and sell a put slightly lower the stock price.

 

[AmbushHillbilly]

Quote from maae10:


Account is wiped out? The position is wiped out, not the account.

On stocks I don't expect to move, my strategy is to sell both calls and puts with the strike price as close as possible stock price or I'll sell a call slightly higher and sell a put slightly lower the stock price.

It sounds like you're selling naked options, whether in singles or straddles/strangles.

Your 15% diversification rule will help with the normal day-to-day market action, but just for grins see what will happen to your account of naked puts/straddles/strangles on a 5% (maybe 10%) down day.

Trust me, if you trade long enough you will awake one day to see EVERY stock you own down and down big. You can throw "diversification" out the window that day.

By the way, you're asking some very knowledgable people (myself excluded) for advice and then basically debating their advice.

Good luck.

 

[maae10]

Quote from AmbushHillbilly:

By the way, you're asking some very knowledgable people (myself excluded) for advice and then basically debating their advice.

Good luck.

The best way to learn is to debate and then get proven wrong.

Quote from AmbushHillbilly:

but just for grins see what will happen to your account of naked puts/straddles/strangles on a 5% (maybe 10%) down day.

How do you protect yourself against the 5% drop?

 

[Tums]

Quote from maae10:

The best way to learn is to debate and then get proven wrong.



How do you protect yourself against the 5% drop?

no need to debate... these are fundamental stuff. Everything you need to know are in a couple of basic books.

we don't even debate intermediate stuff.

bring some advanced topic to the table and we can talk.

 

[maae10]

What books would you recommend?

 

[Tums]

Quote from maae10:

What books would you recommend?

I would suggest you read "Option for Dummies" first, because you are sorely lacking in fundamental and mechanical knowledge of options.