My System

C

cdowis

I have posted a couple of systems here over the years.

Here we go again.

GLD is an interesting market, with steady upward movement, but with breathtaking valleys. So, how do I make money here besides buy and hold.

First, I buy a deep ITM call, 3-6 months out. I then sell a call in the front month with a strike price above the market.

Buy two or three of these and you have 100+ deltas. An account of $10k can carry 200 deltas or better!

So, I have the foundation, where I can just sit back and watch GLD move up, and sweat it out when it makes one of those astonishing moves down. Make a thousand dollars, and lose it all in one or two days. Two steps forward, and one step back, so to speak.

So, today, with GLD at 138.70, we open three jun 125/feb 144 call positions at 14.70 each. Three of these gives us 140 deltas. This is well within our $10k account size.

This gives us a risk of $600 and a possible profit of $1600. I am looking at support at 135 for max loss but it could go down significantly more. Actually I would not open a position at this location. I would wait for a stronger support level to protect my max loss.

This has been very profitable for me and my small account over the past few weeks. But I thought about those huge moves down. How can I actually look forward to them.

Well, when I think things have moved up to some target, such as 140 in my example here, I liquidate one of my positions. If it keeps going up, I enjoy the profits of the two positions. If it goes down, I buy back the short calls at the lower price, and buy a new Jun call. As it moves up, I have the benefit of the naked long calls, and, at some point, I then sell the 144 calls (or something else) at the higher premiums.

I am now back to my original three positions, but with additional profit on the way down and back up, instead of just riding it out.

This looks a whole lot like gamma scalping. Short the calls when they are high, and buy them back when the market moves down.

I am assuming that GLD is bullish over the long term, and this just adds to my profit profile. And, of course, in those times where GLD is just sitting around, I have a nice daily theta from my short calls.

Anyway, nothing really new or astonishing. A gamma scalping strategy with covered option calls. And GLD is an ideal market to play this game.
 
This was a good explanation on how to trade the zig zags of an underlying and will work as long as the underlying bounces around :)

Tho not very often, it's not unusual for GLD to drop 5-7 pts in a couple of days so it's a bit unfair to claim a risk of only $600 yet offer the maximum reward on the profit side. The max risk is the debit cost so it's more like a 3:1 risk. I know you wont ride it that far down but it's a more realistic number than 3:8
 
cdow,

interested in your gld trade. would like a better understanding of the risk. you said a $600 risk on 3 positions. theohorn said the risk is the total debit. i can see that as the blow-out risk without taking any adjustment action. (i havent figured out his 3:1 figure so if theohorn or anyone can help, jump in)

now back to your $600 risk. can we saw it is $200 per spread? gld ($135.20) is down and i figure the spread is now down about $200, so would we bail on the whole position or buy back the short calls and add another long call? or what kind of management would you consider?

thanks
 
I was speaking of $600 per position. Eighteen hundred dollars for three positions.

With the market move down, I simply liquidated my short calls, and will patiently wait for it to go back up to sell them to complete my covered calls.

I will probably add another Mar or Jun DITM call to bring it to four positions. I am long term bullish on GLD, but it only needs to move up and down to be profitable.

It moves up, I short calls; it moves down, I liquidate the short calls, and perhaps add another long call to my position.

I'm considering the weeklies as a possibility while waiting for it to move up.
 
I have a correction for my comment on risk. It was a total of $600, and the actual loss was around $900. It went much lower than I had anticipated.
 
Quote from traderlux:

interested in your gld trade. would like a better understanding of the risk. you said a $600 risk on 3 positions. theohorn said the risk is the total debit. i can see that as the blow-out risk without taking any adjustment action. (i havent figured out his 3:1 figure so if theohorn or anyone can help, jump in)
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The Risk/Rew is somewhere b/t 2:1 and 3:1. You can't assign a maximum risk number at some arbitrary point. The debit cost is the true risk.
 
Quote from cdowis:

I have posted a couple of systems here over the years.


Anyway, nothing really new or astonishing. A gamma scalping strategy with covered option calls. And GLD is an ideal market to play this game.
More...

The only reason you have made money in gld so far is because gld has been in an uptrend for almost a year. The calendar spread strategy counts little and just give you a false sense of security. The tiny income you received from selling the near term OTM calls will never be enough to compensate the loss you will incur if the trend starts to turn. It is close to selling DITM puts.
 
I agree that this assumes that GLD continues its long-term uptrend. This is basically a buy and hold stategy, and I am tweeking it for modest profits. The real gain is when it goes up.

This is nothing fancy or astonishing. Basically I am using the profits in the short calls to help build up my postion. When I get enough profit from the liquidated calls, I buy another ditm call.

In the meantime, I do calendars and condors.

I recently added another ditm call, and will eventually roll them over to Jun (quarterly).

Finally, my account does not permit selling puts. I understand a covered call is equivalent to a short put, without the margin requirement.
 
Quote from cdowis:

.......Finally, my account does not permit selling puts. I understand a covered call is equivalent to a short put, without the margin requirement.
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Well, in such a case (a non-IRA account), you should think about changing your broker, to a firm that is more trader-friendly. For example, ToS, (ThinkorSwim.com) will not impose such silly restrictions.
 
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