No/Low risk, low return option strategies?

Hi All,

I've been actively trading options for 3 years now.
The first year I took my losses (almost 10k) as a tuition. The second year I tried low risk strategies like vertical spreads and covered calls (although not pure options play).
It made a lot of difference I made it all back.

This year was a bit different - I decided to use a couple of advisory services. The one that worked the best so far was McMillan's Investor Keywhole portfolio.

I followed his picks with my own TA on top of it. I usually select 3 out of 5 positions he recommends. His success ratio was above 90% which is good.
I did not loose in any of the selected positions. Thats because all the positions initially came with 15-20% draw-down protection.

Now I found something even safer then this but with a return rate of about 10% annually. I look for a high divident paying stocks like NLY, FRO, etc...
Shares are purchased, deep-itm calls are sold. This creates covered calls with 1% monthly return rate at best. The funny part is - in 30-40% of the cases I'm not called out of my stocks, so I keep dividents and keep option premium.

I don't think it gets any safer then this, although I'd love to stand corrected.
 
Quote from StasDesy:

Hi All,

I've been actively trading options for 3 years now.
The first year I took my losses (almost 10k) as a tuition. The second year I tried low risk strategies like vertical spreads and covered calls (although not pure options play).
It made a lot of difference I made it all back.

This year was a bit different - I decided to use a couple of advisory services. The one that worked the best so far was McMillan's Investor Keywhole portfolio.

I followed his picks with my own TA on top of it. I usually select 3 out of 5 positions he recommends. His success ratio was above 90% which is good.
I did not loose in any of the selected positions. Thats because all the positions initially came with 15-20% draw-down protection.

Now I found something even safer then this but with a return rate of about 10% annually. I look for a high dividend paying stocks like NLY, FRO, etc...
Shares are purchased, deep-itm calls are sold. This creates covered calls with 1% monthly return rate at best. The funny part is - in 30-40% of the cases I'm not called out of my stocks, so I keep dividends and keep option premium.

I don't think it gets any safer then this, although I'd love to stand corrected.
More...

There is no reason to sell the ITM call. All you are doing is selling the same strike OTM put synthetically. The reason you are not getting called on the short call is because the extrinsic value of the call is > then the div amount. Simple math problem.

Your position does carry risk though as is apparent by the OTM short put. Once a year the stock will probably take a dump on you wiping out all the 1% gains you achieved throughout the year. Not trying to rain on your parade. Just trying to make your strategy more transparent.
 
It is being touted by a number of professional traders to hedge your positions and take on more than one
position like straddles, collars, etc.
Price Headley makes the point that directional trades (either buying calls or puts) are better because you do not limit your profits which happens when you do a straddle or collars.
Have been trading options since, May 2005 and started slow with 3 contracts.
So far, I have 7 winners, 5 losers and 1 even (should have been a winner but, I waited too long and lost the gains).
Win/Loss ratio is $3 to $1. My last two trades were on UST MH bought it at $1.80 per contract sold it ten days later at $3.30 and IRF MG bought it at $2.65 and sold it at $8.20. Still working on minimizing my errors and reviewing my trading journal but, I see potential. Loads better than when I was trading stocks.
 
Arl....There is no such thing as a free lunch. The closest thing is selling covered calls but, you still risk losing money if your stock goes down in price. Also, you give up a lot in terms of potential gains as your gain is limited to the premium the buyer of the call pays plus any upside move up to the strike price. If your stock goes down, you lose on the stock which is mitigated somewhat by the premium you received for selling the calls.
I just buy calls and puts and make directional trades after I analyze the stocks. You won't win all the time but, I have had two huge winners in my last 2 trades with gains of 83% and 209%. Not all winners. I had 7 winners, 5 losers and 1 even from my 13 trades since, May 2005.
Win loss ratio is $3 to $1.
 
Quote from smallfil:

It is being touted by a number of professional traders to hedge your positions and take on more than one
position like straddles, collars, etc.
Price Headley makes the point that directional trades (either buying calls or puts) are better because you do not limit your profits which happens when you do a straddle or collars.
Have been trading options since, May 2005 and started slow with 3 contracts.
So far, I have 7 winners, 5 losers and 1 even (should have been a winner but, I waited too long and lost the gains).
Win/Loss ratio is $3 to $1. My last two trades were on UST MH bought it at $1.80 per contract sold it ten days later at $3.30 and IRF MG bought it at $2.65 and sold it at $8.20. Still working on minimizing my errors and reviewing my trading journal but, I see potential. Loads better than when I was trading stocks.
More...
Long straddles don't limit profits. I'm sure it was just an oversight.
 
Quote from smallfil:

Arl....There is no such thing as a free lunch. The closest thing is selling covered calls but
More...

I'm afraid we'll have to throw the baby out with the bathwater after this absurd comment.
 
Cnms2,

Thanks for pointing that out. It was a mistake on my part. Straddles don't limit profits but, cost you double if the stock does not move and stays between the call and the put strike prices. I have just done just two trades which turned up losers. The reason being I should have stuck to my directional trades which was correct.
There is a whole bunch of strategies and I learned a lot from George Fontanills book,
The Options Course, 2nd Edition.:)
 
Quote from smallfil:

Cnms2,

Thanks for pointing that out. It was a mistake on my part. Straddles don't limit profits but, cost you double if the stock does not move and stays between the call and the put strike prices. I have just done just two trades which turned up losers. The reason being I should have stuck to my directional trades which was correct.
There is a whole bunch of strategies and I learned a lot from George Fontanills book,
The Options Course, 2nd Edition.:)
More...
I'd use straddles more as a volatility and / or event play.
 
Quote from arl:


Does anyone here even know what position a retail trader could put on just to earn the risk free rate?
More...

I would imagine that if one sold premium indiscriminately and hedged continuously so the positions would remain delta neutral, the THEORETICAL returns MIGHT end up being somewhat close to the risk free rate. That would depend upon transaction costs and data costs.

And one would need to have plenty of capital, and prepare to waste many years doing it, but I would guess that the average long-term rate of return (fifty years at least) would probably be close to the average risk-free rate. Probably a little less, due to transaction costs.

But I know of no option trader who would ever seek to earn the risk free rate. It would be a waste of time. Just buy Treasuries already. :-)
 
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