Option income strategies

Quote from gkishot:

10percentpermonth went all-in after 30% loss in October 2008 by buying debit call spread. I don't think you want this kind of risk with your money.
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Yes, you are correct about this. However, even if we completely remove the November trades, they still would end 2008 almost breakeven, after starting the year with 34% loss and having another 30% loss in October. Having returns of 140-170% per year (compounded) in three "normal" years and small loss in the biggest bear year in the recent history is not so bad I would say.

How about Wicked Profits? They have an average return of 50-60% (not-compounded) since 2000. OptionPundit has shorter history (2.5 years) but it's record is even more impressive (almost 500% on invested capital, almost 200% cash adjusted).

I tried all three of them, and I can verify that those results are real.
Don't they prove that those strategies work?
 
Quote from lindq:

Here again, you're falling into a very common trap. It's survivorship bias.

The mistake is cherry-picking services and/or funds that have shown success during a certain time period, and assuming this is somehow indicative of how you - or anyone - will perform in the future. Hope springs eternal.

What you are ignoring is the many other services/funds that busted out with the same strategies. But they are deserving of the same attention.
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See a quote in one of my previous posts:
"Over a period of four decades, I have spent thousands of hours trying to devise the "perfect" option strategy using both puts and calls, a strategy that consistently made money in both up and down markets, one which would never give me a single sleepless night. I am absolutely convinced that the perfect option strategy just doesn't exist."

I think this is the key. I'm not saying that this strategy is perfect and it will make money every month. All I'm saying that in my opinion, this strategy has higher probability of success and with proper money management, even less long term risk. It definetely requires more work, experience and knowledge in order to be successfull.

Does it have a chance to lose 30-40% in a single month? Definetely. But didn't some stocks lose even more during October 2008?

Yes, I do cherry-pick services. But can you cherry-pick a service that achieved similar results using stock strategies? The best stock service in the last 5 years according to Hulbert is China & Emerging Markets. It's 5 years annual return is around 25%, nothing even close to the numbers those three services achieved.
 
Quote from lindq:

Experience.

If you had any, you'd know that you are confusing brains with a bull market because you've been placing directional bets.

I wish I had a dollar for every trader I've seen post comments over the years about their great income option strategies, because they happen to catch a market wave that supported them for a while.
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:D
 
Quote from spindr0:

An 11/19/87 event will take your money away at the open. No question about it. But the prelude to it was a add'l 500 pt drop from Aug thru Black Monday and that was a serious warning to be short, hedged or out.

At that time, I was an option noob who had just graduated from covered calls to naked puts (snark on the synthetic equivalence). I didn't know squat about selling stock short, spreads, hedging or money management. I got hammered that day and amassed a full portfolio of stocks pretty quickly.

As for trading small, I think one should trade no bigger what you can tolerate if the maximum loss occurs.
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If you sell naked puts to collect premiums and base your decisions on the premium, it’s a bad idea. If you do it to buy stock you want to own, it’s a good idea. The key is not to sell more contracts than the number of shares you wouldn’t mind to own. Actually, if implemented this way, you would probably do better in October 1987 than just owning stocks. It’s not the strategy that matters; it’s how you use it.

Think of the big picture: you are playing the role of insurance company. Aren’t insurance companies profitable in the long run?
I still haven’t got an answer from lindq why iron condors considered directional bets.
And I still haven’t got any comment about my suggested portfolio allocation and rules.

People warn me in general not to do it, but won’t comment on specific numbers.
 
This reply does a good job of stating why the 60-70% returns you propose for iron condors is a pipe dream.


Quote from Jesus:

Control risk and cut losses sounds great, but its very hard to actually do. Cut losses too soon and you will get whipsawed all the time, and your winning percentage will tank. Let losses run too far and you will watch all your little gains disappear faster than Tiger's wife. You have to find a medium. You have to know when to cut the losses that will eventually become devastating, and you have to know when to just let some losses ride back up to winners. All that is extremely difficult unless you have a crystal ball that can help you time the market. That brings me to my point.

You cannot just sell options and do nuetral strategies and expect to beat the market over long periods of time without

1. Extreme luck.
or
2. Mad skillz
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Quote from akivak:


To our surprise, and against all recommendations and basic money management rules, a great number of our subscribers had allocated 95% to 100% of their trading portfolio to this month's trade. With so much allocated for the trade, it left little or no cash on the side that was necessary for the exit trade. When we sent out the alert to exit the trade, a surprising number of subscribers e-mailed us that they could not perform the exit trade. Because of this, they were unable to buy back the losing positions therefore realizing a devastating loss.

Let this be a lesson for others who are thinking of investing nearly 100% of your trading portfolio in one trade. Keeping money on the side, uninvested, may not be optimal for profit, but risking everything for that gain should not be done. Whatever amount you wish to invest in a monthly trade, an equal amount should be kept in cash. This would represent a 50/50 investment to cash ratio.

I'm not clear how could it happen. Let's say I have 10k in my account and I trade the maximum possible amount (10 RUT spreads) and get $1000 credit. Now I have 11k cash in my account and the maximum margin requirement is applied. Isn't the maximum margin calculated in advance for the worst case scenario when I need money to cover the maximum possible loss? How is it possible that I don't have enough cash to exit the trade?
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It's clear that you don't have all of the correct information.
 
Quote from TheoHornsby:

It's clear that you don't have all of the correct information.
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Could you please clarify what do you mean? You think you might know how did it happen?
 
Quote from TheoHornsby:

This reply does a good job of stating why the 60-70% returns you propose for iron condors is a pipe dream.

This reply does a good job of stating why the 60-70% returns you propose for iron condors is a pipe dream.


Quote from Jesus:

Control risk and cut losses sounds great, but its very hard to actually do. Cut losses too soon and you will get whipsawed all the time, and your winning percentage will tank. Let losses run too far and you will watch all your little gains disappear faster than Tiger's wife. You have to find a medium. You have to know when to cut the losses that will eventually become devastating, and you have to know when to just let some losses ride back up to winners. All that is extremely difficult unless you have a crystal ball that can help you time the market. That brings me to my point.

You cannot just sell options and do nuetral strategies and expect to beat the market over long periods of time without

1. Extreme luck.
or
2. Mad skillz
More...


I completely see your point. I’m not saying it’s easy. In my case, achieving 14% per month since May 2009 was probably pure luck.

However, service like WickedProfits is the proof that it can be done successfully for a long period of time (almost 10 years in this case, with average annual return of 50-60% (not compounded).
I already mentioned OptionPundit and 10percentpermonth. There are more:

http://www.spreadthetrend.com/TrackRecord.aspx - 12-14% per month since July 2007, only one losing month (11% loss in Jan 08)
http://www.cyclespreads.com/perform.htm - about 4% per month since January 2007, no single losing month.
http://www.condoroptions.com/index.php/performance/#condors – 30-40% annual return in the last 2 years.
http://www.monthlycashthruoptions.com/ReturnOnInvestment.htm - 45-65% annual return since January 2006.
http://www.tradingoptionsforincome.com/performance.html - 14% average return per trade since January 2008.

All those returns include a crazy year like 2008.
All of them have extreme luck or mad skills? Why none of stock picking letters doesn’t make that kind of money? Best stock picking newsletters make about 25-30% per year, and 90% (including the best of them) lost about 30-40% in 2008.
 
Quote from akivak:

Think of the big picture: you are playing the role of insurance company. Aren’t insurance companies profitable in the long run?

Yep, especially those that went out of business because they failed to properly assess their risk.


And I still haven’t got any comment about my suggested portfolio allocation and rules.

What's the big deal about portfolio allocation? If I feel comfortable with 65% allocated toward a strategy and you feel comfortable with 50%, which allocation is correct? And all the rules in the world mean nothing in a fast market with gaps, IV expansion, contraction, widening spreads, etc. You can design the world's best airplane but if it won't fly, all you have is a nice blueprint.

People warn me in general not to do it, but won’t comment on specific numbers.

No one said that you shouldn't trade IC's. Posters have indicated that you're not likely to achieve those exalted numbers. You've responded with cherry picked newsletters/web sites that did it. What's the point? It's like saying that you can fly :)
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