Random walk and options?

[noob_trad3r]

If stocks move like a random walk and you cannot time pricing for optimal gains over the long term.

Doesn't it make sense to sell ATM puts on the index ETF (front month) VS buying the stock on the spot and get some compensation for the risk of holding stock.

And sell ATM calls at the price you want to sell as well for the index ETF?

My experimental portfolio YTD shows a +4.79% return VS the S&P annual return of -0.98%

The theory seems to work in practice so far. VS just someone who buys the stock and holds it.

 

[nazzdack]

Quote from noob_trad3r:
----Doesn't it make sense to sell ATM puts on the index ETF (front month) VS buying the stock on the spot and get some compensation for the risk of holding stock.
----And sell ATM calls at the price you want to sell as well for the index ETF?
----My experimental portfolio YTD shows a +4.79% return VS the S&P annual return of -0.98%
----The theory seems to work in practice so far. VS just someone who buys the stock and holds it.

1) It "works" some of the time but not all of the time.
2) Straddling or strangling a stock works well in a sideways-moving market. You can be hurt badly in a volatile environment.
3) Experimental portfolios have "small sample bias". You haven't really outperformed the benchmark.
4) The "theory" works when it works and doesn't when it doesn't. The real question is....when will you trade your theory with real money, especially when we're approaching the most expected volatile times of the year? :eek:

 

[dagnyt]

Quote from noob_trad3r:

If stocks move like a random walk and you cannot time pricing for optimal gains over the long term.

Doesn't it make sense to sell ATM puts on the index ETF (front month) VS buying the stock on the spot and get some compensation for the risk of holding stock.

And sell ATM calls at the price you want to sell as well for the index ETF?

My experimental portfolio YTD shows a +4.79% return VS the S&P annual return of -0.98%

The theory seems to work in practice so far. VS just someone who buys the stock and holds it.

1) Selling the puts is a good idea - but only when you are wiling to accept the premium as your maximum profit.

2) You cannot sell calls - because you do not own shares, and being short puts does not count. Most brokers do not allow clients to sell naked calls.

If you are going to be trading, you need a lot more data points than YTD.

And when you show a 4.79% return, are you considering the margin required to sell naked puts and calls as the 'amount invested'?

Mark
http://blog.mdwoptions.com/options_for_rookies/

 

[trefoil]

Quote from nazzdack:

1) It "works" some of the time but not all of the time.
2) Straddling or strangling a stock works well in a sideways-moving market. You can be hurt badly in a volatile environment.
3) Experimental portfolios have "small sample bias". You haven't really outperformed the benchmark.
4) The "theory" works when it works and doesn't when it doesn't. The real question is....when will you trade your theory with real money, especially when we're approaching the most expected volatile times of the year? :eek:

Just to be clear, selling a straddle or strangle will hurt you in volatile times. If you buy them, though, you want volatility.

 

[nazzdack]

Quote from trefoil:
----Just to be clear, selling a straddle or strangle will hurt you in volatile times.
----If you buy them, though, you want volatility.

1) Yes, agreed.
2) Yes. You want price fluctuation in the underlying instrument and/or implied volatility expansion.

 

[KINGOFSHORTS]

CBOE has some info on the Put write SPY and it does provide a better return than just naked long SPY. But all this is beyond the individual investor so they end up stuck in 401K mutual funds with poor returns.

 

[trefoil]

A reasonable equivalent would be to get into a Rus2k index fund instead of a SP-based one. But once again, not too many people would know about this.
Returns are correlated with the amount of work a person does for himself when putting his money to work. The problem with this is if your job is, say, being a doctor, nurse, policeman, miner even, who has to work crazy hours all around the clock and on weekends and holidays, you're not going to have the energy to put into trying to figure this stuff out, and unfortunately the industry is only interested in pumping such a person dry, not helping him out.

 

[KINGOFSHORTS]

Quote from trefoil:

A reasonable equivalent would be to get into a Rus2k index fund instead of a SP-based one. But once again, not too many people would know about this.
Returns are correlated with the amount of work a person does for himself when putting his money to work. The problem with this is if your job is, say, being a doctor, nurse, policeman, miner even, who has to work crazy hours all around the clock and on weekends and holidays, you're not going to have the energy to put into trying to figure this stuff out, and unfortunately the industry is only interested in pumping such a person dry, not helping him out.

Both IWM and SPY are good put write ETFS a mix of both adds for a nice diversification. Worst case you get long the ETF on expiration, but then you can go and sell covered calls for the next month. VS just going naked long the ETF's and just holding for years and years.




You are right 99.5% of Americans are not going to understand any of this and instead pretty much stick their money in mutual funds with its annual fees on down and up markets or worse get into some kind of Annuity with its huge costs and big surrender fees.

 

[heech]

Quote from KINGOFSHORTS:

CBOE has some info on the Put write SPY and it does provide a better return than just naked long SPY. But all this is beyond the individual investor so they end up stuck in 401K mutual funds with poor returns.

Good link. It confirms what common sense tells us: underperforms bull markets, outperforms bear markets.

By the way, this is a good rebuttal to those who say naked puts are risky. They are no more risky than holding the underlying long... If you manage size properly.

 

[rew]

Quote from dagnyt:

1) Selling the puts is a good idea - but only when you are wiling to accept the premium as your maximum profit.

2) You cannot sell calls - because you do not own shares, and being short puts does not count. Most brokers do not allow clients to sell naked calls.

If you are going to be trading, you need a lot more data points than YTD.

And when you show a 4.79% return, are you considering the margin required to sell naked puts and calls as the 'amount invested'?

Mark
http://blog.mdwoptions.com/options_for_rookies/

If your broker doesn't let you sell naked calls in a non-IRA account get another broker. Selling naked calls is just as legitimate as selling naked puts. If you see a stock at 27 that you believe is overpriced and think to yourself, "I'll happily short it at 30" then it makes perfect sense to sell a naked call at 30. And yes, when considering the return on the sale of a naked option you must always take the margin requirement into account.