Safe Strategy?

J

johnk49

Although I have been reading the options postings for a long while I have never made a posting myself,so here goes.
At the risk of being called a sycophant may I just say I am absolutely stunned at the knowledge you guys have about options.Although I vaguely understand some of the strategies i.e.The Perfect Option Position.I would never have the guts to put this position on,I dont think I would know what I was doing!
Anyway,to the point.As I am getting on in years I tend to be looking for safer positions.I know many people recommend cc's but there is a big downside risk.
The strategy I am thinking of is this,and I want you guys to pull it down and tell me where I am going wrong,buy 2006 ATM Leap puts on such as QQQ SMH HHH DIA sell ATM puts on the front months,if not assigned the premium will lower the cost of the Leap,if assigned I will get the stock and will then then sell CC's until the options are exercised and then repeat the process selling front month Puts.As I understand it while I possess the Leap Put I can exercise it any time if the stock really tanks thus protecting the downside.As I said I am not an options expert so please excuse me if I've made a fool of myself!!
 
It sounds like you are effectively talking about covered calls to the downside, using the long dated leap as a proxy for a short position. Your biggest problem (IMO) is the underlying index moving far away from your initial leap strike fairly quickly. If the index stays in the neighborhood long enough to get most of the premium back, you could have a free leap about half way to expiration. That might be a big IF.

I would suggest constructing a spreadsheet with month by month progressions from now til expiration. Pick random 24 - 30 month periods over the last 10 - 12 years and apply the price movement of your underlying accordingly. I would suggest using the CBOE option price calculator (cboe.com under trading tools) to get prices as they would have occurred. This should give you an idea of the likelihood of profitability and can point to any adjustments in the strategy.
 
Quote from ktm:

It sounds like you are effectively talking about covered calls to the downside, using the long dated leap as a proxy for a short position. Your biggest problem (IMO) is the underlying index moving far away from your initial leap strike fairly quickly. If the index stays in the neighborhood long enough to get most of the premium back, you could have a free leap about half way to expiration. That might be a big IF.

I would suggest constructing a spreadsheet with month by month progressions from now til expiration. Pick random 24 - 30 month periods over the last 10 - 12 years and apply the price movement of your underlying accordingly. I would suggest using the CBOE option price calculator (cboe.com under trading tools) to get prices as they would have occurred. This should give you an idea of the likelihood of profitability and can point to any adjustments in the strategy.
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What KTM said, plus, I suggest selling fewer options than you are long. If you sell as many as you are long and the stock moves hard in the direction of your long LEAP (in this case its a put, so down) then you can get in a position where you "lock in a loss" because the delta on the front month short will go to 1 while the delta on the LEAP will be something less than one.

In general this position will only work if over time the underlying is either flat or down. If it moves up you could lose most or all of your investment.
 
This sounds a little like what some people on ET were doing and pyramiding heavily into heading into 2000 only then their positions were constructed with a positive bias while yours seems basically negative biased.

They disappeared from the boards after the market tanked.

It's not a "safe" strategy to the extent that you're still effectively placing a directional bet.
 
You have to answer the question yourself by mapping out the possibilities and figuring out beforehand what you would do in each case. Also make sure to include all the "near impossibilities" in your figuring, such as, the index doubling our getting cut in half in the next 3 to 6 months.

Once you have everything mapped out, and the balls to stick to the plan, then that is "safe".

In Jan 2002 I started holding a load of QQQ and selling CC on it, buying more QQ as the price went down as I accumulated the premiums. By the summer I had a boatload of QQQ and no desire to hold it. I hadn't considered what would happen with such an extreme drop, and I wasn't ready for it in my head. I bailed. Buying QQQ in the low 20's was genius, as it turns out, but it didn't seem like it at the time.
 
I think you'll find www.terrystips.com of interest. If nothing else it will greatly increase your knowledge of option time decay. I also think the low fee for becoming an "insider" is well worth the cost. (I have no connection to this site other than being a subscriber). Hope this helps.:)
 
@greensail.

I just started subscribing to terrystips also. How sucessful have you been with his strategies and have you tried them on any other indices?
 
Quote from peterfigliozzi:

You have to answer the question yourself by mapping out the possibilities and figuring out beforehand what you would do in each case. Also make sure to include all the "near impossibilities" in your figuring, such as, the index doubling our getting cut in half in the next 3 to 6 months.

Once you have everything mapped out, and the balls to stick to the plan, then that is "safe".

In Jan 2002 I started holding a load of QQQ and selling CC on it, buying more QQ as the price went down as I accumulated the premiums. By the summer I had a boatload of QQQ and no desire to hold it. I hadn't considered what would happen with such an extreme drop, and I wasn't ready for it in my head. I bailed. Buying QQQ in the low 20's was genius, as it turns out, but it didn't seem like it at the time.
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Great post about trade considerations pete, thanks!

Tiki
 
Quote from greensail:

I think you'll find www.terrystips.com of interest. If nothing else it will greatly increase your knowledge of option time decay. I also think the low fee for becoming an "insider" is well worth the cost. (I have no connection to this site other than being a subscriber). Hope this helps.:)
More...

How about, for example, the charles cottle "coulda woulda shoulda" book?? Or the free info that is given on a lot of exchange sites?? thats FREE and it informs you MIGHTY WELL

besides that, with some time on hard, you should figure the greeks out for yourselve. I personally havent got them down to heart yet, but it is drawing nearer and nearer and already im heavily calculating when I see option prices.

Also, what is an 'insider' and why do you think the info is for sale ?
No idea about scamming etc? Cmon if people have good stuff, they use it, not sell it. If they want to buy off guilt they can always adopt 40 foster parents children.

Really, dont pay for knowledge on anything these days. Its all free outthere on the internet. In case of options, i'd recommend Charles Cottle's book: Coulda Woulda Shoulda. Read it good and be familliar with the variables of the option contract pricing

peace&good trading

Tiki
 
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