Selling Premium from a Macro Trader's Perspective

[tnatrader]

It has finally happened for the first time since beginning this journal: I now have the full line of exposure that I have finished accumulating towards. I still have 82% cash after taking account of my short options' delta dollars. Plan here is, assuming I remain bullish, to sell puts if we dip lower. My position size will be 2-3 slightly OTM puts/trade. If we continue to rally I will sell 2 slight OTM calls. If we can trade around 51, I will sell my position sizing will get larger.

With options, the delta moves with the underlying obviously so the plan may be in flux depending on the net exposure level of all my options + equity positions. The biggest wildcard is whether to remain bullish. Much like Brexit or the 2016 election, it's not a binary event like most market watchers expect. The second and third order effects are much too complex to boil down to +/-5% move depending on which outcome occurs. You can make a convincing macro argument either way on US corporate profits in the long run with/without trade deal.

In the very long run, it's all about corporate profits. In the shorter run, it's all about sentiment and large fund positioning. Using an umbrella analogy: in the long run, the price of umbrellas is correlated with how much rain there is. In the short run, the price is correlated with how many people expect rain/how many people are already carrying umbrellas.

My thesis is that in the long run, tariffs are a small part of US equities and after factoring in second and third order effects of multinational firms electing to move out of China, the effects are even smaller. Thus, no recession and no bear market. With or without a deal, the clash between US/China will be the theme for the next 50 years at least. In the shorter run, this remains a hated rally with large funds and institutions becoming more bearish and selling into the 2019 rally. It is a classic wall of worry. If I'm wrong, I'll be the first one to admit it, but me and my 80% cash will be buying here.

 

[tnatrader]

Nice bounce today which led to new highs for me, even with the selling into the close. When we were trading at around 51.5, I sold 4 52 calls as promised. Sold 2 puts near the open as well.

This is the market environment that this strategy thrives in. Psychologically, it's truly worth it to me to make new highs in times like this while giving up some upside during strong uptrends. Looking forward, path of lease resistance remains up, but I want to cover my shares with some calls asap, especially since I was assigned 400 more shares today. If we can hang around 51 or above, sell at least 4 more slight otm calls tomorrow before noon. Most likely sell 2 more atm puts at market open.

Frankly, I hate adding delta on Fridays because the delta dollars that I use to determine exposure level is an illusion. The gamma makes any move so large that you can go from a -100k delta dollar to +50k quick, especially near the close. But until I can come up with a better plan, I'll stick with this one.

 

[vanv0029]

Your system is good except it does not do well with a common v patten 10-15% fall then rise to previous or higher level. I am trying to figure out a way to deal with that. I agree MMs will reduce premium if they see your pattern. I was using your method on biotech AMRN. MM's kept lowering call premium so I lucked out and rode all my shares up to Friday 18.70 close. I think there is now enough institution buying of AMRN so it can handle more rollers. With biotech's one must be out during binary events obviously. I am looking at trying it with LABU.

 

[tnatrader]

I am now carrying a full line of shares as most of my puts will be assigned to me. All of my calls expired, but I'm choosing to lock them in as gains rather than lowering my breakeven. Thus, my next week's BE (where I start selling calls in size) will be 52.5.

For next week, if we dip, I will start selling slight OTM puts. If we dip more, I'll have to sell 2 strikes OTM puts. With all this cash, I can weather this as my thesis remains that any correction will be shallow. Looking to sell calls in size if we can trade to 52.5.

Also looking into the new micro eminis, but no options on them yet. Position size wise, they seem perfect for my account size.
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I want to thank Robert Morse. We spoke at length and he gave me a lot of good advice. If I had more guidance like that when I first started trading, I would be way further ahead.

Also, vanv, thank you as well. I revisited your comment about selling more OTM/ITM and decided to incorporate this in a small way by going one week out. Time will tell if this will work for me, but it's looking good so far.

Your system is good except it does not do well with a common v patten 10-15% fall then rise to previous or higher level. I am trying to figure out a way to deal with that.

Can you go into this a bit further? Are you referring to the typical weakness of the "wheel" strategy where your puts get assigned in a dip, but because it dropped so much, selling the same strike calls are too far OTM and give you so little premo?

I deal with this by betting smaller. A lot of big funds accumulate positions over weeks and months because they have to due to liquidity, but even us smaller guys can learn from this. I'm not that confident that I'm getting the best price at any given moment, especially since my specialty is longer term broad market moves. However, if I scale in over the period of 1-2 weeks for a core position, I know by definition, I won't be top ticking this sucker. Of course, you underperform during very strong bull trends, which I try to hedge against by selling 1-2 strikes ITM if my overall exposure gets too low.

I think if you try to do this strategy mechanically, it wouldn't work. You need to have a strong thesis to give you that conviction to hold through the drawdown in the first place. That's why I bet small--I know the limitations of my thesis.

 

[nooby_mcnoob]

I want to thank Robert Morse

This guy is a prince.

 

[Overnight]

This guy is a prince.

He's also really old and stuff.

 

[vanv0029]

Maybe I am not understanding your wheel strategy. AMRN tanked from around 19 to 16.20. I needed to accumulate shares so they were put to me. Then I sell puts at buy price to collect option premium. Shares are gone much lower than the 18.70 AMRN closed at Friday.

 

[tnatrader]

Maybe I am not understanding your wheel strategy. AMRN tanked from around 19 to 16.20. I needed to accumulate shares so they were put to me. Then I sell puts at buy price to collect option premium. Shares are gone much lower than the 18.70 AMRN closed at Friday.

It's all dependent on timeframe and outlook on a stock. For me, I'm most confident in my thesis of being bullish 6 months out, eg the broad market will be higher 6 months from now. I'm less confident in the steepness of the slope and also how it will get there (how big the dips are etc). So my point was because of those limitations, I bet smaller than someone who's more confident in the shorter timeframes to essentially scale in my position. I also leave enough cash to add more delta if it dips along the way, assuming my outlook remains bullish.

In your case, what's your timeframe and degree of bullishness on AMRN? This will solve a lot of the underlying issues of the wheel strategy.

 

[tnatrader]

Light trading the last 2 days. Just sold 2 slight OTM calls today. I am still bullish longer term (6 months), but for the next 1-3 months, I believe we will trade in a broad range in a more volatile manner. My position sizes will decrease a bit to 1-3 contracts from 3-5. However, because I'm holding so many shares, I need to start selling calls right away as holding the underlying makes no sense if we are rangebound. Looking to sell at least another 2 calls tomorrow morning as I want my delta to come from short puts, not long shares.

The more I look, the better TQQQ looks than UPRO liquidity-wise. The only downside is my macro analysis is more for broad market while the Qs are heavy on tech. Will make a decision soon.

 

[tnatrader]

Busy couple of days again. Biggest news is that I'm switching my portfolio to tqqq. The obvious risk is the China USA Fight of the Century will affect tech much more heavily than the broad market, but the underperformance from that will be mostly negated by the much better liquidity tqqq offers. Also with selling premium, any IV increases associated with this fight to the death will help me as well.

Obviously my short term bull call was far off the mark, but due to my risk management, I'm basically flat for the month while the indices are still down 4-5% for the month. For the past few days, I've been selling at least 2-3 calls/day. My bullish thesis tells me to sell slightly OTM, but risk management says to sell them ATM. Guess who wins.

Short term goal is to shave off enough exposure from my shares to start selling puts again. Until that happens, I'm selling at most 1 put/trade during dips. My long term thesis is new ATHs in SPX and this bull market won't end until at least 3000. There are tons of stops right above us at 2950, but even if I'm wrong, I have enough cash to take the small loss and fight another day.

I am performing much better during this correction than previous ones, even though my analysis was much more timely before. This bodes well in the future when I get my head out of my ass and get my thesis back on point.