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Selling Premium - Strategy Never Discussed
- Thread starter robertSt
- Start date
Hi Robert
Thanks for starting this thread, I also sell iron butterflies and strangles monthly for a consistent return, and so far it's been working well (so far being the key word). I do appreciate where you're coming from with regards to minimizing your risk. The consistent theme on this board (that I've seen anyway) seems to be when it comes to selling premium/shorting volatility, one is exposing themselves to massive risk that, on a long enough timeline, will break your account.
I have found the "trade small, trade often" approach, while closing the trade at predetermined profit targets, has produced a consistent profit even with some large losses. Also, rolling the losers for a credit (and only a credit) has turned a good potion of my initial losers into small winners, tilting the odds of consistent profits in my favor even more. Lastly, ONLY betting 3-5% of my total portfolio, but diversifying multiple trades across multiple sectors, has caused my losses to not be catastrophic to my account. As long as I never bet more, they never will be.
The only difference in my approach is I always roll the position forward a month with the same strike prices, thereby keeping the same risk profile. Sooner or later market cyclicality usually kicks in, and I'll get a chance to exit my position at a profit, or at the very least, a much smaller loss than I initially took. I've been doing this for over a year now and am up about 22% YTD, and I've never had to roll a trade more than 3 months before getting out.
I am glad to see that there are others who are defying the conventions of what we're doing being the inevitable way to ruin. Please keep sharing thoughts.
csp strategy is a relatively safe strategy, but when the underlying stock tanks so its implied vol usually soars to cause your PnL deteriorate a lot. actually csp is virtually the same as cc strategy, but in CC, the nice point is that you don't have to experience the higher IV problem as the call options you are selling is always covered by the underlying you are long. sorry for my poor english and i write this from Taiwan.
CC = naked put write.csp strategy is a relatively safe strategy, but when the underlying stock tanks so its implied vol usually soars to cause your PnL deteriorate a lot. actually csp is virtually the same as cc strategy, but in CC, the nice point is that you don't have to experience the higher IV problem as the call options you are selling is always covered by the underlying you are long. sorry for my poor english and i write this from Taiwan.
Hi ffs1001,
These are good questions, the sort of questions I expected when I started the thread.
1) Stock Selection - I'm not concerned with volatility per se, only the percentage of premium available to me. I want to collect at least 1%, or 40 cents on a $40 stock. I know I'm not going to keep that much on average, so I like to look for situations that offer around 2%. These will be harder and harder to find as the week progresses.
In most situations, this amount of premium will only be available on stocks with high IV. If you pick one with higher current IV than historical IV, you might collect a good premium with the expectation that the stock will return to its HV, speeding the decay to your advantage.
It's probably best, at least until you are very comfortable, to trade liquid stocks with daily volumes of several million shares. This keeps the bid/ask spread narrow. Many weeklies only allow order prices in 5 cent increments, it's probably best to avoid those also.
I have a basket of stocks that meet these requirements and I watch their price behavior every day. Jesse Livermore stressed the importance of what the tape was telling him in making his trading decisions. I interpret that to mean price action and volume, and I think you can often get a "feel" for how something might move based on what you've learned about its past behavior.
2) Timing - For me, timing is more art than science. I'm much more comfortable selling puts after a pullback, or if not a pullback then near the bottom of the short term range. Other approaches may work as well. I usually take a few positions early in the week, while keeping some powder dry for opportunities later in the week. It is surprising how many opportunities are available on Wednesday or Thursday, even sometimes on Friday.
3) When I have to carry through earnings, I accept the additional premium along with the additional risk. It's not unusual to get a 3% premium or even more. But if it tanks, you either have to wait longer to realize your gain or take the loss and move on.
I traded luckin coffee (LK, a Chinese APP based coffee chain store incorporated in 2007) using cc strategy and it really limited my return as LK experienced a lofty nearly 70% hike in price after its earning announcement back on November 13. as its price soars, i will begin to use CSP to hang around with this high premium stock. CSP is a little bit safer than CC in its breakeven point, but are less aggressive than CC strategy in its upside participation. but since LK has set up a high watermark, picking a defensive strategy is a better choice.
MOMO is 37.3 as of now, its a Chinese version of Match. i installed its APP and i can read simplied chinese using its APP as i am from taiwan (using traditional chinese)In the interests of keeping this thread active, I'd like to mention that I starting dipping my toes in this strategy. (Disclaimer - around 20 years ago, I started my options trading by doing covered calls, and this strategy is technically similar).
On Wed 10th, I sold MOMO 33 puts (expiry 19-Jul) for around 0.35. These were doing fine till this Wed, the stock fell to 32.3 at one point. My short puts were ITM, but there were no alarm bells ringing as I could have rolled out to another week, and moved the strike lower to 32.5 for a small credit. Come today and the stock has rallied up to around 35.21 and I have sold a fresh 34.50 strike put expiring 26-Jul for a premium of 0.45.
Would love to hear about other people trades.
csp per se is no more riskier than holding underlying assets, aside from the fact that holding puts sold has to deal with the vega risk.It's precisely what it is. OP will end up in an all-or-nothing position just like playing martingale in the casinos. He's not factoring in the leveraging effect though, that if he's reasonably far out of the money and the option gets within 1 point of his position the IV has likely spiked way beyond the model he has (if he has any) and is likely bleeding out.
Karen the SuperFraud's strategy relied on fraud. Then volatility striked and wiped out 100 million in paper. For reference she basically followed this exact strategy, fraudulently rolling losses to the next month on the HOPE that they'll improve next month. OP is not a fraud (most likely) but is making the same fundamental mistake.
Selling premium in this way is just deferring a bad trade over and over. Sometimes it'll work, sometime's you'll be remortgaging your house. OP is far too confident.
For something like LK, if I were you, I go long calls: huge leverage, limited loss, unlimited profit. Of course, with high IV it is expensive.I traded luckin coffee (LK, a Chinese APP based coffee chain store incorporated in 2007) using cc strategy and it really limited my return as LK experienced a lofty nearly 70% hike in price after its earning announcement back on November 13. as its price soars, i will begin to use CSP to hang around with this high premium stock. CSP is a little bit safer than CC in its breakeven point, but are less aggressive than CC strategy in its upside participation. but since LK has set up a high watermark, picking a defensive strategy is a better choice.
The US example is SHOP.
I had the same painful experience back in 2013 when I first started trading options. Did a lot of buy-write and CSP. Netted worse than buy-&-hold in 2013.I did for a while, until I back tested 2013 and it was disastrous. When I got out of my /ES most recent short call I swore never to do that again. No amount of rolling / adjusting worked during the 2013 ragging bull move
I traded luckin coffee (LK, a Chinese APP based coffee chain store incorporated in 2017) using cc strategy and it really limited my return as LK experienced a lofty nearly 70% hike in price after its earning announcement back on November 13. as its price soars, i will begin to use CSP to hang around with this high premium stock. CSP is a little bit safer than CC in its breakeven point, but are less aggressive than CC strategy in its upside participation. but since LK has set up a high watermark, picking a defensive strategy is a better choice.