In the past I have looked at this idea many times but never had the chance to do any rigorous research. The basic concept is to employ a medium term trend following strategy but rather than buying options when a signal is given, one would sell or write options.
For example take QQQ, 120 minute bars, a simple 20 period breakout system. So every time the Q's breakout above their 20 period range one would sell puts and if they break below their 20 period range one would sell calls.
Basically what this strategy is trying to do is to address the two big short comings of the Trend following strategy, one that the mkt only trends 35% of the time and the second that if your exits are not efficient you end up giving up a good portion of the move. This strategy utilizing a medium term trend hopefully will give infrequent signals, so one would capture the time premium even if the mkt is going sideways.
I wish I knew how to post charts, but if you look at the QQQ 120min chart a signal to sell calls would be given on 1/17/2003 and exit (close the short calls and open a new position by selling puts) was given on 2/18/2003 a month later.
As you can see if you had traded the underlying Q's you would have made about 1 point. But the hope is that the time decay of the options would be much more; and then if you look at the next signal (sell puts 2/18, exit 3/7) it would have been a small loss trading the Q's but the puts with time decay would result in a small profit. ( These dates/numbers are just approximations to highlight a point, the strategy also is nothing stellar)
Wondering if anyone has comments or thoughts on utilizing this technique?
Thanks
For example take QQQ, 120 minute bars, a simple 20 period breakout system. So every time the Q's breakout above their 20 period range one would sell puts and if they break below their 20 period range one would sell calls.
Basically what this strategy is trying to do is to address the two big short comings of the Trend following strategy, one that the mkt only trends 35% of the time and the second that if your exits are not efficient you end up giving up a good portion of the move. This strategy utilizing a medium term trend hopefully will give infrequent signals, so one would capture the time premium even if the mkt is going sideways.
I wish I knew how to post charts, but if you look at the QQQ 120min chart a signal to sell calls would be given on 1/17/2003 and exit (close the short calls and open a new position by selling puts) was given on 2/18/2003 a month later.
As you can see if you had traded the underlying Q's you would have made about 1 point. But the hope is that the time decay of the options would be much more; and then if you look at the next signal (sell puts 2/18, exit 3/7) it would have been a small loss trading the Q's but the puts with time decay would result in a small profit. ( These dates/numbers are just approximations to highlight a point, the strategy also is nothing stellar)
Wondering if anyone has comments or thoughts on utilizing this technique?
Thanks