Trend following system w/ Option writes
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Right. So essentially you have a situation where the risk:reward is minimal and if you are right the payoff is large, but you are just playing for the big move...Personally, I just try to avoid the front month with this little time till expiration...I don't like to be short with the risk that the underlying makes a big move and the OTM options start moving alot...On the other hand, many of the expirations in the past year have not paid off big for long premium since they have had a tendency to congest and contract in the final 2-3 days of the expiration cycle...As the saying goes "damned if you do, damned if you dont"...
For example, when LOW reported a blow-out quarter:
http://biz.yahoo.com/rb/030224/retail_lowes_earns_5.html
I bought LOW @ $37.96 and sold March 37.5 calls @ $1.70 .
I have the same thoughts as you on this issue. I tried a year ago to buy options and quickly (and painfully) found out it is truly a suckers game to buy. I have been just trading the underlying since and with good success. I actually just started paper trading my picks with the corresponding write, just started about a month ago and have had reasonable success. In contrast I tried to do the mirror trade of buying the option to see how it would compare. My trades for the stocks typically last anywhere from 1 - 45 days. I have noticed already the effect of time decay, on positions that I have held for a longer period eg. 2-3 weeks+ I have seen a small profit in the writes, while seeing a small loss in the buy. In the occurences where there may be a flat movement in the stock over say a 30 day period the writer would definitely have the odds in his favor. I have had many stock picks like that in the past.
How I do my setups are as follows:
For the write; I will try to pick an option that is atm or slighly out of the money with no more than 30 days time left, I also look at the theorectical value vs. actual if the option is super cheap then I won't write it.
For the buy; I will try to pick an option that is at least 3 months out, preferably cheap again using theo value
I also look at IV and Actual Volatility.
I have a set stop loss on all stock picks and when they are hit i sell without even thinking about it, the corresponding option would be sold at that stop level price as well.
I wish you well in your option writes. I will post my results when I have a more meaningful data set. ciao
How I do my setups are as follows:
For the write; I will try to pick an option that is atm or slighly out of the money with no more than 30 days time left, I also look at the theorectical value vs. actual if the option is super cheap then I won't write it.
For the buy; I will try to pick an option that is at least 3 months out, preferably cheap again using theo value
I also look at IV and Actual Volatility.
I have a set stop loss on all stock picks and when they are hit i sell without even thinking about it, the corresponding option would be sold at that stop level price as well.
I wish you well in your option writes. I will post my results when I have a more meaningful data set. ciao
Quote from zman7854:
I wish you well in your option writes. I will post my results when I have a more meaningful data set. ciao
If you are speaking here of doing uncovered writes, I have three words of advice: Don't. Ever. Never.
For any trader who can reliably predict the movement of a stock, there are a hell of a lot better ways to profit than short options.
I speak from the voice of experience. You can enjoy collecting a few premiums and think you are on easy street. But eventually...and it WILL happen...you will get hit with a major market event or serious news on your underlying. Those few premies you collected will suddenly look foolish compared to the losses you will take.
A trading strategy with very limited returns and potentially unlimited losses is a suckers game.
I developed a simple strategy where i would trend trade the QQQ, always either being long or short based on whether the QQQ was above or below the 20 day moving avg. At the same time i would always write at the money puts and calls (short straddle) each month. rolling it over every month.
A good strategy except during crazy wipsaw markets. I havn't looked at this in about 20 months. Since that time i think the premiums on the options have become much less. So its probably not as good a strategy.
But i think in concept its a good strategy and may outperform the mkt in long run. You are basically selling volatility, and then hedgeing your self buy trend trading. I think this is a good concept, because you are only beaten by a violent counter trend move, and it is against market pshychology for this to happen.
Evan 9/11 happened while the mkt was below 20 day avg so you would have been hedged.
A good strategy except during crazy wipsaw markets. I havn't looked at this in about 20 months. Since that time i think the premiums on the options have become much less. So its probably not as good a strategy.
But i think in concept its a good strategy and may outperform the mkt in long run. You are basically selling volatility, and then hedgeing your self buy trend trading. I think this is a good concept, because you are only beaten by a violent counter trend move, and it is against market pshychology for this to happen.
Evan 9/11 happened while the mkt was below 20 day avg so you would have been hedged.
One thing to keep in mind is that selling naked OTM puts against an uptrend is VERY different than selling OTM calls in the same situation. The risk in selling naked puts is exactly the same as covered calls, only done at lower cost. The risk selling naked calls is theoretically unlimited. If you sell puts below a stock's current price, the worst that can happen is that you will end up owning the stock at the lower price, with that price further reduced by the premium you took in. Selling OTM puts as some have described here is a great way to generate decent returns, with one caveat, unless you are a fairly nimble trader, only do it with stock you wouldn't mind owning at a lower price.
Jessie
Jessie
This is probably one of my favorite strategies, but one word of caution ...
What happens when you cover or buy back the option that you sold and the market continues against you? Are you prepared to sell another option?
In a market that has a lot of whipsaws, you could get hurt badly.
However, I can't conceive of any circumstance where sellings puts is a good strategy, with the single exception of a case where someone actually wanted the stock and was collecting the premium prior to being put the stock. And even then circumstances can quickly change in the market or the stock, and it is a difficult position to unwind without taking a loss even in the spread.
As either an income or speculation vehicle, short puts is a terrible concept. For example, why would anyone with any trading talent take on the risk of a short put for a small premium, when they could buy the underlying, or a future, and gain the same amount with a small move? It simply makes no sense, and everytime I read someone promoting the strategy I feel sorry for the next poor sucker who gets caught holding the bag. I once had a "mentor" who pushed me into short puts back during the 98-2000 bull market. I was enjoying the 10K per month in premiums until the shit hit the fan, at which time I was very lucky to walk away with any cash remaining in my account. It has taken me three years to trade back to even. So I am always hot to warn anyone away from naked options, of any kind. There are far better ways to make money, but not many that will wipe you out as quickly.