Insane Emergency RE strategy

[haha]

I try to limit risk by position sizing and diversification (multiple indexes, expiration dates, strike prices, etc.) Currently all positions are generally 3 contracts.



June 22, 2:00PM (Central time I think)

As best I can tell the S&P 500 was around 898 at that time.

Dixonge, a couple questions-

1) At any given time, how many of your "credit spreads" are bullish slants, and how many bearish? Wouldn't most of your postitions be exposed to the same bullish or bearish moves of the overall market?

2) Since on entry you establish what your maximum losses might be, at any given time when you are pursuing this strategy, how much money at risk do you have?

Thanks, Ha

 

[dixonge]

Dixonge, a couple questions-

1) At any given time, how many of your "credit spreads" are bullish slants, and how many bearish? Wouldn't most of your postitions be exposed to the same bullish or bearish moves of the overall market?

As of right now I have 3 bull put positions for July (12 contracts) and 2 bear call spreads (9 contracts). For Aug. 2 bull put spreads (9 contracts) and one bear call (3 contracts). Sept. I only have 2 bull puts (6 contracts).

The basic strategy seems to be to buy put spreads when the market reaches the bottom of a trading range or a support position. So if the market has been bouncing between 880 and 920 I would buy 780 puts near 880 and 1020 calls near 920.

In the middle of Feb. I sold several APR put spreads in the 590-600 range while the S&P was dropping below 800. As we now know it bottomed near 670 on Mar. 6 and never looked back. If I had waited the premium could have been better, but that's why I pay someone to tell me when to pull the trigger. I did one trade on my own during that time, an APR 710/700. That position spent a full week underwater in early March but eventually expired worthless. I stopped doing my own side-bets around then.

2) Since on entry you establish what your maximum losses might be, at any given time when you are pursuing this strategy, how much money at risk do you have?

Thanks, Ha

It fluctuates. ThinkOrSwim uses the term 'buying power' to indicate how many options I can buy, which is usually double the figure for stocks. Right now that number is about 40% of my total portoflio, so I'm 60% invested. It is lower right after expiration day, then grows throughout the month. I try to maximize it, leaving a little lying around for either dry powder or to give me room to leg out of some spreads if necessary.

 

[haha]

Thank you.

 

[BunsGettingFirm]

One other update to our plan - instead of just immediately moving overseas we are now planning on purchasing a used vehicle and travel trailer and exploring the nation's sights. Lots of time will be spent in national parks, BLM land, etc. Disneyland, no. Yosemite, yes. This will hopefully allow for acclimation to retired life first, then we can do the international thing later after we've got all the other issues resolved.

I still don't get the motivation for quitting your job now. You didn't say that you can't stand your job or that the stress is causing you to have health problems, and you are putting away money every month. Why not take longer unpaid vacations three time a year? Perhaps you'll find that 10 weeks off a year is enough. I find that about 4 weeks off in a row is enough to fully recuperate. After that, I go a bit crazy. I tried it in 2006.

If you really think that full time life on the road is the life you want, then check out this site: Could RV Living Be Your Dream? Let's Find Out!!. These guys left their jobs in their early 40s to travel and work camp across the country. They are still on the road 4 years later.

 

[dixonge]

I still don't get the motivation for quitting your job now.

Wait, isn't this the Early Retirement forum? I want to retire.........EARLY!

You didn't say that you can't stand your job or that the stress is causing you to have health problems, and you are putting away money every month. Why not take longer unpaid vacations three time a year? Perhaps you'll find that 10 weeks off a year is enough. I find that about 4 weeks off in a row is enough to fully recuperate. After that, I go a bit crazy. I tried it in 2006.

My job is ok, I'm just tired of working.

I'd love to take these 10-week vacations you speak of. Unfortunately my employer has and will never allow for such without qualifying for the Family Leave act. Doubly so for my wife's job.

If you really think that full time life on the road is the life you want, then check out this site: Could RV Living Be Your Dream? Let's Find Out!!. These guys left their jobs in their early 40s to travel and work camp across the country. They are still on the road 4 years later.

I've been reading just about every RV/Van/Vagabonding/Travel web site out there for a couple of years now.

 

[ERD50]

I hope you do come back to it.
Ha

OK, you asked....

As best I can tell the S&P 500 was around 898 at that time.

OK (ignoring comm/fees), so your example credit spread could profit $1.20/share (this represent the sale of the 780 put, minus the cost of the 770 purchased put) with a max loss of $8.80/share (the $10 diff of the 780-770 strikes, offset by the $1.20 credit).

Now, there is a chance that you could lose the whole $8.80 (SPX < 770), and a higher chance that you could lose half or more (SPX < 775.60). Remembering that there are people on both sides of this trade, it would seem that the market consensus is that there is about a 1 in 8 chance that you could lose it all, based on what they are willing to pay out, versus what they are willing to take in (1.20/8.80). That would be ~ 14% drop in SPX from where you traded the options. Recall that SPY dropped 35% in two months from Sept 19 to the Nov 21, 2008 option expiry. Stuff happens.

Now, if I was B&H the index, there is no real world chance that the index would go to zero in 2 months (we would have bigger things to worry about if that happened!), and very unlikely (certainly less than 1 in 8) that the index would drop by half in 2 months. So you would clearly need to put up much less than half your money in these kinds of options in order to have less downside exposure than just buying the index. So that effectively cuts your return on these by that factor. To illustrate, it doesn't do me much good to even have a "guaranteed" 100%/month return, if I can only allocate $1 to it.

And again, I would really question your expectations to make a regular 5%/month over the long haul, even on a smaller portion of the account. There are people on the other side of the trade, and they ain't giving money away.

I read a bunch of option books shortly after I retired, as I didn't understand options and wanted to learn. I finally got to McMillan's tome, and skimmed over most of the later chapters on all these fancy constructs (Iron Condors, Iron Butterflies, etc) once I realized all they do is allow you to define the place on the curve where you want to play (which is quite interesting to me). But, I think a lot of people mistake this for thinking that it can somehow fundamentally change the risk-reward relationship. I see it more like deciding whether to play even-odd or a single number in Roulette. One is "riskier", but the payoff is higher. One is "safer", but the payoff is lower. And in the long run, they payoff exactly the same - a negative ~5.26% (2/38).

-ERD50

 

[dixonge]

Now, there is a chance that you could lose the whole $8.80 (SPX < 770), and a higher chance that you could lose half or more (SPX < 775.60). Remembering that there are people on both sides of this trade, it would seem that the market consensus is that there is about a 1 in 8 chance that you could lose it all, based on what they are willing to pay out, versus what they are willing to take in (1.20/8.80). That would be ~ 14% drop in SPX from where you traded the options. Recall that SPY dropped 35% in two months from Sept 19 to the Nov 21, 2008 option expiry. Stuff happens.

I wasn't utilizing this strategy then, but with higher VIX I can see taking positions even farther away from the current price, or perhaps just calls?

Now, if I was B&H the index, there is no real world chance that the index would go to zero in 2 months (we would have bigger things to worry about if that happened!), and very unlikely (certainly less than 1 in 8) that the index would drop by half in 2 months. So you would clearly need to put up much less than half your money in these kinds of options in order to have less downside exposure than just buying the index. So that effectively cuts your return on these by that factor. To illustrate, it doesn't do me much good to even have a "guaranteed" 100%/month return, if I can only allocate $1 to it.

But I'm *not* shooting for less downside exposure necessarily. If your overriding concern is safety, stay away from *any* options strategy (except for hedging). I again refer you to this thread title

And again, I would really question your expectations to make a regular 5%/month over the long haul, even on a smaller portion of the account. There are people on the other side of the trade, and they ain't giving money away.

You are assuming that the people on the other side of the trade are all successful professional traders....and I'm ok with 2.5% - 5% is my optimal projection.

I see it more like deciding whether to play even-odd or a single number in Roulette. One is "riskier", but the payoff is higher. One is "safer", but the payoff is lower. And in the long run, they payoff exactly the same - a negative ~5.26% (2/38).

-ERD50

So B&H on the S&P will get you a negative 5.26%?

 

[ERD50]

I wasn't utilizing this strategy then, but with higher VIX I can see taking positions even farther away from the current price, or perhaps just calls?

A high or low VIX does not fundamentally change the "game". It only changes how wide that curve is.

High VIX means high expected changes in the underlying index/stock, and the options will be priced accordingly. You will have to move further away from the index/stock price to see the same prices for those options that you would at a low VIX. But your risk/reward is still going to be the same - you just play "closer in" when VIX is low, and "farther out" when VIX is high. As long as VIX is reasonably accurate - no fundamental change in the game.

IOW, do you really think that the market wants to give a different set of odds on a trade, just because of some change in VIX? No, they will (and do) adjust for it.

But I'm *not* shooting for less downside exposure necessarily. If your overriding concern is safety, stay away from *any* options strategy (except for hedging). I again refer you to this thread title

OK, as long as you understand you are taking higher risk - I thought I saw a ref to "conservative strategy" earlier. Options can be used to increase, duplicate, or decrease the risk of a holding.

OK, if you are magnifying gains, you will also be magnifying losses (remember the 8:1 ratio you have there). Now, I suppose the "insane" part of your thread title refers to you being able to beat the market while being leveraged. With leverage, you can't afford to be wrong for long.

You are assuming that the people on the other side of the trade are all successful professional traders....and I'm ok with 2.5% - 5% is my optimal projection.

Nope, I'm assuming that pros will jump on whatever side they can make money. Pros would kill for an "easy" and steady 34%/year (1.025^12). You are (insanely ) saying they won't, and you can. Here's to the "crazy ones"!

So B&H on the S&P will get you a negative 5.26%?

Sometimes, but I meant that a Roulette wheel will, regardless of whether you place a "risky" or a "safe" bet.


-ERD50

 

[dixonge]

OK, as long as you understand you are taking higher risk - I thought I saw a ref to "conservative strategy" earlier. Options can be used to increase, duplicate, or decrease the risk of a holding.

Well, conservative compared to straight calls. I should have clarified.

OK, if you are magnifying gains, you will also be magnifying losses (remember the 8:1 ratio you have there). Now, I suppose the "insane" part of your thread title refers to you being able to beat the market while being leveraged. With leverage, you can't afford to be wrong for long.

The very nature of a spread helps alleviate some of the risk. Buy a put, sell a put. Limited gain, limited risk.

Nope, I'm assuming that pros will jump on whatever side they can make money. Pros would kill for an "easy" and steady 34%/year (1.025^12). You are (insanely ) saying they won't, and you can. Here's to the "crazy ones"!

I'm not saying they can't. I'm not even saying that I can. I'm only saying it's worked for me so far, and my projections are based on the info I have. Who knows, I may be ranting about the evils of credit spreads in a few months *shrug* Maybe I should daytrade?

 

[ERD50]

The very nature of a spread helps alleviate some of the risk. Buy a put, sell a put. Limited gain, limited risk.

Well, maybe this is just semantics, but I think it is where many option traders go astray. I disagree entirely that these spreads "alleviate some of the risk". They do *define* your risk. In your earlier example, you can gain $1.20 max, and lose $8.80 max. That does not "alleviate some of the risk", it defines it.

Compared to B&H the index, your chances of losing everything on that transaction, or even losing half of it are much higher. So how is that "alleviating some of the risk"?

Sure, you can reduce your exposure by putting up less total $ in these spreads to reduce the risk, but that is then just a shell game - on average, have you accomplished anything (other than buying some leverage - which just amplifies gains & losses)?

I'm only saying it's worked for me so far, and my projections are based on the info I have. Who knows, I may be ranting about the evils of credit spreads in a few months *shrug* Maybe I should daytrade?

Well, I tried a much more conservative strategy - shooting for 1%/month gains over and above the market. I did it pretty consistently, I had superior gains and lower volatility compared to B&H - the "Holy Grail" for a retiree. And if 1% sounds shabby to you, that is 12% annual, which means I could spend 4x my current budget - I'd be living large. Or, I could be prudent and spend 2X (which would still be a *lot* of fun, since it would ALL be discretionary spending ) and bank the other half for a rainy day.

Well, my strategy worked well for 18 months, then that old devil regression caught up with me. I adjusted again (before I gave back all the excess gains fortunately), went even more conservative (targeting ~.75% above the market each month, and expecting to give back some of it once or twice a year for maybe 3-4% annually), and even with that I gave back almost all of the excess gains over the past 6 months in just one month.

I actually do think you can make *slightly* above B&H rates with some options added in, but I don't believe it can be a big number. Any big number will get noticed and absorbed by the market.

If you really think you can find a niche that the rest of the market is blind to, and that they are willing to turn their money over to you month after month for years on end - then the "insane" part of the thread title (that you reminded me of) fits, IMO.

Good luck to you, and keep your eyes wide open in case your luck runs out.

-ERD50

 

[dixonge]

Compared to B&H the index, your chances of losing everything on that transaction, or even losing half of it are much higher. So how is that "alleviating some of the risk"?

Keep in mind that most of my comparisons are to straight options. Buying a put has a certain amount of risk - selling a put against it lessens that risk, and vice versa. Both would be more risk than buying straight shares of an index ETF.

I actually do think you can make *slightly* above B&H rates with some options added in, but I don't believe it can be a big number. Any big number will get noticed and absorbed by the market.

So in other words no one has any chance of beating the historical rates of index B&H? All those money managers and fund managers and mutual funds are just useless?

If you really think you can find a niche that the rest of the market is blind to, and that they are willing to turn their money over to you month after month for years on end - then the "insane" part of the thread title (that you reminded me of) fits, IMO.

Good luck to you, and keep your eyes wide open in case your luck runs out.

-ERD50

As I stated earlier, I'm not married to any strategy. I've used several, and if flaws appear, you move on. But I don't need the entire market to be 'blind' to what I'm doing, just one or two people at a time willing to buy what I'm selling. I don't care why they are doing it, and they don't have to be some gullible fool either. There are perfectly legitimate reasons for buying debit put spreads while I'm selling credit put spreads. Each month a different person can do so for different reasons. And they have been so far. And if that's crazy I hope none of us are ever cured!

 

[ERD50]

Both would be more risk than buying straight shares of an index ETF.

OK, I agree with that (although I think you reversed buy/sell on the put, or meant call). And part of my point is, when discussing returns, they really need to be risk adjusted to put them in perspective.

All those money managers and fund managers and mutual funds are just useless?

Now THAT is an easy one. They are less than useless. Odds are, especially after adjusting for costs and taxes, you will do better with the B&H index. There are exceptions, but picking the future exceptions is like picking an individual stock today that will outperform in the future. Again, they MUST be risk-adjusted to be meaningful.

There is probably a FAQ on this, or search if you want to go through thousands of posts

But I don't need the entire market to be 'blind' to what I'm doing, just one or two people at a time willing to buy what I'm selling. I don't care why they are doing it, and they don't have to be some gullible fool either. There are perfectly legitimate reasons for buying debit put spreads while I'm selling credit put spreads. Each month a different person can do so for different reasons. And they have been so far. And if that's crazy I hope none of us are ever cured!

But the "market" for these is not made up of one or two people. Even when there are few transactions, computers are monitoring that bid/ask in near real time and will jump in to buy/sell any imbalance before your fingers can hit "ENTER". Liquidity and supply/demand for options is fundamentally different from that of stocks. Because options do have an underlying component, the bid/ask (not the latest trade) will remain in lock-step with that, at least on liquid underlying components, like indexes.

It makes no difference what reason people buy/sell things - the market determines the price. Potatoes are $X/# at the grocery store - they don't care if I buy them to feed my family, or cut them up until I find one that looks like some celebrity and sell it on ebay for $1M bucks. And I don't offer the grocery store more than market price, just because I hope to make more. I pay what the market bears/demands, regardless.

-ERD50

 

[dixonge]

You seem to be discussing mainly price. I'm not trying to beat the average bid/ask spread price. I'll leave it to the market makers to arbitrage those things, I just put in a limit order for a price that meets my minimal demands and let the order fill as the prices move toward my position. I've gone 2-3 days working on that price before, but most often I adjust till I get a hit. Either way, it most often is the difference between taking in a credit for a 4.5% gain or a 5% gain.

Let me propose a theoretical trade scenario. For me to sell a July 780/790 bull put credit spread someone somewhere else has to be willing to *buy* a 780/790 put debit spread. (I think I have that right).

The market maker makes money on the bid/ask spread, the brokers make it on commissions, and both sides of the trade have supposedly good reasons for the purchase. I'm betting on the SPX to stay above the 780-something breakeven, the other side is betting on going below.

However, long before expiration day the other side could sell for a profit. Say they bought when the S&P was at 920 and it falls to 850. They sell, take their profit. In the meantime the S&P levels out and my spread expires worthless with the S&P at 840. I keep my credit, the other side keeps their profit. The market makers and brokers keep their money. I don't see where this requires a winner vs. a loser or a pro trader vs. a sucker.

This reminds me of when I first started exploring options. Most of the textbook explanations seem to assume that one will always hold an option to expiration and base all their greeks and risk calculations on that assumption. The day I figured out that I could use money management and stop/loss techniques to simply sell my winners at a profit (before expiration, before assignment) was an epiphany. I could sell losers too, capping my losses. It makes the theory and fancy curve charts rather irrelevant, IMHO.

FYI, I'm quite enjoying this discussion btw. If I can't somewhat defend my strategy in the public forum I'd have no business doing it, right?

But the "market" for these is not made up of one or two people. Even when there are few transactions, computers are monitoring that bid/ask in near real time and will jump in to buy/sell any imbalance before your fingers can hit "ENTER". Liquidity and supply/demand for options is fundamentally different from that of stocks. Because options do have an underlying component, the bid/ask (not the latest trade) will remain in lock-step with that, at least on liquid underlying components, like indexes.

It makes no difference what reason people buy/sell things - the market determines the price. Potatoes are $X/# at the grocery store - they don't care if I buy them to feed my family, or cut them up until I find one that looks like some celebrity and sell it on ebay for $1M bucks. And I don't offer the grocery store more than market price, just because I hope to make more. I pay what the market bears/demands, regardless.

-ERD50

 

[dixonge]

OK, I agree with that (although I think you reversed buy/sell on the put, or meant call). And part of my point is, when discussing returns, they really need to be risk adjusted to put them in perspective.-ERD50

To clarify, if I buy a put there is risk, specifically that the stock might rise. If I then *sell* a put at a different strike price I help offset any losses the bought put might incur. One rises as the other falls. It is in that sense that risk is somewhat offset.

 

[ERD50]

I'll leave it to the market makers to arbitrage those things, I just put in a limit order for a price that meets my minimal demands and let the order fill as the prices move toward my position. I've gone 2-3 days working on that price before,...

I also do that often - but it is separate from what determines that price, which is the market's measure of the risk/reward of the position.

Let me propose a theoretical trade scenario. For me to sell a July 780/790 bull put credit spread someone somewhere else has to be willing to *buy* a 780/790 put debit spread. (I think I have that right).

I'm not exactly certain of the mechanics of how it gets filled on the floor, but I always assumed they just fill your sale of the 790 put and your buy of the 780 put. So they just need to match each leg up with a buyer and a seller - not specifically another person looking for that complimentary spread (which I think would be a Bear Put Debit Spread, but I'd have to check).

However, long before expiration day the other side could sell for a profit. Say they bought when the S&P was at 920 and it falls to 850. They sell, take their profit. In the meantime the S&P levels out and my spread expires worthless with the S&P at 840. I keep my credit, the other side keeps their profit. The market makers and brokers keep their money. I don't see where this requires a winner vs. a loser or a pro trader vs. a sucker.

You are mixing things up here. If the other side closed their complimentary spread position at a profit before expiration, then you need to compare them to a credit spread position that was opened/closed at the same time, and that would be closed at a loss - netting zero (disregarding spread/comm/fees). The position you hold to expiration can only be compared to it's complimentary spread held to expiration. If you had a gain, they had a loss.

This reminds me of when I first started exploring options. Most of the textbook explanations seem to assume that one will always hold an option to expiration....

Sure, the books usually deal with expiration to make it clear how these things work. You can close earlier to lock in a profit or limit a loss, but.... at that point you are guessing on the future moves of the market. Locking in a gain means giving up some of the total gain you might have if held to expiry (but relieving you of further risk of loss). Limiting a loss means you give up on the chance that the position returns to profitability at expiration, which it might do.

It becomes market timing - good luck!

FYI, I'm quite enjoying this discussion btw. If I can't somewhat defend my strategy in the public forum I'd have no business doing it, right?

That's the same reason I'm engaging in it from my end. It's been a while since I talked myself through these - good to challenge my thinking and make sure I don't get stale!


-ERD50

 

[dixonge]

I'm not exactly certain of the mechanics of how it gets filled on the floor, but I always assumed they just fill your sale of the 790 put and your buy of the 780 put. So they just need to match each leg up with a buyer and a seller - not specifically another person looking for that complimentary spread (which I think would be a Bear Put Debit Spread, but I'd have to check).

I guess having the market makers in the middle does muddle the picture a bit...

You are mixing things up here. If the other side closed their complimentary spread position at a profit before expiration, then you need to compare them to a credit spread position that was opened/closed at the same time, and that would be closed at a loss - netting zero (disregarding spread/comm/fees). The position you hold to expiration can only be compared to it's complimentary spread held to expiration. If you had a gain, they had a loss.

True. But don't underestimate the number of people trading with weak money management discipline. They will hold that OTM position until it is almost worthless because - well, it MIGHT suddenly shift and go ITM. Ask me how I know...

Sure, the books usually deal with expiration to make it clear how these things work. You can close earlier to lock in a profit or limit a loss, but.... at that point you are guessing on the future moves of the market. Locking in a gain means giving up some of the total gain you might have if held to expiry (but relieving you of further risk of loss). Limiting a loss means you give up on the chance that the position returns to profitability at expiration, which it might do.

It becomes market timing - good luck!

But a strict stop-loss strategy (pre-defined and you stick to it) takes the guess-work out of it. Getting that set at appropriate levels (%? x$?) takes some experimentation or backtesting. Emotions have to be minimized.

It's still market timing in a sense, but the guess-work (so to speak) is built in up front in an effort to survive losses and maximize wins.

 

[ERD50]

But a strict stop-loss strategy (pre-defined and you stick to it) takes the guess-work out of it. Getting that set at appropriate levels (%? x$?) takes some experimentation or backtesting. Emotions have to be minimized.

It's still market timing in a sense, but the guess-work (so to speak) is built in up front in an effort to survive losses and maximize wins.

OK, a strict, pre-defined stop loss takes some emotion out of it. But I question if it is a good financial move. I have yet to see any evidence presented on this by anyone.

Stop losses don't help you financially if an investment dips, and then returns to previous levels - you just "bought high, sold low". I would need some evidence that the money saved by bailing out early on a real dog is greater than that lost by selling on a temporary dip.

Stop losses can also fail when a stock drops when markets are closed. If your $100 stock with a $90 stop-loss closes at $100 and opens Monday AM at $50 - all you will get is $50. It does not happen often, but it happens.

-ERD50

 

[citrine]

Or if it does not work.....you can move to India and teach them how to lose their accents!
That is my fall back strategy....move back to the homeland if my massage career does not last long

 

[dixonge]

I still don't get the motivation for quitting your job now.

Just to clarify, we are targeting Dec. 2010 for retirement.

 

[dixonge]

Trades for your analyzing pleasure.

June 30 - sold 4 contracts RUT August 570/580 bear call spread. $0.92 credit

4 contracts - net credit of $346.05 after commissions.

Margin set-aside should have been $4000-$346.05=$3653.95 or somewhere in that range.

Gain of 9.4% - 4.7% per month

Today sold 4 contracts of RUT August 430/420 bull put spread to create an iron condor. $1.10 credit - net credit of $418.05 - NO margin set-aside.

$346.05 + $418.05 / $3653.95 = 20.9% gain - 10.45% per month

So as long as the RUT stays between 430 and 570 by the third Friday in August I'm good. I apologize ahead of time for not rooting for a big rally...

 

[ERD50]

Trades for your analyzing pleasure.

....

Gain of 9.4% - 4.7% per month

Well, you should say "potential maximum gain of x.x%". - you won't know the gain until you close it, or it expires. And then, it should be compared to B&H with the same amount at risk.

But still very interesting - I'll have to do some analysis later. I'm guessing that adding the bull put spread on top of the bear call spread doesn't require any added margin set-aside, but I'd have to pick it apart to check. Off hand, it would also seem to double your risk of a loss, right? With either one, only a big market swing in a single direction can cause a loss, but now a big market swing in either direction can cause a loss, is that right?. Stable market, you win on both.

If you are up to it, some good info to include with these trades is the price of the underlying when you transacted it, and the points of max profit, max loss, and break even of the underlying. 430 and 570 below are where your credits would start to be eroded, right?

So as long as the RUT stays between 430 and 570 by the third Friday in August I'm good. I apologize ahead of time for not rooting for a big rally...

I hear ya! With my current strategy, seeing the market swing up wildly the 4th week of each month, then way down (to keep volatility going), and then ending the third Friday of each month up 1-2% would be ideal. Is that too much to ask? The B&H portion of my portfolio would see 12-18%/year, and the options would see another 8-12%. I'd take it.

-ERD50

 

[ziggy29]

So as long as the RUT stays between 430 and 570 by the third Friday in August I'm good. I apologize ahead of time for not rooting for a big rally...

In other words, the RUT needs to remain stuck in a rut...

 

[dixonge]

Well, you should say "potential maximum gain of x.x%". - you won't know the gain until you close it, or it expires. And then, it should be compared to B&H with the same amount at risk.

But since I receive the credit up front and it always (so far) expires worthless and I keep the money.......*shrug* I know it's not realized gain until expiration, but still...

But still very interesting - I'll have to do some analysis later. I'm guessing that adding the bull put spread on top of the bear call spread doesn't require any added margin set-aside, but I'd have to pick it apart to check.

My broker does not require extra set-aside. Some do.

Off hand, it would also seem to double your risk of a loss, right? With either one, only a big market swing in a single direction can cause a loss, but now a big market swing in either direction can cause a loss, is that right?. Stable market, you win on both.

only a big *sustained* swing - must last through expiration date. But yes, depending on how you calculate risk, I now have extra opportunities to lose.

If you are up to it, some good info to include with these trades is the price of the underlying when you transacted it, and the points of max profit, max loss, and break even of the underlying. 430 and 570 below are where your credits would start to be eroded, right?

Yes. Boy, you're sure making me work here!

 

[ERD50]

But since I receive the credit up front and it always (so far) expires worthless and I keep the money.......*shrug* I know it's not realized gain until expiration, but still...

And that is exactly the kind of thinking that I expect will *eventually* get you into trouble (or maybe just 'disillusioned', as haha put it earlier).

So I'll say it again - do you really think the person on the other side of the trade is saying - "here, take my money, I don't have any reasonable expectation of ever seeing this again"? I don't. I think that they expect that, over the long run, they *won't* expire worthless at about the same rate as the ratio of credit to set-aside. Otherwise it would be a lop-sided market, and I just don't believe those exist for long, at least lop-sided enough to make huge profits.

The tricky thing here is, you are making something like 8:1 bets, you get a relatively small payoff, and a relatively small chance of losing on any one trade. It can lull one into a false sense of security because you can go a while w/o a loss. But at 8:1, the one loss can eliminate 8 wins.

Not to sound too negative - I think there are reasons why one *can* expect to "win" selling options. But I don't expect that to be a big win.

Yes. Boy, you're sure making me work here!

You do it anyhow, don't you? I always do when I do an option trade. It's simple stuff, it's just that I haven't studied all the configurations in so long, I'd have to look each up to tie it all together and know which numbers to add and subtract.

But hey - you're the crazy one, right (see thread title)?

-ERD50

 

[dixonge]

And that is exactly the kind of thinking that I expect will *eventually* get you into trouble (or maybe just 'disillusioned', as haha put it earlier).

To me it is a matter of perspective. When buying options I am on guard from the minute I submit the trade. My stop loss (whether built into the trade or set up as an alert) could be triggered in mere minutes. I have let go of many dollars and I may never see some of those again, gone forever. An additional subtle but insidious mindset comes into play as well. If I buy a LEAP for, say, 2011, why would I bother with a stop loss? If the market turns against my position today, is it not reasonable to assume that by 2011 it will surely recover? So you watch your portfolio value slowly shrink and soon you are thinking like a gambler, scheming how to double down and win back all you've lost. By the time you panic and attempt to sell, is there any value left to your options?

But when selling, the perspective is reversed. I am being *given* money up front, which I will then attempt to hold on to. I have a lot of cushion built in so that stop loss triggering is much less likely. And somehow, psychologically, letting go of losing positions is easier. Some of this is anecdotal, but that's my story...

So I'll say it again - do you really think the person on the other side of the trade is saying - "here, take my money, I don't have any reasonable expectation of ever seeing this again"? I don't. I think that they expect that, over the long run, they *won't* expire worthless at about the same rate as the ratio of credit to set-aside. Otherwise it would be a lop-sided market, and I just don't believe those exist for long, at least lop-sided enough to make huge profits.

Regardless what the other side of the trade *expects,* the raw numbers show that the vast majority of options expire worthless, and this benefits the sellers.

Conclusion
Data presented in this study comes from a three-year report conducted by the CME of all options on futures traded on the exchange. While not the entire story, the data suggests overall that option sellers have an advantage in the form of a bias towards options expiring out of the money (worthless). We show that if the option seller is trading with the trend of the underlying, this advantage increases substantially. Yet if the seller is wrong about the trend, this does not dramatically change the probability of success. On the whole, the buyer, therefore, appears to face a decided disadvantage relative to the seller.

Do Option Sellers Have a Trading Edge?

You do it anyhow, don't you? I always do when I do an option trade. It's simple stuff, it's just that I haven't studied all the configurations in so long, I'd have to look each up to tie it all together and know which numbers to add and subtract.

But hey - you're the crazy one, right (see thread title)?

-ERD50

I pay attention to the numbers when I first put on the trade, but I'll admit I don't track them too carefully except for the breakeven. Max profit is the initial credit.