Anybody ever traded options??

[VaCollector]

Ok....I'm not sure if this is the proper area to post this inquiry.....or if it might be considered heracy to post such an idea on this ultra-conservative board BUT at the risk of takin' a lickin' from you guys ....I just wanted to ask

I visited with a couple of friends yesterday, informed them of my new part-time FIREing...and after the [-]what I come to find as normal[/-] confused,surprised looks and explanations....we began a discussion of "how" it could be possible....

My explanation included the conservative approach that I have read regarding index funds, apportioning, etc.with a focus on safety, etc.......and after they finished rolling their eyes at me....I was introduced to their newest foray in investing - OPTIONS.

It seems that they took an investing course in the fall of 2006 ~ paying $25K for the priviledge ~ .......and have attended several investment seminars to learn the ins and outs of the stock market....and while they have learned about the basics (mutual funds seem to be a joke to them) they are completely enamored with trading options and spent a couple of hours trying to help me (mental midget) to understand the process....

While they are admittedly new in this field, their results are impressive to say the least.....a 54% NET return since they began trading REAL MONEY (after paper trading for several months).....HOLY POOP BATMAN....I want some of that!!

OK...so I DID feel like I was at an Amway convention...with all of the sunshine being blown up my butt....and after the euphoria wore off....I still couldn't shake the fact of their results!!

Anybody here ever traded options with positive results?? Any other advice (other than to run the other way - hard and fast)??

Opinions and experiences appreciciated ~ thanks!!

 

[OAG]

How did they "prove" their "results"! Just curious.

 

[haha]

Anybody here ever traded options with positive results?? Any other advice (other than to run the other way - hard and fast)??

I have traded options with very so-so results. IMO, to get the returns your friends mention they would have to correctly guess the direction of the underlying on whatever option they are trading. No way could they make this from exploiting supposed inefficiencies in pricing, volatility estimation, etc.

My not doing it doesn't prove it can’t be done. I would say that if they continue to be successful over at least an entire bull/bear market cycle then they may well be onto something. Overall the likelihood is low, but perhaps not impossible.

Ha

 

[ziggy29]

Ok....I'm not sure if this is the proper area to post this inquiry.....or if it might be considered heracy to post such an idea on this ultra-conservative board BUT at the risk of takin' a lickin' from you guys ....I just wanted to ask

There's nothing particularly risky about writing covered calls and buying protective puts. These are, in fact, the only option trades allowed in an IRA because they are perceived to be low-risk options.

The former gives you a little added income on your existing position, the downside being that if the stock runs a lot higher, you can have the call exercised on you and you will have to sell the stock at the strike price of the call, not the (presumably higher) market price. In that case, you'd still be making money, but not as much as if you didn't write the covered call.

The latter is basically like purchasing "share price insurance" on a position you don't want to sell for whatever reason, but worry about near- to intermediate-term share price erosion. If it plummets, you still could sell your position for the strike price (which would probably be near the value at the time you purchased the put). Anyone who bought protective puts in early 2000, for example, on tech stocks was certainly glad they did.

I used to occasionally write covered calls around 1999 and 2000 when volatility was high and premiums were high. On some holdings I could get as much as 10% of the strike price for options still 20% out of the money. So if the underlying security didn't rise 20% in that time, I basically padded its return by 10%. Even if the call was exercised, I still have the income from writing the call AND some of the underlying appreciation. These days premiums have fallen quite a bit, so they haven't been worth it to me.

These are the only two types of option trading I'd consider if I were a fairly conservative investor. Some are riskier and some -- like writing uncovered calls or selling a naked put -- could end up disastrous.

 

[brewer12345]

I've sold covered calls (not my favorite strategy), bought protective puts and simply gone long puts and calls as a speculation. I will probably monkey with naked put writing at some point, but this would always be a minor activity.

Most of my option trades are buying calls on stocks which I already own. Usually, I buy longer dated calls on stuff that has heavily sold off, with the expectation that the market has over-reacted and the stock will recover. But I do this only when I am very familiar with the company and have a firm opinion of what it is really worth. This is a fairly high risk activity that requires a certain amount of nimbleness in trading, so I confine it to 1 or 2 per cent of my portfolio (gambling money).

Check out my post in the shipping thread for an example of my typical option trade.

 

[eridanus]

Ok, I admit it. I'm big on index funds but I do my share of options.

I've gone long with calls (DSX and the Yen) that turned out great. I've also done covered calls that have cratered (US Airways when it reorganized). A covered call doesn't protect you if the stock falls off a cliff. Finally, I do some naked calls on the indices. I got caught in November 2004 when Bush won the election and the uncertainty vanished from the market.

It's not a gold mine. The leverage is high, and so is the risk/reward.
A return of 54% is dangerous.

 

[VaCollector]

How did they "prove" their "results"! Just curious.

I got to see their actual computer program that showed all trades, etc.....and then I did the math....it really was impressive

 

[ERD50]

Yes, I've done a variety of option trades. Common sense should tell you there is no magic way to make +50% w/o taking on a lot of risk (as in losing it all in the next six-months) or everyone would do it. Markets are reasonably efficient, and eat up any anomalies very quickly.

Now, a tougher question - exactly *how* did your friends calculate their 54% return? I've seen some very 'creative' calculations performed, especially when dealing with options.

If these are covered calls, one very popular (as in radio show infomercials, paid seminars, etc) method is to simply not count your losses. Now, that sounds too obvious, so they slickly wrap it up in a bunch of convoluted snake-oil marketing speak and talk about 'cash-flow'. They will not address actual total returns, which is how the rest of the world measures performance. Therefore, you really cannot compare those (fictitious) returns with mutual fund published (real) returns.

I've been in a discussion (on another forum) where one of these 'investors' started out with a $10,000 balance in his account. Two months later, he had a $7,000 balance in his account. Yet, he swore that he 'made' a $2,300 profit in two months (the premiums he collected from selling the calls). But, the underlying stocks had dropped like a rock. No worries - I 'll just keep selling calls on it, and I'll make the money back, or the stock will come back. There is nothing you could say to convince this person that he was not making money hand over fist - it is what he wanted to believe. That's not investing, it is wishful thinking, and delusional accounting.

I'd be curious if this is what your friends are involved with. If so, tell them to watch the actual net worth of their account over time (need to account properly for deposit/withdraws if they are doing that). That is the only true measure of performance.

Oh, and one bit of warning. They paid $25K for this system - it is human nature to want to defend that expenditure to make themselves appear to be smart people. Be prepared for some wildly defensive [-]rubbish[/-] arguments from them.

-ERD50

 

[ERD50]

I got to see their actual computer program that showed all trades, etc.....and then I did the math....it really was impressive

Ahhh, our posts crossed - can you expand on 'impressive' - ERD50

 

[VaCollector]

It's not a gold mine. The leverage is high, and so is the risk/reward.
A return of 54% is dangerous.

Maybe so....but just once....just once....hmmmm

I'm not educated enough even to understand some of the terminology that you guys are throwing around but they did seem to think that whatever they were doing as very conservative.....and so....I WILL take the opportunity to study this facet of stocks too....but just the thought of returns that are "too good to be true" is contrary to my conservative upbringing and reminds me of the tortoise and the hare....

 

[VaCollector]

Ahhh, our posts crossed - can you expand on 'impressive' - ERD50

Total account value begn with $10,300 (two weeks ago)....yesterday's value was approx. $15,800 and some change....worked out to about 54%.....they showed me Investortoolbox.com and Thinkorswim.com.....

I could only imagine if I had [-]had the guts/stupidity[/-] to put $500K in those same trades......

But then that's kinda like dreamin' about what I'm gonna do with my lottery winnings

 

[eridanus]

50% in two weeks?!? That's either by huge luck, huge risk, or huge deposits.

It's all good until the market tumbles. If they were doing this "conservative" strategy in March 2000, they'd be SOL for a few years.

For which stocks are they selling calls?

 

[ERD50]

I've sold covered calls (not my favorite strategy),
....
I will probably monkey with naked put writing at some point, but this would always be a minor activity.

Why is that? Writing a covered call has the exact same risk/reward profile as as writing a naked put. One is the synthetic derivative of the other.

This assumes you are holding the cash to back up the purchase of the underlying if the put is assigned. But, to not do so would be comparable to holding the stock in a covered call on margin - which would also entail more risk.

Now, writing a naked call is another story... theoretically near infinite losses if the stock goes to the moon

-ERD50

 

[ERD50]

Total account value begn with $10,300 (two weeks ago)....yesterday's value was approx. $15,800 and some change....worked out to about 54%.....they showed me Investortoolbox.com and Thinkorswim.com.....

Two likely explanations:

1) Is this their actual account value (liquidation value - the actual $ amount they could withdraw if they closed the account Monday AM), or some number that their computer program is spitting out (which might just be adding 'cash flow' to the original balance)?

2) They are using a highly leveraged system. No magic there. If the trades go in the right direction, you can make 1000% in a day. 54% in two weeks is child's play! But of course, if the trades don't go your way.....

Keep watching them, if you can get real numbers. Early success is probably their worst enemy - it will suck them into the world of the invincible. Which will only make their eventual blow-up all the more painful.

Google 'Taleb' and 'Black Swan' for some interesting reading.

-ERD50

 

[brewer12345]

Why is that? Writing a covered call has the exact same risk/reward profile as as writing a naked put. One is the synthetic derivative of the other.

This assumes you are holding the cash to back up the purchase of the underlying if the put is assigned. But, to not do so would be comparable to holding the stock in a covered call on margin - which would also entail more risk.

Now, writing a naked call is another story... theoretically near infinite losses if the stock goes to the moon

-ERD50

It has to do with the nature of the stocks I usually traffic in. Generally speaking, I buy hated companies with lots and lots of upside potential. So selling calls means I get to endure bags of volatility on the underlying but I don't make the big gains if my analysis is correct.

Selling puts, OTOH, simply means that if I get exercised I am buying something I find extremely attractive at a price I find attractive. I still retain the longer term upside on the stock and I get to enter or add to my position at an even lower price (including put premium) than I could have otherwise. Again, if my analysis is correct, there is lots of upside and I retain it.

 

[glen12]

I've had good success in writing naked puts. The key has been to sell puts on stocks that you really would want to buy at prices that you really are prepared to pay....and not to be greedy. There is an excellent chance that the eroding time value of options will work in your favor and you can bank steady cash on a monthly basis.

But you'd really better have planned out how you will handle things if the option gets exercised or is in the money at expiration...because the "fat tails" really do happen. I've tried more aggressive strategies that really came back to haunt me, so now I'm happy to get a 'taste' every month and leave the big scores to someone else. Pigs get fat and Hogs get slaughtered.

 

[eridanus]

Another aphorism,

"Selling premium is like picking up nickels in front of a steam roller."

 

[terminator]

1. Two weeks isn't even the short term to evaluate something.

2. I've traded LEAPs (long term options) for the past year. I made 70% (on a very small amount) over the course of the year. That sounds great until I realized that a LEAP on Dow index for the same period of time would have given me a 200% return. Or put another way, you'd have to be a total idiot to lose money buying call options over the past year.

3. I've looked at selling call options, but it doesn't work for me primarily because if were to get called away then I'd have to pay capital gains in exchange for the (typically) small premium.

 

[megacorp-firee]

1st rule of [-]gambling[/-] investing ... if you don't understand it ... don't do it.
In my mis-spent youth (years ago);
I have sold covered calls ... easy, not much risk, ...gleens you a few % points.
I have bought calls and puts ... also easy, much more risk for a good return

Was it worth it? ... yes, made a few bucks and it fed my need for the adrenalin rush ... (go to vegas it's cheaper). But you do need to w*rk at it ... to do it right (replace a more mundane j*b) you would need to spend lots of time researching, IMO.
At the height of my craziness, I have had +/- $20K days days .... all in all a very nice education and few bucks in my pocket.
Had to quit doing it, since I had a 'day job' and had to pay more attention to it. By the way, this was back when the markets were 50 cents to 1 dollar wide ... not so today... (damn this electronic trading)

The real question is can you sleep at night? It IS very stressful way to make an 'easy buck'.

I still sell covered calls when the market seems right and my hormones are raging.
If you choose to follow your friends ... the best advice is to do it with
throw away' money .... whatever that is ....

I love glen12's pig/hog quote .... how appropriate.

p.s. the numbers that you show your friends doing ... they are entirely plausible ... and they look like beginners luck ... track them for a while and see how much disipline they have ...
One more comment: this is, like many things, for the disiplined [-]gambler[/-] trader... don't confuse this with investing.

 

[clifp]

I have a fool proof way off making 50% plus with options trading.

Step 1 develop an options strategy
Step 2 spend a $1K in printing binders, making powerpoint slides, burn a CD or two
Step 3. Rent a conference room and spend another 7-8K in buying radio ads, and local ads promoting your options seminar.
Step 4 Sell 30 people your $500 super options strategy.

Repeat every 2 weeks, may need to move to a different city on occassion.

 

[yona]

Only LEAPs

Last week was my first time to by options. It did with small percentage of my money and only because the execution date is Febuary 2009.
The stock is a real estate company in HK and is traded for about 1/3 of NAV. So, I believe the risk is small (the option name on yahoo is 0507.hk)

I think I'll never buy short term options. One can have a very hight return without much risk if he buys extremely cheap nano caps, so there is no need to gamble with options.

 

[unclemick]

Ok....I'm not sure if this is the proper area to post this inquiry.....or if it might be considered heracy to post such an idea ---
Anybody here ever traded options with positive results?? Any other advice (other than to run the other way - hard and fast)??

Listen to your belly button - RUN!

Everyone I knew in the last forty years who dabbled either lost big, barely got out even after a lot of work - it has a tendency to test/strain some/many peoples nerves.

I haven't seen any papers/studies on the average trader's odds of winning lately.

heh heh heh - anyone here old enough to recall Hilary Clinton's Cattle future story?

 

[FinanceDude]

I've looked at selling call options, but it doesn't work for me primarily because if were to get called away then I'd have to pay capital gains in exchange for the (typically) small premium.

The private money manager I work with does this all the time. If there's enough spread, he buys the stocks and sells the call the SAME day. He looks at it as a way to enhance income in the portfolio. I haven't done a lot of it but it works well at times.

 

[clifp]

The private money manager I work with does this all the time. If there's enough spread, he buys the stocks and sells the call the SAME day. He looks at it as a way to enhance income in the portfolio. I haven't done a lot of it but it works well at times.

My gut instinct and a bit of back of the envelope calculation leads me to believe that writing covered calls (similar to what the money manager does) by reducing volatility would lead to a (slightly?) higher SWR.

I've a done a moderate amount of covered call writing on individual stocks, and looked at lot of index writing on ETFs.

If anybody would be interested in collaborating on back-testing this theory please let me know.

 

[Meadbh]

Moshe Milevsky's paper on "Asset Allocation and the Transition to Income: The Importance of Product Allocation in the Retirement Risk Zone" (M.A. Milevsky and T.S. Salisbury) 495KB, October 2006; accessible from Welcome to the Individual Finance and Insurance Decisions Centre online... - advocates the use of carefully planned options as a strategy to reduce portfolio volatility during the critical early retirement years. (and confirms that it's better to avoid retiring into a bear market).

I agree with other posters. Try this at home only if you really understand it, and if you have the time to keep a constant eye on the stock. Otherwise you could find yourself in deep doo doo.