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Old 12-17-2011, 06:52 PM   #161
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If I am short a 125 put and SPY is at 124.95 within minutes of the close, I have to buy back the put (or roll forward which still technically is buying it back). The problem is that the price wont be .05. It will be more like .15 and sometimes more like .25+ if I need to make the trade earlier for some reason. The whole point of selling these puts is to make money as the time value ticks away and I dont want to lose out on any of it. I haven't put a lot of thought to it yet, but I was considering shorting SPY in a case like that. Wont that lock in my price and be the same as if the market closed at that minute?

In other words, I dont think I would be subject to any price changes after that. If SPY rallies, my short put makes a bit more money but my stock loses money and vice versa. I break even. If SPY closes below 125, doesnt the stock that gets put to me just cancel out my short shares?
If you don't get assigned (e.g. the stock rallies above the strike price after you short it), you will be net short the stock over the weekend.
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Old 12-17-2011, 11:30 PM   #162
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The 8 Fridays that I'm talking about actually covers 7 weeks because it starts with a Friday and ends with a Friday. It covers from 10/28/11 thru 12/16/11. B&H SPY is down 5% during that span, not up 1.77%. This is an apples to oranges comparison to what I'm talking about so I'm not sure why you even brought it up.
You mentioned 8 weeks, so I picked those dates from the calendar. It's as valid as 7 weeks.

At any rate, I think it shows that you can't judge something like this from a few data points. SPY returns went from -4.85% to +1.775% by just moving the start point one week. A -3% return strategy could be judged as doing OK by one measure, and lousy by another measure just one week apart. Not really meaningful.


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How about you discuss your options strategies?
Sure, but first I'll discuss my goals, as my strategy is influenced by what I think is reasonably achievable. My goal is to eek out a small, hopefully steady return in excess of SPY B&H. Since I'm skeptical that big gains are there for the taking, and I won't put myself at much more risk than SPY B&H, I'm not swinging for the fences. I'd be happy to beat SPY by 1% each year.

I do think that people pay a premium for insurance (buying puts) and for lottery tickets (buying calls). So I think there is money to be made selling these. I don't think it is a lot, or the big money would swoop in and eat up the excess.

I guess it's time for me to review how the Buy/Write index funds have been doing. That is something that I have used for a model. Back when I looked at them, they sometimes under-performed SPY by a bit, but reduced volatility significantly. But they sold calls just one strike out. I'm thinking that going further out might give me more volatility than those approaches, but still provide income from the premiums, and not cap the gains as much/often. I'm not really looking for lower volatility, but I'm hoping the premiums exceed the cost of the capped gains. So essentially, I sell calls on SPY, as far OTM as I can and still get ~ .5% premium. That would be ~ 24% a year if I never had to BTC, or buy back SPY that got assigned - but that will happen. Hopefully, the annual buy-backs cost less than the annual premiums received.

I just moved to the weeklies later this year, I prefer them for the faster feedback, and if I want to avoid ex-div dates, I'm only out 4/52 weeks rather than 4/12 months. I recently started splitting my call sales - I do half on Monday (or later if the market is down Monday, or on Friday if I'm rolling out), and half later in the week at a higher strike if there is a bounce up in the market. If the market is flat, I might decide to sell the other half by Tues/wed, if there is still some premium there. This means I may take in less on some weeks, but if I have to BTC, the pain is less.

YTD, I under-performed SPY by a small fraction of a %. I've been up in all the other years I've been selling calls, so I think this was just a run of bad luck for me, a few weeks with big spikes up cost me. So we will see.

-ERD50
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Old 12-18-2011, 07:43 AM   #163
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Sure, but first I'll discuss my goals, as my strategy is influenced by what I think is reasonably achievable. My goal is to eek out a small, hopefully steady return in excess of SPY B&H. Since I'm skeptical that big gains are there for the taking, and I won't put myself at much more risk than SPY B&H, I'm not swinging for the fences. I'd be happy to beat SPY by 1% each year.

I do think that people pay a premium for insurance (buying puts) and for lottery tickets (buying calls). So I think there is money to be made selling these. I don't think it is a lot, or the big money would swoop in and eat up the excess.
My goals are quite similar. Although I am seeking to gain alpha by reducing volatility.

One thing I have been noticing lately is that there seems to me a consistent premium for puts compared to calls. Since the profit profile of a naked put is the same a s covered called. I would think they would always trading at the same price.

However, if look at Dec23. A ATM covered call at 122 is @1.25+ the increase from 122 to 121.59 current price that = 1.66. However the 122 put is 1.72. Looking at the monthly I consistently see puts being priced a few percent higher than equivalent calls. Am I missing something here?
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Old 12-18-2011, 07:57 AM   #164
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Why do you want to avoid ex-div dates and what exactly happens when they come around (apart from the obvious)? I guess the price of SPY drops when the dividend is paid out? I had never paid attention to it, but now that you mention it we obviously had one on Friday. All day I was wondering why the hell the everyone was reporting the SP500 was in the black when SPY was in the red.

I assume the price changes overnight Thur night? Even if all of this is correct, I still don't know why you need to avoid that week. The SPY puts that I was short last week made money on Friday even though SPY was down for the day because the time value gets sucked out the most dramatically on the day of expiration.
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Old 12-18-2011, 07:59 AM   #165
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My goals are quite similar. Although I am seeking to gain alpha by reducing volatility.

One thing I have been noticing lately is that there seems to me a consistent premium for puts compared to calls. Since the profit profile of a naked put is the same a s covered called. I would think they would always trading at the same price.

However, if look at Dec23. A ATM covered call at 122 is @1.25+ the increase from 122 to 121.59 current price that = 1.66. However the 122 put is 1.72. Looking at the monthly I consistently see puts being priced a few percent higher than equivalent calls. Am I missing something here?
I don't think you are missing anything. That's one of several reasons I sell puts instead of covered calls.
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Old 12-18-2011, 10:31 AM   #166
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Why do you want to avoid ex-div dates and what exactly happens when they come around (apart from the obvious)?
It's really just a personal preference to keep my accounting 'clean' rather than any solid economic decision.

I apply my 'system' mostly in a tax-deferred account that I'm not currently adding to or drawing from. So I can quickly do a simple test of my performance against SPY B&H at any time.

Now, if I sell calls on EX-DIV dates, I can have an uncertainty over whether my shares get called or not, and I may have only a partial assign. Then, I have to buy back the shares, and the price may have gapped, and I have an extra transaction forced on me that doesn't represent my 'pure' strategy. Maybe that's not a good reason, but I don't like the uncertainty at any rate.


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I don't think you are missing anything. That's one of several reasons I sell puts instead of covered calls.
Do divs explain this? I haven't looked that closely lately, but it seems any significant delta could and would be arbitraged out as a riskless play?

Maybe FIRE'd@51 could comment on this, he seems to have a really good grasp of these mechanics.


BTW, one of the reasons I have limited my selling of cash-covered puts is that it requires a large chunk of cash to sit in my account. I know it is insured to $X, but there is some fine print on the total amount of coverage the broker has company-wide. I was not able to find out if this was sufficient to cover each and every account if something really, really bad happened. We almost all preach diversification here, and I feel well diversified with SPY, and the broker is only holding the paper records that I own that, but having a large chunk of cash at one broker scares me. That isn't diversification. Even though the risk must be really small, the idea of losing money in 'safe' cash scared the dickens out of me. Just didn't seem prudent. I'm much more comfortable with those 'risky' ( ) options.

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Old 12-31-2011, 11:11 AM   #167
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End of year results for weekly naked SPY put selling

Real time results for 35 weeks:

Naked Puts....+7.4%
SPY..............-7.7%

YTD results including estimated back test results prior to the 35 weeks:

Naked Puts...+22.3%
SPY..............+0.0% (about 2.0% including dividends)
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Weekly options calls writing
Old 01-08-2012, 02:01 PM   #168
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Weekly options calls writing

Hi,
I was writing covered weekly calls against JPM and GE recently.
Please share your best stock picks for weeklies.
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Old 01-08-2012, 08:51 PM   #169
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Hi,
I was writing covered weekly calls against JPM and GE recently.
Please share your best stock picks for weeklies.
The only thing I sell weekly puts on regularly is SPY, which is the Sp500 index tracking stock. Most individual stocks are just too volatile for this strategy, at least for my tastes.
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Old 01-09-2012, 02:48 PM   #170
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For Vanguard Voyager Select and Flagship clients, options commissions have just been lowered from $8 plus $1.50 per contract to $2 plus $1 per contract. Plus the first 25 trades per year are free for Flagship clients.

Commission Schedule
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Old 01-09-2012, 05:08 PM   #171
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For Vanguard Voyager Select and Flagship clients, options commissions have just been lowered from $8 plus $1.50 per contract to $2 plus $1 per contract. Plus the first 25 trades per year are free for Flagship clients.

Commission Schedule
My that is almost worth moving some more money to Vanguard for.
Anybody know if Vanguard has a decent trading platform?
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Old 01-09-2012, 06:25 PM   #172
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Anybody know if Vanguard has a decent trading platform?
IMO, the trading platform ranks somewhere between non-existent and terrible. But I only use it for my Rollover IRA trades (primarily the 25 free trades), which are pretty vanilla since you can't do complicated options trades in an IRA anyway. To sell a cash-secured put or do a spread trade, you have to call a Vanguard Brokerage Associate, but you still get the low commission rates. I have my own spreadsheets that I use for my analysis. All I need Vanguard for is to enter the trade.
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Old 01-09-2012, 08:03 PM   #173
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IMO, the trading platform ranks somewhere between non-existent and terrible. But I only use it for my Rollover IRA trades (primarily the 25 free trades), which are pretty vanilla since you can't do complicated options trades in an IRA anyway. To sell a cash-secured put or do a spread trade, you have to call a Vanguard Brokerage Associate, but you still get the low commission rates. I have my own spreadsheets that I use for my analysis. All I need Vanguard for is to enter the trade.
I guess it depends on what you mean as 'complicated', but from your next sentence, I assume that includes cash-secured puts and spreads.

So just FYI, I have my IRA with E*Trade, and I do cash secured puts, and can do spreads on one screen.

Their Comm schedule is $10 and $.75/contract, so if I did my arithmetic right, break even with Vanguard is at > 34 contracts. Not that I'm recc E*Trade, I guess they are all right, I'm with them due to inertia and no big problems that have driven me away. I don't really have a frame of reference to say if they are better/worse than anyone else.

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Old 01-09-2012, 09:23 PM   #174
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I guess it depends on what you mean as 'complicated', but from your next sentence, I assume that includes cash-secured puts and spreads.
Just to clarify, I don't consider cash-secured puts a "complicated" trade. It is because you can't enter them online that I give the trading platform very low marks. BTW, Vanguard lets you write a covered call (as you know, functionally the same thing as a cash-secured put) online. Nor can you roll out a covered call online, unless you want to leg into the trade, because the platform does not allow you to enter any type of spread trade. Hopefully, these deficiencies will be corrected in the future.

Cash-secured puts and covered calls are the main trades I do in my Rollover IRA. For the low (or no) commission, I don't mind calling the options desk to enter the trade.

For trades in my taxable account, I use another broker and pay the higher commission.
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Old 01-21-2012, 09:44 AM   #175
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As I mentioned at the beginning of this thread, its tough to calculate "return" when selling naked puts since you aren't actually buying anything upfront. There are three ways Ive seen people do it.
1. Some people will want to call their profits "infinity" since there is nothing to divide into.
2. Some people will want to divide profits into the required margin to put on the trade.
3. Some will divide profits into the total amount of money it would cost if the stock was put to you.

#3 is the most correct way if you want to compare your returns to stock returns or if you want to compare your returns to someone selling covered calls on the same stock. But #2 is more correct for the way most "traders" think. They only care about how much money they make compared to how much money (or margin) they are tying up.

There has been lots of discussion here about whether or not selling naked puts can possibly outperform the underlying stock long term. I think long term the returns will probably be very close (although I believe the shorter term puts you are selling, the better chance you have of outperforming the stock).

To clear up this point in my mind, Ive done some more research. Instead if selling naked puts, I looked at buying deep ITM calls and then selling short term calls against them. This is a diagonal spread and is similar to selling covered calls except it costs much less which means the profits are the same dollar wise but much higher percentage wise.

Example: SPY is trading at 131.54

1) Covered call...Buy 100 shares of SPY for $13,154. Sell a weekly 132 call for 0.74. Assuming the stock doesn't move, you make 0.56%
2) Buy 1 Jan'13 95 Call for $37.95. Sell a weekly 132 call for 0.74. Profit = 1.94%
3) Naked put...Sell 1 weekly 131 put for 0.76 **return is different depending on your method of calculating**. If you are a trader you will divide into your required margin and get about 1.92%.

Now I know, most people on this forum are not traders and will never want to convert their SP500 holdings into options and trade every week. For anyone who does trade a portion of their portfolio, this may be of some interest. The research Ive done so far shows that there may be a bit of extra profit squeezed out by using method #2 instead of method #3. Most of all, by using method #2, it clears up the question of what a trader's actual returns are. You buy something, when you sell it you divide your profit into your original cost and get your profit.

Lastly, assuming that the market is not in a complete free fall for an extended period of time, there is absolutely no way this method can lose out to a buy and hold strategy. Of course ,that's one of the main reasons for using options in the first place. To get serious leverage. The down side is that you do have to actually invest real money and not just trade with buying power available to you from your other buy and hold investments.
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Old 01-21-2012, 11:10 AM   #176
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The down side is that you do have to actually invest real money and not just trade with buying power available to you from your other buy and hold investments.
Have you calculated your after-tax return in terms of the number of hours per week that you're spending on this?

I don't mean just the actual buying & selling-- I mean the researching, the tweaking, the spreadsheet data entry, collecting data for tax returns, and prepping the tax returns. You might even include the time you spend composing posts and discussing the system. What's your "hourly wage"? At the end of the period after all the taxes are paid and all the money's been taken off the table, how much money goes into your wallet and how many hours did it take to get it?

Because it sounds like it's at least as much a job as it is an investment... only in an options-trading job there's the long-tail probability that a black swan will claw back a year or two of your earnings.
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Old 01-21-2012, 01:08 PM   #177
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I don't calculate that stuff because I enjoy doing it (well except for doing the taxes). Its a hobby as well as something that makes me money. Its no different than everyone here reading this forum and discussing all the different aspects of investing and learning about the best withdrawals methods and all of that, trying to eek out an extra percent here or there. If they spent all of that time working (and getting paid) instead of thinking and discussing, they would have a lot more money and wouldn't need to have the perfect AA or the absolute best CD rates. But we all know that discussing this stuff is a whole lot more fun than working, otherwise we wouldn't be doing it.

Actually discussing this stuff while at work kills two birds with one stone.
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Old 01-21-2012, 03:49 PM   #178
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I don't calculate that stuff because I enjoy doing it (well except for doing the taxes). Its a hobby as well as something that makes me money. Its no different than everyone here reading this forum and discussing all the different aspects of investing and learning about the best withdrawals methods and all of that, trying to eek out an extra percent here or there. If they spent all of that time working (and getting paid) instead of thinking and discussing, they would have a lot more money and wouldn't need to have the perfect AA or the absolute best CD rates. But we all know that discussing this stuff is a whole lot more fun than working, otherwise we wouldn't be doing it.
Actually discussing this stuff while at work kills two birds with one stone.
Fair enough. I don't get nearly as much entertainment value out of this discussion, especially when I could be surfing. But if I was earning the equivalent of $150/hour then I'd be more motivated.

If any of you other posters are implementing utrecht's plans then I'd appreciate an estimate of your hourly wages... remember, that's after taxes and including the time you spend preparing your tax returns.

I had to invest a lot of time reading about selling covered calls & naked puts, but now that I've been doing it for a couple years I'm earning over $250/hour. Of course I don't do it for very many hours.
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Old 01-24-2012, 03:45 PM   #179
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...collecting data for tax returns, and prepping the tax returns.
Some custodians allow at least covered calls in IRAs - this should avoid increasing the complexity of the above.
I don't know if other utrecht strategies (naked put or buy/sell calls) could be easily used inside IRA. Anybody tried?
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Old 01-24-2012, 04:12 PM   #180
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Some custodians allow at least covered calls in IRAs - this should avoid increasing the complexity of the above.
I don't know if other utrecht strategies (naked put or buy/sell calls) could be easily used inside IRA. Anybody tried?
I've done covered calls and cash covered puts (often referred to as naked puts, but that doesn't seem right to me if the cash is there to cover it).

I don't think there are any restrictions on buying calls versus covered calls (you need to have option access, but I think calls are part of the 'entry' level for options. I'm pretty sure I've bought calls in the IRA, but can't say for sure.


BTW, out of all those, I think buying a call is the most dangerous. AFAIK, nothing would stop me from putting 100% of my IRA into buying a single OTM call. If that call expired worthless (a likelihood), I would lose my entire account in one fell swoop. Maybe there are protections, don't plan to test it!

OTOH, a covered call or cash covered put would require the stock to go to zero, not likely, and you would still have the premium (small comfort).


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