Anyone here trade options?

[utrecht]

Here's something similar that I haven't tried yet. The same bracketed put calendar spread but instead of using individual stocks, using SPY and using 3% brackets instead of 5%. The only real risk that I see in my strategy is that a stock can move a great deal in any given month and if it moves more than 7-8% there is probably going to be a loss, depending on the implied volatility of the stock. SPY is very rarely going to move that much in any one month. However, since volatility is lower, so are the option prices so I'm not sure if it would would better or worse.

Here were the prices as of the beginning on May 20th which is when I opened the trades for the June option cycle.

SPY...166.80

June/July 162...0.95
June/July 167...1.05
June/July 172...0.61

Current prices as of right now with SPY at 164.79

June/July 162...1.67......75.7% profit
June/July 167...1.25......19.0% profit
June/July 172...0.17......72.1% loss

Total profit of 18.4% profit while SPY is down 1.2% during the same time frame.

Now any hedge fund or other big traders have access to this same information and have since the beginning of options trading. Would something change if someone poured huge amounts of money into it? I don't know, but what I do know is that nothing is going to change when I invest my comparatively piddly amount of money into it.

I'm not saying you can make 18% every month. I believe profits are higher this month because volatility has risen while the trades were open. There will be months where volatility drops while the trades are open which will hurt and there will be months when SPY moves 4-5%. I'm not sure how far it needs to move to cause a loss. Long term I believe this is a low risk profitable strategy as long as I don't increase my position sizes every month along with the size of the bankroll that I allot to this strategy.

 

[FIRE'd@51]

I had already been trading ATM put calendar spreads and had a good feel for how they reacted so I just stayed with puts all the way when I started using the bracketed approach. I have wondered if using all calls or a combination of the two would work better but haven't researched that yet. Do you have an opinion on that?

I would think the liquidity and bid-ask spreads would be better with OTM calls than ITM puts. Also I would expect a reduced chance of an early assignment.

 

[FIRE'd@51]

So my question is, how do you make money on something that everyone knows is going to happen (unless the world ends, and then it is moot)?

Calendar trades are volatility bets, and any excess return comes from a mismatch in implied volatilities. Usually the one-month option has a higher implied volatility than the two-month. So long as the underlying stock realizes a volatility less than the implied volatility of the one-month option, the trade is likely to be profitable. As utrecht points out, these trades blow-up when the underlying stock makes a larger move than would be expected from the implied volatility of the one-month option. The GOOG calendar discussed in his blog is a prime example. utrecht's method of using "brackets" is a clever attempt at controlling losses should the underlying stock make a large move.

If the implied volatilities of both the one and two month options are the same, the trade should be a "fair game". However, if the one-month option is systematically overpriced relative to the two-month (in terms of implied volatility), the probability of the trade being profitable is increased relative to the what would be theoretically expected (analagous to a weighted coin which comes up heads more than half the time when flipped thousands of times).

 

[utrecht]

I would think the liquidity and bid-ask spreads would be better with OTM calls than ITM puts. Also I would expect a reduced chance of an early assignment.

I'll be opening a new batch of trades early next week. I'll paper trade the calls on the high side of the bracket just to see how they react compared to the puts.

 

[1st Tee]

Wow.....13 pages.

I always smile when I see this thread.

Know a guy who took $10k and turned it into $1.2m buying calls.
Back in the 90's just prior to the Dot Com boom.
My company hired a very bright PHD out of grad school.
Forgot the year but he was buying way out of the money calls, six months out for pennies. Then market took off.
That company went from single digits to over 80 in less than 6 months.

I was his mentor/coach. One day he couldn't focus. All excited and didn't know what to do. I didn't believe him until he showed me his account balance on my computer. We had a long talk. That weekend he brought his wife a new car and she quit her $20k a year job. Two weeks later they brought a 3,800 sq ft, 3 car house in a prime area. Paid cash. There's a lot more to the story but I will keep it short. He is a good friend.

 

[ERD50]

I had an interesting conversation with an old friend the other day. For the past year or so, he's been telling me how great he's doing trading options. But I could never get him to give me a reference point, like how are you doing versus the S&P? He always had some excuse - he wouldn't invest in the S&P, it can take a big dive, and supposedly the way he constructed his options he had a limited downside, etc, etc.

He kept telling me about this or that trade, basically structured as selling puts, and he'd keep saying things like "What is the chance that stock XYZ will drop below my b/e point in that time!" And I'd always say - "I don't know, but on average I'd think the chances are pretty much aligned with the premium you are earning. I doubt the people on the other side of the trade are willing to give a way a lot of money. Maybe some, but not a lot". He always thought he 'knew' that most of his trades were a good deal for him. OK, maybe he's good at picking them, I don't know. He's a very smart guy, he's constructed all sorts of complicated spreadsheets and macros to evaluate each trade. Maybe he can make it work for himself.

So in this conversation, he starts talking options again. Well, the market had been on a tear this year, so I figure he's doing great selling puts. He tells me he tripled his money last year! Of course, I don't know how much absolute $ this is, but he's very well off, he puts a lot of time/effort into this, spends some significant $ on software for tracking gains and tax liabilities, and he mentioned he had outrageous taxes due, so I take it that it is not small potatoes. He goes on to say, he lost every penny of last years gains so far this year - ouch!

Then I get the line I hear from so many of these traders - "I should have followed my 'system', I knew better, but I deviated by this or that.". Yeah, right.

... Know a guy who took $10k and turned it into $1.2m buying calls.
Back in the 90's just prior to the Dot Com boom. ...

Good for him, but I suspect that this was similar to knowing someone who won the lottery. Good for them, but that doesn't mean we should all go out and buy lottery tickets.

-ERD50

 

[utrecht]

If he tripled his money in one year he was taking WAY too much risk. It's no wonder he lost all his profits in 6 months.

 

[ERD50]

If he tripled his money in one year he was taking WAY too much risk. It's no wonder he lost all his profits in 6 months.

I agree with you. But I was amazed at how he just couldn't/wouldn't see it.

And I don't mean to infer that to you either. It's just something I see with many traders.

-ERD50

 

[utrecht]

I have some positions with plenty of risk, but they are fairly small percentages of my trading account. The only way to triple your entire account is to take massive risk with the whole account. That's just plain dumb.

 

[1st Tee]

My friend up above learned a hard lesson about margin.
A few years after making that money he was using margin.

Took the family and mother in-law to Europe for 3 weeks.
Market crashed (dot com bust).
He didn't check his account for over 9 days and had margin calls.
The firm sold everything and he lost over $500k.
He has never recovered from that loss but has a good paying job and no debt.

When I was a young man, I learned that I always lost money trading options.

So today I will sometimes write calls against a position.
Sometimes write puts on something I want to buy at a lower price.

I did buy some deep in the money calls on BAC and made $10k back in Q1 but that
was me just gambling. I don't do that very often.

 

[utrecht]

Wow. I don't even know how to respond to that. Your friend sounds like a complete and utter fool, but at least he has a cool story to tell his grandkids.

 

[ERD50]

Wow. I don't even know how to respond to that. Your friend sounds like a complete and utter fool, but at least he has a cool story to tell his grandkids.

Yes, not monitoring an account while on a high % of margin is pretty crazy.

Sorry, I didn't mean to distract from your posts with option war-stories. Options and margins are tools. Tools can be used correctly or carelessly.

I've also occasionally bought a relatively small amount of deep ITM calls when I felt like speculating on an issue. It's much the same as using margin, the premium effectively replaces the borrowing cost. Premiums on deep ITM calls are pretty low, and your max loss is defined. A deep ITM call will move in-sync with the underlying issue (minus the premium), and you just pay a %, plus that small premium. This allows one to speculate in an IRA, where you can't do margin. Obviously, this is dangerous on a large scale, but if you want to play with a small amount w/o liquidating something else, it is an option (no pun intended).

-ERD50

 

[1st Tee]

I'll be opening a new batch of trades early next week. I'll paper trade the calls on the high side of the bracket just to see how they react compared to the puts.

Are you still trading, positioning for the downside?

I'm just protecting my capital, waiting for this to play out.
Never been good at trying to catch a falling knife.

 

[utrecht]

Yes, still trading.

 

[Micho5]

I have just read through this whole a bit older thread, utrecht thanks for all the valuable information written in it. Are you still selling your mechanical weekly puts on SPY? How has it been going for you in the past 4 years?

Actually there was recently a paper made by prof. Bondarenko that analyzes and compares the strategies of selling monthly puts on SPY (index ticker PUT) and weekly puts on SPY (index ticker WPUT). Here is the paper itself: http://www.cboe.com/micro/buywrite/put-oleg.pdf

And here is an article that summarizes the findings of the paper: https://www.indexologyblog.com/2016...riguing-new-analysis-of-put-and-wput-indexes/

Long story short, simple B&H of SPY had the best longterm return (but only due to the bullish past few years!) but selling monthly puts had the highest sharpe ratio, followed by selling weekly puts and B&H of SPY had the lowest sharpe ratio of these 3. So actually it seems that utrechts strategy of B&H and using margin for selling extra puts is a pretty clever strategy to get some additional profit (of course for higher risk, but as the risk adjusted return of PUT and WPUT has been better than B&H of SPY one should be better off doing this strategy than not doing it). Also trading costs probably change a bit the expected returns of this strategy.

In the graph that charts selling weekly puts it seems that past 2 years didnt actually bring in any profit and the strategy would be breakeven - how have you been holding up?