Lets discuss some real time option trades

[ERD50]

Quote:

Originally Posted by Leon44 I have been reading this thread with great interest. It's good to see what other investors are doing with options. I have been using a conservative strategy for over a year now. I buy a stock prior to the x-div date and sell an ITM call on it for a month or two to give me downside protection. For example: yesterday I purchased 800 shares of GE for 17.42 ( went X today) and at the same time sold 8 Feb 16 calls for 1.57. the normal div for GE is 3.94% but with my call I put out less cash making the div. 4.29%. Plus I pick up 15 cents in time value. This gives me an annualized return of over 9% if GE stays above 15.85. I also have a 9.01% hedge on the downside. I use the dividends to purchase more shares and overtime it adds up. I loose out on any big stock run ups and have risk if the stock tanks but I just swing for singles . Does anyone else use this method?

Never used that strategy - it sounds very interesting. Pls keep some more examples coming.


-ERD50

[clifp]

The good news is both of my puts expired worthless. The bad news is in my IRA I would have been better off simply purchasing the SPY at 124.0 than writing and collecting $.80.

The other problem I discovered with writing weekly cash secured put in a IRA is timing issues. Eventhough with an hour to trade my SPY Dec 23 124 put is worth .01 I can not rollout a new put without spending $.75/contract to buy back the old one. This means I have to wait until Monday to write a new weekly put, so I lose roughly 20% of the time premium.

Of far more importance is that $VIX is now down to 21 and change. This is 1/2 the level VIX was at just a few months When I look at writing weekly ATM SPY puts I am looking at implied volatility of 15 for weekly puts and 18 for the Jan 126. To me the premium are not worth the risks associated with writing options with this low level of implied volatility.

Fundamentally, I think while the risk of a double dip recession in the US are marginally lower than they were in Aug-Oct. I see very real change in Europe lots of talk but little action.

Anyway I am out of the option writing business until VIX moves above 25.

[Leon44]

Today I put on a diagonal spread. Bought 4 SU JAN 2013 15 leaps for $14.24. Sold 4 Jan 12 $30 calls against the leaps for .51. That is a 3.58% return for 4 weeks. Plus the stock is at 28.61 so I have $1.39 upside potential if I'm called out. My plan is to continue to sell calls monthly or weekly against the leap. By using the leap instead of the stock I increase my returns. If I can continue to duplicate this throughout the year that will give me an annualized rate of 46.54%. I chose SU in this case because I have followed it and traded it for years. It also has weekly options available. It is in the lower part of its trading range with a PE of 8.92. It just went x so I don't need to be concerned about that event. Although I like the div. capture covered call method the best, I use the diaganal spread frequently as well. Both are geared towards generating income.

[Leon44]

clifp:

I did forget to comment that as you suggested I do the covered calls/dividend strategy in my IRA's , so I don't have to deal with the tax implications. I did the spread in a regular account.

[utrecht]

Quote:

Originally Posted by clifp The good news is both of my puts expired worthless. The bad news is in my IRA I would have been better off simply purchasing the SPY at 124.0 than writing and collecting $.80. The other problem I discovered with writing weekly cash secured put in a IRA is timing issues. Eventhough with an hour to trade my SPY Dec 23 124 put is worth .01 I can not rollout a new put without spending $.75/contract to buy back the old one. This means I have to wait until Monday to write a new weekly put, so I lose roughly 20% of the time premium. Of far more importance is that $VIX is now down to 21 and change. This is 1/2 the level VIX was at just a few months When I look at writing weekly ATM SPY puts I am looking at implied volatility of 15 for weekly puts and 18 for the Jan 126. To me the premium are not worth the risks associated with writing options with this low level of implied volatility. Fundamentally, I think while the risk of a double dip recession in the US are marginally lower than they were in Aug-Oct. I see very real change in Europe lots of talk but little action. Anyway I am out of the option writing business until VIX moves above 25.

Actually this week you would have to wait until Tuesday since the market is closed on Monday. However, you don't lose 20% time premium on a Monday. I don't know the exact percentages but it increases dramatically each day as the week goes by. I would guess its 10% or less on a Monday.

[brewer12345]

Quote:

Originally Posted by clifp Anyway I am out of the option writing business until VIX moves above 25.

I think exercising such discipline is key in strategies like this.

Out of curiosity, what do you do with your slug of cash if the VIX stays low for a prolonged period?

Just a thought, but I see a similar market opportunity in closed end funds whenever the VIX spikes. There is a whole class of covered call CEFs that get the crap whacked out of them and have their discounts to NAV whenever the VIX spikes. Of course, this is also when the funds generate the most income from selling calls. Typically the funds get beaten and then as the VIX declines the funds stabilize, rebound and the share price drives closer to NAV (which is rising as the VIX declines).

[ERD50]

Quote:

Originally Posted by clifp Anyway I am out of the option writing business until VIX moves above 25.

Why is this important?

Sure, the premiums are higher for a given strike distance, but assuming that VIX is a reasonably decent indicator, that also means the odds of hitting the strike are higher. Seems to me, if VIX is low, you move closer in. The odds should all work out about the same for a given % premium, no?

-ERD50

[brewer12345]

Quote:

Originally Posted by ERD50 Why is this important?

Selling puts is the same as selling catastrophe insurance. Market plunges and destructive hurricanes are very difficult to predict. The fundamental requirements of making money in insurance are 1) make sure you get paid handsomely for the risks you are taking, and 2) make sure you really understand the risks you are taking. You can scope you max loss when you sell puts, but that is about it. So your main lever of making sure you make money when selling puts is to get paid well for doing so.

[utrecht]

I agree with ERD50. When the VIX goes down, premiums go down but so does the odds of taking a big loss. Using brewers insurance example, its like going from insuring a teen aged driver and getting high premiums but taking bigger risks to insuring a 40 year old. Lower premiums and lower risk. In the long run I think profits are about the same.

[clifp]

Quote:

Originally Posted by brewer12345 I think exercising such discipline is key in strategies like this. Out of curiosity, what do you do with your slug of cash if the VIX stays low for a prolonged period? .

Quote:

Originally Posted by ERD50 Why is this important? Sure, the premiums are higher for a given strike distance, but assuming that VIX is a reasonably decent indicator, that also means the odds of hitting the strike are higher. Seems to me, if VIX is low, you move closer in. The odds should all work out about the same for a given % premium, no? -ERD50

VIX is a backward looking measurement, which I don't think does a particularly good job of forecasting the future market volatility. I.e. when the VIX hit 40+ this last summer despite the forecast of dramatic moves the market was basically flat.
If I am writing puts, I am basically selling insurance. The risk/reward ratio needs to be favorable for me to do so. People aren't fearful enough of market crash for them to pay a lot for portfolio insurance.

In particular in the case of an IRA where it is a cash secured put. I have two ways of losing if the market tanks in the next 4 week, or if we have Jan rally. I think there is a reasonable chance that next Jan people will get tired of seeing 0-1% interest rates and move money into the stock market.
If the Dow finished the year above 12,000, small investor may start going back in. If I collected by 1.8% put premium next month 6 or 7% rally I look pretty foolish.

I am not really sure what I will do with the money in IRA, probably buy a broad index fund and emerging markets.

[clifp]

Quote:

Originally Posted by utrecht I agree with ERD50. When the VIX goes down, premiums go down but so does the odds of taking a big loss. Using brewers insurance example, its like going from insuring a teen aged driver and getting high premiums but taking bigger risks to insuring a 40 year old. Lower premiums and lower risk. In the long run I think profits are about the same.

This would only be true if you think the volatility equal risk. I don't believe that chance of a major financial crisis in the Italy or Spain in the next 6 months is 1/2 of what is was back in Oct. I think it is about the same and the only that has improved is US economy is very marginally better.

The market has suddenly decided that 16 year old driver, is now driving like a 40 year old I don't believe it.

For instance back early I posted about a short strangle 117P 123C with a net credit of 5.06 I wrote on 11/21. Today with the same 28 days until expiration, A SPY 123P/129C strangles gets me $2.79 that is 45% less premium for the same risk.

[utrecht]

You could be right. I don't know whether you are or not. I just keep on selling puts. It worked every year for the past 7-8 years that I tested the strategy and there were plenty of times when the VIX was high and plenty of times when it was low.

The only thing I really change when the VIX is low is buy more options instead of buying spreads.

[eatingmywords]

What criteria are you using to cover possible losses?

I sold some spreads with a little too much time (7 weeks) and had to buy them back. I think the technical analysis is spot on, but the options timing was off. For example, the Jan DECK '85 put would probably have been profitable, but I was uncomfortable with the max risk due to the spread width and # of options. Likewise with the AMZN 205 call.

I'm still in with the TLT put spread and will probably sell the call spread in the next few weeks. Should I get out selling spreads with individual stocks and focus on less volatile etfs?

[utrecht]

I think selling spreads on individual stocks is fine. I just don't normally sell puts on them on a regular basis.