Lets discuss some real time option trades

[clifp]

On optionshouse I just type SPX in the quote and go to the option tax, you should see the options change.

The spreads appear wider when the market is closed. I'll have to look when the markets are opened. So right now a Jan 1200P has 27.20 bid 29.00 ask and 28.10 last trade. The SPY 120 has 2.87 bid 2.90 ask and 2.88 last. Of course since it is 10 contracts you need to multiply the SPY spread by 10x.

It is worth watching I think.

 

[utrecht]

There's also some kind of extra exchange fee when trading SPX options at Optionshouse. I think it may only be $0.35 though.

 

[clifp]

Looking at the spreads the weekly were .30 to .40 at the money or slightly below so a bit higher than .01 to .02 for SPY options.

The spread for the Jan was significantly larger 30.70B 32.40 ask for Jan 1200 with SPX=1205. I suspect that larger spread for the Jan is probably a function of the more complex (Mark to Market) accounting rules when trading options on SPX.

Anyway this something I'll start looking at next year after all of the distributions, tax selling etc are done.

 

[utrecht]

Any ideas why my HANS Jan85 Puts are DOWN today with the stock down 0.65%? They have a delta of -.17 so with the stock down 0.62 shouldnt the puts be up .62 x .17 or about .10 or .11? They went from 1.13 down to 1.02 where they are right now. Makes no sense to me.

 

[ERD50]

Any ideas why my HANS Jan85 Puts are DOWN today with the stock down 0.65%? They have a delta of -.17 so with the stock down 0.62 shouldnt the puts be up .62 x .17 or about .10 or .11? They went from 1.13 down to 1.02 where they are right now. Makes no sense to me.

I know nothing about HANS, but it isn't uncommon at all for a stock to move towards the option and yet also see the option decline in value. In fact, it is pretty common after an ER. Before the ER, there is a higher expected volatility, so options are priced high. A bad ER comes out, the stock drops, but now it is known just how bad the news is, so there may be less fear of a steep drop off.


Not sure anything like that applies to HAN today, but that would explain it. Does the delta you are using really factor in the current implied volatility?

-ERD50

 

[utrecht]

I dont know that much about the greeks but the delta I quoted is the current delta. Also, I am also short some HANS puts. They lost value as well (meaning I made money on them which is exactly opposite what shouldve happened) so maybe the volatility did go way down over the weekend because the same strike calls also went down. However, there was no recent earnings release in this stock.

The puts exactly like the stock was up .62% not down .62%

 

[clifp]

So I sold an SPXW 1200 Dec 23 Put at $10.30 I am not sure but I believe the next highest ask was $10.50 so a .20 spread. I figure this will let me see how the LTG and short term tax treatment actually works, assuming Schwab reports it correctly.

The normal $9.30 commission applied.

 

[clifp]

12/21 wrote 10 SPY 124 Dec 23 puts for .80 in my IRA. The spread on the SPXW was too large and tax advantages are not applicable in my IRA, so I went with more liquid SPY options.

 

[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?

 

[clifp]

Leon I looks like you are employing a buy write strategy and dividend capture. I think it is viable strategy especially if you use it inside an IRA. I know there are some complicated rules regarding when qualified dividends are taxed at the more favorable rate. I try to stay away from them.

I tend to wait until I have owned a stock for near a year before writing a covered call. That way if the stock is called away the option premium is treated as a long term capital gain. Of course in an IRA none of these concerns apply.

 

[ERD50]

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]

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]

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]

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]

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]

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?

.

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]

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.