Anybody ever traded options??

[fmhealth]

First time poster. Long time trader in options. I respectfully have to take exception to many of the ideas offered-up on this topic. Yes, most option traders LOSE MONEY. That's simply because they are BUYERS. Virtually all option SELLERS are very profitable.

I myself operate in a somewhat arcane corner of this mkt by selling PUTS. I can tell you that 80% of the trades using this strategy are profitable. I've been embracing & fine tuning this approach for almost 15 years. I keep very detailed records. Since I retired 13 years ago at 48, I have surplus of time that I can dedicate to this avocation.

If anyone is interested, I will gladly post the July & Aug. positions that I've taken. One more aspect to this. The proceeds that I generate are then invested in Closed End Funds that yield approx. 8% & pay on a monthly basis. Once again, I will gladly flesh out these ideas if anyone feels they may be able to benefit.

As usual, PLEASE due your own DD before investing dollar #1.

 

[ERD50]

I myself operate in a somewhat arcane corner of this mkt by selling PUTS.

Once again, I will gladly flesh out these ideas if anyone feels they may be able to benefit.

fmhealth, welcome.

I have been selling (cash covered) puts and (stock) covered calls. I sell at strikes below the current price of the underlying, which gives a little downside protection.

The process was giving me returns a bit better than the market and with less volatility, but it seems that lately (last 6 months?) the premiums have dropped, and this is much tougher. The 'cap' on gains from selling options versus gains from a rising market just hasn't worked in my favor. I benchmark against SPY, as that is where this money would be otherwise.

Have you found that to be true? Is there a 'good' and a 'bad' time for this technique? Can one identify those times?

I would be interested in seeing your positions.

TIA - ERD50

 

[ERD50]

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.

clifp, search this forum, google and the cboe for "BXM". That is a 'buy/write' option index.

short version - They buy SPY and sell a call one strike higher than the stock price. Rinse/repeat each month. Do a bit better in down/flat markets, a bit worse in rising markets. Which, does not seem like a bad thing for a conservative investor?

-ERD50

 

[brewer12345]

First time poster. Long time trader in options. I respectfully have to take exception to many of the ideas offered-up on this topic. Yes, most option traders LOSE MONEY. That's simply because they are BUYERS. Virtually all option SELLERS are very profitable.

Heh, speak for yourself. I've made an awful lot of money in the past couple of years buying options, mostly calls. Of course, there is money to be made selling options, too.

 

[ERD50]

Heh, speak for yourself.

C'mon brewer, he said 'most'.

Sure, if someone manages to pick the right calls at the right time, they can make a bundle in buying calls. I would tend to agree with fmhealth that 'most' (>50%) of the people buying calls are not good enough at their picking/timing to overcome the burden of paying the premiums.

I'm happy it has worked for you, there are always exceptions, sometimes lots of 'em.

-ERD50

 

[FIRE'd@51]

I myself operate in a somewhat arcane corner of this mkt by selling PUTS. I can tell you that 80% of the trades using this strategy are profitable. I've been embracing & fine tuning this approach for almost 15 years. I keep very detailed records. Since I retired 13 years ago at 48, I have surplus of time that I can dedicate to this avocation.

I'm not at all surprised by your results - selling puts is a bullish strategy (the expected return on a short put is positive), and since stocks trend upward over time, most of the puts will expire worthless. I would expect that selling cash-covered puts (which is functionally equivalent to covered calls) will under-perform holding the underlying stocks over time, since you will not participate in the upside. I sometimes sell naked puts as "targeted buys". I only do this on stocks I am sure I want to own, as it potentially lets me get them a few points below the current price. Of course, it the stock trades up, the put doesn't get assigned, and I miss the rise in the stock price.

 

[FinanceDude]

First time poster. Long time trader in options. I respectfully have to take exception to many of the ideas offered-up on this topic. Yes, most option traders LOSE MONEY. That's simply because they are BUYERS. Virtually all option SELLERS are very profitable.

I myself operate in a somewhat arcane corner of this mkt by selling PUTS. I can tell you that 80% of the trades using this strategy are profitable. I've been embracing & fine tuning this approach for almost 15 years. I keep very detailed records. Since I retired 13 years ago at 48, I have surplus of time that I can dedicate to this avocation.

If anyone is interested, I will gladly post the July & Aug. positions that I've taken. One more aspect to this. The proceeds that I generate are then invested in Closed End Funds that yield approx. 8% & pay on a monthly basis. Once again, I will gladly flesh out these ideas if anyone feels they may be able to benefit.

As usual, PLEASE due your own DD before investing dollar #1.

I think there's a few of us who are interested.........

 

[fmhealth]

ERD & Brewer thanks so much for your rapid replies. I've found the best time to sell Puts is when bad news is oversold in the mkt. Premiums tend to quickly expand as sellers head for the exits at any price. Also, when a new month is added, for example in 10 days Sept will be a new month for many stocks. Premiums tend to be on the generous side. Finally, I sell LEAPS and then fill in the closer months. I find that this technique locks up very generous premiums that of course slowly erode. I also use tight stops on expensive stocks that I rather not own (GS & BOT).

The following are my PUT positions for July& the strike price.

1-GS--200
2-HAL--35
3-WAG--42.5
4- FDX--95
5-INTC--20
6-YHOO--25
7-APPL--70
8-QCOM--42.5
9-WM--37.5
10-GS--185
11-AMGN--50
12--VLO--67.5
13--BOT--180
14--WYNN--80
15-RIG--85
16-MSFT--27.5

These precceeding are by no means any type of reccomendation. Simply my positions at this point in time.

Proceeds are invested in PFN, EOE, HTR & PTY.

Best of luck!

 

[fmhealth]

Fire'd your spot-on when it comes to missing some large upside moves. APPL is a prime example. Sold the 60s, 70s & 80s at one time. Stock is now around 120.00!

But, since my objective is very simple, TO MAKE MONEY, I'm really not interested in owning many stocks. Currently I hold 54 various positions. This is probably too heavy an equity weighting for me. I simply cannot resist the tempation to scoop up the very generous amounts of cash folks are willing to pay for some downside protection of their positions.

Taxes, as someone already mentioned, can be a thorn in the side of a PUT seller. I prefer to look at it simply as the cost of doing business. People buy & maintain real estate for far less profit than can be generated by a thoughtful option selling program.

Just one man's thoughts. Continued success & most importantly STAY WELL!

 

[utrecht]

I also sell options. Can you give me some of your criteria for opening a position? Obviously you pick a stock you are at least slightly bullish on, but what criteria do you use to pick the strike price and month of the option?

Also, do you ever close these positions out? If the stock starts dropping, do you roll forward , buy back at a loss, or what?

What broker do you use?

 

[fmhealth]

Hi UT. I'll give your queries my best shot. My brokers are Ameritrade & Schwab. Like Schwab the best because of their user friendly trading platform.

My stock picks are an ecletic mosaic of technical & fundamental plays. I LOVE T/O & Buy outs. Especially when the BOD are involved. Premiums quickly expand & you can rapidly make some serious money. I've found this to be especially profitable. BOT & HET quickly come to mind. Also, when a stock is unfairly punished simply because the public doesn't understand how an industry functions. A vivid example here would be MRK when they had the Vioxx problem. The stock was beaten down to the low 20s. People even used the term BK when looking at the weight of all the lawsuits.

NOTHING could be further from the truth. I was selling PUTS very aggressively at that time. MRK, like most Big Pharmas are pure money machines. Even in the worst case the earning would have had a momentary problem. Last time I checked, MRK was in the 50s. BTW, I'm still selling 40 Puts on this one. Take a look at DNA. IMO it's on it's way to 100 within 12 months. Folks, even analysts simply cannot grasp just how powerful these companies truly are.

I choose the strike & month in the following manner. Let's take a real example GS. Been selling PUTs on this one every month. I start with the LEAPS & then work backwards starting with the closest month. If GS is 220, I usually look at a strike 10-15% below the mkt. Giving me some room for error. With expensive stocks like GS I ALWAYS put in a stop as soon as the buy is confirmed. If I take in a 5.00 premium I put the sell at 7.50.

I have been taken out numerous times already this year. I actually like to take as many small losses as possible. Keeps me away from the devastating effects of major hits. Which BTW I used to experience before I stared using stops. I don't use stops on stocks I'd like to own. MS, VLO, HAL, DNA, AMGN, RIG, BHP come to mind. I also buy back positions for gains & rollout to a further month where appropriate.

Hope this is helpful in some small way. It's my hobby & I found out along time ago that I like to make money on a regular basis. Best of luck!!

 

[clifp]

FM what happens if we have a broad market correction of say 20-25% this summer? Do you have sufficient cash/assets to purchase all of these stocks at the exercise price?

 

[fmhealth]

Clif, excellent question. One that rumbles through my mind on a regular basis. The short answer is yes. I believe that the brokers insist & rightfully so that you are fully collateralized (sp) with enough resources to cover a complete meltdown.

As you know, the Mkt at some point will head down. My strategy is two fold, first & foremost I place stops under stocks I'm simply playing & have no intention of owning. Secondly, let's say that DNA get some bad news from the fda on one of their key products. The stock sinks, the puts blow up. I immediately buy back the puts for a significant loss. I then look at the puts at the current level & see what value can be found, if any. Usually the price on the now lower puts is very high. People think the stock is going MUCH lower. I'll sometimes step in & reinitiate my position at these lower prices.

Sometimes, although not often, the stock is actually Put to me. At that point I sell calls against my position, cutting my loss a bit & holding for a rebound somewhere in the future. This is all part of the game. Everyone involved has to make a buck at some point in time. That's why I only sell puts on stocks that I'm willing to own. Otherwise, tight stops are essential.

Hope this helps. Your comfort level with whichever strategy you ultimately embrace is one the the keys to success!

 

[nfs]

I would tend to agree with fmhealth that 'most' (>50%) of the people buying calls are not good enough at their picking/timing to overcome the burden of paying the premiums.

Who do you believe is buying what fmhealth is selling?

 

[ERD50]

Who do you believe is buying what fmhealth is selling?

I think a lot of speculators are drawn to buying calls. They see the possibility of huge percentage gains through leverage, and are willing to pay the premium for that opportunity.

But, in order to make a profit, not only does that speculator need to be correct in the direction of the underlying stock, but also the time frame. And the directional move needs to exceed the premium.

So, I think it is tough to make money on average buying calls. Certainly you can find the opportunities, I have done it on occasion, brewer has, but I suspect there are plenty of losers in the game.

If you sell options, you trade the possibility of large returns for the consistent premium, but you still hold the downside risk ( a bit less if you sell at a strike below the current stock price). I'm not convinced that is always a good trade-off, but it sure seems to be under the proper market conditions.

-ERD50

 

[nfs]

I think a lot of speculators are drawn to buying calls.

Let me repeat my question for this case: Who do you believe is selling what those speculators are buying?

Let me suggest reading this thread and, in particular, this post. The post contains a simple example of how option sellers convince themselves they're making money on every trade yet somehow end up with less money. I assure you it's not an uncommon belief, especially among covered call writers.

 

[ERD50]

Let me suggest reading this thread and, in particular, this post.

Interesting posts. Nice, clear example (two $10 stocks, one goes to $5, one goes to $15), and I agree, many option sellers would think they 'won' over the stock buyer and they would be wrong. But I'm not sure you can extrapolate that example to an entire portfolio (and maybe you did not intend to).

You are absolutely correct that you only get a (relatively) high % premium on a (relatively) highly volatile stock. Some option sellers don't want to believe this fact and think they can get a high premium on a 'safe' stock. With few exceptions, they would be wrong.

But, the distribution of stock movement is roughly a bell curve. Very many of the highly volatile stocks that I have sold options against moved very little during the option period (as one would expect from a bell curve), and of course, others moved a moderate amount and others pushed the tails.

When you throw in a bunch of stocks with high implied volatility (and premiums to match), and see that a good number of those stocks trade within a more narrow range, your example falls apart a bit. Though, it is still a very good example to make your point, I just don't think you can apply it so directly to an entire real-world portfolio of option selling.

... how option sellers convince themselves they're making money on every trade yet somehow end up with less money. I assure you it's not an uncommon belief, especially among covered call writers.

You are preaching to the choir there. I'm with you on that. I engaged in a long, long 'discussion' on that very topic on this forum. I do however, think there are fundamental reasons why one could make a little bit of extra risk-adjusted return. In practice, the difference may be too small to really benefit from, I think it depends on market conditions - if the market is over-estimating volatility, option sellers benefit. Can one tell when volatility is 'over-priced'? That sounds to me like trying to determine when a stock is 'over-priced', I'm skeptical.

Let me repeat my question for this case: Who do you believe is selling what those speculators are buying?

My analogy is that call buyers are like gamblers, put buyers are like insurance buyers. Both should realize that they are going to lose money on average, but they pay a premium to play 'the game', one in the hopes of a big gain, one in the hopes of hedging a large risk. The casinos, ins co's, and the option sellers collect this premium, and if they could not make a reasonable risk-adjusted profit, would not offer the product.

I tend to think that options are priced this way by the market, the sellers need to be rewarded for their risk, or they go home. But, they can't make a 'killing' at it, or the players wouldn't play, and the market would quickly adjust to any 'excess' profits anyway, with more sellers coming forward to cash in. I am *not* convinced that an individual with a limited number of positions in a portfolio can expect to cash in on that - a few outliers (which can only hurt, not help, the option seller) might easily wipe out the benefits.

So 'who' is selling? Those that think they can make enough in premiums to provide a higher risk-adjusted return compared with an outright buy. That doesn't mean they are right adit/add: The option sellers also need to have the capital to back their sales (option buyers only need to come up with the premium), and need to be of the mindset to take a smaller, potentially more consistent return, versus a big win. I think that puts them in the minority, and supply/demand might be in their favor.

A much shorter version of all this : There is no free lunch.

-ERD50

 

[theoldwizard]

I have a friend that used to do "computer work" for an option trading company. This was over 15 years ago and it was a small company. Although it was a small company, they had spent hundreds of thousands of dollars on computers with "direct feeds" from the "exchanges" and a "seat" on those exchanges (to eliminate brokerage fees).

They traded options so fast that 5 minutes of downtime during the trading day could cause them to lose "$1M".

They had complicated algorithms that ran all night on their computers telling them what trades should be made.

These guys made money !

 

[utrecht]

Yes, if one stock goes to $5 and one goes to $15, the stock buyer does beter than the put seller, but if they both stay at $10, the put seller does better. We could post examples all day long where one or the other does better.

 

[theoldwizard]

Interesting posts.
...
My analogy is that call buyers are like gamblers ...

Confession time.

I have gambled (bought calls), and to date, I'm ahead. It is very "addictive" to make 100-200% profit in a matter of weeks.

Of course I lost 100% on 1 transaction in less than a week.

If you treat options like going to the casino and NEVER BET MORE THAN YOU CAN AFFORD TO LOSE, you can have fun and maybe make a buck or not lose too many !

 

[brewer12345]

I think a lot of speculators are drawn to buying calls. They see the possibility of huge percentage gains through leverage, and are willing to pay the premium for that opportunity.

But, in order to make a profit, not only does that speculator need to be correct in the direction of the underlying stock, but also the time frame. And the directional move needs to exceed the premium.

So, I think it is tough to make money on average buying calls. Certainly you can find the opportunities, I have done it on occasion, brewer has, but I suspect there are plenty of losers in the game.

If you sell options, you trade the possibility of large returns for the consistent premium, but you still hold the downside risk ( a bit less if you sell at a strike below the current stock price). I'm not convinced that is always a good trade-off, but it sure seems to be under the proper market conditions.

-ERD50

I do a few things to try to get the odds more on my side. First, I generally keep my positions small and my total options exposure modest (1 to 2% of my portfolio). It is easier to stay unemotional when dealing with small sums, and the losses that occur will be negligible overall. Second, I am generally ruthless about taking profits with options. I am a patient shareholder and willing to wait for years to see an investment bear fruit. One does not have the luxury of time with ptions, so positions that turn a profit are liquidated pretty quickly. Third, I tend to buy options on stocks that I already own and know a great deal about. Often an options trade for me is an effort to take advantage of short term weakness in something I have confidence over the long term. Fourth, I try to buy options that trade cheap to their intrinsic (black-scholes) value.

 

[ERD50]

I do a few things to try to get the odds more on my side. First, I generally keep my positions small and my total options exposure modest (1 to 2% of my portfolio).

Good points. I find that many people think of buying calls as 'low risk' as they control, say, $100 of stock with a $10 investment. They think along the lines of 'you could lose $50 on a big drop, a call buyer only loses $10'. However, they are much more likely to lose 100% of their investment than is the stock buyer. So, if they invest a lot, they will lose a lot. It's just plain old (dangerous) leverage.

Often an options trade for me is an effort to take advantage of short term weakness in something I have confidence over the long term.

I have bought calls under those conditions also. I just don't do enough research or have enough confidence in my intuition/analysis to do it very often.

Fourth, I try to buy options that trade cheap to their intrinsic (black-scholes) value.

I was under the impression that there are computer models running near real time on all these things, and that any drift from the Black-Scholes value gets scooped up lickity-split? IIRC, the one 'subjective' aspect of the B-S model (maybe they should have given Scholes top billing?) is the implied volatility? So, if you think the market has the IV wrong, then you have a potential buy opp, is that it?

-ERD50

 

[brewer12345]

I was under the impression that there are computer models running near real time on all these things, and that any drift from the Black-Scholes value gets scooped up lickity-split? IIRC, the one 'subjective' aspect of the B-S model (maybe they should have given Scholes top billing?) is the implied volatility? So, if you think the market has the IV wrong, then you have a potential buy opp, is that it?

-ERD50

Depends.

Volatility is the main thing open to debate, and really the only one that matters.

I see three types of equities that appear to have mispriced options:

1) Companies nobody cares about, especially those that have issued warrants that trade on exchanges
2) Companies that pay out big, fat dividends. Considering the volatility of the underlying, EGLE and DSX options are consistently cheap.
3) Companies that are extremely heavily shorted. In these cases, puts tend to be very expensive and calls very cheap. This happens because people who would like to be short but cannot get a borrow on the shares sell the calls and buy the puts to create a synthetic short.

 

[FIRE'd@51]

So, if you think the market has the IV wrong, then you have a potential buy opp, is that it?

Volatility traders (i.e. those who choose to sell/buy options because they think the implied volatility is too high/too low) typically set up positions that are neutral with respect to stock movements (they are betting on volatility, not direction). Essentially the initial position would be (or look like) an at-the-money straddle, and as the stock price moves around, they buy or short stock to keep the hedge ratio zero. If they sell/buy volatility and the realized volatility is lower/higher than the implied volatility, they make money. However, being short volatility (i.e. a seller of options) is a game where one can blow oneself up, since gap moves can really hurt. This is what happened to a lot of volatility traders (as well as the dynamic portfolio insurers) in 1987.

Someone who has a view on a stock really doesn't care that much about whether the option is "fairly-priced" or not - he primarily wants the leverage. In other words, you can make a lot of money buying overpriced calls on stocks that go up a lot, or lose money on cheap calls on stocks that don't go up.

 

[brewer12345]

Someone who has a view on a stock really doesn't care that much about whether the option is "fairly-priced" or not - he primarily wants the leverage. In other words, you can make a lot of money buying overpriced calls on stocks that go up a lot, or lose money on cheap calls on stocks that don't go up.

Sort of. I guess I will usually buy when I have a view on the underlying, but I pay attention to the pricing of the options vs. the intrinsic. If the options are priced too high, its harder to make money on the trade.