Anyone here trade options?

[utrecht]

Update: Now 17 weeks in

Real time real trades selling weekly SPY puts:

Puts...+5.6%
SPY....-13.9%

YTD returns including back test using estimated option prices prior to May

Puts...+16.7%
SPY....-7.0%

 

[dixonge]

In all fairness to dixonge's strategy, had he been trading SPY options, and been assigned he wouldn't have suffered the big whipsaw loss he did. Remember, he was trading SPX options which are cash-settled at the opening on expiration day (he had failed to roll them out). That abrubtly dropped his beta to zeo, just before the market recovered strongly that day, a recovery he didn't participate in.

There are reasons for everything I did back then. First, SPX versus SPY - had to do with commissions and margin calculations if I remember correctly.

Re: rolling out, that was one major problem I had. As part of my general risk protection strategy, I attempted to spread positions out over both time and strikes. When a position moved against me, I could roll forward, or out, or both. For that particular weekend in question, I ended up with several positions that had already been rolled a couple of times, thus eating into my profit already. Another roll would have killed profit, a close-out would have been a loss. Of course, hindsight being 20/20 all of those would have been better than the hit I took when they fixed the price about $20 below the previous night's closing strike. And then the actual price went right back up.

I wrote in more detail about this somewhere, perhaps on this forum, but I can't find it right now...

 

[dixonge]

Speaking of dixonge: We Are Homeless and Living in our Car | Vagabondians

Don't forget the updates:

Still Homeless, but Living in an SUV

and

A Bigger Tent - on Wheels

 

[dixonge]

OMG! That's him (same avatar)! I guess he can be tracked by the home page on his contact info here.

Well, he was clearly a "different drummer" type, he may be very happy with that life. I hope so.

-ERD50

That may be the kindest thing you've ever said to me! LOL

So far, yes. Very happy. We've toured all of the great national parks and landmarks of the western U.S. Now we're getting in some long overdue visits with family and friends. By November we'll be back in Texas, end of Phase I.

 

[REWahoo]

By November we'll be back in Texas, end of Phase I.

Please bring some rain and cool temps with you.

 

[dixonge]

What troubled me about dixonge's strategy is, he never seemed to be able to understand what the risks were.

Perhaps if it was clearer to him, at all times, what his max downside risk was, he would have been more careful to monitor those positions and roll them out, or just close them out to limit exposure.

I very sincerely believed that I had a firm grasp on the risk. Obviously, I did not. Investor Psychology 101. But I did read a lot about it, and I was actively seeking a balance between risk and reward.

My final conclusion is that few can overcome the big boys in investing in the long run. Most of you will disagree, but I think the numbers back me up. The mark never knows he's a mark...I know I didn't...

 

[utrecht]

Latest Update...21 weeks into real time trades

Selling Weekly Puts...+6.5%
SPY.........................-14.3%

 

[arebelspy]

Thanks for the update. Seems like you have done well so far.

 

[utrecht]

Someone asked how this strategy would work in a market going straight up. The last 5 weeks, the SP500 is up 14% or so. My strategy of selling the SPY weekly puts is +9%.

Overall real time results over 24 weeks

SPY....-2.8%
Naked Puts...+11.5%

So far, Ive kept 40% of the premium collected each week on average. According to my back test, long term it should be closer to about 33%.

Ive done some more research and have decided to add another component which I plan to track separately. Ive started selling SPY ATM puts on the day of expiration. For example, yesterday I sold the 128 Puts when SPY was at 128.05 about 30 minutes after the open. I collected 0.43 each. That's a .34% premium and expiration is in 6 hours. Nobody can tell what the market will do in any 6 hour period. It may go up and it may go down. If it goes up, I make money. If it goes down but less than .34% I make money.

My research shows that I should be able keep 25% of the premiums collected on average. I believe as long as I stick with this long term, there's mathematically no way to lose money unless there's some research somewhere that shows the market drops more on Fridays than on other days.

 

[clifp]

Utrecht what are your trading cost? Schwab charges $8.95 + .75/contract so I think my commission would eat up any trading costs on a 6 hour trade.

I have been taking advantage of the volatility by writing spreads, slightly out of the money calls and puts. My Nov position was written when the SPY was ~123.5 and consisted of a 121 put and 126 call. I got $5.25 so I make money as long as the SPY closes between 116 and 131.

If the VIX drops and stay below 30, I'll stop doing this.

 

[justplainbll]

Some 10 years ago, after a month of back and forth with Morgan Stanley, they agreed to let me sell naked puts. Fortunately, by the time they agreed I had invested elsewhere. I'm still counting my blessings because I subsequently inherited a bushel load of JPM with a cost basis of ~ $40. If I had pursued the naked puts, I would probably have a long term holding of 2 bushels of JPM with a considerably higher cost basis.

 

[utrecht]

I have accounts at E-Trade and OptionsHouse. I do most of my trading at OptionsHouse which has 2 commission schedules and you can switch back and forth daily. The better commission schedule depends on how many contracts you normally trade. $5 per trade up to 5 contracts and then $1 each after that....or $8.50 per trade + 0.15 per contract. Basically the cutoff is 10 contracts. Either plan is $10 for 10 contracts. Less than 10, its cheaper to use the first one. More than 10 and its cheaper to use the second.

I dont see how the short time frame has any bearing on the trading costs. If I make $400 and pay $10 in commission, I don't care if the trade was open for 6 hours or 6 weeks. The amount of my profit that my trading costs eat up is the same.

I believe what you are doing is called writing a strangle. Personally I like those better when the VIX goes lower. The lower the VIX goes, the less money you make but the higher percentage of the time the trade will be a profitable one. Lower VIX equals lower risk and lower reward. It doesn't mean the trade is no longer a valid one.

Speaking of the VIX, I sold some puts on the VIX on Friday. I think the VIX is going back up very shortly.

 

[utrecht]

Some 10 years ago, after a month of back and forth with Morgan Stanley, they agreed to let me sell naked puts. Fortunately, by the time they agreed I had invested elsewhere. I'm still counting my blessings because I subsequently inherited a bushel load of JPM with a cost basis of ~ $40. If I had pursued the naked puts, I would probably have a long term holding of 2 bushels of JPM with a considerably higher cost basis.

I try to stay away from writing naked puts on individual stocks. Too risky for my blood. I mostly write puts on the SP500 index (SPY). I use spreads for individual stocks.

 

[ERD50]

Ive started selling SPY ATM puts on the day of expiration. For example, yesterday I sold the 128 Puts when SPY was at 128.05 about 30 minutes after the open. I collected 0.43 each. That's a .34% premium and expiration is in 6 hours. Nobody can tell what the market will do in any 6 hour period. It may go up and it may go down. If it goes up, I make money. If it goes down but less than .34% I make money.

Interesting.

One consideration is that in order to sell the naked Put, you need to have the cash (or margin) to back it up. In effect, that means that money is out of the market the rest of the time. I'd say you should measure your gains against B&H in that same index over the time you have that money (or margin) on the sidelines.

-ERD50

 

[utrecht]

I'm using margin created by collateral from my long term B&H investments. I would never use this margin for anything other than short term trading.

 

[FIRE'd@51]

Overall real time results over 24 weeks

SPY....-2.8%
Naked Puts...+11.5%

These past 24 weeks have been a pretty good test of your strategy in that we have had large market moves in each direction. I have a couple of questions:

(1) What was the average gross (before commissions) put premium (as a percent of SPY at the time of trade) over these 24 weeks?

(2) What was the maximum weekly loss on the naked puts?

 

[utrecht]

Avg put premium so far is 1.77%, but I expect that to be lower long term as the VIX goes back down to normal levels.

Maximum weekly loss so far is a week where I sold the puts for 1.97 and bought them back for 9.92.

 

[FIRE'd@51]

Maximum weekly loss so far is a week where I sold the puts for 1.97 and bought them back for 9.92.

I assume this loss occurred the week of 9/16 - 9/23 when SPY dropped 6.6%. When you "rolled out" your short put position did you roll down the strike price (thereby locking in the loss) or did you keep the strike price the same to retain the upside?

 

[utrecht]

No, that was a bad week, but actually 7/29-8/5 was worse. SPY dropped about 7.1% that week.

I rolled down the strike price. I always use one strike price below whatever SPY is trading at.

PS..Lets hope this week doesn't set the new mark for bad weeks. At least I did sell some VIX puts to offset the possibility of the market taking a dive after such a run-up. This has nothing to do with the strategy of selling weekly puts, but it does help money wise on the overall ledger.

 

[clifp]

I try to stay away from writing naked puts on individual stocks. Too risky for my blood. I mostly write puts on the SP500 index (SPY). I use spreads for individual stocks.

Different philosophies. I limit my speculation/gambling on the SPY to a small position only say 5 contracts because I have no clue where the market will be in couple of months, other than my underlying belief that we are in a trading range of Dow 11,000 +/- 1,000 which won't change until their fundamental change in the economy. Your point about lower VIX increasing the probability my strangle trade working is correct. I just feel that if I am writing insurance premiums because people are scared about the market I want to collect a nice premium if the disaster doesn't happen so that have money to pay off the case when it does.

On the other hand I am comfortable writing puts on individual stocks, because I have pretty firm opinions (and/or rely on M*) about the value of individual stocks. So I have been watching Chevron CVX for a while I figured it was reasonable buy in the low 90s, but I didn't have cash at the time. Now I have cash, but it moved into the 100s in latest rally but today I wrote a 95 option that if exercised will get me the stock I want at price I comfortable owning. If it doesn't get exercised than I making good money on my unused margin, even Chevron drops to the low 80s in the next 7 weeks, I comfortable owning the stock with its 4% yield (at that price).

ERD raises a good point about measure the returns vs buy and hold, and I have to say I haven't been good about doing that. I personally am comfortable have short roughly twice as much short puts as I have cash on hand. So this changes my benchmark quite a bit.

 

[utrecht]

Its very difficult to make an apples to apples comparison between B&H and trading especially when it comes to options. However, in the case of my naked put writing, I do think its a fair comparison. If the year starts with SPY at 120, 100 shares costs $12000. Its easy to figure the return of those 100 shares at the end of the year. Now if I sell one contract every week or every month and take the total profit at the end of the year and divide that into the same $12000, I think the returns are a fair comparison.

Trying to compare total trading profit any other way really doesn't compare.

 

[cb7010]

Why Naked Puts?

Just curious why you choose naked puts..I've dabbled a bit in options over the past couple years, started out with covered calls and writing puts and recently have done a few credit spreads and iron condors..this week was the first time I did them on the weekly options. I'd love to understand opinions on standalone puts v. spreads?

 

[utrecht]

I do trade spreads on individual stocks. I only sell naked options on an index. Trading spreads is less risky than trading spreads but since an index will generally move less than individual stocks do, Im OK with the extra risk from selling naked options. You could go broke on one really bad naked options trade on a volatile stock but indices just dont move as much so I prefer not to pay for the extra protection by buying the option that makes up the other side of the spread.

 

[cb7010]

I do trade spreads on individual stocks. I only sell naked options on an index. Trading spreads is less risky than trading spreads but since an index will generally move less than individual stocks do, Im OK with the extra risk from selling naked options. You could go broke on one really bad naked options trade on a volatile stock but indices just dont move as much so I prefer not to pay for the extra protection by buying the option that makes up the other side of the spread.

Ok, this makes sense to a certain degree, but still trying to rationalize it. I am using some numbers from today on the SPY and 111111 puts

So the 120 Put last traded at $.40 and the 119 at $.33, thus in a put credit spread, for each $1 I put at risk, I gross $.07 or 7%...if I sold only the 120 Put Naked, I would get $.40, but, I'm technically having to allocate $120 to collect the $.40. I guess what you are saying is that to collect the same $.07 as me selling naked, you can go down to the 114 Puts and the extra "risk" associated with having to put up the $120 is worth the extra cushion on the downside for the same gross return in dollars at the end of the week? Am I understanding correctly?

Thanks,

Chris.

 

[FIRE'd@51]

So the 120 Put last traded at $.40 and the 119 at $.33, thus in a put credit spread, for each $1 I put at risk, I gross $.07 or 7%...if I sold only the 120 Put Naked, I would get $.40, but, I'm technically having to allocate $120 to collect the $.40. I guess what you are saying is that to collect the same $.07 as me selling naked, you can go down to the 114 Puts and the extra "risk" associated with having to put up the $120 is worth the extra cushion on the downside for the same gross return in dollars at the end of the week? Am I understanding correctly?

Actually, the required margin on a naked put struck at 120 with SPY at 125 would be more like 20 to 25 per share depending on your broker, not 120. Also, with only a 0.07 credit, commissions will eat up a large part of your return.