Over those 14 weeks the SP500 is -12%. My weekly put options have returned +1.3% including transaction costs which are steep until you start trading large positions. This includes the pummeling I took week before last.
What I wanted to discuss with someone with some experience is how effective you think it is to back test an options trading method. Since there are no historical weekly options prices to look at, what I did was take the avg option premium percentage Ive been getting and then apply that to weekly SPY prices going back to the beginning of 2005. ...
My first question concerns how you calculate the return. Is it $-earned divided by the average margin required to carry the position?
Heres the formula I use:
Assume that I sell one SPY put. I receive $2 in premium and the stock price is 120.
If the put expires worthless I make $200. If I was forced to buy the stock it would cost me $12000 so I divide $200 by the $12000 I was theorectically tying up. So my return is 1.67%. This is similar to buying 100 shares of SPY for $120 for a total of $12000 and then selling it for a $200 profit.
Technically I never have to put up the $12000 because I buy the put back before it expires if its not going to expire worthless and Im not technically tying up a full $12000, but thats the only formula I can come up with for return.
Technically I never have to put up the $12000 because I buy the put back before it expires if its not going to expire worthless...
Can't happen? Never say never:
http://www.early-retirement.org/forums/f30/insane-emergency-re-strategy-40682.html#post939013
-ERD50
Speaking of dixonge: We Are Homeless and Living in our Car | VagabondiansIn 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.
Heres the formula I use:
Assume that I sell one SPY put. I receive $2 in premium and the stock price is 120.
If the put expires worthless I make $200. If I was forced to buy the stock it would cost me $12000 so I divide $200 by the $12000 I was theorectically tying up. So my return is 1.67%. This is similar to buying 100 shares of SPY for $120 for a total of $12000 and then selling it for a $200 profit.
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.
Speaking of dixonge: We Are Homeless and Living in our Car | Vagabondians
I agree with this methodology, with two caveats.
You must credit any dividends paid to your benchmark, as they are embedded in the put premium.
In light of my comment to ERD50 above, when you buy back a put just before expiration, do you immediately roll it out, or do you wait until Monday? If you wait until Monday, you should really stop the clock on your benchmark and restart it Monday when you sell the put to make the comparison as "clean" as possible.
Speaking of dixonge: We Are Homeless and Living in our Car | Vagabondians
IIRC, dixonge's first name was Glenn.
I have no problem with this. A strategy is allowed to have "market timing" in it. I'm just trying to understand precisely what utrecht's strategy is. He seemed to imply that his strategy is mechanical (?). If so, is sitting out some weekends (and exposing oneself to overnight risk relative to the benchmark) part of the strategy, and if so, why? If not, then I think it should be controlled in the benchmark as well, particularly in any back-test.I have two views on this. Yes, it might seem 'cleaner' to match the time frames of each investment against each other (start/stop the clock).
I don't do this, and my thinking is - if there is a period of time that I am not selling options against my position, there is a reason for it. So I consider that 'sideline' time as part of the 'cost of doing business'. If the market goes up while I was out, I may have an "opportunity cost".
Numerical hypothetical to put it in perspective:
SPY goes from 100 to 120 (adjusted for divs) in a year - benchmark is 20% gain.
Let's say there is only one month where I feel conditions are right for selling calls, and I make an added 1% that one month. I would say my strategy out-performed the benchmark by 1% ( 21% versus 20%) for the year. I might want to say I made 12% annualized (or 12.6825030% compounded), as I was only invested in the strategy for 1 month, but the reality was that the startegy didn't allow me to invest all 12 months.
-ERD50
I agree with this methodology, with two caveats.
You must credit any dividends paid to your benchmark, as they are embedded in the put premium.
In light of my comment to ERD50 above, when you buy back a put just before expiration, do you immediately roll it out, or do you wait until Monday? If you wait until Monday, you should really stop the clock on your benchmark and restart it Monday when you sell the put to make the comparison as "clean" as possible.
I have no problem with this. A strategy is allowed to have "market timing" in it. I'm just trying to understand precisely what utrecht's strategy is. He seemed to imply that his strategy is mechanical (?). If so, is sitting out some weekends (and exposing oneself to overnight risk relative to the benchmark) part of the strategy, and if so, why? If not, then I think it should be controlled in the benchmark as well, particularly in any back-test.
I have no problem with this. A strategy is allowed to have "market timing" in it. I'm just trying to understand precisely what utrecht's strategy is. He seemed to imply that his strategy is mechanical (?). If so, is sitting out some weekends (and exposing oneself to overnight risk relative to the benchmark) part of the strategy, and if so, why? If not, then I think it should be controlled in the benchmark as well, particularly in any back-test.
IIRC, dixonge's first name was Glenn.
Hello! We are Glenn and Dixie, and we are Vagabondians.
Yes, very important. When I traded some 'naked' puts, I preferred to use the term "cash-covered" puts. Maybe your broker lets you cover them with margin, but don't lose sight of the fact that the full amount of money is behind the trade. You could have that money working in other investments, so you should use the full amount of your 'cover' as the denominator in your yield calc.
A friend of mine figured he made an 'infinite' return when he sold an option, then bought it back at a lower price. Selling an option ties up the capital it would take to own the underlying. I don't think I convinced him, because he liked his view better!
-ERD50
Can you explain this sentence to me, please? If I was sitting out some weekends, then I wouldn't be trading mechanically. I would be trading based on whether or not I thought that particular week would be a good week for my trading method. Since I'm not doing that, what should "be controlled in the benchmark"?
Well that didn't take long
SP500............+19.4% not including dividends
Weekly Puts...+15.1%