Hi all, a ton of comments on the previous post. Today I was happy to see my stocks were treated ok. As I mentioned, I am liking call spreads more and more. It has not been a good market for naked puts or put spreads, Hopefully we are all safe as I know we all BELIEVE IN LOTS OF CUSHION... Right? It is one of the few ways for us, the little guys to protect ourselves. We can't out play or out guess the big boys. Also the traders that continue to bet on the big returns will make them now and then, but more often they bust out and slink away. To stay in the game it is time for caution and safety. Small crumb returns will keep you around and make you money. This is one of the more bearish markets in years. Don't fight it. Let it do what it wants to and take the opposite side. If it wants to go down, fine, we play calls. When it turns and goes up, we play puts. It is that easy.
Good trading all.
68 comments:
Thanks for the new tread Jerry! But I have a feeling this one will get filled with posts soon. =)
HI Guys,
Can you give advantage of this call spread vs put spread considering any market conditions (bearish, flat or bullish)
@Gary, Yes Brooklyn, how did you know? What do you have against Brooklyn? Don't tell me your from Boston!
I've never sold naked calls, does anyone know the level required with TradeKing in order to trade naked calls?
@Allan
You're predicting where the market won't go with credit spreads. So if the market is bearish, it probably won't go up. So I'd trade call spreads and vice versa. The advantage with credit spreads (either call or put) is you can be wrong in the direction of the trade and still make money. Just be sure to leave lots of cushion and not to get too greedy!
The problem I've had with call spreads is that premiums tend to be lower on that side of the trade (people expect bigger and faster moves to the downside), especially with the market trending down and the VIX near a historic low. So you can't have much cushion and still make a decent premium. Anyone have a different experience?
Re fills - naturally the ability and speed of the fill is based on your limit price. OH doesn't give you the midpoint. TK and TM do and I use them to pick my price at OH.
My experience with w I d e spreads, I.e. SPX & PCLN is to use the midpoint or even slightly higher on silly wide spreads. I've had decent success. Otherwise I start at midpoint. And come down .05 on SPX and about .02 cents on stocks. I also wait around 30min for fills. I will go 1/2 way between bid and midpoint but rarely have to.
Call vs Put spreads. They work exactly the same. Your put spreads are below the strike while call spreads are above the strike. If you do BOTH it is called an Iron Condor. The beauty of these is you only need margin for one spread. Only one can be a loser. Cool eh?? Why not collect a second premium for no more collateral. You can place all four legs in one order to save commish or do one spread on day and the other side the next day after you see how things are working.
TK has order form for condors and gives you the midpoint of the whole trade.
Sorry for being so long winded. Hope this helps.
I'm loving this slow moving week!!!
Rick
I have looked at call spreads on SPX mainly and concur with Glenn. Call spreads tend to be closer to current SPX price and for about 40 to 60 points cushion (weekly) you get 5 or 10 cents in a spread. And one or 2 reasonably good days will make the spread go ITM. The hope is there won't be these good days in this bad market now.
The callspreads give you protection against a flash crash or other big down day and help you sleep at night. Being long equities for years, I don't ever remember a huge "up" day. Calls working great for me this week (so far).
Hi all, I agree with most that call and put spreads are the same just different side of the current stock price. Either play is best with volitile stocks. But you can still get plays with plenty of cushion ie; ones I have now-
NFLX @262 i HAVE 290/95
GOOG @ 519 545/50
PCLN @ 500 540/45
So there are plays out there.
Jerry
Just sold SPX iron condor 1240/1245 1320/1325 for .15. Sweet!!
40pts cush for one day.
OMG I just realized what you have all ben talking about forever. With an IC I only need to pay my standard stock fee 1 time instead of 2 and then pay the PER Contract fee.
On top of this the maint required is the SAME as a spread.
If you choose far enough away you should be ok put or call depending on the bear or bull market. An extra $10-$50 a week adds up fast!
Nicky,
TradeKing amount required for naked call
= $100K
http://www.tradeking.com/p/services/tradeking/about/marginschedule.tmpl
So if you have 100k of equity in the account you can write naked calls?
I have level 4 approval, I think naked calls requires a higher approval, no?
And a completely unrelated question, is your name Heather?
I'm going to have to post this message in parts again:
Nic and ShoNuff (not sure what it means, but I like it) thank you for your comments. Nic, as I've said before, someone commenting on something I've previously posted on this blog, no matter how bad, is not going to hurt my feelings. I jettison the "feelings thing" when it concerns money. I want to know the error of my ways, I want to know what I'm doing wrong that could put me at severe risk of a big loss. I might feel somewhat embarrassed, but hurt feelings...no way. I look at it this way; would I rather be embarrassed about something that was brought to my attention versus losing a bunch of money because of something I didn't know or wasn't aware of. I'll take the embarrassment every time. So, I put this out there, I challenge anybody, make that I dare anybody to rip this strategy apart, to point out the faults in what I'm doing. Embarrass me up one side and down the other in pointing out how stupid I am for doing what I doing. I'm not emotionally tied to this strategy. I'll dump it in a second and move onto something else if someone's argument against trading this strategy are convincing enough. Hell, I'll be thanking that person. So the challenge is out there..."BRING IT ON BABY". Let's enter "GAME-ON" mode. Anybody (and I know there's some "smart cookies" out there) want to take me on with this strategy...let's do it! That's why I posted this out there--to find out what I don't know that could save me from possible financial ruin down the road.
You're right Nic, one of the major concerns people probably have with selling naked puts on the SPX is the amount of margin money required by the broker (for non-PM accounts) to put on the trade. In my case, I have this money sitting in my account that I'm really not doing anything with anyways, so for me, that's really not a concern. Trading options is all about trade-offs. To gain an advantage in one area, you're going to have to give up something in another. There are no trading strategies that are all pros and no cons. This strategy is no different. To have the advantages (the pros) that I have in this strategy, I have to give up something (the cons)...i.e. the trade-offs. You and ShoNuff have pointed out (and correctly so), that the ROI/ROR does not look very good. Nic and ShoNuff, you're right! But, I look at it this way. If I can trade a strategy where I can extract chunks of money in a relatively short amount of time, that has proven to be reliable, consistent, and dependable and I can do this, multiple times, against the lifetime of an underlying's weekly option, then the trade-offs (the cons to this strategy) are something I can live with. That margin money is a tool that I use to extract these chunks of money from the market. Same thing as you using a car to get from point A to point B or a hammer to pound a nail. So, for me (and only for me), the ROI/ROR thing, is not a concern. My concern is, can I use this margin money to extract enough cash (in chunks) to justify doing it. If the answer is yes, then I don't care about ROI/ROR. There has been a lot of talk on this blog about ROI/ROR and that's great, I'm all for that. But, for me (and only for me), trading this strategy, it's a non-issue. Besides, I wouldn't want to have to defend it, because if I had to, I couldn't, I would lose. I just want to trade this like a GIGO (Get In, Get Out)...like SEAL Team 6 (enter, do your business, exit). In this strategy, I'm my own SEAL Team 6 so-to-speak. I enter, I get the cash, I get out or GIGO (get in (get the cash), get out). I want minimum amount of exposure, time-wise, to the market and still be able to extract a chunk of money, with each incursion, while doing it.
Nic, you are also right in that I'm buying them back for (.05). Yes, that does give back some profit, but I'm also doing this multiple times in the course of that weekly options lifetime. You have to ask yourself which is more profitable--selling put options one time @.15/.20/.25 or more and holding till expiration so they can expire worthless (thus you keep the entire premium, minus commissions, of course) or doing it multiple times (2, 3, and for this week I'm on my 4th iteration of the weeklys that expire tomorrow). You do the math Nic...the answer is pretty obvious.
Nic, you're also correct about time decay. I'm working the outer edges of the option chain, the strikes that will go to a .05 (minimum increment size for the SPX) offer the quickest. Remember, this is a weekly option and we are thus talking about the sweet spot of the theta decay curve (the steep part) and from that viewpoint, the best time to benefit from the effects of theta. All OTM options (composed entirely of extrinsic time value) have to eventually go to (in the case of SPX) a bid/ask spread of .00/.05 with the outer-most strikes occurring first and this strategy is benefitting from that. Now, price (manifested through delta) and volatility (manifested through vega) can affect the premiums value, temporarily, but eventually the effects of theta will win out for all OTM option premiums. Because of the effects of delta and vega on an option premium's value, this strategy works best, I'm finding out, in neutral to bullish markets, maybe even slightly bearish would be OK...we'll see, I haven't been trading this strategy long enough to know all the answers at this time. I sell the options, buy them back, sell them again (same or higher strikes), buy them back again and so on and so on. Like I said, I'm on my fourth iteration for this week...it's been a good week! You said you went ITM on some spreads, that must have been pretty scary, I hope you didn't lose any money.
I love the whole idea of trading "crumbs" and there are many ways to trade it. I came across this strategy entirely by accident. I started trading SPX because of reading messages by others who were trading it. I thought, hell, I'll give it a try and see what happens. The I saw what was going on with the strikes that I was selling my naked puts against and how quickly they would drop to a .05 offer. Look, if you enter, on Thursday, a short naked put position on the weeklys that you could close out for .05 the next day, on Friday, what's there to gain by holding it to the following Friday just so it could expire worthless. That's the question I asked myself. From that, one thing led to another and that's how I came across this strategy. Maybe other people are doing this same thing already, I don't know. There are some other aspects of this strategy that I have not mentioned yet for the sake of brevity. These messages are too long already. I'm still waiting for Jerry to say "don't post anymore messages on my blog" or "don't post anymore messages over say 20 words". I'm not an expert on this strategy, I'm still learning and we'll see what happens going forward. But for now, I'm having a lot of success with it and will continue to trade it until such time as it proves otherwise.
So Dave, what is your ROI for April and May for example? Thanks.
@Nicky,
Yes, you have to ask for approval at TK for naked calls. The team there will tell you it's their financial management team's approval - something like that. They look for multiple years of experience too. It's nothing like PM account margin wise. It could be just 2X. You may want to check with them. I asked OH, margin = 2 times. Not much help.
No my name is not Heather - it's Hannah which means God's Grace.A navy 23-old stranger donated a kidney to me in 2006 when he saw my name Hannah - which is the same name as his 18-month old daughter then. A miracle indeed.
Wow Hannah! A miracle indeed! Have you traded future options yet? Do you see a better return than stock options for the same cushion percentage?
Chelski,
Haven't - who is your broker? Hesitating to change broker. Give me more info....TOS and OptionXpress trade both future and stock options. Yes , higher leverage and higher profit for sure...the two edge sword cuts both ways too if you aren't careful!
Hannah, I haven't traded futures options yet. I've opened an account with OptionsXpress but just found out I cannot paper trade futures. I'm in the process of opening an account with Interactive Brokers to paper trade first.
@Dave G, I love your GI GO strategy. Right now I can no use it though because I don't have the maint my broker requires. I will have to revisit this when I can do naked calls / puts and I have the maint available. But currently with running the weekly spreads and letting them expire (this is basically all I can do till I build up more capital (I call it capital because I treat this like a business) is the weekly / monthly spreads. I return 4.8% avg a month doing this.
Dave as far as the SPX goes add tax advantage to your pro side. I don't do my taxes and I never can remember how they break it out but cash indexes are taxed at 15% on the first 40% and your regular rate on the balance. Or the other way around. 40/60 or 60/40? Call your accountant.
For every one about to try futures options. Good luck this is hands down the FASTES was to lose money sort of going to the casino. I take that back you can have your ass handed to you so fast you won’t know what happened. The only advice I can give is ONLY do ONE contract and only get in on a limit well under the market. If you don't get a fill walk away. NEVER chase here!! When the cheat hits the fan use a market order for the exit.
It’s a great tool to hedge a portfolio in the middle of the night if an event happens but to just trade it is most times a fool’s errand.
O-ya that’s the other thing wait till you’re getting up at 2 or 3 AM to see what the futures are doing. Pure junkie stuff for sure.
Not as easy as it looks. Never is.
One more on Futures for the TOS people under Seminars search for Linda Raschke on trading S&P 500 E-mini futures.
Non TOS looks like Linda has some stuff on YouTube. I like this woman.
http://www.youtube.com/watch?v=wsH6fWVP3Z8
Chelski, I did my first ever trade in SPX on May 3. The first two weeks all I did was sell naked puts and hold them till they expired worthless on expiration. After I saw how fast the premiums dropped in value on these weekly SPX options (especially the strikes at the outer edges), I started deploying the GIGO strategy in my SPX trading. I have only aggressively been doing it for the last two weeks. So, I really don't have enough time at trading this strategy to give you that information. Also, I know for many of the followers of this blog, ROI/ROR is an important consideration, and I understand that, but for me, in trading this strategy (and this strategy only), it's not a concern. I'm only concerned with the "chunks of cash" I'm extracting from the market on each GIGO trade.
Hannah, that's some story...incredible, you're truly blessed. I don't know that young man and probably never will, but he has my respect...forever. If you have contact with him, please pass that on to him.
Fulgore, some time back Hannah said she enjoyed your posts on this blog. I want to second that, I do also. Many times you bring a smile or a chuckle to me and I like that. I picture you as being much younger than me, and I wish I had started my trading at your age. I figure, in about another 5-10 years you're going to be "The Man". Just follow Jerry's lead (something I admit, I'm not good at) and you'll get there. I'm not into spreads (at least not yet)...I like to go naked on my short puts. Also, you posted a recent message, I believe, about you having all winners and no losers (you're undefeated vs. Mr. Market) in trading the "crumb" method...congratulations! Just don't get too cocky, and don't get too greedy, follow Jerry (the crumb method), and you'll have a recipe for trading success for probably many years to come.
Raging Bull Winkle, welcome back (under your previous moniker). Another cool name. So many cool names/monikers on this blog. Raging Bull Winkle, thanks for bringing that up...you're "spot on". The SPX falls under the umbrella of what's called "1256 contracts" and as such all capital gains from trading such contracts are subject to a 60/40 tax breakdown. That is, 60% of all gains are treated as long-term capital gains (lower tax rate) and only 40% of those gains are treated as short-term capital gains (higher tax rate). A definite advantage indeed. Less money in the hands of Uncle Sam means more money in your "Hip-Pocket National Bank".
David G,
Great posts in regards to your trading style, GIGO. You are turning your newly earned money into more funds that can buy more and earn more quickly. I think this would only really work with naked puts, as it is hard to get anything worth trading with spreads and then be able to move up daily like you do. A spread trader would easily reach an area where danger may lurk. The GIGO method is something to look at.
You also bring up a great point in the 1256 rule, and that leads me to a question. What do you guys use when tax season rolls around, as far as entering all your profits and losses from the prior year? Past years for me has been a pain and I am not an accountant. This year is going to be nasty when it comes to taxes, thank god I work from home and have my first child on the way. But increasing my trading by 20 or 50 times (see what working from home does), taxes will not be fun.
Chris
@ Dave G: That sounds like it could be a very good strategy....but doesn't the market have to cooperate with you right away for that premium to shrink up so fast? Also what kind of commissions are you paying? I realize that with naked puts you would be paying less than spreads but the doubling cost of closing stuff out all the time would be irritating for me, at least.
@Gssound (or anyone else wondering about taxes) I have been wondering about this issue too. Do people who make their living doing this file quarterly? Is there any kind of penalty for coming in at the regular tax-time with a big stack of capital gains that have accrued throughout the whole year?
@Raging Bull Winkle, when I refer to futures options I talk about commodities futures in gold, silver, oil, natural gas and wheat etc. Are you also saying trading options in commodities futures is like gambling too? I think you can still use the crumb method in selling puts/calls. What do you think? Cheers!
@Dave G, Thanks for you good comments, I am glad to bring a smile to your face. (as Jerry would put it, the check is in the mail :) ) I am 30. I guess to some this in young and to some this is old haha.
Yes you are very right Dave as you have to give yourself a reality / ego check almost weekly when doing the crumb method because you can get very cocky with yourself. Like I was telling Jerry this style of trading takes discipline and alot of it. If you have discipline and reality check then you can make the money.
The way I see it is I like the idea of "getting rich slow which is better then getting rich never"
if it takes me 8 year to be rich, rich to me means all my expenses/bills paid for each month by the market then that is fine with me.
Lets all try and keep ourselves in check and grab those crumbs however they may show up. Weather it is in 1-2 days (GI GO) or weather they take a week to show up.
I really like this blog as even a new person can ask questions to a verteran, and they all will be answered with respect and courtesy.
Keep up the good work all, expirey date is today for weekly's GOOD LUCK.
PS - finally put up a profile pic :)
Missed this week as none of my orders went through. Was able to sell a put spread for June monthly ending next week. Sold 10 puts 1150/1125 for 10 cents.
my LULU 60 hit .05 at the open and I've closed out this postion - currently 100 % cash - good thing with what it is looking like early - bottom fish or take a day off - hmmmmm.
I did my first iron condor this week and just closed out the position for a ROI of 2.77%. The SPX fell 2% this week, scary stuff.
Days like today remind you the importance of a good cushion.
Yes, very scary... more cushion!
All my SPX is expiring today.
50 SPX Put 1235/1225 @0.2
50 SPX Call 1315/1325 @0.05
Yep scary stuff indeed. I had plenty of cushion too, just felt like closing out my position and locking in some gains. I can enjoy the rest of this friday worry free haha.
Hi Dave G,
Maybe you have already mentioned this somewhere in the old post, but if you don't mind, can you tell us what broker are you using for the Portfolio Margin account?
(and how much it charges in commission per option contract?)
Thanks for sharing.
@All
Noob question here but when does a stock option contract (non index) actually expire? Is it 4pm on Fri or does after hours count?
Thanks!!
Hi all,
The last bit of my ACAT'd IRA became tradeable at OH this morning. Not wanting to waste an opportunity... I sold 50 SPX ICs 1250/1255/1305/1310 for .15!! 3.6% ROI for 6hrs. Suuwweeet.
Cheers,
rick
DR3Z - Equity options expire on the 3rd Saturday using Friday's
**closing** price.
Options expire using the "composite" or "consolidated" prices as set by the Options Clearing Corporation. After Hours trading does not count, but determining the official 4PM closing price is complicated.
See the details here:
http://www.optionsclearing.com/components/docs/market-data/infomemos/2010/jan/26849.pdf
Here's a highlight:
"Composite" or "consolidated" security prices for American Stock Exchange (AMEX), New York
Stock Exchange (NYSE) and Nasdaq securities are those prices from market activity on any of
various participant market centers throughout the country that are parties to the “Consolidated
Tape Plan”. Trading and price data for these securities on these market centers is processed by
an Exclusive Securities Information Process ("ESIP") center, which consolidates and reports all such activity. SIAC is the designated ESIP for all AMEX and NYSE listed securities; Nasdaq the ESIP for all Nasdaq securities. ESIP's require the participant market centers to report trades within 90 seconds of execution. Thus, after the market close, trades can continue to be reported to the ESIP centers. It may also be necessary for a market center to resolve trade prices related to order imbalances that may have occurred on the close. The composite or consolidated
closing price is set by the last eligible trade reported, for trades made during regular
trading hours. This last reported trade can be from any of the participant market centers,
regardless of volume. For example, the composite closing pricing could be determined by a
reported trade from the NYSE, AMEX, Nasdaq, NYSE/Arca, International Securities Exchange,
Philadelphia Stock Exchange, or other entities trading such securities.
It is important to note that the composite or consolidated closing price is not determined by "after
hours" trading. Also, participating market centers are free to determine their own “regular”
trading hours. In articular, “ETF” products are known to have varying trading hours across market centers. Thus, the composite or consolidated price may be determined by a trade made
on any participating market center during the regular trading session as determined by that
market center.
Another great day for the bears. I watched Cramer's monologue today. He is the alpha-male of perma-bulls. I've not seen him this glum in a long time. He did not sound very optimistic at all. He had one good line about the markets though. He said "the best fix for a bear market is lower prices". The best part about today was hearing the closing bell.
Chris (Gssound), I agree with what you said about GIGO and naked puts vs. spreads. As for taxes, I do my own taxes and I use TurboTax (Premier). I love TurboTax, it's easy to use and it understands what needs to be done for entering the information traders need to enter. I also have a spreadsheet that I created for entering my trades. I input into the spreadsheet all my trades as I enter them and again when I exit them. This makes it real easy for me to match up the trading activity for the past year that I get from my broker with what I have in my spreadsheet. It's not difficult to do, it's just monotonous and tedious. This year I will probably have between 500-1,000 trades (depending on how many GIGO trades I do) to input into my Schedule D. Not looking forward to that, but hey, you gotta do it. You can go to jail for tax evasion...ask Richard Hatch (winner of Survivor 1) about that one. I agree, taxes are no fun.
Gremjun, you are correct sir! This strategy works best in neutral to bullish markets. It still works in bearish markets (providing you leave plenty of cushion), just not as well. I don't get as many GIGO trades off in the lifetime of the weekly options due to the fact that they (the options) hold their value longer because of the declining market (SPX) and increase in volatility (VIX). I'm ready for Mr. Market to go bullish again or at the very least go sideways. But, as Guy Adami says, "You have to trade the market you have...not the one you want". So, I'll make the best of the market we have and when it does turn, I'll be ready baby!
Fulgore, from where I stand 30 is young. You still got a lot of life ahead of you. I like your line about getting rich. You and I have the same goal as far trading is concerned. Did you steal that one from me when I wasn't looking?
tk, I don't have a PM account (I trade from a regular margin account). Raging Bull Winkle does, and as far as I know, he's the only one on this blog that does. He knows tons more about PM accounts than I do, so I'll let him comment on them. Just for the record, my broker is TradeStation and I pay no ticket and .80/contract.
DR3Z, for Cash settled index funds (like the SPX) your question is clear-cut, not so much so for stocks. You'll get different answers from different people. I addressed this topic on a message I posted under the Wednesday, May 18, 2011 thread titled "A great time to pick up some free money ". The message was posted on May 19 @ 8:21 AM.
Wow, a lot of techincal questions and answers. Thanks to all that contribute.
My week went very well with no bad plays. Call spreads for me until the market shows some strenght.
I had 12 different plays and 10 were on the put side. Don't fight the market or try to make it fit your idea of where it should be. It is what it is.
Hopefully all had a decent week, now get ready to do the next one.
Smart plays, plenty of cushion and reasonalbe expectations and you are on the road to riches...
Jerry
Goog put spreads look interesting...as there are none! I dont know if its just tradeking but the chains show no out of the money puts for next week. Being rookie, I've never seen this. Is this common?
Close one, FAS $23 weekly's expired, FAS closed @ $23.05.
First off, I know from reading Jerry’s book (if you don’t have the book buy it, its only 10 bucks) that he does not like technical’s. And I totally get his reasoning, keep it simple. I’ve been reading about the Greeks (delta and theta in particular) and am starting to believe it can’t hurt too much. I’m always willing to learn new concepts.
With this said, what technical analysis (if any) do you guys use in researching your options? I do understand that technical analysis is just a guide not the rule. From my limited experience, recently I’ve been looking at the Williams %R and Bollinger bands. They both have aided me in the direction of the stock so far. But this could also be just….luck. If anyone does not mind sharing I’d love to read.
Thanks!
HI guys, first a correction to my post last night. I had 12 positions and 10 were on the CALL side not the put side.
Dr, thanks for the book plug..
I am not against using technical’s for traders that understand them, but after spending a years or so trying to make sense out of them, I came to the conclusion that I didn't have the time to spend doing all that and when I did I came to the same destination. For traders that are trying to time the market and using strikes closer to the stock they probably work great. But I just use my filters, add in what the market trend is and do the opposite.
My problem with technical is, which is the most important? If the Bollinger band say opposite of the 200 dma (day moving average) which are different than the 5 dma which contradict the head and shoulders etc etc.
But the beauty of playing options is that there is room for all styles and methods. No certain one is correct. Each different trader will find what works for them. My best tip for newer traders and for ones that keep wondering how come they don’t make money, is to;
Use my filters or your own
Avoid over-reaching for results (roi)
Plod along with boring positions that let you sleep
Discipline is paramount to success
To point out the advantage of discipline are some numbers.
If you start with 20K and make 3% a month but only net 2% after taxes, in 15 years you will have over a million in the bank. With that you can net over 260K ann. after taxes.
Or go out to 20 years and you can start netting over 63,000 per month or 800k annually after taxes.
Enough preaching for one week! We still have a few weeks before we get into the main earnings season. Plod your way to riches.
Jerry
ps; Henry...wow
Didn't sell any puts friday; I'm already at 1.7% for the option month so i have met my goal and next week will start looking for July expiration; I did, however, day trade for a few bucks just to remember how stressful it is :)
@DR3Z - I use a little technical analysis; Fast Stochastic & RSI to find oversold/bottoming stocks; MACD & candlestick reversal patterns to find pivots and I try (but being patient is not my strong suit) to wait for a higher high candlestick before pulling the trigger.
Hi Dave G, I am trying compare trading once/week spread vs the GIGO multiple times/week. Just need some confirmation/clarification from you to make sure that I got it right about your GIGO, specifically on SPX. Let's go with the real-life current situation:- SPX is now around 1270. let's give it a good cushion, 100 points in one week- 1170 strike price expire next week-(7.9% cushion). Looking at the current option premium of 1170 bid/ask is .40/.65;-let's assume that you can get .50 premium for the naked put. Using your current broker, TradeStation, to sell 10 contracts of naked put of spx at 1170 strike with .50 credit premium will require $154,500 with the profit of $500 excluding commission.
Now, to compare with a put spread of 1170/1165, using similar margin requirement of $155,000, assuming that we can get .05 premium from this spread (bid/ask = .40/.65 and .20/.60, mid point is .13 credit, so .05 premium is reasonable, with these no, you can sell 310 contracts of the put spread with profit of $1550,excluding commission. Base on this no. you will have to trade the GIGO technique at least 3 times/week (500 vs 1550) on a similar amount of margin maintenance to get the same amount of profit of once/wk put spread. If we include the commission in this situation, the naked put commission of 10 contract is not a big deal, but for 310 spreads, it is around $320. This reduced the $1550 no. to 1230 net profit.
Is my calculation on the GIGO naked put correct?
Thanks,
Since my post overlapped Jerry's I want to add that I use Jerry's filters FIRST then use T.A. The filters for picking a quality underlying is crucial.
Selling puts at 20% cushion when the underlying is near or at a oversold price makes for a restful month.
Have a great weekend.
I wanted to give an example of a stock that fits both Jerry's filters and my use of T.A.
VECO - fits most if not all of Jerry's filters. On the T.A. side; Fast Stochastic rose above the 20 line, positive tick on MACD histogram, RSI in the slightly oversold area & we have a higher high candlestick.
Price 52.68 strike 41 (22% cushion) 5.6% ROI for a July expiration.
I will be looking at this on Monday; before then will need to 'google' around to make sure there isn't anything I'm missing or unless there is a total meltdown in the markets or something spooks me; I'll be placing this order.
SPX normally I ride these all the way but this was the first time I tried the old in and out. Or GIGO did not seem like the week to just leave it ride.
Friday the 3rd 9:45 AM I sold 20 1175 @.40 and 20 1150 @ .20 I also bought 15 1100 puts @ .15 to bring the margin down to 135K
Monday 11AM the 6th I bought back at .20 and .10 50% gain on both. I kept the puts open and Friday 11AM I sold 10 1255 puts for .20 so net net. 575.00 gain for two full days.
Short of my weekly goal but better than sitting out.
Nothing open for next week. I am starting a WOF on VZ selling June 35 and 36's puts
Chelski-- Are you also saying trading options in commodities futures are like gambling too?
I never tried commodities but most likely yes? You’re up against professionals with deep pockets for research.
Veco looks like a good one newport...
I'll be watching this one too. Thanks for sharing.
Check out the open interest at the 40 strike.
I was looking at RIMM, which is near 52 week lows and both the calls/puts have a nice ROI, with cushion 20% up or down. Strikes near 30/27.5 and also 45/47.5 have 10 to 5 cents, stock price is 36.50for June.
RIMM has earnings Friday. I had sold call spreads way OTM on them TWICE in the past two months forgetting that. Unbelievable how it slipped, especially the second time!
Newport, VECO looks pretty good for a monthly put play. Earns around 7/25 and sell the july 40's will give 5%+ It has not traded near 40 since around new years day. I might have to take a hard look at that one Monday morn
thks for the heads up.
Jer
TK.
If you do not have one open (PM -Acct) Go with Interactive Brokers.
Margin Intrest .690% on margin over 1M under it's I think 1.125%
check there ad in IBD
Dave and tk,
Dave, thanks for a very exhaustive explanation. I also looked into this and got about the same numbers as tk. I see your point with ROI, to be honest I've never been a great subscriber to that argument either as I prefer to look at the direct monetary return on a trade, but since most of us are restricted by mainenance requirements, I guess at the end of the day it really does come back to ROI. Even if you have a ton of money for maintenance I guess it still has to be compared with alternatives to use the funds.
This is where I'm trying to figure out if your numbers would work for me. A five point spread requires $500 maintenance and each naked SPX about $17,000. Or to put it differently, I can work with about 325 spreads compared to 10 naked SPX. If I stay at .05 on the spreads these would generate $1,625, whereas 10 naked SPX would require a premium of $1.63 to generate the same. You are obviously using a GIGO strategy for safety, so even if you can get .50 in the beginning I'm assuming the premium drops as the week closes, and if you were to average let's say .25 on the week, you would have to go in and out about 6-7 times to generate the same amount, not counting the exit commission.
I'm not sure if the above is correct or apply to you, probably not, but this line of argument comes close to my own thoughts and efforts. I will follow the numbers for a couple of weeks to see how the time decay plays out if the stock price goes against you and see if the decay is so much more significant. To generate 3-4% every month one needs a lot of trades when going for 3-5 cent crumbs, and it is in my experience difficult to get filled far OTM on these, but given the choice I would rather be really far out with a week left, than nervously close with only a day or two. Last Wednesday was a wakeup call for me.
Nic (+Dave & TK)
I've been sitting on my hands all week trying to find a way to comment on the GIGO method...and you did a fine job.
expounding - It seems to me your account equity ($25K or $25MM) is not relevant to our mutual goals here; maximize earnings. Assuming that is your goal as well.
In my view (my humble view), the GIGO method, while obviously effective, seems to maximize commissions and personal effort, and not necessarily profits.
I know on my trades (credit spreads, mostly SPX) the profits accelerate into Friday as the time decay accelerates. I could trade out early for 75% of the weekly profit, but the last 25% becomes a gimme. With the added fees on SPX trades, I'd always choose to wait for expiration.
Are you seeking to maximize profits/earnings, or to maximize 'action?' I fear it could be the latter. **WARNING** I am not trying to pass judgment. From my personal experience of some 25yrs in the market. My greatest profits (and losses) occurred during 'seasons' of accelerated trading. Emotion played a huge role, and I know now that emotion *MUST* be taken out of the equation for longterm success.
Please accept this cautionary note of concern as intended. Friendly!!
As I age, now 53, this 'ol fart has come to realize that the market is many things to many people. Filling financial and emotional needs for the masses. My 'need for speed' has not completely wained. When that 'season' comes, I take $10-$20K to Las Vegas, lite up the tables for a long weekend and enjoy all the perks....That 10-20K is a fun tax. So, I need to make at least $100K between visits, and that (for me) requires emotionless focus on the boring crumbs. My weekly ROI is 2-3%, and sometimes higher. I'm so bored, I cry my way to the bank every Friday ;-)
Just another perspective.
Good hunting everyone!!
~ rick
Raging Bull W,
Thanks for the suggestion, I am still looking for a good place that offer Portfolio Margin. I will check out IB when I am back from my family vacation at Yellowstone next week. I believe that using a Portfolio Margin is a way to go for SPX option crumb method with deep cushion (if you can swing it). Just have a hard time finding the broker that offer PM with decent commission rate.
I am with TradeKing and Fidelity right now. TradeKing's option commission is hard to beat (for 9+ contracts, it is only $8.95 plus $0.15/contract), but it is not offering PM just yet.
Thanks again.
VECO, so far, looks good. @Ed - if the premium is still there this morning, I'll sell the 40's - thanks.
Negative - that up candle Friday was on less than 50MA volume.
Positive - Bank America raised it's price target for VECO this morning.
Alright fess up.
Which one of us sold those 25 Veco 40's for July?
lol
I have 30 of the 41's and filled for 2 of the 40's..
Jerry
I STO 25 of the 40's @ .20
I now do hve the 25 of the 40's
Jerry..lol
Little more Veco data:
source: http://seekingalpha.com/article/274530-9-highly-shorted-stocks-with-impressive-profitability?source=yahoo
4. Veeco Instruments Inc. (VECO): Semiconductor Equipment & Materials Industry. Market cap of $2.12B. Float short at 29.29%. TTM EBITDA/common equity at 0.56 vs. 5-year average at 0.21. TTM interest coverage ratio at 54.49 vs. prior-year TTM ratio at 5.68. This is a risky stock that is significantly more volatile than the overall market (beta = 2.45). The stock is a short squeeze candidate, with a short float at 29.29% (equivalent to 10.42 days of average volume).
Sold some July covered calls, nice income there, TTWO releases a new game tomorrow, hopefully that takes the stock to $16+, if not then I will likely get put on 500 shares @ $16 - on Friday.
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