I have been doing nothing but stocks and options for 15 years and I have never seen anything quite like this. Yesterday down 600 today up 300. Every day it is the opposite of the previous.. How to play this.. do it like porcupines make love, very careful. Even if we are not at the bottom we have to be so close that it probably doesn’t matter. I try to not hit the bottom or the top. Just make money and trade careful. I see that many of you are still trading the SPX etc. To me it is just to risky. My stock positions move maybe 10 points or so and the index’s can move 50+ in heart beat. It is just to wild and unpredictable.
Today I opened several new positions all calendar spreads.
IBM bought the 1/12—165 sold the 8/20 170
POT – bought the 1/12—55’s sold the 8/20—57.5
These made around 10% ROI. I will continue to sell calls on the long calls. These plays are added to my BIDU & AAPL positions.
22 comments:
Hi all, I thought I would expand on a trading idea that has served me pretty well over the past 8 or 9 years.
I avoid using stocks as a basis for my option trades when those stocks are ‘fad’ stocks. Many times you can make big money and quick $$ but eventually they fade and soon it is ‘disappoint time.’ The little traders (us) are nearly always behind the curve. When options get a bad name is it often because of that curve. Many traders keep trying to out-guess which way a stock is going. By the time a ‘hot’ stock comes to our attention, many smart traders are already out of it.
Examples CROX, PNRA. LULU etc. with LULU, I have friends that love their clothing. But a few years back it was CHS. Eventually these stocks will fall out of favor and fall rapidly. When hot they make a ton of money, but will you recognize when they have overcooked? I have found sticking to true winners with a large market share, will hold up or come back quicker during or after a fall. Try to avoid the ‘fad’ stocks.
Thanks Jerry.
Also, Thank you Fulgore for the explanation on your last SPX trade from the previous post.
TK
Jerry, some more questions if you don't mind. :)
1) Since you sell (for instance with IBM at 170) your short term calls so close to strike, it would seem as if these goes ITM about 50% of the time. What do you do if it has already gone ITM a couple of days before expiry?
2) Why not buy the long one deeper ITM and with the higher delta get a higher gain if the stock shoots up? I know it is more expensive but if you sell way before expire the time decay should be modest, right? I just feel that if you hold AAPL you may get your weekly $1-2 but miss out on something like a new iPhone or other announcements coming up? Is it intentional that you want smaller swings in the long call?
Ok, in my quest for higher returns, lower risks and magic formulas, I think I have the answer to my first question above:
The ideal point to close doesn't, as I originally assumed, seem to be the moment the short call goes ITM but instead, the point where the delta of the short call becomes larger than the long call. I know most of us hate deltas and stuff, but since delta represent how close the option follows the underlying stock, it is logical that as long as the long call has a higher delta than the short our profit increases even though we're now in the money on the short.
So in conclusion the sweet spot to close the position is the moment the deltas are the same (easy to see with TOS for example). I will continue my tests but it implies another advantage for buying the long call deep in the money, besides the lowered risk of a margin call if the position goes down.
The deltas. The long calls out several months will always have a lower delta than the short call, right??
These cal spreads are driving me nuts in this rollercoaster market. My short calls are making a few bucks every week. But the damn long calls are being cut in half. I've made $500 in my short AAPL calls the last two weeks and lost $7500 in the DEC calls. What's wrong with this picture? Same situation with GOOG.
Rick
That's really my point, Rick. The money made on the shorts are crumbs compared to the movement on the leaps. It is crucial to have a strategy for the longs, and the only one I can see is to keep them until they recover, WHILE making sure they don't loose to much time value by rolling at the right point.
I do believe there is a good model in here somewhere though, once I understand that sweet spot for rolling the leap.
What happened to selling put options? I don't see much talk about selling naked any more on this blog. The Calendar spreads have attractive ROI, but in a downturn market, you lose a lot of principal - I've been there. I sold naked puts this week, however, on BIDU, IBM, AAPL, AMZN, the usual suspects, and, if there is no drop of 500 plus points, these options will expire worthless tomorrow. Jerry, I think it's amazing that you have made a living out of selling options. But do you still sell puts or do you think this market got too dangerous for this type of strategy? Thanks
Hi Jerry, I have an question about the Calendar Spread. For your IBM 170, what if the sell call 170 gets in the money on next Thursday or Friday but you still win (ex price = 173). You just leave there and let it expires? What will happen when ITM option expires?
Thanks.
Question-
Jerry Wrote:
"Today I opened several new positions all calendar spreads.
IBM bought the 1/12—165 sold the 8/20 170
POT – bought the 1/12—55’s sold the 8/20—57.5
These made around 10% ROI"
Can someone help understand how he made a 10% ROI? If he is buying the long call and selling a short call he still has a debit balance.
Is anyone doing any Put Spreads in this type of Market?
Thanks everyone for helping me understand this.
Hi all, wow a lot of questions. As with most answers in options there is no real right or wrong way. Their will be experienced players that can swear they have the only correct answer. I can only tell you what has worked for me and the discipline that seems to help me get to my goals.
First. Nic, regarding your question what to do if the stock goes in the money ’ITM’. In a perfect world the stock will end up right below the sold strike. But if it doesn’t, I don’t fret until the Friday of closing. Again there is always more money in the option than the stock until Friday and when parity approaches. If the stock goes ITM on Wednesday I will wait until Friday and roll to what seems a safe position (a farther out call). I buy to close and sell to open.
Let’s assume that the stock is trading around 100. When opening I would buy the Jan 100 and sell the 105 near option. Ideally if you have bought a call at or lower than the stock it will appreciate some to compensate for the lost time value. If the stock goes to 107 and I have to roll it, I will sell next weeks 110 or 115 depending? I might lose a little rolling but meanwhile my bought Jan call has went up some in value. It the stock does go up again I will again roll up. One of the weeks the stock will not go up and I will let it expire and then maybe sell the long (Jan) call. A stock like AAPL you can buy the Jan or April 380 and sell this weeks 400 and do it over and over. Maybe the stock goes to 440 by Jan. Perfect, you sell a way out of the money call, let it expire and sell the Jan 380 for around 55. Over and over..
Nic; regarding buying deeper in the money. They cost more and if the stock drops a bunch you are out a bunch? Just a money management thing that I do.
BALD; just roll with them and assume you have bought the stock. Like aapl, with stocks, to get the weekly prem’s you would have to put out 460 or so. To do these cal spread you put out 40 or so. Don’t worry if it takes the stock 5 months to reach your long strike just keep selling calls and enjoy. Another way to think of these is like a player that buys a stock strictly for the dividends. He doesn’t care where the stock is, just so he gets his dividends. These sold call are like a monthly dividend.
Paul, I still sell some puts but not in this market, just to wild. When the mkt settles down some I might do more. They are still a viable way to trade.
Traderich; I do not let them expire unless they are out of the money! Assume that you have a stock around 100 you sell the 105 and have bought the Jan 100. the stock closes at 106 at the option expiration. ( I don’t let that happen)
What would happen is you would have to sell someone the stock for 105, to get the stock you would have to exercise your 100 option. You get to buy it for 100 and sell it for 105. that is the simple way to say it but basically what happens.
These Cal spreads are not the only way to trade but with the arrival of weekly's, they offer a nice weekly return.
Jerry
@Paul, Ed K
I continue to sell put spreads. The fear has caused so good premiums with absurd cushion. My SPX 975/950 's will expire tomorrow. I only trade on MOnday but already there is a 905/895 spread giving 0.15. That is 22% cushion. In the past 43 years the S&P has NEVER dropped 22% in one week. In fact only once did it have an intraweek low of 23% drop and it finished that week at 18% drop.
IN a "normal market" you would have to go to 7-8% cushion to get 0.15, 22% is unreal. If this spread is avail late monday morning ill sell it.
Cheers
Great points Jerry
While my long calls (my stock) has dropped significantly, I still collect my weekly div. If GOOG and AAPL can get close to strike, quickly, I'm golden. Much of the loss is time value of 2-3 weeks because price is only 6-7% below the orig strike.
Regarding a recent comment regarding my 7/1 SPX collapse, and inability to roll out of the fire, because the "money was already gone. Wrong!! To wit: I had a put spread in apple that was totally ITM. At that time I had option purchasing power of $162. For grins I entered an order to roll out to from AUG to SEP and up from 365/370 to 385/390 and I could collect $3.65 or $3650 for 10 contracts. I went to preview and no warnings and I placed order then cancelled bc I had some time and in fact the spread is OTM now!!! The point is the trade above on 400c would have saved $145k of the $200 lost.
So the bottom line is, as long as you control the contracts, you can roll with NO cash in the account. That aaple spread was only position, and was worthless, and I had $162 left in the account. I did NOT need another $5k for the 10 contracts.
Excuse long post. I need to ask FINRA if OH's comment that I was "like pinned cattle waiting for slaughter, and there is nothing you can do" was true. Too bad I could not price or trade a roll out/up on their iPhone app.
Cheers all,
Rick
The above example was in my IRA acct. I still have a whopping $20k in my reg acct, and damn grateful.
The scull & crossbones will return.
Rick
Thanks Jerry & rthoptions.
I'm also selling naked puts and put spreads, specially on weeklies and current month expiration date options. I'm learning to appreciate the shorter period of time exposure with this recent sell off. I'm following Jerry's rues to use good stocks like AAPL, BIDU and focus more on cushion and risk management than on ROI. I started to do the indexes as well (e.g. RUT) to eliminate company specific risk.
Even on spreads or nakeds, if you chose the wrong direction, your account could start to look pretty ugly. I know we all want our account to appreciate in value from the time we enter a trade to the time we exit a trade but that just doesn't happen all the time. So, the question is: how long do we take the beating before pulling the trigger?
Jerry, last Friday, if you held on to the AAPL 370/365 to close, you have bigger cohunas than me. At one point the 370's were worth $8.20 before going to zero in one day! I could not take the risk and got out.
Pick the right direction is the moral of the story!
@Roadking2, one of the points of selling nakeds or spreads is not "to be right on direction."
The stock can go up a bit or a lot, go side ways, and even down a bit. But if the stock goes down a lot, which became the "normal" recently we get into trouble. Statistically, however,
we are on the right side of the trade selling options (80 to 90 % of all options expire worthless) but in reality we bear all the risk. That's the challenge and there is no way anyone can know when the big drop will happen.
Bought BIDU 55 call jan 13 @ 98.30
and sold aug 20 C @ 0.89.
I'll be giving it a shot on calendars starting with BIDU and sell calls on a weekly basis. If all goes well this can give me around 3 % a month as long as the price of the stock holds, which wouldn't be bad at all...and much better than dividends which is usually 3% a year :)
I'm going golfing so keep the mkt under control. I have already rolled and set up what-if's. I am training my daughter to take over as i golf more and more... now she can sweat instead of me...LOL
good luck all
Jerry
Paul,
I agree with you about not worrying about direction too much.
However, one misstep in 52 wks of trading could devastate your account.
After the last two weeks, I find myself second guessing my decisions even though I have only made two or three mistakes.
On a positive note, I am getting 2% back this week! 15% to go.
I wanna be like Jerry. Just rolled my AAPL calls to next week. Now I'm going sailing. No daughter to take up the slack tho. The beauty of these calendars is that you can buy time so easily, and maybe avoid that Fri afternoon 'white knuckles' effect.
Roadking2,
this is a risky business. I've been hit in this recent sell off and my account is now negative for the year. But, like you, I got my 2% this week. The question is if we can remain profitable consistently for the next 52 weeks? What I learned in the last days is that I will no longer hold puts with over 30 days of expiration. I will focus on weekly puts and calendars, as I did with BIDU this week. Let's see how it goes.
gonna try to get 1 percent this week but will wait for Wed Thur to make any decisions. Got out of my gld put with 5% gain Fri. Still holding AAPL calls and plan to sell against them for Aug20 monthlys. good luck.
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