Looking to trade front month conservative spreads for consistent and predictable income stream. Is there any option book written specifically on this subject? Thanks!
I thought this was a pretty good book: The Complete Guide to Option Selling by James Cordier, Michael Gross
Watch the Dan Sheridan series of webcasts (CBOE has them). He devotes 60-80% of his portfolio to "income" techniques and discusses each of them at length. I liked the Option Selling book the previous poster referred to, but it's just too simplistic. Sheridan promotes always being covered (condors, butterflies, etc), the latter promotes never being covered (straddles, strangles, etc.). The secret to selling options (to me, at least) has been to never take a risk larger than an outright position. I can't go and sell 100 $.40 options on ES unless I were willing to hold a 100 contract ES position. Many people walk away from a selling strategy at that point. If they'd only take a 5 lot in ES, they see their maximum income per month at $200. Alternatively, they say, "There's no risk! 100% up to go!" and sell many more contracts than they can afford to lose on. Another caveat--if you're thinking of selling options now, be very careful. IVs in MANY electronic markets are at historic lows. Take a look at EuroFx, bonds, index options. There's not much money selling volatility there, and a lot of pain if these markets start moving. You're looking for "conservative spreads for consistent and predictable income stream"? "Conservative" generally refers to probability of winning. In that case, covered spreads you're writing may have a 90% chance of winning $500 and a 10% chance of losing $5000. And that assumes you can compute the probabilities accurately. The point is, "conservative" will require 10 winners for every loser just to break even. "Predictable income stream" is even more difficult. Say your first trade is one of those losers ("Ha! That won't happen!" you say? My first pit trade was selling wheat calls in October). You're immediately down $5k and will spend the next year digging yourself out. Many of the books say, "Just sell when you're in the hole 100% of your premium". Let's say you've convinced yourself that the odds of you winning a position are 95%. The market moves and you're now in the hole 100% of your premium. The odds of you winning are still in the 75% range! So, do you exit? If so, you've completely changed the odds of you winning in the first place if you're willing to get out while you still have a 75% chance in your favor. Your "edge" (selling a position with a 95% chance of winning with premium more than 1/20th the potential loss) is now completely unbalanced to being a guaranteed long-term loser. Last year, my single biggest winning strategy was selling options. But "predictable" and "conservative" the approach is NOT.
One of the chapters in my book discusses selling option credit spreads in great detail. This is a potential way to bring in conservative premium income on a regular basis. Good luck. http://www.amazon.com/Get-Rich-Opti..._bbs_sr_1/002-1043344-0420856?ie=UTF8&s=books Also, try our free option newsletter. We give tips on all kinds of trading. See my article from 1/12/07. http://www.smartoptionsreport.com/ Lee Lowell
I'll second that! When traders talk about option selling and "probabilities", I just shake my head. If the IV increases, the probabilities change. If IV is at historic lows, the probabilities will almost certainly have to lowered over time.
ahhh...the never ending chicken and egg debacle. So who is a leading and who is lagging , HV or IV ? And the answer is...
take a look at the thread "methodology of the ditm vertical bull call spread" above on this forum. It works for me as a conservative and predictable strategy More information available on the subject if your request it. I hope the thread gets some replys to keep it active, because it is a great strategy.