phil, selling options is one strat i use, usually with credit verticals or put diagonals right now i like FSLR for a bear call credit spread, (BeCS) AAPL also looks good for a BeCS while it is in between earnings what about weeklys, have you sold any of them?
Hey Lux I appreciate you jumping into the thread I was hoping to find a fellow option seller. I have a Bull Put spread on AAPL currently the May 515 / 500 net credit of .44 tempted to buy back the 500's early in the week to get a little more juice it seems to be holding the 560 area nicely. I have sold some weeklies but not a lot of them I find you have to get to close to the action to get any desent premium. I have not looked at the FSLR for a long time what strikes are you looking at. Thanks again for posting
I have been a so called "net seller" of option premium for many years. I have been profitable every year since 2003. The key is managing the losing trades, the winners will take care of themselves. Decide on how much you are willing to risk on your trade and no matter what do not deviate from your stop loss point. Of course, each trader's risk tolerance and account size is different so how much you are willing to risk per trade is up to you. If you are not sleeping well at night then you are risking too much. I usually stay away from front month options. Yes yes, all the books say that options with 30 days or less until expiration has the best chances of time decay. While this is true, you would have to select strikes that are dangerously close to the money. Any rally or sell off will cause the premium to explode higher and you will probably be exiting for a large loss only to see the premium deflate in a day or two when the underlying goes back to normal levels. I like to sell far out of the money strikes using farther months (60, 90, or even more days until expiration). When I started selling options, I sold a lot of far out of the money, farther month ES ratio credit spreads. Sounds boring? Yes, usually they are very boring but profitable. Because of sky high margin requirements on ES these days, I have decided to trade something else to give me a better return on margin used. I did very well recently writing August CL strangle. Back in early March when the media hyped the Iran threat and crude oil was trading at $110, I sold three August CL 140 calls for 1.21 ($3,630) and I also sold three August 80 puts for 1.11 ($3,330). My stop loss on this trade is if either premium doubles. The margin required for this trade was about $6,000 at the time. I exited this trade May 2 and booked a profit of $5,972.16. The premiums on both sides decayed so much that there was no reason to hold this trade until expiration. In general these are the type of option writing opportunities I look for. I am fine with trading farther out months that offer higher time premiums. And I usually do not need to hold the position until expiration. A lot of times I can exit and book profits early. Is this the "holy grail" of options trading? Absolutely not. I have suffered my share of losses trading this way especially when I do not follow my own stop loss parameters. But that is part of the learning experience. Just my two cents worth. Hope this helps. And yes I will be there for the option sellers dinner or party or whatever you folks have planned.
That's a great post MJ haven't done a futures options myself but great to hear from other option sellers. We seem to be in the trading minority for sure as option sellers say "dull but profitable" I'll forward your dinner invite
How did you fare in 2008 and over the last two micro-crashes? PS. if there is one thing option selling is not, it's dull. It's 99% of boredom, but 1% of sheer terror.
Sounds a lot like Cordier and his Liberty Trading stuff. Yeah it works, most of the time, and it may even be an okay idea on a smaller account that was not your main traing account. When I do an option trade I always look at the risk graph. What is your max loss on the CL short calls? It isn't double the prem... Sure most times you can get a trade off in time to null your risk, but what about a nightmare like you wake up Monday morn to find that Israel attacked Iran, other Arabs are joining the fight, most mid-eastern oil is embargoed, CL is limit-up for a WEEK, etc... Or something bad happened to the wheat crop, or China bought all the cotton, or... Goodbye account. That may never happen, but open-ended risk will hurt you eventually. Good trading to all.
What do you use as a stop loss? I have seen all of the following suggested among others - twice the premium - three times the premium - wait until it goes into the money a little Also one has the alternatives of converting short legs to spreads, or rolling up the position. Of course there is no one answer, and it depends on your bet size as a fraction of your account value, but I am still curious what different people use as their rule of thumb.
For me it's generally twice the premium unless it's getting real close to expiration. If I think it's going to pin to a particular strike close to the money I may wait it out a little and let theta take it's course
Selling premium for a small trader may as well be doubling up in the underlying as price moves against him, with the assumption of future reversion. Same game more or less.
Wow. Lots of replies for a Saturday night. I went out for dinner and watched the NY Rangers win game 7 and came back to a ton of posts. I did okay in 2008, would have to look at my tax returns for the exact numbers but I did take most of December off in 2008 and vacationed in Hawaii. It is indeed Cordier and Liberty Trading stuff. One of the main reasons why I went into selling option premium is because of Cordier's book. And yes, it does work most of the time and it has. Any trading strategy works most of the time, there is no such thing as a no risk trading strategy. If someone has one please tell us all. Nightmare scenarios are possible at ANY TIME. If you are afraid of those "what ifs" then you should not be trading because at any given time a terrorist attack can occur, a pipeline can be blown up, a natural disaster of some sort can strike. Would it be any different if you were trading stocks, futures, bonds, Forex or whatever? I was in the markets on 9/11, was in a gold strangle. My calls got exercised into futures contracts but I was able to get out of the futures at minimal loss when trading resumed and things returned to normal. I was holding a corn strangle last March when the earthquake/tsunami hit Japan causing corn prices to spike downwards. I was able to exit my corn puts at around double the premium but my loss was cut in half because the premium on the calls were virtually worthless. Then I immediately wrote a corn put ratio spread and made a lot of money when things once again returned to normal and corn went limit up. For people who do not know, Crude Oil, Corn, Cattle and other futures can lock limit up or limit down but options will continue to trade, so it is still possible to get out (usually at unfriendly prices but you can still exit) should a "nightmare scenario" occur. I am not quite sure what is meant by "open-ended risk" because one can always exit an option position even though its underlying is locked limit. I can not speak for others but I try my best to stay as diversified as possible using different, unrelated markets such as corn, crude oil and coffee. Also, I do not over-position. Just because I have X amount in my account does not mean I have to leverage it all. A reason why I like to trade very far out of the money strikes is because should a "nightmare scenario" occur, I would have plenty of leeway to work with. With most commodities and index options, I hardly ever just hold a naked position. I either write a strangle or enter a ratio credit spread as my hedges. With my previous CL trade, I was $30 out of the money on the put side and I was $30 out of the money on the call side. When was the last time CL opened more than $10 up or down? If it did happen, I do not remember. I am not saying that it can't happen but I just do not remember the last time it did. And lets just say Israel did attack Iran and CL locks limit up for for two straight days for $10 each day. The premium on the CL calls will probably double, maybe even triple. I would exit the calls and take a loss but remember I would also collect just about all of the premium on the CL puts, thus reducing my loss. Yes, I would probably still take a decent loss but my position size is only 3 so it would not be anywhere close to "goodbye account." Plus after a tremendous price spike like that, the premium on crude oil calls $50 out of the money would probably be ridiculously high. It would then be a perfect time to sell those calls after CL has already ran up $25 or more. With any trading strategy one chooses to use, there are risks involved. The key is managing that risk as best you can. I have been selling options since 1996 and making a pretty good living from it. I have suffered through my share of losing trades but I take each as a learning experience. Hell I still remember the first time I got a margin call at 8 AM. I remember the first time my short options were exercised and turned into a futures position. I am not suggesting that option selling is the best method to trade nor am I suggesting that option selling is for everyone, it is neither. It is just something that has worked pretty well for me.