An example will help. Let's look at the prices to close - open a 40-45 POG spread for various months. POG closed at 51.06 on Friday. March 4.6 - 5.2 June 3.9 - 4.9 Sept 3.5 - 4.6 Now if someone at the beginning of February entered the September spread for 1.4, should he hold on for a few more months, with the prospect of making a buck more, or close it out now?
you're not quoting spread prices. you're quoting the ask for the long side minus the bid for the short side and vice versa. if you are consistently paying up like this for spreads where both legs have .30 - .80 wide markets -- you are giving up so much edge that you would HAVE to be an amazing stock picker to make any money at all. wee
R U serious? You'd actually consider holding the Sep vertical for an extra buck? Man, if you have to ask, then you have no business trading product in the first place. riskarb
Obviously I am not on the same wavelength as some of the other posters. I am not a good stock picker. I rely on newsletters and columnists for determining undervalued plays. But what I do, works, at least it has since last April when I started with options. I think the key thing is that I build up a portfolio of many (~ 40 per month) positions and hold them as long as possible. For long calls and puts, until 2 to 4 PM on expiration Friday. Using highly illiquid issues with big spreads isn't such a problem if they are cheap to begin with and end up well in the money. At expiration, every month, the majority of my longs end up worthless. However, it has been true that I have a sufficient number that are up 400 to 2000% so it more than makes up for the former. (Is this Pareto's law?) I started this thread to see how the same philosophy would work with long term debit spreads. The idea being that I would get a higher win percentage in return for lesser maximum return per position. Unfortunately, I don't think there is much experience with such a method that other people here can share.
Well, since last April we have had one long sustained bull ride. Only the paranoid survive in options so I would ask myself two questions: 1) How did I do on a portfolio ROE basis versus, say, buying-and-holding the S&P500? Only if I beat this benchmark by a lot (to compensate for extra risk taken) would I evaluate my method as "works." 2) What will I do when the long-term trend shifts? We could easily have a year where the market is down 10% -- not a ton but enough to cause a lot of misery for those who bought ITM calls. Also, the prior comments you've received on this thread seem quite helpful. Clearly your strategy is a little unorthodox which is good if it works. You are right though to test it by asking others to poke holes in it. At the end of the day it only has to work for you; the rest of us will go back to whatever works for us.
On any one month, I have had about 3% of my total portfolio invested in calls. The rest is in stocks and cash. I almost always buy the calls 1 or 2 strikes OOM. The average return, on the call portfolio, for each month has been about 75% with a range of -15% to 130%. I think that besides the bullish trend of the market, low IV has helped. I have been keeping about .5% of my portfolio in puts during this experiment. Almost all expire worthless. I suppose that during '02, I might have been successful with a reversed procedure. Judging by the insulting comments, some people have made here, I might be on to something.