Low risks 'set & forget' options strategies

Discussion in 'Options' started by virtualmoney, Jul 11, 2010.

  1. I have heard of option traders mentioning low risk methods (maxDD ~8%) they use in options strategies where they get a fixed return ~5% every month/quarter by setting up a number of combo option spreads and leaving it on their own...Is this true?
    Are they refering to both covered call + cover puts combined?

    Stocks, Vix, gold, oil and indices can all spike up or down suddenly so are these options strategies applied on treasuries? If not, what instruments are applied in 'set & forget' strategies?
  2. What do you have to offer in return for knowing? Here a principle (mine): "What looks now like a one standard deviation away is likely to become 2 standard deviations away at around 75% of the time trip. ". One side sees one standard deviation, and another sees 2 standard deviations.
  3. drcha


    There was a paper floating around a couple of years ago about selling the near-month straddle or near-the-money (1st or 2nd) strangle on TLT each month, and letting it go to expiration (presumably you would take it off a day or two before). There was a positive expected return for this strategy over time--I think it was about 20% annually. The paper explored several strategies for supplementing this method with hedging, profit taking, etc., and I think concluded that it was best to simply put the trade on and do nothing further. The only 'adjustment' they did find useful was to try to enter the trades during volatility spikes.

    It is not too bad an idea for a small portion of your capital, but I would not be willing to do it with anything too volatile (this is why they chose quiet little TLT-which clearly would have bitten you badly if you had done this over the last few months). Definitely this would be a bad idea with individual stocks, especially in earnings season.

    While a set and forget strategy may be do-able, it's hard to see how it could be optimal. Anything with shorts gets crazy the last few weeks, so that near expiration, you find yourself risking a large amount in order to pocket a very small amount. Possibly a better twist would be 2nd month options and trying to get out around 2-4 weeks early. A longer time frame gives you a chance to wait for a favorable volatility condition and also allows you time to put on the same type of trade at different prices of the underlying, thus widening (but also shortening) your profit zone.
  4. drcha


    Nothing that makes 5% per month is low risk.
  5. If futures,say s&p index,expires towards cash value and option on futures premium decays, can an almost equal delta spread trade be created in opposite directions by selling call/put options and buying/selling futures so that you keep some premium at expiration?
    Or if futures premium does not take into account volatility, can we close both futures+options hedged position with net profit when option's premium increases with volatility? Any literature on this approach?
  6. spindr0


    Have you been reading the Yahoo bb's ??? :D

    5% a month is 80% a year compounded. If that was achieveable, why would anyone do anything else (stocks, bonds, mutual funds, etc.) ??? Yep, just mortgage the farm and plop it all down in 'set & forget' strategies? Uh huh. Reality check time?
  7. bone

    bone ET Sponsor

    Any opportunity like that gets arbed down to zero in a big hurry.

  8. donnap


    :D Did I hear someone mention free money? Sign me up.
  9. spindr0


    It was the borrowing at risk free interest rates that nailed it for me!! :p
  10. Me too... How/where do I sign to get involved?
    #10     Jul 13, 2010