Monthly Income Generated

Discussion in 'Options' started by nycderivtrader, Jul 21, 2007.

  1. All,

    Anyone care to provide figures of what they typically generate in a given month selling options, and with the capital required to produce your number?

    lawrence-lugar likes this.
  2. Uh oh.
  3. If anyone answers this obviously loaded question you will no doubt receive answers that consistently writing options will eventually ruin your account. They will use trite sayings like why pick up pennies in front of a steamroller etc. From your previous posts you are new to this so I would give the same recommendation as most in that you should stay away from options until you understand them a lot better than you do now, but I will try to answer your question since others have asked similar ones.

    Anyone who trades options should well be aware that a famous trader who manages hundreds of millions has been selling options for decades and he does quite well for himself. I don't happen to agree with his methodology but it works for him.

    There is nothing inherently wrong with most any option strategy. If consistently selling or buying options always led to your doom then no one would do it anymore. Your success will depend on such things as your trading ability, position sizing, risk management, etc. It is not hard to back test premium selling trading ideas. You win a lot then you eventually take a hit. It is impossible to foresee the much quoted "black swan" event, and it is impossible to correctly hedge a short option against it.

    Some would say that people who sell puts are crazy and they will eventually blow out. This will of course depend on many things, you may or may not survive depending on your methodology. But these same people probably know traders who have gone home long the ES contract with $5000 or less covering it. They feel they are safe because they have a stop in. If there is a major event it can potentially shut the exchanges down before your stop can be traded and the market will gap down. A mere 6.5% gap and your account is debit. Leverage trading, whether it is futures, stocks, or short options involves considerable risk.

    I am not advocating either side of selling or buying or any one specific strategy, to do such would show that you do not understand options. In the hands of an experienced and disciplined trader options can be a good trading instrument. Unfortunately most who trade them are neither.

    Your title "monthly income generated" shows that you do understand the risks involved. Capital is somewhat irrelevant since you can short an option spread with little money. Since July 2002 there has not been a move much over 8% in one month in the SPX, so for the last 5 years you could have been selling options profitably and made a sizable return. That monthly percentage return would get you excited, but if you take into account events like 1987 and 9/11 the safe percentage return you can make is nothing spectacular. If you think to just short calls instead, stock takeovers can kill you, and far out of the money index calls trade for very little but sizable monthly moves, 7%+, do happen.
  4. spindr0


    I keep 100% of the premiums that I sell.

    I just lose on the stocks involved :D
  5. OPT789,

    Thank you for your lengthy response. I have since read several of your other postings and would like to thank you for your informative additions.

    To give you a background on myself- I have been a longer term investor for the past 10+ years and have dabbled in options. I haven't in the past been the largest options seller, however, with premiums (volatility) on the rise/at high amounts, I wanted to understand the variables a little more since this has become more valuable of an -investment- for my objectives.

    I manage a screen of about 30-40 stocks at any one time and have a fairly knowledgeable assesment of each, with a particular focus on my top 10 holdings. I am looking at my top holdings as forms of possible options selling (calls and puts, about 10 bucks out from the strike for the intra month contract). I calculate that these can generate decent amounts of money- pennys in front of the steam roller.

    What I am going on is my knowledge of the underlying and my posts are to help inform me of rates I can theoretically achieve, based upon what I calculate as the capital at risk.

    Thanks again,
  6. Have you read the suggested books, Natenberg, McMillan, etc? Have you charted the implied vs historical volatilities to see if there are better times to sell? What is your risk management, how will you get out of losing trades, how will you hedge, roll, or adjust them? These are all questions you need to answer for yourself before you start risking any significant money.

    If you really want to do this I would suggest using spreads to short the option you want to sell, and start small and diversified. With a vertical you know your exact max percentage return and risk before you even execute the trade. Selling naked is not something for someone new to options. Risk and money management are key since you will win the vast majority of the trades, so the thing that matters most is what happens when you are completely wrong a few times in a row. If you want an oversimplified rule of thumb think of a scale from 1 to 10. 1% return per month is relatively safe and 10% return per month is possible but you incur very serious risk.
  7. What I have started to look into are selling strangles on equities that I am familiar with. I think that based upon premiums that I am seeing, 3% - 5% would be a good yield to pick up with reasonable risk.

    No trading yet and I will continue to price in what I feel is adequate, based upon the underlying. Keep the suggestions coming.

    Here is my long only fund, equities only:

  8. I consistently make 6-9% returns selling options on a100K account. This fluctuates some months but thats the average.
  9. lindq


    The premiums you pick up for a few months will look pretty lame if (when) we have a sharp pullback in the market. It isn't worth the risk. I speak from experience.

    The aforementioned fund manager doesn't sell options on equities. He sells on indexes. Still risky, but less so.

    If you are skilled enough in predicting the movement of the underlying, you are better off simply trading the underlying, and leave it at that.

    If, despite the risks and warnings, you are determined to continue, then you must consider worst case scenarios for your entire trading account every time to take on a position. It isn't fun getting margin calls from your broker because you over-leveraged on short options, the market is moving sharply against you, and you failed to calculate ALL the possibilities.

    A few years ago I was determined to follow the path you proposed. I talked to an experienced options trader and asked him his opinion. Don't do it, he said. Because "shit happens". I didn't listen to him and was very sorry I didn't. It was a 200K lesson I certainly won't ever forget.

    I pass that advice along to you. Shit happens. And when it does, the very last thing you want to be holding is short options.
  10. Better fuckin listen to this guy.
    #10     Jul 23, 2007