The following is my trading records for the past 4 years: 2008 -93%(-630,000) 2009 +215%(226,000) 2010 +95%(367,000) 2011 closed the book on 6/28/11, +23%(186,000) My approach is simple. Build a portfolio of 100 to 60 different companies or ETFS by selling puts. I use IB portfolio margin. I liquidated the account on Tuesday, the day before the Greece vote, because of the fear factor. I want to try less risky strategy, like spreads. But I am wondering what kind of returns I can expect. Please share your thoughts. Thanks.
Spreads will certainly reduce the risk and volatility in your account. Yours has had wild moves. The first year must have been exceedingly painful. I see that you are profitable overall, so it's worked out for you OK. Reduced risk and volatility also usually mean reduced returns, as well. It really depends how you set up your structures. If you continue your current general strategy using spreads, however, you simply keep selling the current "flock" of puts on these companies and then buy ones that are further out for a bit or a lot of protection (which depends on how close the spreads are together or if you buy extra ones at the furthest OTM strikes). If you are using 60-100 companies, you can also simply buy SPX puts for generalized (but not matching) protection against the entire group. I'm not sure how close to the money you are going on your put selling, but one possible idea would be to have SPX protection at about the same level as the distance OTM on average. To make this thought clear-- if your average put is running 10% OTM, then buy SPX puts also 8-10% OTM. That way, if the market falls 10% or more on the whole, you will be able to close the SPX puts for a significant profit as a hedge against your put selling portfolio. If you sell 500 puts for the group as a whole, you would buy a similar amount of SPX puts as a hedge. SPX puts will be generally cheaper on a per unit basis than regular stock options leaving you with a net credit overall. Of course, any time the market moves higher, (like this week), your SPX put portfolio would get hammered, dramatically reducing your profits from put selling. That is what spread protection will do. As you know, options give you a world of choices, and there is no free lunch.
Thank you, John. I like the advice of buying SPX put as a hedge against the portfolio. It is a cheaper insurance. Yes, the first year is very painful. I just didn't believe the financial stocks would collapse to such magnitude. But I am glad that I didn't give up. I hope that what didn't kill me will make me stronger in the future.
No one can answer that accurately but if you're willing to put in the effort, you can. (A) Pick an UL. Determine the IV of the option sold (or use an arbitrary average for the UL). Extrapolate the cost of the protective/long leg strike. Determine the closing price of the UL. If held to exp, max loss is strike diff less premium receive if outside the long strike. If inside, ITM amt less premium received which may be a gain or loss. If closed before exp, you'll have to extrapolate the price of the long leg. Wash, rinse, repeat for all of your positons. (B) Use a historical data base and instead of (A), look up closing prices It's a bit of work but your own trading records will tell you approximately how spreads would have performed instead of being nekkid. The simple answer is that gains and losses would have been muted but loosely speaking. with spreads, the largest loss years would have been reduced far more than the smaller gain years.
Look at this thread, starting on second page with Atticus' posts. http://www.elitetrader.com/vb/showthread.php?s=&threadid=206482 Also, there is a book called Put Options by Jeffrey Cohen that shows how to protect your put portfolio against market crashes. You seems to be doing very well with the puts in "normal" markets, with a little downside protection you can outperform vertical spreads in my opinion. Care to share more about your strategy?
This doesn't add up. If you lost 93% == $630k in 2008, then by arithmetic you ended the year with $47k. So a gain of 215% the next year would be only $102k, not $226k -- unless you're adding cash to the account?
Yes, that seems right. Here's a quick table, in $k, assuming his 2008 info as the starting point, Year Start End Ret Ret$ 2008 677 47 -0.93 -630 2009 47 148 2.15 101 2010 148 289 0.95 141 2011 289 355 0.23 66 -322 Tot