Option income strategies

Discussion in 'Options' started by akivak, Dec 12, 2009.

  1. akivak

    akivak

    Like I mentioned in my first post, I started using iron condors in April 2009. Despite very strong move since then (rut moved from 450 to 600 – that’s 33% in 7 months, doesn’t happen very often), I had 14% average gain (including two losers). I made 8 trades, 2 losers (6-7% each) and 6 winners. September was particularly difficult, with RUT moving 18%, but I managed to close the trade with only 6% loss. In calendars, I had made an average profit of 12% per month.

    This period was not exactly “normal”, the upside move was much stronger than any historical “average” which is almost as bad for those strategies as downside. I don’t know if this was just luck, but I also watched few services making around 10% a month (including losing months). 10percentpermonth made 139% in 2006, 174% in 2007, 51% in 2008 and 150% in 2009. That included 35% in January 2008 and 30% loss in October 2008. Those results are on invested capital, if you assume 50% in cash, it is still 70-80% overall portfolio return in “normal” years and 25% in 2008. They do IC only, diversifying into calendars can reduce risk and make returns even higher. Look at OptionPundit – since inception 2.5 years ago, they have almost 500% return on invested capital and almost 200% on overall portfolio, with only one losing month of 11% loss.
     
    #41     Dec 16, 2009
  2. Your numbers are a pipe dream. Selling low premium iron condors will never achieve those numbers.

    If u want to anyone to beleeve otherwise, start a chain in the JOURNALS forum and demonstrate it with real time trades or at least EOD.
     
    #42     Dec 16, 2009
  3. akivak

    akivak

    I can definitely do it.

    Meanwhile, here is the history of my IC trades since April 09:

    May: -7% in 31 days
    June: 21% in 27 days
    July: 21% in 55 days
    August: 29% in 25 days
    September: -5% in 70 days
    October: 16% in 45 days
    November: 26% in 46 days
    December: 31% in 43 days

    An example of November Iron Condor trade:
    RUT at 570:
    Bought 520 put
    Sold 530 put
    Bought 670 call
    Sold 680 call
    Total credit: $250 per spread.
    Total capital at risk: $750
    Maximum profit: 33%, as long as RUT stays between 530 and 670
    Closed two weeks before expiration for $55
    Final profit: 26% (250-55)/750 in 46 days

    I’m not selling low premium iron condors, I aim to get $2.0-2.5 which gives me risk/reward ratio of 1:3 to 1:4
     
    #43     Dec 16, 2009
  4. akivak

    akivak

    A question to experts:

    One of the services that I mentioned has the following comment about their Jan. 2008 loss:

    To our surprise, and against all recommendations and basic money management rules, a great number of our subscribers had allocated 95% to 100% of their trading portfolio to this month's trade. With so much allocated for the trade, it left little or no cash on the side that was necessary for the exit trade. When we sent out the alert to exit the trade, a surprising number of subscribers e-mailed us that they could not perform the exit trade. Because of this, they were unable to buy back the losing positions therefore realizing a devastating loss.
    Let this be a lesson for others who are thinking of investing nearly 100% of your trading portfolio in one trade. Keeping money on the side, uninvested, may not be optimal for profit, but risking everything for that gain should not be done. Whatever amount you wish to invest in a monthly trade, an equal amount should be kept in cash. This would represent a 50/50 investment to cash ratio.


    Basically they say that they couldn’t adjust one of the trades in auto-trading because no extra cash was put aside. This caused a maximum loss of 89% in this specific position (RUT).

    I'm not clear how could it happen. Let's say I have 10k in my account and I trade the maximum possible amount (10 RUT spreads) and get $1000 credit. Now I have 11k cash in my account and the maximum margin requirement is applied. Isn't the maximum margin calculated in advance for the worst case scenario when I need money to cover the maximum possible loss? How is it possible that I don't have enough cash to exit the trade?

    10k is locked against my position and cannot be used to open new positions, but it can be used to close the existing one. Since the existing position can never be worth more than 10k, I don’t see how is it possible not to be able to close the trade.

    What am I missing?
     
    #44     Dec 16, 2009
  5. Good trading so far akivak. I've read a lot of IC websites/threads and a lot of people will say, 'just manage risk'. But in my opinion managing risk is taking on a directional bet to counter the unrealized loss of the losing spread, which defeats the point/definition of 'market neutral' strategy?

    in other words, i think that the hedging/adjustment has to have an edge/positive expectancy just like a directional strategy.
     
    #45     Dec 16, 2009
  6. lindq

    lindq

    Experience.

    If you had any, you'd know that you are confusing brains with a bull market because you've been placing directional bets.

    I wish I had a dollar for every trader I've seen post comments over the years about their great income option strategies, because they happen to catch a market wave that supported them for a while.

    And what happens is that they continue to push the envelope, thinking that the nice income stream is going to keep flowing. Then one day, shit happens, and they wish they'd never heard the words 'option premium'.

    Many people have been down your path, including me. And those who have been fortunate enough to survive will be doing you a favor by suggesting - as some have here - that you proceed with extreme caution and expect the worst. Because at some point you'll face it.
     
    #46     Dec 16, 2009
  7. akivak

    akivak

    If I'm trading call and put spreads at the same distance from the underlying, why do you call it directional bet? Then once again, isn't the extreme bull market we had in 2009 almost as bad for those strategies as bear market?
    "proceed with extreme caution and expect the worst" - isn't this correct for any strategy? If dow is down 24% like it did in October 87, I don't think that any strategy would work.

    How do you explain the success of the three trading services that I mentioned? They were succesfull for a long period, including 2008 which was one of the worst bear markets.

    P.S. "What am I missing" question actully refered to a specific issue regarding margin.
     
    #47     Dec 16, 2009
  8. Quote from TheoHornsby:

    Your numbers are a pipe dream. Selling low premium iron condors will never achieve those numbers.

    If u want to anyone to beleeve otherwise, start a chain in the JOURNALS forum and demonstrate it with real time trades or at least EOD.
    --------------------------------------------------------------------------------

    Quote from akivak:

    I can definitely do it.

    a ki vak,
    you definitely live up to your name. standing up against the onslaught of nay sayers. i hope you keep posting and start a journal.

    http://www.hapkiyoosool.com/ki.htm

    best regards, and may you trade in luxury
    traderlux
     
    #48     Dec 16, 2009
  9. gkishot

    gkishot

    10percentpermonth went all-in after 30% loss in October 2008 by buying debit call spread. I don't think you want this kind of risk with your money.
     
    #49     Dec 16, 2009
  10. lindq

    lindq

    Here again, you're falling into a very common trap. It's survivorship bias.

    The mistake is cherry-picking services and/or funds that have shown success during a certain time period, and assuming this is somehow indicative of how you - or anyone - will perform in the future. Hope springs eternal.

    What you are ignoring is the many other services/funds that busted out with the same strategies. But they are deserving of the same attention.
     
    #50     Dec 16, 2009