I've created this interesting strategy for options trading and I wondered if anyone had tried anything similar. I always though selling options was a bad idea, but this brings about an interesting form of hedging. I'm going to do some research on the validity of the strategy, but I would like your feedback along the way. www.capturingtheta.com
Huh? Of course, one can enter a short straddle and take BIGTIME risk on the sale of the short call... Instead, and shhhh - don't tell anyone about this new thing - covered calls. Keep it quiet! Just like a short straddle, and with considerably less risk, in the case of CC's, the time value goes down as time passes, and IF the stock stays relatively stable or goes up, one can simply keep that money in one's pocket. (no duh) On the other hand, if the stock is NOT stable, and goes down, one has done nothing but reduce one's basis. (again, no duh) What am I missing? I'm just not seeing what the great revelation is here... With large risk can come large rewards OR large losses.
It's hardly news that you can profit from selling options. I sell call and put spreads on a regular basis. It is essential to use a good stop loss policy.
This strategy is very similar to "scalping a straddle". In this case it is a short straddle, which gives you considerable gap or overnight risk. Try this on a stock that gets a buyout, or a lawsuit overnight and you won't be able to add protective stock before you get creamed. Not to mention lots of brokers will not allow a naked short call on equities, without a large account/high net worth. Like similar scalping a long straddle, or "gamma scalping", profits are never automatic or easy. No free lunch in life and especially in options trading. Good trading to all.
Great point Wayne. I didn't think about the overnight risk. What about trading on futures or forex, which are basically 24/7 (except for the weekend risk)?
Yes, this is just negative gamma scalping, which has been discussed here on numerous previous threads. There's no magic to it. Of course, you can make money if you do it "correctly"... but risks are still substantial. When you go short the underlying when the price goes up, you're covering the call, which is really a synthetic put. So now, your portfolio is essentially two naked puts. When you go long the underlying when the price goes down, you're establishing a synthetic call, so now your portfolio is essentially two naked calls. You're swapping back and forth between naked calls/naked puts as the price moves. And not only are you losing money with each scalp, you still have all of the normal risks with a naked option position.
I would personally never put on a trade that had more or less unkown risk. Sure, it's easy to say "when it gets close to X, I'll just do Y and I'll be safe...". But things happen. And they happen when you least expect it...you just went out lunch for a few and... In my experience, no, you aren't being paranoid---the market IS out to GET YOU! And sooner or later get you it will. So if you like theta gains and think you have a plan, and it sounds like you don't mind dancing around with trades and "adjustments", why not play around with the old standby Iron Condors? Defined risk and (usually) plenty of time to make adjustments. Can you make money with them? Will you not over-lever and slam your account when we get one of those big moves? I don't know. That's up to tha playa.
If you are going to sell options, credit spreads are the way to go. But selling options on ETFs (SPY, QQQQ) can be tough to collect enough premium. You might look at RUT, or if you have big ones, NDX and/or SPX.
If I where about to start trading options again I would look into a strategy to exploit volatility dislocations in various stocks and instruments. Kind of reversal to the mean strategy, a bet that IV will normalize. Sometimes then some major event happens like surprise earnings report the stock make a big move and volatility shots through the roof serval standard deviations. Like then the VIX was trading at 80 last year. Thats a no brainer trade to take, like 95% probability on your side.