Another week. I made $1000 gross on a Wednesday spread and $850 net. I've had two weeks to review weekly OEX credit spread trading. There was an interesting comment from a newbie talking about a 200 point out-the-money credit spread workiing for two years for somebody on the NDX. I more or less compared that to the OEX and it is roughly 10 to 1 in points. In other words, if you put a 4 strike, or 20 point Vertical Bear Call Credit Spread away from the opening on a Monday for the OEX weekly. Your probabilities of success over the past 12 weeks were 93% winning. If you could put on the spread 25 points or 5 strikes away from the Open on Monday, your winning is probably 100% for a year. The fly in the ointment is; there are no premiums so far away. Premiums are usually only 2 strikes, or so away from the action. Early in the week you might get a premium at 3 strikes away. It is not far enough away though and you must move in my NEW RULE until the index moves 1 strike toward your target, so your actual spread is 4 strikes out from the OPEN on Monday. You need an early morning or late afternoon sudden move to balloon premiums then you can get the spread on. So this week past starting on Monday I waited for the OEX to move enough to get on a spread. It did not do so, but I did by three days later, on late Wednesday succeed getting .20 cents in a spread four points out from the open on the Monday. By that time the OEX had moved 1 strike and a couple of index points closer to the 20 point, or 25 point out-the-money goal, above the market. It worked out and I made my money, with a 50 contract spread. Or $25,000 at risk and a 3% reward on margin. I failed to make the trades for Thursday, though if I had, the trade would have been a successful IRON CONDOR. I fell asleep in the hammock, waiting for my buying time on Thursday morning and it passed me by and I missed the opportunity. Option time decay kicks in around 11:45 a.m. on Thursday. You have to beat the premium changing. I've gone over the adjustments and it is just not possible really to adjust much of anything in credit spread trading is my conclusion. You can CLOSE the spread before you get hit on the short, which will not lose the $25,000 but will still lose probably half of it. Other than that, there does not seem to be any adjustments you can make to save a LOSS if it occurs. The Thursday Friday Iron Condor is a good one because TIME DECAY is so big, that you should be able to CLOSE if necessary with a .10 cents, or 15 cent loss. Still huge on a 50 contract spread. The profit though is like 1 % for the risk. I've come to the conclusion you have to gamble, ALL or NOTHING. I am trying to LEG into the spread, to get my 25 points preferably and 20 points if not, out-the-money. Or the 200 points in the NDX At 93% probability of succeeding that is not such bad odds, most of the time. On the down side, in a bear plunge if you tried to do an IRON CONDOR with a Vertical BULL PUT credit spread, your odds of winning are only 66%. Call it in round numbers a 50 - 50 bet. Not very good odds. A lot depends on the volatility of the market. So a check on Monday of the VIX and the ATR would be in order, to know if you should even bother putting on a Vertical Bull Put Credit Spread as that is were the danger is. In a narrow ATR and a low VIX number, it is entirely worthwhile and your odds go up. Otherwise with a large ATR, or high VIX around 25 or higher, stay out of it. Those are my research conclusions and will be trading this way for the forseeable future as far as credit spreads go. Now I have to find a futures broker and see how to trade the E mini. I like the sound of it so far, reading.
Hi falconview, are you actually living in Belize? In the hills or on the coast? The 200 point out of the money only works for monthly options. I havebeen watching it, and still trying to figure out thebest exit strategy if the market moves against you. Is there somehwere you can go back and get the previous months prices on a given date? I had read about the be strategy to buy back the spread when it would cost you 150% of what your original premium was. So say that happened 2 months of the year for a loss, it would only take 3 winning months to make that back. That leaves you 7 months to make say 4-5 % for a 30% annual return without the big drawdowns. I am still trying to figure you mch it needs to move against you to get to the 150% amount. The other option is to do a repair, where you buy back the original spread and immediately buy another further out to reduce the cost of doing this. I still think this has possibilities compared to the weeklies you are doing Michael
Falcon View: I came across some of your posts, and I now realize you are a serious person. Let me give some comments: 1. In some of your posts I got the impression that you may be thinking that the greeks may help in forecasting. They do not. Consider a short call for instance . What (non-delta )greeks would essentially say is whether the stock is heading closer to or far way from the strike. It can be thought of as reference point, which you mention you did not have. Recall that time premium is maximum at the money. Therefore when stock moves towards the strike, you know that time value rise, and which it vega, and gamma (assuming volty is constant). The gamma part is a bitter less intuitive at first, but essentially you can think of it as less time means higher gamma for ATM. In multiple option legs at different strikes, the reference is more complex. You can think of the reference point as a center of gravity of your position, which you can get a feel of by looking at the greeks. In relation to greeks, you are right that they are not important for a retail trader as they are for a market maker. 2. I believe you have a good grasp of trading they underlying. You have also a good graps of risk and reward, and you have patience. I am very surprised you are down in your paper account. An area where options may be of help is when one combine both options and underlying trading. For instance, if one identifies a turning point for a market to move down, one can sell an ITM call. One can do it because if the stock were not to move soon or a move little, the time premium is a consolation prize. Therefore your position will have two streams of income: capital gains (possible, but not sure), and the time value (which is sure) and which you can think of as a rent. 3. If you were to sell at ATM options, the return without leverage cannot be more than around 30%. This is an important point to understand, and I think you got some of that feel when you did the spread analysis. If you move in the money, you can add a bit of capital gains, and earn the time premium as well. So your return might rise (or decline) depending on how good you are in the direction. 4. If you want to sense whether you can have a good system to time turning points, assuming you can do this on a paper account only, I can give some of my predictions so that you have a sense of what others can do or cannot do. If you want to find out, just give your instrument, and I would give what my models say. Again, this is assuming you paper trade only. 5. There are other potential areas where one can do better with options---If we had positive interest rates for instance. 6. There is a side to options that is unseen. It is this unseen that can actually give you extra opportunities. Let me give a pointer. If you were to sell 2 strangles (two OTM puts and calls at two different strikes), you can also view them as selling two straddles one at each strike. Why is this important? If you look at prices, straddle have a minimum value when they are pure straddles, meaning when the stock price is at the strike where you puts and calls are. Now assume you sell 2 strangles. When the stock moves, one of the straddles that is equivalent to the two strangles will have a lower value compared to its initial higher value, which you can cover with a profit. If the stock does not move, the strangle lose time value. So you have yourself in a situation that as long as stock moves and/or time moves (but assuming volatility does not rise too much), you have initial ideas of strategies that take profits from the unseen. Best wishes to you!
Stanford Yes I live in the foothills of Belize, place called Hillview, on the side of Green Parrot Valley. Retired here. I'm going to be 73 in November. For more info, look up WesternBelizeHappenings blog. **************************** "Hi falconview, are you actually living in Belize?" "I have a condo on the barrier reef island of Caye Caulker, but live most of the time in the foothills of the Belize Alps." In the hills or on the coast? The 200 point out of the money only works for monthly options. I have been watching it, and still trying to figure out the best exit strategy if the market moves against you. Is there somehwere you can go back and get the previous months prices on a given date? I had read about the be strategy to buy back the spread when it would cost you 150% of what your original premium was. So say that happened 2 months of the year for a loss, it would only take 3 winning months to make that back. That leaves you 7 months to make say 4-5 % for a 30% annual return without the big drawdowns. I am still trying to figure you mch it needs to move against you to get to the 150% amount. The other option is to do a repair, where you buy back the original spread and immediately buy another further out to reduce the cost of doing this. I still think this has possibilities compared to the weeklies you are doing Michael *********************** I actually ran the exit strategy in real time, about one point before the short side got hit in the spread. The loss is about half of your margin. I came to the conclusion there is no satisfactory EXIT strategy and you better put on your spread so far out, that your risk is as close to ZERO as you can get. Forgetting the premiums, just stay SAFE! I don't understand your 150% exit comment. If you get 15 cents, or 30 cents as a credit how would that work as a calculation to figure when to exit? The spread premium for credit does not actually shrink until Thursday afternoon in the weekly trading, the day before expiration. I believe it would be the same for monthly? You can still get on a 30 cent spread up until three days before expiration day, monthly, or weekly. Early in my testing, I ran in the OEX, three strikes either side of opening in the monthly. I got hit twice in three months, but both times, the movement penetrated one point in the credit spread then retracted, on a FRIDAY at expiration leaving me with the credit. Scary business! My new study of three months of the weekly bar, indicates that all trades MUST be 4 strikes out the money in the OEX. ON the top side. This would translate into 200 points in the NDX. Frankly I can see no advantage to trading one or the other? It is the same percentage change, as the two indexes track one another. Control of lower spreads, the BULL PUT spread is the thing. Not always you can put this on. You need a slow climbing BULL TREND with a small ATR and a VIX chart that is below 18, or 17. The danger then, if any; is when volume dies out and you get warnings of a reversal by the daily bar action. this is fairly easy to read in chart reading. That said the IRON CONDOR in the weeklies is working out each week, put on Thursday and expiring Friday. This is advertised by the guy with PEAK INVESTING. I've been running it, or watching it. It certainly would not likely work on a BEAR PLUNGE? I have not been able to find historical premium prices and what I use is BIG CHARTS. You can get FREE real time if you go to CME, but I don't use them. When I get antsy about real time, I simply move to the BIG CHARTS one minute chart. It is close enough. The premiums float with volatility. Or like an auction with bidding and buying. A short quick trend movement balloons the premiums. Got contributors on here trying to teach me recognizing this intuitionally with the GREEKS, but essentially you can see it as a ticker tape reader, as the index moves up and down, in what is called noise, or flutter. Such things are short and show up on 15 minute and one hour charts. I use the Big Charts 10 day, one hour mostly for that. My trading is done on the one month, one day chart. Premium ballooning is volatility in real time. If the strength of the bidders is there, the premiums will change. You do not need to understand the GREEKS in my opinion. The advantage to selling or buying options in a credit spread, is to get in when the volatility is ballooning. You sell for more credit. You can recognize this on a 5 minute charts as the action moves. When the action reverses you are in at the best credit. Thinkorswim actuate their trades on multiple exchanges and get the best price available and I have them superior to Option House. My conclusion is to disregard the size of the credit spread premium collected and concentrate on RISK, as in the further out-the-money you can go the better for SAFETY. Better not to lose, than mess around trying to squeez more credit. A profit is a profit. A LOSS is going to ruin you with real money. You cannot tolerate it. Legging in seems the only way to do that? You can run a BIG CHARTS back for one or two years, or even more, though they get difficult to read after that. I just run it back three months. If you did MONTHLY BARS and print it. You can measure and calculate the movement from the OPENING of the MONTH bar to the top of the bar, or HIGH. This will give you a number and so far I have found no case when the movement was more than 5 strikes in the OEX and actually 4 strikes except once, which would have penetrated the credit spread on the upside and then came back again, leaving your credit intact. The figures for three months on weeklies done this way show 93% probability for success at 4 strikes out and 100% success at 5 strikes above the weekly open. The one time in the past three months that reduced the probability for 4 strike far out for safety, simply penetrated the spread and reversed into good credit range again. Still if I can get 5 strikes will go for it BIG TIME with 100 contract trade, all the margin that can be spared. On the 4 strike in the OEX, or your NDX monthly 200 points, my guess is you are just below the 100% winning trade level. But I woudn't sweat it, if you could build up the bank reserves. The only advantage to a monthly trade is getting a much higher possible credit in premium. I'm currently thinking to just work on building SAFETY into the weekly trading and go for four trades or more per month this way. In the weekly as the week progresses which is only five days, the choices of STRIKE out the money premium credit limit reduces. We are talking the upper spread, the BEAR CALL SPREAD. The lower spread is always uncertain and HIGH RISK. That is a judgement call, you must make looking at the daily bar chart, versus the ATR and the VIX numbers. The summation is: Do your trading so you don't LOSE - EVER! Go for safety and not for premium.
To: TRADING JOURNALS I've only dabbled with strangles and straddles, buying them. I never made any money, and do not fully understand them. Thank you for your input I'm not even convinced that I can make any money in them? At least buying, and you talk of SELLING, which I think needs MARGIN? I appreciate your comments though and there is so much to try and learn, it is fun of itself. I like the challenges. Your confirmation of my opinion on the GREEKS was excellent. I feel better for it. Sometimes I feel the oddball out of it. My problem with technical intricacies ( like GREEKS ) results from about 5 years with TRADE STATION back in the early 1990's. I finally threw it in the garbage can and went back to simpler methods. You can get too complicated and the forums of those days and years, were full of wonderful exciting jingo, jargon and ideas. I finally realized albeit slowly, as I'm a slow learner, that it was garbage and trading is more or less simple and best learned either from a chart, or ticker tape action. You need a feel for the bidder and buying action. Intuitive feel gained from experience. Maybe I'm just a cranky old man? Still the account balance is what counts to me. The measure of success is the account balance. Regarding my loss. It was deliberate on my part. I wanted the feel, or experience in my subconscious, so I had data to think about strategies. There is so much noise out there and opinions, but until you try it for yourself, there is no good way to eliminate the confusion mixed advice gives you. It was paper money and true it will take me three months to make it back, but no problema, can do. It is a delay, but feel my intuitive sub conscious is now better fitted for doing what I want, which is PROFIT and a good account balance. I can see trading CREDIT SPREADS successfully is not going to make my annual financial target. So while still trading credit spreads, plan to turn my attention to E mini futures recommended by Cache Landing. Join me in the fun of learning and have a good time.
To; Michael Stanford Michael I think your idea of closing the spread as an adjustment when you reach 150% increase of premium is invented by somebody without practical experience. I'm not sure, because I haven't run the numbers myself. Still my experience with CLOSING THE SPREAD resulted in such a LOSS that was gargantuan. The reason is: when you put on a CREDIT SPREAD, you are SELLING HIGH premium and buying LOW PREMIUM. When and if you decide to CLOSE THE SPREAD you will be BUYING HIGH PREMIUM ( the market maker ASK price and selling your cheap side of the spread for even cheaper. Or something like that? Try that on any spread in any time frame, doesn't matter what time of the month. The only time CLOSING A SPREAD will work is afternoon on FRIDAY before expiration. Then one side has gone to zero and the other side is .05 cents. Give it a whirl and run the numbers in an opposite diagonal to selling, between the bid and the ask. The market maker is going to make out like a bandit, much more than when you SOLD the spread. A huge amount more! I may be wrong but guess this is so. Tell me how it works out?
Falcon: I think you are very experienced, and practical. So let me say something that may resonate with your practical experience, but may not resonate with your hopes from selling option premium. What is the maximum one can make from selling option premium? Well, the premium seller is essentially neutral on the market. His best scenario is that he sells the maximum premium, (sits somewhere in Belize and enjoy his drinks), or go sleep with no worries and wake up on expiration day to find the market right where it was when he sold his premium. In essence the market did not move (even if it does in between). Now if you knew that the market will not move, what is the maximum premium you can get? Answer: It is the premium you get from selling the straddle. What is selling the straddle, it is just a fancy way to say you sell one call and one put (both at the money). Go to the prices, and you will see how much a straddle costs. How much you can make from this? It depends on volatility. Let us assume an average volty of say 25%. This means that the market would finish within 25% (up or down) with 68% probability (2/3 of the time). The one year straddle costs should roughly cost 80% of the 25%, which is 20%. The 80% is a rule of thumb of mine. [Try it! If you like it, use it to brag about it to fellows in Belize. I give you the bragging rights! ] Now if you do this each month, you multiply the 20% by square root of 12 (12 months in a year). You will get something around 70%. This is the maximum one can get as a seller of premium. Remember that to get it, you have to sell each month, and the stock does not move from where it was, each and every month. You may by now realize that it is unrealistic to get 70%, but that is reality. Anything more than the above is a result of leverage! The margin requirement of a straddle (at open) is around 20% to 25% for equities (and lower for an index). If you use a leverage of 2, then maximum you can make is 140%. I would be careful trading the futures. The point in options is that your odds of winning on a given trade is higher than playing the direction, which is what an E-mini or other futures trader do. It is a negative sum game in both, but in options you can design things so that on in one trade alone, the odds are in your favor. Cheers!
Woweeee! There is enough meat in that bun, for me to get interested. Will follow through and try it. Can you tell me what happens when a sold, gets in-the-money as to market movement and assignment if any complications? Or explain how to get out with a profit and at what level that might occur? Can you also do this on the OPEN of a weekly, or a monthly set of charts? Some time frame? Lots of the tricks and nuances I do not understand. Thank you very much though for offering this idea and assistance. Love it! What you want for Xmas? ( grin! ) What are the risks, or hazards?
Trading Journals Ten minutes later. Printed out your blurb which got me interested. Then tried to figure it out. Question: I would probably straddle the index. What is leverage of 2 and how is that done? Not clear to me. Since market goes up or down, I presume you have to clear the market maker spread and commissions, before showing a profit? Should you hold to expiration, or you can close anytime you show a profit, and or get a market reversal? ( Think you mentioned something about that in an earlier post. Will have to go back and print it out and start a LEARNING STRADDLE SELLING FILE ( GRIN! )
Got your other contribution printed out and started my selling STRADDLES learning file. ( grin! ) My email is: hillviewhacienda@yahoo.com Presuming you want to send me something? ******************************** I had a friend back in the 1990's who was a multi- millionaire and he and his wife were doing STRADDLES and STRANGLES. Didn't understand then, and don't yet know either. But I will put the time in slowly here, to acquire the tactics and nuances involved if you have the time? ****************************