What to make of this strategy?

Discussion in 'Options' started by HowardCohodas, Jul 27, 2011.

  1. Write ATM PUT on stock (or other underlying that involves delivery).

    If PUT expires worthless, repeat write ATM PUT.

    If Exercised (take delivery), write ATM CALL.

    If CALL expires worthless, repeat write ATM CALL.

    If Exercised (called away), go back to selling ATM PUT.
     
  2. You're just selling real or synthetic puts in perpetuity.
     
  3. Its a good strategy for stock you want to own long term. But horrible if you dont like the stock at a particular (current) price. Cause worst case you get assigned on the first sold put at price X and the underlying goes from X-your-sold-put-price (your cost basis) to zero while you hold it. You might sell one more call against it but thats about it.

    Not that you shouldnt do it; just pick an underlying you can live with for a very long time; and that has a relatively good chance of not going to zero.

    -gariki
     
  4. Limited upside, maximum downside.

    Eat like bird, sometimes shit like an elephant :)
     
  5. IWM for example?
     
  6. MTE

    MTE

    The strategy is called systematic option writing and it works as long as the underlying doesn't crash.
     
  7. If you do it without leverage: that is you write puts on the same notional your account is, you will probably do well.

    You are buywriting. From research that I have read, historically the strategy has outperformed a buy and hold (on the SPX) not accounting for transaction costs and taxes (a big issue). The research also said that the more out of the money the better you performed because the underlying delta helped as the markets have risen. Slightly better downside than a buy and hold, and lower upside (but indices and large stocks rarely gap up significantly).

    When you account for taxes and transaction costs, the returns may not outperform because you will have too many short term capital gains and constant trading to a buy and hold. Additionally while you will get some part of the dividends, you will miss out on some of them on the account of lower delta and on what dividend you do "capture" you will not get the favorable tax treatment.
     
  8. Are you comfortable holding IWM if it goes from about 80 to say 60? how about 40? 20? How long can you hold and how much can you hold. If you are comfortable then yes? IWM is as good as any other index product.

    -gariki
     
  9. If you think about it these guys have done really well. What they lost in 2008 was about what they make in the other years. So a calamity that we have seen once in 80 years is negative what they make every other year. Their problem is that they are too volatile and if they de-levered their strategy (diluted returns with cash) their returns would look quite good, especially for a premium writing strategy.
     
    #10     Jul 27, 2011