Discussion in 'Strategy Development' started by paysense, Jun 30, 2007.
OK. Say I want to profit from a market that has topped or is going sideways...trying to determine if it is about to correct.
Let's consider taking all the cash in an account - for example $1M - and diversify amongst 3 indexes.
For the sake of argument let's say the QQQ right now would cover that diversification (which it wouldn't since it's probably best to use spx and djx options as well), but for arguments sake:
QQQ @ 47.6
Bid price for Jul 48c @ .48 (above overhead resistance)
Ask price for Jul 49c @ .23
So in the next 3 weeks we stay rangebound (below 48).
purchase price minus sell price is .25 realized gain. Broker may like this trade, since it is 'covered' with a higher strike call purchase.
Question: how many contracts would said broker allow you to sell against call purchases not to exceed 1M cash covering margin requirements?
You don't know this? Requirement = strike differential less the net credit. $75 per contract on the spread. 13,333 before commissions.
Haven't you started another "writing calls" thread?
Yeah...it's called "Naked Index Calls = $$$$". I'm sure you've posted to this.
Anyway, 13,333 contracts before commissions is what I needed to know. I sortof put it out there on the other thread - but no contributors.
What this says to me, is a decent return (20-30%) is possible per optimal market 'event' (as viewed by me/perhaps 2-4 times per year).
If I see institutional distibution days are stacking up and new highs aren't likely in the near-term (or for that matter, if stong accumulation begins at the bottom of a correction or bear market), this strategy may be considered relatively safe (since WOTM/call purchases).
One can simply test the waters and 'phase' into positions with the diversified options across the major indexes to perhaps generate a decent annual average return.
Question 2: Indexes gap up toward and through the strikes. How would one best position a stop-loss method. Before I liked naked index call sells that I'd buy back if a 50% increase occurs. Being 'right' 3 out of 4 times due to the loss would still average a high YTD return. But with spreads how would this similarly be approached with regards to keeping losses contained?
I think I got this one almost figured. In this example the QQQ would have to 'end up' above 48.25 and to become a loser up to the 49 strike or a .75 loss - three times the return!!
But I'm still not sure how this pans out as the QQQ fluctuates - perhaps to head up toward this zone. It seems anywhere below 48.25 would be profitable...but if somehow it pops above this...most of the 1M could be wiped out.
I quess I'll have to paper-trade this and gain experience developing/refiining stop-loss methodology with spreads. Probably just unwind if gap up gets close to exceeding overhead resistance.
However I still don't know what the bid/ask prices will be, in this example, as we get closer and closer to expiration and what kinds of losses are expected??
Bid/ask price spreads are still killer with options. I'd like to see some of these go to the decimalization system.
So now I don't have a clue. Seems markets won't correct as soon as I thought. We are rangebound and not all indexes have 'broken out' (like QQQ????) to new highs.
So my question: SPX and MID spreads are doing...ok?
But QQQ's are above 48.25 (48.31) I sold the AUG 48's and bought the AUG 49's.
Any ideas on minimizing/stopping losses with spread strategy.
I'd like to profit by selling WOTM index calls/ limit margin requirements with call purchase to make a tidy 5-10% return per 'event' a few 'tops' per year - BUT limit the losses to about 1/2 the possible profit.
Any ideas on strategizing said idea?
GakaP [cool, GAP (up) with a hairball sound in the middle - probably consecutively happened lol]
If the above text is an example of how your thinking process is structured I don't have high hopes for you. Best of luck, all the same.
I am not an options trader, but what I've heard is that when the market moves sideways or down, you should write covered calls. Even if your stock gets called away you'll be alright.
You got that right.
...only takes a few years of experience to understand that option "stops" can get filled FAR, FAR away from the intended price. Reason: wild moves on the open.
Better do a ton of backtesting on this one dude....and hopefully, you've got solid option price data history too.
Again, best of luck.
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