Been thinking the last few days (I know…scary!)

#ShortPuts – What do you think about this theory?

Looking back over the last 18 months where I’ve been predominately just selling puts and covered calls I realized something. Besides my crazy, high risk, entries I rarely receive any stock. Maybe 1 out of 10 times at the very most.

So, with that in mind, here’s my idea…stealing a little of this from Whiz but with my own twist. Whiz will trade very narrow spreads that are relatively safe but uses many contracts. He either wins or loses and rarely adjusts and his wins seem to outnumber losses enough to where he makes pretty darn good money. I was very skeptical at first but after watching him a couple years he really does do pretty good.

My theory is to do something similar but with my rule of never doing it on something I don’t want to own. I’m thinking that on the put sales that you’re reasonably confident on to crank up the number of contracts and use spreads. Then one of two things can happen…

1. The trade will bring in multiple more times the profit of just the put sale
2. The trade will implode and you’ll get stock at a limited downside

Now my strategy would be to allow assignment of number of shares I’m comfortable with and roll the spread loss into the basis and recover with call selling. (Whiz would just take the loss and move on) To help minimize the damage I would close one of the long puts (or however many shares you are willing to take) right at the close on expiration day. This would lock in profit there and leave one short put to get assigned.

If this losing situation were to only happen once every 10 or so trades the additional profit on the winners would be very nice.

Let’s use LULU as an example. I would only want 200 shares max if everything goes bad so that would be selling 2 naked puts the way I’ve been doing it.

Sell 2 Jan 24th 210 puts @ 2.05 for $410 premium

My new trade would be using say a 5 to 1 ratio on the sales vs stock I’m willing to receive and selling 5 wide spreads. You could use more or less depending on risk tolerance. The more you sell the more you have to make back on an implosion but also the more you make on a good trade.

Sell 10 Jan 24th 210/205 BuPS @ .82 for $820 premium.

LULU

Based on the TOS analyze of the spreads the max loss would be about 4180 at expiration on an implosion. My theory would be to sell two of the long puts on Friday afternoon and receive the stock from the two naked shorts that would leave. Whatever those puts bring in the 4180 loss would be reduced by that amount. The worse case scenario would be for the stock to end up right at the bottom of the spread where the longs wouldn’t be worth anything and the spreads would be at max loss. Of course the stock is at a higher level to start call writing which is good.

Let’s say at expiration the stock is at 200. The position would be at max loss but the 2 longs I’m selling are worth a total of one grand reducing max loss to 3180 and giving me 200 shares. The stock would be at 200 and my basis would be at about 226 (210 put sale plus 16 dollar loss on the assignment). I would have to depend on call writing to get that back.

So big picture, if you did this trade 10 times total premium would be $8200. If you happened to get stock once you’d be in the hole the one time and have to recover.

If you did the trade 10 times just selling the 2 naked puts the total premium would be $4100 and you’d own the stock at some unknown levels depending on how much it dropped.

With my “theory” at least the starting point for repair would be manageable if the thing were to “pull an ULTA” on me.

Another twist on this would be to buy an extra long put. It would reduce overall profit but really cap losses on an implosion. In fact if the stock were to tank enough you could make money on the drop. Here’s a sell 10 buy 11 scenario. Max gain drops to about 700 but losses start getting reduced as soon as the spread gets blown out. This would probably be well worth the extra buy.

LULU skewed

Hope some of this makes sense!!

#spycraft

#spycraft The low volume march…

#spycraft

The low volume march to infinity has triggered my adjustment level so I closed the CCS side of the 12/13 318/322 for a 0.83 loss. I am hoping for a pull back on Monday when people return but hoping has never made me any money.

Left the put side open, will close when it is down to 0.05 then loss will only be 0.20.

Following the new rules I opened the PCS side for 12/20 at the 304/301 strikes for 0.24 credit. Will stay one sided until there is a definitive change/reversal.

A rapid flush down I would back ratio.

Happy Thanksgiving Bistro’ers!

#spycraft v 6.1 12/13 291/295…

#spycraft v 6.1 12/13 291/295 and 318/322 IC

Have not added any the last 2 weeks. I am trying a full cycle before adding additional spreads. But what I have so far has proven what almost always happens with these. They are challenged in 1 direction only, in this case the upside. I have a profit but negligible ($49 on a 5 lot vs. 315 at expiration). The short strike is 318 for the 12/13 expiration.

So this is the decision point. Do I close the short calls and leave the puts open? Do I back ratio? Do I butterfly and cap losses to the upside? Or do I just sit on my hands and see if we eventually stay in the range and close for near full profit.

Here is my thought process. We can certainly keep grinding higher but if I back ratio and it stalls or reverses I basically lock in a loss at that point. If I close I lose on the calls but still have the puts making a few extra $. If I butterfly same as the back ratio, basically lock in a loss to one side.

So since I have not breached the short strike I will let it sit and decay and hope for flat or a little pull back. Then might be able to close early for a small profit.

But additional rules to putting these on, I will start them only one sided, then add the other side only at a definitive reversal. In the indexes the credit is generally higher on the put side and father OTM as well. That is something that has been persistent since 1987 black Monday (or was it Friday?). So there is more room and time to adjust to the put side anyway. Plus the market goes down faster than up so at that point a back ratio would make sense and likely give you a nice directional pop to the account.

Also will probably be going shorter time frame, looks like 10-21 DTE may be ideal as opposed to 28-45 DTE. I know the TT research shows 45 DTE ideal and it seems to be for naked options. But with spreads the decay is soooooooo slow it gives the market too much time to move.

Will update if I do anything or if it expires. Then will try the ladder one sided and will post as I open/close.

Anyone else has any ideas feel free to share? I know these can work, the math and probabilities are there, just need to avoid the big losses or convert losing trades to winners or flat.

#spycraft Added the Dec 13…

#spycraft

Added the Dec 13 put side since we are just chopping for now. Now that I put the trade on watch the market move.

STO 296/292 CCS for 0.29. 5 contracts completing the IC with the calls at 318/322. 0.63 credit total.

#spycraft Starter position this morning….

#spycraft

Starter position this morning.
STO the Dec 13 318/322 CCS for 0.34 when the market opened lower.
You could do better now or move up a strike. At the time the short was at delta 15-16.
5 contracts so max risk around $1700 with commissions.

Will wait on adding put spread until a bigger pull back.

Plan is to add new positions each week and manage at 21 DTE or 50% profits, or big movement to the short strike whichever occurs first. If the short delta hits 30-32 would modify.

#spycraft Version 6.1 or so….

#spycraft

Version 6.1 or so.

Trying these again with a small account. Starting value around 6k. They work, the issue is controlling the 1 or 2 out of 10 that go against you and wipe out the gains on the other 8-9.

Here are the mechanics.
Start 28-45 DTE. Sell the 16 delta puts or calls then buy options 3-5 strikes outside that. Manage at 21 DTE or 50% profit, whichever is first.
Set up as ladder so add new positions each Thursday or Friday. As they are managed, roll or close.
Adjustments: back ratio works if you catch it early. The problem is it usually reverses then you lose some on the spread and the back ratio. But if you are going to back ratio I would do it when the delta of the short option doubled to 32.
Other options are convert to butterfly when it hits the short strike. You will still lose but will be much less and if you happen to get a pin then could make some money.
Final option is convert it to a diagonal or calendar. This depends on your outlook for the time the short option is in play.

Will also leg into iron condors depending on overall direction.

Nothing more complex than that.
Plan to start in 2 weeks when my current XBI puts expire in this account. Will post results monthly or so but will post the weekly trades as I open them.

Random stuff that may be useful.

So my 5 week full time trading experiment has been over for about 4 weeks now. Not trying to brag, but had my second best trading month ever even in a very choppy market. Over 9% returns for the month on my total portfolio and now up 38% for the total portfolio for the year as of this last weekend. Several losing trades in there as well.

So ran a few experiments and noticed a few things about the market in live time.

1. While tastytrade has found that the best time to sell options is 45 DTE, it takes a long time for the decay to occur, especially if the ticker moves. I found that there is a huge theta crush from 21 DTE to 14 or 7 DTE for OTM options. You will be closer to the money than 45 DTE, but the theta decay is huge. I may have posted this already and if so sorry for the repeat, but I was in EXPE and several other trades. Had opened both 45 DTE and 21 DTE. It took 3-5 weeks for the 45 DTE options to crush 50% but only 10 days for the 21 DTE to do the same. Recycle capital faster, make more $.

2. #spycraft version 5.1 or so idea. The weekly income is awesome, but then the 5 STD moves crush all your profits and then some. I have been setting up hedges using /ES and SPX and keeping them on almost all the time now. On the big moves down, you can roll for cash and reset the hedge to new levels. You can set up a longer term hedge 90 DTE or so to cover you max loss basically scratching the trade. It will cost more but will prevent the losses. I have not figured out the ideal ratios yet but stay tuned. Plan is to sell 21 day IC or credit spreads, use the cash to buy a few hedges, then roll weekly and keep cash coming in to reduce the hedge cost basis to zero. Other option is convert the spreads to ratios or butterflies. The butterfly seems to limit the losses faster and then if whipsaw no additional losses.

3. Keeping hedges on allows you to be a much more aggressive trader. If the SPX goes to zero, you hedges will be worth much more than your portfolio was. Because of the volatility expansion you can also buy cheaper options than you thought. I have been planning for a 10% drop as my starting point. Then figure out which option would be worth 10k at a 10% drop. Then you can figure out how many contracts to cover your portfolio. Best to do when the VIX is 12. The black swam events seem to be occurring on average 2 times a year since 2015 but are only supposed to happen once every 5 years. I will always have a hedge and will pay for it by selling options or rolling profits from the hedges.

4. #jadelizard and #lizardpies are hugely adaptable. You can often move 3-5 strikes and still take in a credit. You can also skew it to up or downside and really increase returns. If runs through the upper strikes just let it all expire, take the cash, and reset the next week. If it moves down, reset the straddle ATM.

5. #pietrades are still the cash machine but can convert to jade lizards or LEAPs if it really implodes on you.

6. Staying out of earnings trades has been helpful to my equity curve.

7. Staring at 1 and 5 minute charts is mind numbing. Congratulations to those of you that can do it and trade directionally. I can’t and have a lot more fun things to do. I will stay mostly non directional with a slight directional bias and enjoy life and my free time. Most of my trading is on my free time so the less I have to spend trading is more time to do other things. I personally will not take any trade on anything shorter than a 15 or 30 minute chart but my real triggers are now hourly or 4 hour for the weekly trades.

8. Spreads can save your bacon in really volatile markets.

9. Keep enough cash on the sidelines for adjustments and opportunities.

10. There is always another trade or opportunity. If you feel pressured to make a trade, it is probably a bad idea. The less emotional you can be also the better the adjustments/recovery you can make. Think before hitting the confirm and send button and have a plan and stick to the plan if the trade goes against you. Be mechanical in your trading and adjusting. It may seem boring to some but the reason I trade is to make money. I want adrenaline I will go kiteboard or ski and hopefully not break my face again.

11. Having a group to trade with is like extra eyes on the market. Everyone sees different opportunities. Thanks for sharing 🙂

12. Being a specialist pays off. I am a family practitioner but specialists make more in the medical field. Also true in the market. Have a handful of tickers you know, watch and trade. They all have their own personalities and once you know them it is easier to trade them. I think once you have above 10-12 names you are probably trying to do too much. Trading the same tickers over and over has improved my consistency and results. Sure, play the occasional lottery ticket but to pay the bills stick with what you know. And also make sure your tickers are diversified.

Cheers, Chris 🙂

#spx1dte, #spzx1dte