Karen’s main trading strategies focus strictly on selling premium and using Bollinger Bands to view the standard deviations in a graphical form, preferring to put on trades outside of two standard deviations to current prices. She used to trade as many as 30 stocks at a time, but was continuously burned by the earnings announcements of the public companies she held in her portfolio. Karen revised her strategy to focus on selling wide Index strangles in SPX, RUT and NDX.
Today, she mainly trades the S&P 500 Index (SPX), which in addition to tax advantages has commission optimization, liquidity, and size, as opposed to SPY, which she says is too expensive for her to trade cost effectively.
Karen sells contracts at 56 DTE (Days To Expiration) and keeps the trade on for a few weeks, or sometimes, just a few days. She then takes the front month off and sells the back month, again at approximately 56 DTE. Around 40 days, if the options seem safe, she leaves the front month on, but more often than not she takes off her initial position 10 to 25 days later. For example, by October 30th she closes out of most of her November positions and already has positions open in December.
When volatility is high, Karen constantly trades, selling and collecting premium. If volatility is low, she often lets her front month positions expire worthless. For her, good volatility is when the VIX is between 18 and 20.
Karen also ladders out positions – opening positions at different expirations, and always trying to sell Calls and Puts 95% OTM (Out of The Money) or two Standard Deviations away.
Karen always looks at the market as if it has already fallen 100 to 200 points, and then subtracts 12% more from that.
For example, if the SPX was $1,450, Karen may subtract 100 points to $1,350 then multiplies that by 0.88 (12%), giving her a price of $1,188. Karen would then actively trade in that area.
Karen does sell Calls, though much less often than she sells Puts. She also legs into each side of the market rather than placing trades as “strangles.” As a contrarian in her trading style, Karen sells Calls on up moves and Puts on down moves. Most often Karen sells more Puts than Calls.
Another risk metric Karen uses is the analyze tab on the thinkorswim platform, utilizing the parameters of 10% up and 12% down to see how her net liquidation would look if the market were to move in either of those directions. Karen’s goal is to prevent her trades from going ITM (In The Money). If a position moves close to 30% ITM (In The Money) she makes an adjustment by moving her positions up or down when the underlying hits that level. She might sell more options on the untested side to cover the cost of moving the position, but she also looks at the time left on the option to make decisions on whether to close or roll a trade. Karen rarely leaves open positions in front month options but may do so if they are nearly worthless.
Karen commits around 50% of her capital, though sometimes she will go as high as a 70% capital commitment, but prefers to remain at around 50% in case she needs to move positions up or down. Karen never uses “stop losses” because she and her team watch the markets at all times.
In 2013, Karen claimed she did not have a losing month, nor did she have to roll out her front month positions to the next month. She used between 1 - 1 ˝ Standard Deviation to open positions rather than a 2 Standard Deviation. As for a time frame, she sells Monthly Puts and Weekly Calls, two weeks out, trading closer to ATM than she has in past years.
The following 8 users say Thank You to Cogito ergo sum for this post:
That strategy of hers to manage the winners by rolling out to back month is interesting. I always try to have a standing order to close short positions once they get to ~1/4 of the original value. Like with this recent up move in CL some of my puts are now sitting at the bid, ready to be closed out.
Would be interested to know how you guys manage your winners, other than holding to expiration?
Here's an example. I sold some CLQ 75 Puts at 0.05 on April 16. If I'd held them until expiry on July 17 they would have made about 3.7% monthly ROI. My spreadsheet showed a better ROI if I closed the position at 0.02 at any time before May 24. So I put a GTC BTC order at 0.02. I got a partial fill on May 9, giving approx 14.7% ROI, and the remainder of the position closed on May 13, giving 12.6%.
Thanks again Ron and Kevin.
The following 3 users say Thank You to MGBRoadster for this post:
I am beginner to future options world.
Appreciate to all of your great posts to extend my limited knowledge in commodities future options trading.
Recently I came cross to this tastytrade video - Rising Star - Craig. You may google and watch it.
It is sharing the story of the rising star - Craig, who also using karen's strategy to trade /CL only with no single losing trade.
a. Initial capital about USD34,000
b. In year 2012, 100% capital return, i.e. USD68,000
c. In year 2013, 100% capital return, i.e. USD136,000
d. In year 2014 March, about 10-20% capital return.
His strategies only selling /CL with following conditions:
a. 60 DTE
b. IV 20%
c. Close the position at 30 DTE, he claimed that the premium drops 80% from its origin value.
I just funded the trading account and would like to trade /CL using his simple strategies.
This is my first post in the forum. Thanks for reading and comment.
The following 4 users say Thank You to haeloong for this post:
100% return selling options is pretty aggressive, based on my personal experience. Obviously, it can be done.
My one piece of advice: take a look at CLs history over past 2 years. Compare it to the period of 2006-2010, with regards to volatility. I wonder how well an aggressive option selling approach would have worked then?
If you have any questions please send me a Private Message or use the futures.io "Ask Me Anything" thread
The following 2 users say Thank You to kevinkdog for this post:
That's excellent advice, esp. for a beginner. CL volatility (ATM options) reached an all time low in December 2013. It's still very close to that low. As measured by $OVX, let's call the current figure 16%. In the first week of August 2011 it spiked from 30% to 60%. In the worst of the financial crisis it reached 100%.
If you're just getting started, be careful, and I'd recommend defined risk spreads. Yes, they reduce your profit potential, but on the plus side, you're buying your protection at a very low IV, too.
The following user says Thank You to CafeGrande for this post:
I have started doing similar thing recently. Have not seen Craig's video before though. The main question for me what are the deltas of his shorts. It looks like he using 10 delta. I am much more conservative and staying between 2-3 delta. There is still nice profit at that level and I sleep better