Sorry in advance for the long post. Hopefully this will be useful to someone on the fence about starting to trade OTM options...
OK, last weekend I made the decision to try out the "sell deep OTM options" strategy. On Monday, I opened an account with OptionsXpress. By Friday (today), I was funded and made my first trades (below). Super quick process.
Some intial thoughts/musings:
I have never traded options before now. But, I already knew all the lingo, calculations and the basics of options. Also, I have been trading futures for over 20 years. So, I wouldn't recommend a newbie jump into this like I did.
OptionsXpress has by far the best customer service of any broker I deal with, and I currently have 3 other futures brokers and 1 forex broker. I dealt with them via e-mail and live chat, and always got quick, straightforward answers.
I found a deal where the first 50 trades (until June 30) are basically commission free. They still hit you with exchange fees, and some other 75 cent "transaction fee," but for a few months I'll be paying aorund $2.20-$2.50 per contract. After the promotion goes, assuming I am still trading this method, I'll ask for a discount like others have. When I do my initial ROI analysis, for now I still assume $15.51 commission per contract (worst case). ROI numbers below will use actual commission I am paying.
If you saw my Big Mike webinar in December, you might remember I was big on "incubation." In a nutshell, the idea is that once you find a trading strategy, you don't use real money for a couple of months, and instead you just watch it in real time. It is a great way to save trading capital when you create one of those "looks great in backtest, fails in real time" type systems.
Obviously, I violated my own rule here (cue foreboding music). I did that because 1) this is not a traditional backtested system and 2) I felt I could only evaluate it by actually using real money. So, in effect I am incubating this approach, but with a small amount of real money. Mid year, if the method (the way I implement it) seems to hold up, I plan of moving an IRA account there, and trading it more heavily.
OptionsXpress Trade Calculator is a pretty neat tool. Even though it has OE margin requirements, I am using it to evaluate spread positions I trade with another broker (who has no online margin calculator).
My initial "test" here will try to get the 3 x margin requirement around $1,000. Most times this will mean selling only 1 contract.
So, here are the trades today (I will use the same reporting style as Ron has):
Sold 1 CLJ3 75 put for .07. Margin $327, cash excess $654. 42 DTE. $2.22 fees. ROI 5.0% per month (seems so good, I wonder if I did something wrong)
Sold 1 KCK3 200 call for .21. Margin $344, cash excess $688. 70 DTE. $2.52 fees. ROI 3.2% per month (seems so good, I wonder if I did something wrong)
I have one other open order. If it gets filled today, I will go back and edit this post.
Below is how I plan to "watch" these trades. Much slower pace with options than my normal futures, so my monitoring method may change.
Comments/questions/criticism will be VERY appreciated. Especially criticism - please feel free to challenge me on my trades and my calculations.
Last edited by kevinkdog; February 1st, 2013 at 12:28 PM.
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Great that you have decided to give selling OTM options a try!
I am looking at the same KCK3 200 call strike too but I do not have a position yet, probably Monday I will put in an order.
I did ask OX about rolling over my 401K. The bad news is that they told me that I cannot sell options on futures in my 401K/IRA account at OX. I am not sure where Ron99 has his IRA account but I do not think it is with OX. I am sure he can answer that when he is back.
When I opened my account with OX, they were very willing to negotiate my commission structure. I am certain that it helped me to mention the extremely low commission I was getting at IB. I did not expect OX to match IB but I was pleasantly surprised that OX went from $12.99 to $3.99 (exchange fees are separate) without any quota requirements on how many trades I must make. So it does pay to negotiate with OX.
And yes, Trade Calculator is indeed a very neat tool. I have been using it a lot to get an idea about what my margin requirements would be. I like to use the Trade & Probability Calculator too although I don't think it is entirely accurate some times.
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