Thanks for the insight and glad to hear you are doing well Ron.
Vic Sperandeo's books are some of the few that helped me out and he warned that in the long run ppl selling naked OTM options have the buyer expire worthless 90%+ of the time, but the rare 10% crude (or whatever) move against them kills the profits. Scared me off.
My difficulty in general with buying options through a broker has been having a good idea the levels - but not the timeframe parameter in which it occurs - and worry over time decay.
From the sellers point of view I don't see how unexercised and worthless are all that different. For most traders though the margin will force you out before you even have to worry about having the contract put to you.
Last edited by mongoose; February 24th, 2013 at 01:40 PM.
I think unexercised means "closed out before expiration." Those options could be profitable or not when the are closed out. They just were never exercised, but they would have some value at the time of closing - otherwise why close them out?
Welcome. Thanks for sharing. I used your method and plugged in various strike combinations with CL and W, when I have time I will try it on KC, SB, GC and a few others. So far I really like the potential results, especially if I can collect 2x to 3x more premium than the required margin.
Here are some of my observations and questions:
1) At first I was concerned about the extra commissions but I quickly realized that the potential profit will more than cover the costs. Plus being able to stay in a position to weather the volatile times is always a good thing. Keeping margins low and manageable is also very important to me.
2) I know you mention that you usually only stay in a trade for 3-5 weeks and exit with a nice profit. And I can understand why too cause if the front month long options expire you would be left with a short naked position or have on a strangle which will require 2x-3x or even more margin. So my question is have you stayed in a trade until expiration and how do you deal with the margin increases? Especially on IB too where margins are much higher than most places.
3) A 95% win rate is obviously awesome but how do you deal with the 5% of losers? What is your stop loss plan? I realize that your positions provides a 2-3 point hedge but a position of 30 CL's is $60,000 to $90,000 in potential losses. I am certain you will not allow any trade to get to that point so where and when would you take a loss?
Actually had to drop KC & SB from my system as had trouble getting reasonable fills at the strikes my system indicated, but it works great for markets like ES, GC, CL, W.
1) Yes the commissions are more than for naked options, but it's certainly worth it from an ROI perspective. I do often end up keeping the long legs until expiration as by the time I'm taking profits on the short legs the longs are worth very little, so keeping them saves on closing commission and gives me a portfolio that's actually black swan friendly (which is nice when selling options!)
2) No ever stayed until expiration as once I'm past 70% profit on the spread I bring in the shorts (and sometimes due to weekends/long weekends/luck I'm actually closer to 80% profit by the time I get my order in and filled). Margin increases haven't been too much of a problem because I hold a lot of cash and peel off some contracts if a margin increase takes me too far from my ideal position size. However with spreads any margin increases have a much smaller impact than with naked options.
3) I'm really risk averse and it's taken me over 12 years to get to my current level of profitability, so to me not making money = risk of losing money so if by 3 weeks into a trade I'm not reasonably profitable I close it out early (a time stop if you like on losses, breakeven or minor profits) so my losses are relatively small given the size of trades I do. Yes I'm probably giving up some trades that would ultimately be profitable but this rule works for me. Also with the double diagonal spreads one side will always be very profitable if one side is approaching a loss. My system is specifically looking to enter on a volatility spike so usually turmoil gets me in and a quieter day really allows the shorts to decay rapidly. The $ risk looks big but are position sized appropriately to my account size (Van Tharp has an excellent and very detailed book on position sizing, doesn’t cover option selling specifically but the principles are solid and can be made to work).
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