$10,000 Income Portfolio

[humble_pie]

love it

[Argonaut]

I have a bunch of margin maintenance kicking around, so I opened up a spread that I that already sold before with more contracts.

Jan 2013 AAPL 515/525P x5

Lower risk than you guys, but I like to keep it very far out of the money. The premium is still there to be found unlike any other stock, so I can't complain.

[GOB]

Great trade. An incredible ~35% annualized return for a trade almost certain to pay out.

[humble_pie]

sold 1 aapl july 600P at 50.40. It was the dizzying prospect of going above 50 that did me in.

dear CC & other graciously silent skeptics: i beg of you all to gather here one year hence. If aapl cracks below 560-580 we izz toast. The others here will be ok on their life rafts but i have no jacket on this one.

if the does not crack we izz rich at last

[GOB]

September 2012 Monthly Update (and Thoughts)

September 2012 Starting Balance: $35,946.72
September 2012 Ending Balance: $37,582.02
September 2012 ROI: 4.5%
Total ROI to date: 13.9%
Annual projected ROI: 55.6%
October starting balance: $39,582.02 (deposited $2,000)

This past week brought my returns back down to Earth, but I'm still happy with them and I'm still doing better than I expected to. The total and annual ROI aren't very precise because I keep adding funds to the account, so I'm calculating them conservatively (as if all the funds were there from Day 1). That's why total has dropped this month from the last, even though I made profit.

The last week of price action and discussion here has really set me thinking about what the best strategy really is going forward with this portfolio. Despite my desire to own the stock (and I do own a fair bit in my other accounts), my experience thus far tells me selling puts is the way to go.

Here's my thought process - if you find any holes in the logic, please let me know. It all seems a bit crazy but it works in my head.

I'm making 2 assumptions that I base my conclusions off:

1) AAPL will move up and down, but long term will be (much) higher than it is today. This should carry on until fundamentals or valuation changes, which should be evident to me. This assumption, of course, is not a sure thing but I'm willing to assume it is for the purpose of this portfolio.

2) Margin can be maintained as needed. This can be a sure thing if I'm careful and always have cash on hand to fund the account quickly if anything crazy happens.

Taking the above assumptions as fact, the best way to trade an aggressive options portfolio is simply selling weekly puts. Here's the crazy part - I think it may be a good idea to sell in the money puts (strike price above stock price). This makes sense for the following reasons:

1) It will allow me to capture much more of the upside in the stock. I missed out on a good chunk of AAPL's August and September run because the puts I sold were always at the money or out of the money, which meant I had to keep flipping to chase it up.

2) If my put is about to expire in the money, I can roll it forward a week while at the same time getting a small credit. The worst case would be receiving almost no credit if the put is way in the money - never a loss because the option I buy will have more time decay than the option I sell. This rolling forward can theoretically continue on indefinitely, until the stock recovers as it always has in the past. The past does not guarantee the future, but again, I'm making the assumption that we haven't seen the end of the AAPL story.

3) This method gives me more margin than holding the shares. If my account grows a little more, I'll be able to write two separate puts, which I can stagger to take advantage of price fluctuations and increase overall return.

4) If the stock becomes oversold or stays low, I'll be able to write cheap bull call spreads for future gains. Related to 3), I'll have the margin to be able to do this. If I held the shares, I'd be deep in the red and likely wouldn't have much extra room to take on additional trades.

For example, if my account was brand new today, I'd look to sell a $675 put next week. This allows me $10 of share price appreciation, and if we don't get there, I simply roll forward. If we drop to $650, I may enter some spreads to take advantage of the selloff. If we approach or exceed $675 next Friday, I'll roll forward a $685 put, and so on. Pretty similar to what I've been doing, I guess, just selling higher strike prices. It sounds riskier, but I think the risk is only minimally increased, and I can capture much more of the stock appreciation.

Would love to hear everyone's thoughts on this. Please pick it apart if you find any concerns.

[Argonaut]

I like most of what you've said, and you have done a great job. Where I would differ is your idea to sell puts higher than the strike price. The premiums received have diminishing returns the further away from the strike you go. I prefer to just study option chains and don't look at the Greeks myself, but I'm sure there is a (deeper) mathematical explanation for this. Of course, the same is true the further you go out of the money, but this brings the much loved benefit of lower risk of assignment.

[GOB]

You might have a point there. I've only thought about this in my head. It'll be useful to see the live prices as the market moves and determine if going into the money is in fact worth it. Thanks for the feedback.

[humble_pie]

The premiums received have diminishing returns the further away from the strike you go.

same thing with calls. DITM options are often 100 delta, so the premium consists of 100% intrinsic value & all the time value has already decayed. Bids on these options are frequently less than intrinsic value.

however, in nearer-term aapl options i'd expect this feature to be less prominent or even suppressed entirely. Not sure why. Which brings me to item No. 2.

I prefer to just study option chains and don't look at the Greeks myself, but I'm sure there is a (deeper) mathematical explanation for this.

many traders operate like this. On a formal, taught-in-school basis, they may not analyze the greeks or pay any attention to the greeks.

however, what they do have is a wordless, pre-verbal but highly accurate sense for the mathygreeky numerical relationships.

i remember a math student friend explaining to me. We were discussing how so many female students develop math anxiety before the age of 10, how this is a huge problem which educators struggle persistently to solve.

my friend said that tiny children, at the ages of 2 & 3, will know how to set sticks in accurate numerical progressions, even though they don't have the vocabulary to discuss what they're doing & they can't explain their decisions.

the same thing happens with some option traders imho. It doesn't matter whether or not they can talk up a storm about gamma trading. When they look at an array of option prices, they are able to quickly pick & choose according to what seems to be instinct - except it's a "smart" instinct.

[Dmoney]

September 2012 Monthly Update (and Thoughts)

September 2012 Starting Balance: $35,946.72
September 2012 Ending Balance: $37,582.02
September 2012 ROI: 4.5%
Total ROI to date: 13.9%
Annual projected ROI: 55.6%

Awesome returns GOB. Keep up the good work, and keep the updates flowing. Learning a ton from watching your trades and the discussion they generate. While I like my strategy so far, and am getting more comfortable with it by the month, clearly the versatility of options present phenomenal opportunities.

I'd like to give some other strategies a shot, but commissions would kill me. I'd need to be trading higher volumes in the more liquid US market to justify paying $100+ for a spread, and I'm not yet comfortable with the value of my portfolio to be entering significant additional positions.

Good luck!

[humble_pie]

1) ... my experience thus far tells me selling puts is the way to go.

... the best way to trade an aggressive options portfolio is simply selling weekly puts. Here's the crazy part - I think it may be a good idea to sell in the money puts (strike price above stock price).

2) If my put is about to expire in the money, I can roll it forward a week while at the same time getting a small credit. The worst case would be receiving almost no credit if the put is way in the money - never a loss because the option I buy will have more time decay than the option I sell.

1) greatly to my surprise, when i looked at friday's closing aapl option chains i saw that ITM put premiums are rising incrementally with each higher strike. It's the escalating incremental increase that surprised me, not the $$ amount related to each higher strike price. I was not expecting to see this so dramatically. The increment of the rise is somewhat greater with short-term puts like october weeklies, somewhat less with say the 2014 LEAPs.

hmmmn i'm going to have to ask my uber-options-knowledgeable friend about this.

obvious cautions about selling ITM puts have already occurred to gob i'm sure. That they work best in a rising market. When market turns down, the consequences could become trickier.


2) tricky consequences: puts that hover towards expiration not-too-far-in-the-money can usually (always, for me) be rolled forward for a credit. Sometimes a pleasingly significant credit. We've discussed this upthread. Since all of the previous put sells were found money, ie there was no cost base, this strategy has benefits.

however

... the worst case would be receiving almost no credit if the put is way in the money - never a loss because the option I buy will have more time decay than the option I sell

the true worst cases are savage deep drops that plunge an ITM put so deep in the money that, in practice, no rollovers are possible. At those extreme DITM levels, options often trade with no TV premium whatsoever, in fact bids & asks are usually lower/higher than intrinsic values.

in puts, in this extreme crash/collapse scenario, trader might want to roll down only a strike level or 2 in hopes of not having to pay through the nose to buy back the DITM whilst receiving phhhht-all for selling ATM. But alas he will find most or all of the roll-foward put candidates that are within the small range of strike prices close to his existing short will be identically priced. For him, there will be no possibility of profitable rollover. If he tries to roll down, he will find bids below the ask on his current short put. If he tries to roll forward, same obstacle. Geronimo.

next, the trader considers rolling down to a gah ATM put strike. This will create a whopping loss because, of course, he has to buy back his existing DITM short. Plus usually in such chaotic crash circumstances, dealers will increase their B/As, so one or the other or both of those dratted puts are going to sport a vicious bid or ask that will be far below or above intrinsic value.

this is Lephturn's death trap scenario.

a tentative out can sometimes be rolling insanely forward in time, like out to a 2015 put. This is totally depressing, because it puts a drag-lock on the account for such a long time. However the existence of stable LEAPS markets is another criterion that i have for choosing a stock to trade options on in the first place. During armageddon, while the mobs burn down the palace & guillotine all the royal heads into bloody pulp, taking refuge in a faraway-30-month-off LEAPs option to protect one's capital is not the worst thing that could happen.