With these insane markets, we pulled the plug and use up almost all the margin available on the following trade:
sell to open 4 PUT MON 2011JAN22 65 for $4.95 USD
net premium: $1,965.05 USD
margin requirement: $24,034.95
strategy used: near 52-week low
probability of success: medium
comments: with MON closing @ $71.10, there is a downside protection of 8.58%, this trade has a medium chance of expiring worthless. if we observe the price action over the course of this month, there is a strong support at USD 70. i am fairly confident this trade will be successful, as people will always need to eat and the commodities sector so far has underperformed most other sectors during this amazing rally.
Current Options Portfolio
realized gain
Last updated May 7, 2010
note: calendar year total return is approximate
Reading Material
101 Options Trading Secrets
Using a Put Selling Strategy
The Beauty of Selling Put Options
Put Option Selling: Ge Paid to Buy the Stocks You Want
Options Selling - 5 Simple Success Tips
Risk of 'Unlimited Losses' in Naked Option Selling is a Myth!
Here's a Different Way of Looking at Options
Using a Put Selling Strategy
The Beauty of Selling Put Options
Put Option Selling: Ge Paid to Buy the Stocks You Want
Options Selling - 5 Simple Success Tips
Risk of 'Unlimited Losses' in Naked Option Selling is a Myth!
Here's a Different Way of Looking at Options
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Final Commentary
The experiment was a great success overall. It is very obvious there is no way to beat the indices in a major bull market runup. The selling put strategy works best in a slightly bearish and neutral market. Day to day market movements are mostly dependent on daily economic news as seen throughout 2010.
Success purely depends on market timing and also on lady luck. If you started to sell puts at the market peak of August 2007, obviously you would have gotten burned badly. No technical analysis in the world would have saved your ass at that point. Cash was king in bear market of August 2007 - March 2009.
The best trading advice is being cautious at all times and carefully plan out your trades. Time and sector diversification and selling strikes that are far enough from current market levels will give you the best probability for success.
I hope you have learned a lot from this blog and hopefully you are now ready to start trading with real money. The biggest risk, is not taking risk. No risk, no glory!
Donald
Success purely depends on market timing and also on lady luck. If you started to sell puts at the market peak of August 2007, obviously you would have gotten burned badly. No technical analysis in the world would have saved your ass at that point. Cash was king in bear market of August 2007 - March 2009.
The best trading advice is being cautious at all times and carefully plan out your trades. Time and sector diversification and selling strikes that are far enough from current market levels will give you the best probability for success.
I hope you have learned a lot from this blog and hopefully you are now ready to start trading with real money. The biggest risk, is not taking risk. No risk, no glory!
Donald
Experiment Ground Rules
This is an experiment to evaluate how successful my selling cash covered put strategy over time. The target end date is January 22, 2011. Over the course of the year, market and trade recaps will be posted frequently. This paper trade is solely for educational purposes. To keep things simple, here are some ground rules before we start:
1. We start with an imaginary $100,000 USD cash portfolio as of February 15, 2010.
2. We only sell cash covered puts on large capitalization companies and ETF Indices with expirations at most one year out.
3. The minimum premium received should be at least $1.00 USD per option after commission. We strive to sell near the 52-week low level strike level most of the time if possible. Due to the major runup in the markets since March 9, 2009 lows, this will be extremely hard to find a trade with decent credit within the one year time allowance. The alternate strategy is to find stocks that bounces strongly off a certain support level or trend line and we will sell puts options near that particular strike.
4. Ideally we want all trades to expire worthless. If the option is in the money at expiration, we will take delivery of the stock. While respecting the NET $1.00 premium after commission, we will write a call option (covered call strategy) at the same strike that we sold the put at. Ideally, we want to write the front month option if possible, otherwise we will write the first available month that will give us a minimum of $1.00 premium after commission.
5. We assume there will be no assignment during the life of the trade.
6. Commission used will be $9.95 (base) + $1.25/contract and the assignment fee will be $39 (base) + 8 cents/share.
7. To keep the portfolio diversified, we will trade at most three options within the same sector, but we will trade the same underlier with different expirations.
8. Ideally trades take place on a down day or whenever a stock declined in value.
9. To initiate a position, we will use the closing bid option premium on that day.
10. Interest earned on the cash will not be calculated.
1. We start with an imaginary $100,000 USD cash portfolio as of February 15, 2010.
2. We only sell cash covered puts on large capitalization companies and ETF Indices with expirations at most one year out.
3. The minimum premium received should be at least $1.00 USD per option after commission. We strive to sell near the 52-week low level strike level most of the time if possible. Due to the major runup in the markets since March 9, 2009 lows, this will be extremely hard to find a trade with decent credit within the one year time allowance. The alternate strategy is to find stocks that bounces strongly off a certain support level or trend line and we will sell puts options near that particular strike.
4. Ideally we want all trades to expire worthless. If the option is in the money at expiration, we will take delivery of the stock. While respecting the NET $1.00 premium after commission, we will write a call option (covered call strategy) at the same strike that we sold the put at. Ideally, we want to write the front month option if possible, otherwise we will write the first available month that will give us a minimum of $1.00 premium after commission.
5. We assume there will be no assignment during the life of the trade.
6. Commission used will be $9.95 (base) + $1.25/contract and the assignment fee will be $39 (base) + 8 cents/share.
7. To keep the portfolio diversified, we will trade at most three options within the same sector, but we will trade the same underlier with different expirations.
8. Ideally trades take place on a down day or whenever a stock declined in value.
9. To initiate a position, we will use the closing bid option premium on that day.
10. Interest earned on the cash will not be calculated.
General Investing Guideline
1. You are the best person to manage your own money
2. Treat this as a hobby and have fun. If you treat investing as a chore, your success rate will be much lower on average
3. Patience (There’s no such thing as once in a lifetime investment!)
4. Do your Due Diligence
5. Keep abreast on economic news daily
6. Keep it simple – Focus on large capitalization companies that have high competitive advantage
7. Concentrate on cash flow as opposed to capital growth
8. Buy at value
9. Diversification
10. Risk Management (Risk only what you can afford. Setup stop loss limits. Once the stock hits your stop loss limit, closeout your losing position and move on to the next trade)
2. Treat this as a hobby and have fun. If you treat investing as a chore, your success rate will be much lower on average
3. Patience (There’s no such thing as once in a lifetime investment!)
4. Do your Due Diligence
5. Keep abreast on economic news daily
6. Keep it simple – Focus on large capitalization companies that have high competitive advantage
7. Concentrate on cash flow as opposed to capital growth
8. Buy at value
9. Diversification
10. Risk Management (Risk only what you can afford. Setup stop loss limits. Once the stock hits your stop loss limit, closeout your losing position and move on to the next trade)
Options Trading Guideline
1. Pick up any option book and start reading. There’s ton of information on the Internet and be sure you read difference sources. Make sure you understand the structure, the risk and the profit/loss of any option strategies
2. Always paper trade any strategies that you are unfamiliar with
3. Focus only on highly liquid options with excellent daily volume (DOW JONES listed companies for example)
4. Determine your outlook on a particular stock or index or futures well ahead of time - you can be bullish, bearish or even neutral (only options allow you to trade this particular stance)
5. Options are more a swing trade thing than a day trade (usually 1-6 months in duration) – Never force a trade, just for the sake of trading. Patience is key, you have to give it some time for a strategy to develop.
6. Never use options to speculate (some do, but I don’t)
7. Knowing some basic technical analysis will help you place more successful trades (especially knowing support and resistance levels)
8. On average approximately 80% of options bought expire worthless – it pays off to be a seller
9. Diversification
10. Risk Management
a. Setup stop loss limits, closeout the position immediately once it hits the prescribed threshold and move on to the next trade.
b. Never let a straight and simple long option position expire worthless. Always salvage some premium and move on to the next trade. Avoid 100% losses.
c. Risk only what you can afford and don’t overextend yourself. (10 contracts = 1000 shares or 1000 cash multiplier!). Know how much capital is at risk all the time.
d. Never borrow money to purchase options. Options are highly leveraged instruments and you can easily lose your shirt very quickly. Option premium prices change constantly and rapidly.
e. Always have enough cash at hand to cover an assignment (AMERICAN style options can be exercised anytime)
2. Always paper trade any strategies that you are unfamiliar with
3. Focus only on highly liquid options with excellent daily volume (DOW JONES listed companies for example)
4. Determine your outlook on a particular stock or index or futures well ahead of time - you can be bullish, bearish or even neutral (only options allow you to trade this particular stance)
5. Options are more a swing trade thing than a day trade (usually 1-6 months in duration) – Never force a trade, just for the sake of trading. Patience is key, you have to give it some time for a strategy to develop.
6. Never use options to speculate (some do, but I don’t)
7. Knowing some basic technical analysis will help you place more successful trades (especially knowing support and resistance levels)
8. On average approximately 80% of options bought expire worthless – it pays off to be a seller
9. Diversification
10. Risk Management
a. Setup stop loss limits, closeout the position immediately once it hits the prescribed threshold and move on to the next trade.
b. Never let a straight and simple long option position expire worthless. Always salvage some premium and move on to the next trade. Avoid 100% losses.
c. Risk only what you can afford and don’t overextend yourself. (10 contracts = 1000 shares or 1000 cash multiplier!). Know how much capital is at risk all the time.
d. Never borrow money to purchase options. Options are highly leveraged instruments and you can easily lose your shirt very quickly. Option premium prices change constantly and rapidly.
e. Always have enough cash at hand to cover an assignment (AMERICAN style options can be exercised anytime)
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