Doug,
It's valuable to lay out these questions and reason through them. I've been thinking about the same thing but with taking on more risk then you are proposing.
A couple of comments.
I always use, no exceptions "the rule 200% rule" with options. That is, if the option goes against me and doubles in value, the position is closed. No rationalizing, no what if's, the position is closed.
So with the above criteria, I run various "what if" scenario's against the maintenance/margin in the account. With a firm rule on closing bad trades, I find it easier to see what kind of trouble is possible.
On a daily basis, I watch and make sure there is at least 3x the amount cash available to cover the short position. For instance, if the account has 10 options trades currently worth $50k to cover the premium, then I want to have $150k in cash available to cover the positions. In most cases, I want this to be in cash but sometimes will fudge a little by using the value of common shares to help with this data point. As I'm not holding shares much anymore, this doesn't come up much.
I almost never write spreads as the cost of buying the protection in my opinion isn't worth the cost especially with puts. I'm not going to write puts on a stock I wouldn't want to own anyway. When selling calls, the positions are small and am comfortable with assuming a loss if they go against me. Even on an extreme event where a stock were to open at zero in the morning, the naked calls wouldn't bust the account. These are small trades.
In hindsite, option trading has made me a much better trader as I'm forcing myself to adhere to a firm stop loss. It's funny but when I buy a stock and it goes against me, it's usually a slow dribble and I'm not quick enough to get out. With options, mistakes are easy to identify and get of quickly.
Great conversation you've started.
Michael |
