Hi Ralf and Lance-
Sorry for the delay, I've had P.C. problems. Anyway, here's the basics and the strategy. First, if you want to sell options, you always need to cover them, either by owning the stock or buying options further away from the exercise price. Second, if you want to sell indexes, ALWAYS sell the S&P 500, NOT the 100. The 500 are European so you can't be exercised before the expiration date. The 100 can exercise you before the expiration date and if the market moves quickly against you, you can really get killed. You don't get quite as much premium, but you get alot more safety. Anyway, here's and example from 10/14 closing prices for SPX options expiring in November:
SPX closed at 703.54. The NOV 715 Calls priced at 6 1/2, the NOV 720 calls priced at 4 7/8. You would sell the 715's and buy the 720's (to cover the 715's). Your total profit is 1 5/8 (6 1/2 - 4 7/8). So if the S&P 500 closes anyware below 715, you gain 1 5/8. That's about a 1 1/2 percent move for the SPX in a month, which historically is a good bet. If you did this 5 times, you would make $812.50 (1 5/8 * 500) and $1625.00 if you did it 10 times (1 5/8 * 1000) etc.
On the bear side, you would sell the NOV 685 for 5 and buy the NOV 680's for 4 1/8 for a premium of 7/8. So your profit would be $437.50 for 5 contracts and $875.00 for 10 contracts, etc. as long as the S&P 500 closed above 685, which would be a decline of 2.7% in about a month. Not likely by historical standards. So if the S&P 500 closes anyware between 715 and 685, you make 2 1/2 (1 5/8 + 7/8) or $1250 for 5 contracts or $2500 for 10 contracts, etc.
To calculate your loss, just take the total you would gain (2 1/2) and subtract if by the number of contracts. If you sold 5 contracts the loss is 2 1/2 (5 - 2 1/2). So your loss would be $1250 for 5 contracts, etc. You will always have at least one winner since you are trading both sides.
I started selling 5 contracts on each side in Jan 1994 and the SPX closed in between the strikes every time. You can see how the money adds up after only 3 or 4 cycles. I was trading 20 contracts on each side in 1995 when the index closed outside the range. I did it again the next month (thinking is was an aberation, which historically it was) but it again closed outside the range. I was back to 5 contracts and did o.k., but I stopped when I didn't have the time to follow the markets as much as I should.
The idea of an exit strategy doesn't really come into play. The idea is to let them expire and not pay more commission (which adds up). There were many times where the index was outside my range during the month, but I held on because in the end the market would react in my favor. You end up timing the market, and that really doesn't work. I would just put the strategy on the first or second day of the new cycle, and let it ride. No thought of what I think would happen.
Lafferty in N.Y. has (or at least had) a program where they would do this for you. You might want to call. They probably also lost alot in 1996 so I don't know if they continue this program.
Hope this helps out. If I can be of further assistance, please let me know. Good luck. |
