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Strategies & Market Trends : Option Strategies -- Ignore unavailable to you. Want to Upgrade?

To: Hank Scorpio who wrote (2242)	2/24/2021 6:04:55 PM
From: robert b furman	1 Recommendation Recommended By Thehammer Read Replies (1) \| Respond to of 2591

Hi Hank, First off welcome to the thread. There are some pros here, who have vastly more experience than I about the ins and outs of options. If you've noticed, the premiums of puts and calls accelerate during periods of climatic trading. Calls on big run ups and puts on big declines. At these extreme inflection points a put or call can become bloated by a multiple, say 2 or 3 times the average over time. Those extreme points, make me think I'd not try to get the average of every week. Collecting the usual weekly time decay can get wiped out, in those extreme inflection points. In other words the collection of normal time decay can be exceeded during inflection points. I find the study of CLX (climax points) to be helpful in determining those points. I learned clx from Don Wolanchuk and it can be studied here: Subject 52296. That's my first thought to your wheel system. I am admittedly a scardy cat investor. I try to time my sells of puts during climatic downtrends when the put premiums a swollen by fear. I only sell puts on stocks I'd like to own and pat a substantial dividend. If I get them assigned to me. they fall into my dividend revenue stream. Before I sell a put, I decide at what strike price I would like them to be assigned to me based on dividend yield. For me that takes the fear out of the trade. I take it either way and let the beauty of time decay work on my side. IN TIME DECAY I TRUST!! That's just me, but welcome here and please do post your trades so we see how your wheel system works out. The beauty of SI is we all get to learn how to collectively prosper in this wonderful capitalist system. Bob

To: Hank Scorpio who wrote (2242)	2/24/2021 8:41:16 PM
From: THornsby	2 Recommendations Recommended By dealmakr Thehammer Read Replies (1) \| Respond to of 2591

Here's an interesting answer that I came across recently. I agree with most of what the answerer said: money.stackexchange.com Here are some reactions to your questions: If you don't want ownership, selling lower delta OTM puts initially is sensible. Sell less OTM strikes if you want ownership at a price. Implied volatility increases before pending news, particularly earnings announcements. If you like the stock, it's a good time to capture a fatter premium. As you noted, when "you get a major correction, the stock is put to you and you take significant losses." There's an old market expression that describes this: "Most of the time you eat peanuts and sometimes you sh*t like an elephant." As you stated, selling naked strangles doubles the yield but only has one sided risk. I don't have an issue with short selling (equities) but IMHO, you really need disciplined risk management to manage that, whether it be cutting you losses or understanding how to defend the position with other option adjustments. The important point is that it's ok to be agnostic about direction but you need to be prepared to deal with an underlying that has directional conviction. If you're selling 20 delta weekly naked puts, you're not going to have much buffer between current price and the short strike. If a large drop occurs quickly, you may end up being unable to sell a 1-2 weeks out covered call without locking in a loss. Now it's a marriage for more weeks or months. I'm skeptical about the usefulness of moving averages and other canned indicators for trade decisions. Moving averages are lagging indicators. The longer the MA, the more the lag. The shorter the MA, the less the lag but the greater the number of whipsaws. There are other reasons but my short answer is to trade in the price domain rather than the derivative which isn't always accurate. The MACD also has false signal issues but I don't want to write a novel :->) Personally, I preferred hedged positions because the Black Swans and hard market corrections like last March don't whack you. Accept lower profit potential in return for no Black Swans (vertical spread, iron condor, etc.).

To: Hank Scorpio who wrote (2242)	2/25/2021 9:46:11 AM
From: Thehammer	2 Recommendations Recommended By DinoNavarre THornsby Read Replies (1) \| Respond to of 2591

Thanks for the outline of your plan and adding to the overall discussion. I have utilized options as part of my investment strategy since the early 80’s albeit not in as systemic a fashion as I deployed in the last 10 years. I am more of a seat-of-the pants type investor and try not to over-engineer my decision process. I have used spreads, combinations and portfolio insurance (bought index options to hedge short positions). Initially, I mainly sold covered calls and occasionally puts usually margined. So, it was willynilly but my focus and still is maintaining a portfolio of securities. Then I came into a large cash position due to a merger. That is when I came up with PLAN NUMBER 1. I used the cash to buy short term munis all with maturities of less than 3 years and most with maturities of less than 1 year. The average yield was about 2.5 – 3% not bad for federally tax-free income. I then write puts (technically not cash covered but close). They were mostly DGI stocks. All of the puts were sold OTM with expirations in 1or 2 months. My plan was to let them expire or be exercised but to keep writing puts as long as I still had bonds. I made it through a couple of cycles and then we had the great sell off (2008-2009). Everything was put to me. However, they were mostly quality DGI stocks (GWW, MMM, UTC, LOW. ECL etc). I had a couple of losers, but I managed to get rid of them relatively unscathed. By 2011, retirement (early) was looming, and I converted my 401k to an IRA. Almost all of the stocks put to me were at this point well above the exercise price. I purchased a lot of DGI stocks in my IRA but saved a significant cash portion for selling cash covered-puts at which point PLAN NUMBER 2 evolved (and is still evolving). 1) I use a tracking tool for open positions but keep track of all historical trades by security thus I have a P&L by security but have never bothered to aggregate them. 2) I have sold calls sporadically but lately the market value of my open calls probably exceeds that of my open puts. Lately I have been paring back the puts as they expire or are closed. 3) I track several aspects diligently: ITM, Time value, days to exp, and option percent change. The tool that I use allows for the setting of alerts. 4) Rarely do I allow an exercise. When TV erodes to a point that the likelihood of assignment is high, I will roll the option. I also close / roll OTM positions that have returned over 90% (i.e. sold put for $2.00 and now selling under $.20) 5) I use spread orders to roll and almost always use limit orders to open positions. 6) Only write puts on companies that I believe in their long-term prospects and almost always already am long. When the market moves against me (Big Time) I have usually been able to walk out of the position, but it may take over a year. 7) For DGI stocks, I look for 10-12% annual returns) for non DGI stocks, it is a lot higher. 8) Mentioned that I track a lot of information on each trade by security. As the puts are rolled, I keep track of the net cash received per security and utilize that figure to calculate a net purchase price if I am assigned. 9) Over the decade that this has been deployed, the option premiums will periodically “dry up”. I then either sit on the cash or deploy elsewhere (such as BDC’s) 10) I don’t track call trades but do track them in the tool. 11) As previously mentioned but reiterated the main driver for selling a put is a comfort level with the corporation that was derived from fundamental research. I have a little feel for technical on an intuitive basis, and it may influence the timing of a trade, but it is far from scientific. 12) Flexibility is the key as few plans are “forever”. 13) Avoid temptation to get greedy…. Hank, in response to your specific questions: I seldom do weekly’s but a lot of people do and it seems to work. I try to balance the smaller premiums with likelihood of assignment. Premiums are generally best if you straddle some binary event (such as earnings). Your concern over corrections is well placed, but that is why I do care about the stock and its overall valuation at the time as well as its prospects. At one time I was short over 10 CRR puts in my margin account with an exercise price well over $100. I think they are now zero. At the time the prospects for CRR were high cheap alternatives came into the market. Consequently, I like to limit exposure on a per security basis. I am not exactly sure what a “wheel strategy” is but it does seem similar to what I do but with shorter cycle options. Have used combinations (short call and put) on occasion but am long the stock. I do not use 20 day moving averages or other technical indicators though if I hear the RSI is relatively low, my ears perk up. (Relative Strength indicator).