Strangle targets

I did some serious spreadsheet work tonight and revamped my Optioneer strategy as far as entry levels are concerned.

I had been figuring on aiming for the 1.9 point minimum target, or $397, and anything over that I would allow the difference to add lenience to the trade (the amount that I let the broker use to meet the bid during the day if needed to fill the trade). A 2.2 point target could get filled at 1.9 or higher which is a 0.3 point lenience. Anything over the 1.9 would be considered a bonus.

I have not been getting orders filled using this so far, even when I had a 2.2 point target once, so I decided I had better rethink how I view the targets. This is going to creep over into my options trading in the TFSA I am sure as well.

My goal, or ultimate plan, is to be able to replace my income allowing me to choose what I may want to do for "work" but not necessarily just do nothing. Nice thought but retirement to me is not just out playing golf and trying to manage a fixed income getting chewed away by inflation.

Cashflow is the key. I determined my daily cashflow target, conservatively, and figured out how much capital I would need in the Optioneer strategy in order to allow enough concurrent trades to produce an average daily before tax profit and came up with about $51,000. Of course I would want to figure some overhead in there for a few losing trades and perhaps a bad run of not getting fills, so add $10,000. This is based on $10 per day per trade with each trade averaging a 37 day duration (trades are between 30 and 45 days long)

$60,000 would provide enough cash to fund 12 trades, or 6 double lot trades. How the market is moving will determine how many trades I will need to double or triple up on in order to remain diversified and still keep most of my capital in play.

Things that I have not figured into this, which amounts to my fudge factor against me would include tax claims of interest on debt (figuring I can pull a Smith maneuver or something similar) and any other items that I can claim against my income tax. It also does not count compounding and increasing the trade size, as if I were drawing the cash off the account and keeping only the $60,000 to work with.

My plan would have me continue to build the capital base in addition to working the TFSA with options, funding my DRIPs that I previously setup, perhaps dropping some cash into the RRSP to get some immediate tax sheltering on some profits. Basically working many angles at the same time to produce a varied source cashflow.

So, my spreadsheets have me moving my target quite substantially to my surprise.

A 30 day trade could target as low as 1.55 points or $300 over 30 days
A 45 day trade target would be targeting 2.15 points or $450 over 45 days
Roughly each day under 45 the target can drop by $12.50 and I can still provide a $10 minimum daily average return. There will be times when cash cannot be immediately reinvested as well as times when the target is higher than my minimum and these two factors should cancel each other out.

I placed a trade for tomorrow with a target of 1.9 points. With my new calculations, and the trade being at 36 days I could accept 1.80. Friday I could accept 1.75 and on Monday as low as 1.60 points.

I could also add a trade doubling factor in here. Once the expiry is less than 37 days (the average expectation) I could double the trade if the expected target is higher than my minimum. This allows for the capital to work quicker for me... I will not consider this until I have enough to manage 5 or 6 concurrent trades though. With my lower entry targets these trades would be almost sure to fill and I would not need to, but could, tweak the call protection to add the 0.15 points as well.

Jeff.