Playing in the traffic

I have been doing a fair amount of thinking over the issue of yield and target profits for my trading plan for the new year. The only reason this is mentioned as if it were a new year thing is due to the coincidental timing. I don't believe in new year's resolutions, only changes that need to be initiated and initiated when they ought.

My thoughts keep going back to general guidelines mentioned by a few sources when it comes to determining where to sell calls or puts and what yield to aim for. They all miss the mark in that timelines are loose, most mention the shorter the better and less than anywhere from 30 to 45 days is the common. Yield expectations are between 5% and 10% and strikes are to be 10% away from the current price.

This is like telling someone to look both ways before crossing the road. What is missed is that this does not work to cross a 4 lane highway nor does it address what to do should you get out there and the situation changes.

Everyone from option services to ETF and stock information services all say to go play in the traffic but fail to give the information necessary to negotiate the highway when all the other cars are larger and are going much faster than me.

Of course this has never stopped me in the past.

0.2% has been tossed around often in my posts as it equals 0.2% Return On Risk on a daily basis. Based on a $5000 capital base that equates to a $10 per day (7 day week, not trading days) for the duration of the trade.

I will be sticking to this. For every small trade put on that meets this target when added to the combined trading account the yield of $10 per day per $5000 risked shall be achieved.

As I mentioned recently, I have reworked my spreadsheets to reflect this target and have ran some samples for the current market levels, spreads are of very low yield so far. I have noticed that I cannot meet this target and get the strike comfortably away from the price when trading SPY right now. Playing with the call side of the spectrum I can meet my target at 0.26% for a 5 contract January call spread of $2 at strike of 116... that is only 4.37% away from SPY at $111.14.

Going for February gives 0.24% for a 10 contract February call spread of $1 at strike 119 which is only 7.07% away from $11.14.

Both spreads are risking just under $1000 but have a tight margin for movement given the respective timeframes.

This is why the index futures contracts are better, even if much more expensive to trade. Todays' numbers have the current Optioneer call spread 9.8% away from the closing level for the February expiry. The downside is that the daily yield is 0.16% or about $7.10 per day.

That would be the equivalent of trading the 122 strike in SPY, 9.77% away with a profit of 0.07%. I could match the target of 0.16% by selling 120 strikes but they are a full 2% tighter.

This leads me to reconsider using Questrade spread trades at all, as much as I like playing with them I cannot create at least as low a risk trade as I can with futures... easily. Perhaps the added risk is not as large a factor as I imagine if I only keep on the correct side of the trend and use the regression channels strickly. Optioneer takes both sides of the iron condor every trade regardless where the market levels are, I will only be taking both sides based on the linear regression lower risk entries by legging into them on a staggered timeline as I did last time.

Jeff.