Target Yield Adjustment?

The big question running about in my head right now is can I lower my target yield and still make money? While the short answer is yes, the long answer becomes am I willing to do so?

Due to the market circumstances and the end of year seeming top out the premiums are very low for SPY and sector ETF options right now. Even over in the futures arena I saw one of the lowest value trades in all of my research into the Optioneer setup last week.

I considered lowering my target yield, among some other ideas for option strategies, but found that I cannot do so in any but the SPY chain. SPY is liquid enough, and large enough that there is enough premium value to go outside of my target if only to keep money in play. Dropping from 0.2% per day to 0.1% per day drops the ROR from 10% to 5%, roughly.

Once again, I need to remind myself that ROR is not king, cashflow is.

In keeping with the theme I figured a mix might be in order and came up with these iron condor style trades for tomorrow. I compared the January 0.2% call and 0.1% put against the February versions. This gives me higher premiums for the call side, which is less likely to get hit in my mind and wider margins for the put side which is always in jeopardy. While I don't like the idea of being in a trade for 46 days I want to compare the ideas as my gut tells me to stay short... let's see if the numbers justify my feeling.

January expiry iron condor

Buy 10 Jan 118 calls and sell 10 Jan 116 calls for a credit of 11 cents
Buy 5 Jan 100 puts and sell 5 Jan 104 puts for a credit of 9 cents

Combined daily cashflow for the 11 day duration is $9.56 with a risk of less than $4000
That is just over the 0.2% per day with a total $105.10 return or 2.6% ROR.
Not that big but based on the timeframe not too shabby either...2.6% for two weeks.

February expiry iron condor

Buy 20 Feb 120 calls and sell 20 Feb 119 calls for a credit of 13 cents
Buy 7 Feb 97 puts and sell 7 Feb 100 puts for a credit of 19 cents

Combined daily cashflow for the 46 day duration is $6.94 with a risk of just more than $4000
That is just under the 0.2% per day with a total $319.10 return or 7.97% ROR.
The total numbers look better but in reality they are not. This trade is much longer, more can happen and the premiums are not as good on a pro-rated basis.

Comparing the same timeframes shows that the second trade returns 2.27% in the same timeframe as the first trade returning 2.6%. My best bet is to take the first trade tomorrow for January even with a small lenience and plan to place the February trade as it expires. This keeps my money in play while keeping to the shorter timeframes where the premium erodes faster and the risk is less.

I should note why the discrepancy between the two expiry trades exists. The call spread for January is yielding a 0.38% daily return. The next strike call spread is under 0.1% so there is a steep drop off in premiums. If I change the credit on the trade to be in line with the February daily return the cashflow is more comparable. This is the idea in trading options is sometimes to find the better prices where they are over and under priced. I set my spreadsheets up to take advantage of these as I check a $12 strike range for spreads of $1 to $4 and use the best single spread combo. That is also why my position sizing is all over the place as I try to compare similar risks. A $2000 risk will take between 5 and 20 contracts to match depending upon the spread.

What I am getting at here is not so much that the Shorter term is a higher yielding trade all the time, just that is is similar enough that it have better numbers due to the shorter timeframe involved while optimizing the spread ranges.

Now, if this trade can be filled with tomorrow's trading is another issue altogether.

Am I willing to take the shorter trade while reducing the yield from my original plan? You bet.

The other side of the coin is to only place the call side trades. Doing that and boosting my initial January trade to a full $4000 risk would yield a much higher cashflow of around $18 per day or 0.38% ...well over my 0.2% target.

Strategy for tomorrow will be to watch the pre-market and see what the sentiment is likely to be off of the bell. If everything is going to hold the drop of Thursday the the call side only might be in order. If it looks as though a surge and higher open then close is likely then use the full iron condor trade.

Jeff.