In light of my small boffo yesterday I thought I might take a closer look as a sheet that I had setup a while back to try to determine risk and ideal spread strikes.
It involved using various Average True Range (ATR) periods with a weighting towards the more recent values to come up with a daily ATR value. This value is then just multiplied by the days to expiry for the potential trade to come up with a possible range to give me a target to look for.
I put in an adjustment for position from the current median value of the 80 day Linear Regression. This indicates a call spread strike higher when the price is near the top of the channel and a put strike lower when it is near the bottom.
The last item is a risk factor that widens the spread strikes depending on which spread (Call or Put) I am looking at based on the LR position again. Values are 1, 2 and 3. Call or Put spreads with the SPY price at the median use a 2, general risk. I might use these for an iron condor under certain circumstances. Call spreads with the price at the top of the channel get a 1 and at the bottom of the channel get a 3. Puts are reversed.
Puts are skewed farther with a built in factor as they are higher risk spreads in general.
Based on these numbers from today's chart I get a call strike to sell at 116.38. I would round up or down depending upon market conditions, it's only one dollar either way so it's not a big deal. The put comes up to 108.23.
Using my target pricing I get a decent call spread at 117-118...which was where I was trying to go yesterday around noon and goofed with another 116-118.
Where I was going with this was to look at the ATR for past 10 trading day periods to get a feel for what might happen over the next 10 days to the expiration of my spreads. I am almost $3 away now and the ATR for hte past 10 days is 1.09. Tha largest 10 day ATR I see in the past was around the $3 mark as SPY was coming off of the March lows... it has been higher but those were due to large drawdowns earlier than that...ATR for uptrends are more relevant right now as ATR peaks on down moves with a few exceptions.
Jeff.
Questrade, My direct access discount broker.
Tuesday, January 5, 2010
Monday, January 4, 2010
Today's spreads
Well, I placed a trade over at Optioneer, I doubt it will get filled but I put it in just in case.
My Questrade account had more activity. Seeing as I place call and put spreads separately one or the other will get filled if the price moves a bit in the direction of the spread. I placed a 116-118 call spread and it was filled pretty early as SPY jumped right off the bat. The put spread didn't go anywhere.
I later called and cancelled my put spread to free up buying power and decided to place another call spread, 117-118 for a smallish premium gain in line with the first 116-118 spread seeing as SPY had moved up $1 that would be about right. SPY peaked and was starting to head down a bit so I changed my mind while on the phone with the order desk...I should have just called back.
I goofed.
I wanted to take advantage of the jump in SPY by placing a 116-117 spread as the premium was setting up really nice as the discrepancy between premiums was large...too large. I ended up placing another 116-118 for an 13 cent credit...the credit for the 116-117... and ended up with 19 cents on the 116-118 instead...
I am not exactly sure how I managed that but I got in a hurry and was looking at the wrong column. For the exact same exposure the 116-117 with 20 contracts was $230 compared to the 116-118 at 10 contracts $160....DUH!
Because I got the net credit wrong the order executed right away so I didn't even get a chance to call back to cancel it and place the correct order. I now have two identical spreads one at 11 cents and one at 19 cents that will be combined somehow into one. Dollar cost averaging spread trades anyone? My spreadsheets do not accommodate this trade.
Advantage, if I have to close the 116 strike options they can be closed in one transaction instead of two I suppose.
Live and learn.
Jeff.
My Questrade account had more activity. Seeing as I place call and put spreads separately one or the other will get filled if the price moves a bit in the direction of the spread. I placed a 116-118 call spread and it was filled pretty early as SPY jumped right off the bat. The put spread didn't go anywhere.
I later called and cancelled my put spread to free up buying power and decided to place another call spread, 117-118 for a smallish premium gain in line with the first 116-118 spread seeing as SPY had moved up $1 that would be about right. SPY peaked and was starting to head down a bit so I changed my mind while on the phone with the order desk...I should have just called back.
I goofed.
I wanted to take advantage of the jump in SPY by placing a 116-117 spread as the premium was setting up really nice as the discrepancy between premiums was large...too large. I ended up placing another 116-118 for an 13 cent credit...the credit for the 116-117... and ended up with 19 cents on the 116-118 instead...
I am not exactly sure how I managed that but I got in a hurry and was looking at the wrong column. For the exact same exposure the 116-117 with 20 contracts was $230 compared to the 116-118 at 10 contracts $160....DUH!
Because I got the net credit wrong the order executed right away so I didn't even get a chance to call back to cancel it and place the correct order. I now have two identical spreads one at 11 cents and one at 19 cents that will be combined somehow into one. Dollar cost averaging spread trades anyone? My spreadsheets do not accommodate this trade.
Advantage, if I have to close the 116 strike options they can be closed in one transaction instead of two I suppose.
Live and learn.
Jeff.
Sunday, January 3, 2010
"...but I digress"
I was talking to my youngest daughter today, she is 11 years old now. Often she will ask me about something, it could be anything, and the inevitable part of the question comes down to "why?". She never wants the superficial why but the real deep down reason why. All too often the real deep down reason is money whenever the question pertains to human interaction.
Today we were talking winning a million dollars and what would we do with it. There was an ad on the radio which brought the subject up. She chuckled after I gave my answer and she noted that it was the same answer the last time we talked about this.
I figured it was a good time to talk about the importance of a savings plan with a loose investment twist... seeing as we all of a sudden had a million to deal with.
I told her that if she could make a deal with herself that she will save $200 a month once she has started working, even if it is part time student jobs, that she will be better off in the long run and wouldn't ever really need a million dollar lottery win. If she misses a month because she really has to then track it and pay it back later but always, whenever possible, put that money aside first, before buying the extraneous stuff. We did some quick math to get an idea of how much we might have after a few years, fun discussion.
I am sure that I read about some that have done this, and were lucky enough to have been taught to do this early on. I told her that I wished someone had told me this when I was a kid. All I ever remember is the marketing for RRSPs through the bank that went on about saving for retirement... I did not put this in a retirement savings light as that is too far away for a kid to conceptualize.
I figure that if she really does this, when it comes time for some of these expenses she will have figured it out for herself that leaving it to grow is more important than spending it and that she will have taken it far beyond the initial kid savings plan when that time comes anyway.
This prompted me to do a quick calculation based on a $200 per month contribution with a variable rate of annual return. I figured that a 7% annual ROI with monthly compounding would be easy enough and started with that.
10 years after inception the balance is just over $35,000 with just under $11,000 being gains.
I played around with the numbers a bit and came up with the following results after 10 years:
(always the same contributions, $24,000 over the ten years)
10% Annual ROI : Balance = $41,510 : ROI = 71.53%
15% Annual ROI : Balance = $55,931 : ROI = 131%
20% Annual ROI : Balance = $76,672 : ROI = 216%
25% Annual ROI : Balance = $106,760 : ROI = 341%
30% Annual ROI : Balance = $150,736 : ROI = 523%
35% Annual ROI : Balance = $215.429 : ROI = 790%
40% Annual ROI : Balance = $311,135 : ROI = 1186%
45% Annual ROI : Balance = $453,399 : ROI = 1774%
50% Annual ROI : Balance = $665,735 : ROI = 2651%
The trick is consistent contributions and consistent gains, even if small.
Jeff.
Today we were talking winning a million dollars and what would we do with it. There was an ad on the radio which brought the subject up. She chuckled after I gave my answer and she noted that it was the same answer the last time we talked about this.
I figured it was a good time to talk about the importance of a savings plan with a loose investment twist... seeing as we all of a sudden had a million to deal with.
I told her that if she could make a deal with herself that she will save $200 a month once she has started working, even if it is part time student jobs, that she will be better off in the long run and wouldn't ever really need a million dollar lottery win. If she misses a month because she really has to then track it and pay it back later but always, whenever possible, put that money aside first, before buying the extraneous stuff. We did some quick math to get an idea of how much we might have after a few years, fun discussion.
I am sure that I read about some that have done this, and were lucky enough to have been taught to do this early on. I told her that I wished someone had told me this when I was a kid. All I ever remember is the marketing for RRSPs through the bank that went on about saving for retirement... I did not put this in a retirement savings light as that is too far away for a kid to conceptualize.
I figure that if she really does this, when it comes time for some of these expenses she will have figured it out for herself that leaving it to grow is more important than spending it and that she will have taken it far beyond the initial kid savings plan when that time comes anyway.
This prompted me to do a quick calculation based on a $200 per month contribution with a variable rate of annual return. I figured that a 7% annual ROI with monthly compounding would be easy enough and started with that.
10 years after inception the balance is just over $35,000 with just under $11,000 being gains.
I played around with the numbers a bit and came up with the following results after 10 years:
(always the same contributions, $24,000 over the ten years)
10% Annual ROI : Balance = $41,510 : ROI = 71.53%
15% Annual ROI : Balance = $55,931 : ROI = 131%
20% Annual ROI : Balance = $76,672 : ROI = 216%
25% Annual ROI : Balance = $106,760 : ROI = 341%
30% Annual ROI : Balance = $150,736 : ROI = 523%
35% Annual ROI : Balance = $215.429 : ROI = 790%
40% Annual ROI : Balance = $311,135 : ROI = 1186%
45% Annual ROI : Balance = $453,399 : ROI = 1774%
50% Annual ROI : Balance = $665,735 : ROI = 2651%
The trick is consistent contributions and consistent gains, even if small.
Jeff.
Shifting fom Linear Regression entries.
Given my thoughts on timeframes and cashflow issues I may have inadvertently shifted my idea from Linear Regression spread entries to the wider margin iron condors placed as cash becomes available. Seeing as the LR optimized trades are to boost yield and reduce risk they will be time sensitive in that not always will they line up when I have freshly freed up cash to trade with.
Looking back on LR setups I can have cash in place all the time but can I have maximum cash in play constantly?
What is the reduction in cashflow as I average the daily trading over the entire capital base and total time period and include those days or weeks that I have some or all of my cash sitting idle?
What is the effect of applied savings to the account balance to enable larger positions in my trading rather than relying strictly on account growth? This is something that I completely overlook when I study returns and something that I should not overlook.
Re-visiting the cashflow vs yield issue...beating a dead horse yet?
There are a myriad of other issues and ideas that I could look at to apply toward my trading in future. I figure that, seeing as I am cashflow targeted now, I should consider at least these fresher ideas.
Applied savings is probably larger than I anticipate. I can easily setup automatic transfers to my Questrade trading account in what ever denomination I feel that I can manage. Use it in place of a savings account in the sense that I can also withdraw as easily...seeing as my trading is no longer registered account based.
Is this safe? Given the wider margin and lower accepted daily yield I believe that it is safe enough. I will need to apply some exit strategy rules to allow safety margins over and above the strike from price spacing. Also this savings is usually used to buy "extras" other than groceries, paying bills and the like so if I all of a sudden I lost it all it would not be sorely missed. Besides, the likelihood of that happening is really small.
Applying this additional capital on a regular basis allows me to up the trading base by a few contracts at a time with each transfer thus increasing the cashflow regularly. I have not done any forecasting to include this at all so I am unsure of the final effect overall, but it may offset the effect of using linear regression entries somewhat if that is not already offset by keeping total cash in play all the time.
Using sort timeframes, under 30 days, means that I could break my capital in two chunks and use half for the put side and half for the call side... riskier than I might like. For now I will remain with the idea of applying about $2000 per side and using the balance to apply as LR entries until I am more comfortable with the plan.
Back to cashflow again. Assuming that I apply savings, use wider margins with lower yields, keep all cash in play in one form or another and concentrate strictly on cashflow I can produce a different type of trading game. The larger base, using full capital on these trades, increases the yield due to lowering of the commission relative rate (increasing the size costs $1 per contract as opposed to another $9.95 plus $1 per contract for a new trade). Seeing at these small position sizes it makes a difference, enough that bumping up to maximum right now changes some for the strikes by $1 thus decreasing the risk factor.
This turns into a similar game as investing for dividends. "Slow and steady wins the race" as the saying goes. I still like the idea of hitting larger returns overall but I will be satisfied to see the cashflow progressively increase at a greater than the typical expectation for a dividend plan rate. That was a 30 year plan IF my timing and the stock market timing worked out perfectly... along with the company dividend plans continuing on track.
I still have three spreads tying up some capital now but they all expire on Jan 15th. Even with placing the January trade tomorrow it will expire at the same time freeing up all of my account...except for a small stock position. At that point I will review my ideas and goals and see what my next step might be.
Off to ceck out the Optioneer trade setups for tomorrow now.
Jeff.
Looking back on LR setups I can have cash in place all the time but can I have maximum cash in play constantly?
What is the reduction in cashflow as I average the daily trading over the entire capital base and total time period and include those days or weeks that I have some or all of my cash sitting idle?
What is the effect of applied savings to the account balance to enable larger positions in my trading rather than relying strictly on account growth? This is something that I completely overlook when I study returns and something that I should not overlook.
Re-visiting the cashflow vs yield issue...beating a dead horse yet?
There are a myriad of other issues and ideas that I could look at to apply toward my trading in future. I figure that, seeing as I am cashflow targeted now, I should consider at least these fresher ideas.
Applied savings is probably larger than I anticipate. I can easily setup automatic transfers to my Questrade trading account in what ever denomination I feel that I can manage. Use it in place of a savings account in the sense that I can also withdraw as easily...seeing as my trading is no longer registered account based.
Is this safe? Given the wider margin and lower accepted daily yield I believe that it is safe enough. I will need to apply some exit strategy rules to allow safety margins over and above the strike from price spacing. Also this savings is usually used to buy "extras" other than groceries, paying bills and the like so if I all of a sudden I lost it all it would not be sorely missed. Besides, the likelihood of that happening is really small.
Applying this additional capital on a regular basis allows me to up the trading base by a few contracts at a time with each transfer thus increasing the cashflow regularly. I have not done any forecasting to include this at all so I am unsure of the final effect overall, but it may offset the effect of using linear regression entries somewhat if that is not already offset by keeping total cash in play all the time.
Using sort timeframes, under 30 days, means that I could break my capital in two chunks and use half for the put side and half for the call side... riskier than I might like. For now I will remain with the idea of applying about $2000 per side and using the balance to apply as LR entries until I am more comfortable with the plan.
Back to cashflow again. Assuming that I apply savings, use wider margins with lower yields, keep all cash in play in one form or another and concentrate strictly on cashflow I can produce a different type of trading game. The larger base, using full capital on these trades, increases the yield due to lowering of the commission relative rate (increasing the size costs $1 per contract as opposed to another $9.95 plus $1 per contract for a new trade). Seeing at these small position sizes it makes a difference, enough that bumping up to maximum right now changes some for the strikes by $1 thus decreasing the risk factor.
This turns into a similar game as investing for dividends. "Slow and steady wins the race" as the saying goes. I still like the idea of hitting larger returns overall but I will be satisfied to see the cashflow progressively increase at a greater than the typical expectation for a dividend plan rate. That was a 30 year plan IF my timing and the stock market timing worked out perfectly... along with the company dividend plans continuing on track.
I still have three spreads tying up some capital now but they all expire on Jan 15th. Even with placing the January trade tomorrow it will expire at the same time freeing up all of my account...except for a small stock position. At that point I will review my ideas and goals and see what my next step might be.
Off to ceck out the Optioneer trade setups for tomorrow now.
Jeff.
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.
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.
Saturday, January 2, 2010
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.
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.
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