Any suggestions on option trading strategies

[whywork]

I want to try some aggressive growth strategies with a minor percent of my portfolio.

Trading options seems to be one approach. I hear few strategies

1) Trading weekly spy options
2) Buying deep ITM leaps instead of stocks and rolling them over
3) Earnings or swing options plays

What are some strategies that have worked for you or that you recommend. Also I see subscription based trading alert services. There are a couple that claim 100-200% returns (spxoptiontrader, optionsintelligence). Are they trustworthy? Do you use these or go with your own strategies

[Financial.Velociraptor]

I've been primarily an options trader since 2011.  My take is if you use options, especially at first, to increase  your leverage instead of reduce your risk; you are probably going to lose a ton of money.  There is both art and science to trading options successfully.  It is usually best to learn by selling covered calls first.  In the current go-go market, that will probably lower your net return (while reducing your risk.)

Out of  your three suggestions, 2) Buying deep ITM leaps, would be the most appropriate for a beginner.  Trading weeklies or trying to out smart the institutional investors on earnings are fool's errands.

My personal strategy for the current environment is just inside the money net debit spreads on expiries 4-9 weeks out.

Want to strongly discourage leverage for a novice options trader....

[ChpBstrd]

Seconding @Financial.Velociraptor. #1 and #3 are the choices newbies on Wall Street Bets make when they don’t realize the extent of their disadvantage against counter parties who definitely have teams of analysts and supercomputers on their side and maybe insider information too.

#2 could be reasonable if you are talking about buying LEAPS calls during a period of low implied volatility, and rolling maybe at the 1 year mark to take short term losses or long term gains. It’s reasonable because it is a defensive bullish position with a finite (though more likely) loss profile and an embedded tax arbitrage strategy. The only issues are such a position would only rise a fraction of the speed of the underlying - I.e. by the delta - if it rallies and time value is converted to intrinsic value rather than being a 1:1 rise in the contract’s value.

TL;DR - You won’t blow up your portfolio with maybe a 10-20% allocation to long LEAPS calls, but you’re fairly likely to lose that 10-20% and underperform the underlying because you’re taking less risk.

If ANY of the concepts above were unfamiliar ideas, your first steps are to try a paper trading account for a year and to read most of optionseducation.com. No big decisions until you take those steps, or else you’ll get your face eaten off out there.

[whywork]

Thank you both. Seems like selling cash secured puts and covered calls is safe for a rookie.

So let's say I use my 100% margin and sell cash secured puts daily on SPY with a strike price that can never theoretically be reached. What would be such a price? Since SPY never fell more than 7% in a single day, how about 10% below current price? What would be a good strike price to optimize the premium and avoid put? Similarly I can sell covered calls on stocks I own. Any downsides you see with these?

For the earnings play how is this strategy. A month before the earnings season buy 1 year out LEAP SPY calls deep ITM to simulate a 1.5 leverage on SPY. Sell one day before the earnings season if in profit. On the other hand if spy falls, keep upping the leverage by selling the calls and buying new LEAPs with less deeper ITM strike. Do this steadily so that with a 50% correction, I end up buying ATM SPY LEAPs. Then I hold that for the 1-1.5 year LEAP period

When market pulls back by 5-10%+ also, use similar strategy of starting with deep ITM LEAPs and moving to ATM LEAPS

[Financial.Velociraptor]

Thank you both. Seems like selling cash secured puts and covered calls is safe for a rookie.

So let's say I use my 100% margin and sell cash secured puts daily on SPY with a strike price that can never theoretically be reached. What would be such a price? Since SPY never fell more than 7% in a single day, how about 10% below current price? What would be a good strike price to optimize the premium and avoid put? Similarly I can sell covered calls on stocks I own. Any downsides you see with these?

For the earnings play how is this strategy. A month before the earnings season buy 1 year out LEAP SPY calls deep ITM to simulate a 1.5 leverage on SPY. Sell one day before the earnings season if in profit. On the other hand if spy falls, keep upping the leverage by selling the calls and buying new LEAPs with less deeper ITM strike. Do this steadily so that with a 50% correction, I end up buying ATM SPY LEAPs. Then I hold that for the 1-1.5 year LEAP period

When market pulls back by 5-10%+ also, use similar strategy of starting with deep ITM LEAPs and moving to ATM LEAPS

There is no definitive way to answer those questions.  Options premiums can be (relatively) expensive or cheap at different times due to various underlying factors.  That said, going 7% out of the money on a weekly is going to yield pennies per share.  You might be locking in a loss after trading commissions.  It's hardly worth trouble. 

Your best chance for alpha as a newbie, IMHO, is to trade slightly out of the money covered calls on stable and defensive stocks that pay a quarterly distribution.  The dividend aristocrats are a good place to start and provide you with some additional downside protection in that most of them are 'forever stocks' you can hold through a crash and recovery for the dividends.  But you are most likely to see alpha only in risk adjusted terms.  That is, your total return in a steeply climbing market will be lower than just holding the index, but with less risk.

It takes years to learn how to do it right (and I've done STUPID half a dozen times - so I know).  If you go down this path, start out with small positions sizes.  Focus on risk management and not total return.  Don't use margin.

[ChpBstrd]

There is no price that can never theoretically be reached. Just wait until Pakistan and India have a nuclear war, or China invades Taiwan, or 10 year treasury yields hit 6% again!

This gets to a point I've learned about options over the years: They are priced with brutal efficiency, if not overpriced by market makers, and when I think I see a "bargain" I usually lose. The price of a 1% chance of total loss is 1%, and you can sell that or buy that. People often think up a scheme where they'll earn 1% 50 times, but this is simply gambling on a rare event not happening. Others will think up the opposite scheme - to bet 1% on rare events over and over again. As with Vegas roulette, you'll get rich or get broke, depending on the sequence of unpredictable events. It's an efficient transfer of risk for money, and the house always has an edge.

What sucks about calls in particular is that the volatility component of their price contributes more to their value during a correction or crisis, so just at the moment when you think the bottom is in and you'd like to leverage up on calls, the calls get more expensive - to the point you can lose money while being correct about the underlying asset's recovery. In the same scenario, put options offer the opportunity to grab at a falling knife. If you sell cash-secured puts when the market is 10% down to grab that juicy volatility-spiked option price, then you'll get utterly destroyed if it turns out the correction will be -25% or -30% - both delta and vega will nail you at the same time.

Regarding the earnings strategy - investing in options based on volatility is perhaps a more predictable thing than guessing that all the other market participants have been wrong about their earnings estimates. If volatility is low, it'll probably go back up eventually. If volatility is high, it'll probably go back down eventually. Why not buy LEAPS call options when volatility is low? A good at-a-glance proxy for IV is VIX. Then, when the SHTF, you'll notice that volatility is partially supporting the price of your now-OTM call options and, due to the phenomenon of delta, your options didn't fall as much as the stock position they represent would have fallen. That's when you sell your calls and buy the stock and that's how you miss out on a portion of a correction. This comes, of course, at the price of missing out on a portion of the rally before the correction. YMMV. 

There's no free lunch either way. Tens of thousands of market participants with Bloomberg terminals and supercomputers are busy wringing out whatever inefficiency comes to market any particular day. That's why I think of options as part of my asset allocation rather than in a day-trading kind of way. The advantage of a hyper-efficient odds-based market is not that you can spot bargains and win gambles with any consistency, it's that you can use it to arbitrage inefficient arguably-bubble markets. E.g. if tech stocks are inflating into an irrational bubble based on their fundamentals, and put options on tech stocks are efficiently priced because they always are, then the combo of the two offers unlimited upside and safety on the downside.

[MustacheAndaHalf]

So let's say I use my 100% margin and sell cash secured puts daily on SPY with a strike price that can never theoretically be reached. What would be such a price? Since SPY never fell more than 7% in a single day, how about 10% below current price?

What do you mean "use my 100% margin"?  That sounds like a road to disaster for someone with no experience using margin.

And maybe you can help update this wikipedia page, which claims that last year the S&P 500 fell more than 10% twice in a week.
https://en.wikipedia.org/wiki/List_of_largest_daily_changes_in_the_S%26P_500_Index

The market does not shut down after losing 7%. There was a "trading halt" on March 9 2020 at the market open.  After the market dropped 7%, trading was halted... for 20 minutes.  Then trading resumed.

[bthewalls]

Thank you both. Seems like selling cash secured puts and covered calls is safe for a rookie.

So let's say I use my 100% margin and sell cash secured puts daily on SPY with a strike price that can never theoretically be reached. What would be such a price? Since SPY never fell more than 7% in a single day, how about 10% below current price? What would be a good strike price to optimize the premium and avoid put? Similarly I can sell covered calls on stocks I own. Any downsides you see with these?

For the earnings play how is this strategy. A month before the earnings season buy 1 year out LEAP SPY calls deep ITM to simulate a 1.5 leverage on SPY. Sell one day before the earnings season if in profit. On the other hand if spy falls, keep upping the leverage by selling the calls and buying new LEAPs with less deeper ITM strike. Do this steadily so that with a 50% correction, I end up buying ATM SPY LEAPs. Then I hold that for the 1-1.5 year LEAP period

When market pulls back by 5-10%+ also, use similar strategy of starting with deep ITM LEAPs and moving to ATM LEAPS

There is no definitive way to answer those questions.  Options premiums can be (relatively) expensive or cheap at different times due to various underlying factors.  That said, going 7% out of the money on a weekly is going to yield pennies per share.  You might be locking in a loss after trading commissions.  It's hardly worth trouble. 

Your best chance for alpha as a newbie, IMHO, is to trade slightly out of the money covered calls on stable and defensive stocks that pay a quarterly distribution.  The dividend aristocrats are a good place to start and provide you with some additional downside protection in that most of them are 'forever stocks' you can hold through a crash and recovery for the dividends.  But you are most likely to see alpha only in risk adjusted terms.  That is, your total return in a steeply climbing market will be lower than just holding the index, but with less risk.

It takes years to learn how to do it right (and I've done STUPID half a dozen times - so I know).  If you go down this path, start out with small positions sizes.  Focus on risk management and not total return.  Don't use margin.

Guys I read options trading should be to value of around the 2% ish value of the portfolio.....for the cautious investor.....in reality are those of you trading options making a decent annual gain on top of normal buy and hold etfs to warrant the extra work?

[whywork]

Thanks all for the replies. I wanted to use 30% of my margin and get safe returns from it. I don't want to buy and hold as market is at all time high and I don't want to increase my risk with margin.

I thought of wheeling options but it has the downside of stock tanking (similar risk of buy and hold but lesser volatility).

Waiting for market to correct and then buying indexes or deep ITM leaps on indexes seems like the only decent strategy.

Are there any other relatively decent strategies (options or otherwise) to invest margin in?

@bthewalls, wheeling doesn't beat buy and hold as per historical performance. The only positive is that it doesn't tie your capital and when market moves against you, wheeling has slightly better performance. But you definitely lose to buy and hold in bull markets

[bwall]

Thanks all for the replies. I wanted to use 30% of my margin and get safe returns from it. I don't want to buy and hold as market is at all time high and I don't want to increase my risk with margin.

Keep in mind that the market has been at an all time high for most of the time since the financial crisis.

The last good buying opportunity was in March, 2020, which also coincided with the last great wave of panic selling.

[whywork]

Keep in mind that the market has been at an all time high for most of the time since the financial crisis.

The last good buying opportunity was in March, 2020, which also coincided with the last great wave of panic selling.

Right. Market timing isn't a good idea. I am fully invested in the market. I am thinking about using my margin and if it's a good time to use margin now (at market peak). If the market corrects here, my losses would amplify. Using margin and timing lows and taking out on highs seems safer. That way I can minimize any portfolio drawdowns while using margin to improve the returns. Let me know if you see any issues with this

[FLBiker]

Market timing isn't a good idea. ... Using margin and timing lows and taking out on highs seems safer.

I don't know anything about margin or options, but this is confusing to me.  Isn't "timing lows and taking out on highs" market timing?

[MustacheAndaHalf]

Waiting for market to correct and then buying indexes or deep ITM leaps on indexes seems like the only decent strategy.

You will need to do some planning over how much you invest at what point.  You won't know if the market 20% down will recover, or drop to 40% down.  Last year's -35% drop had a fast recovery for the S&P 500, but there's also crashes that last 3 years, like the dot-com crash (-20%, -10%, -10%), which could spoil an options strategy.

[talltexan]

Investing is about accepting risk to capital in exchange for a long-term return.

Is there a reason that market risk and market return for $SPY or $VTSAX do not meet your needs?

[Malossi792]

Investing is about accepting risk to capital in exchange for a long-term return.

Is there a reason that market risk and market return for $SPY or $VTSAX do not meet your needs?

Agree. Recently, if a new topic pops up with some crazy idea with risk dialed up to 11, it's almost always from OP.
OP, have you read the whole thread from the time of the GFC on Bogleheads (by Market timer)? Suggest you do.

[ChpBstrd]

Investing is about accepting risk to capital in exchange for a long-term return.

Is there a reason that market risk and market return for $SPY or $VTSAX do not meet your needs?

Agree. Recently, if a new topic pops up with some crazy idea with risk dialed up to 11, it's almost always from OP.
OP, have you read the whole thread from the time of the GFC on Bogleheads (by Market timer)? Suggest you do.

When I was just starting my FIRE journey and had relatively little money at stake (5 figures) I spent a lot of time online looking for lotto ticket investments and lost five figures at a time chasing them. It’s disheartening to have a 10-15 year journey ahead when every day at work sucks and your youth is being used up by the rat race. Hence the motivation to find a shortcut, and hence the viral potential of anyone on social media offering such a shortcut - after you view some ads of course. There are true stories of people who put it all into Netflix or Bitcoin or Apple and held for a couple of years until they were rich - the author of the blog 1500 days went big on Facebook for example - but you cannot necessarily copy their approach without finding the next big thing. Hence the swarms of 20-30 year olds plowing paychecks into dog money or meme stocks. It’s a symptom of despair. Get rich or die trying, as the song goes.

Where there is a market, a product will appear, and so an ecosystem of for-profit investment misinformation companies and influencers exist to trade the attention of desperate investors for ad revenue, or worse, make them pump-and-dump rubes.

MMM is arguably an influencer and business, but he’s also promoting a legitimate plan to retire within a decade if you are sufficiently motivated, using the lowest-risk way to invest in equities (index funds), and enjoying the best years of one’s life in the process (I.e. a lifestyle built around friends, exercise, healthy eating, and productivity, protected from encroaching employers by FU money). The goons on YouTube and TikToc making videos that feature them holding wads of cash that they made with their surefire options strategy are a whole different category. But they offer quicker results than the MMM method and so the most desperate people watch them. Ironically, the more desperate a person is, the more likely they are to be the victim of investing misinformation. This is similar to how one’s inclination to try opiates is related to their level of pain, or how one’s consideration of “alternative medicine” miracle cures is related to their despair about being sick, or how so many down-and-out people can fall in love with political movements that promise to solve all their problems. Predators stalk the young and the wounded, and if you find yourself in either position you’d better be careful out on the fringes.

[whywork]

Thank you all for those warnings. I feel a small percent of your portfolio being in risky strategies is not such a bad thing.

Buying ATM Leaps on FAANG stocks would have returned 120% yearly return post taxes. Why not do such a thing with say 5-10% of your portfolio instead of settling for SPY average return? Last 10 years the options would have resulted in

Year, FAANG return, ATM LEAP Return (post LT tax)
2010, 19%, 50%
2011,  6%,  -46%
2012, 23%, 76%
2013, 42%, 200%
2014, 10%, -10%
2015, 45%, 216%
2016, 10%, -10%
2017, 45%, 216%
2018, 10%, -10%
2019, 49%, 240%
2020, 58%, 300%
2021, 39% (Projected), 178%

[Malossi792]

It's called performance chasing and it's not generally a winning strategy.
If I wanted to scratch that itch, I would do so with a small percentage of new contributions, not the whole portfolio which would have the added risk of me rebalancing into a losing strategy instead of cutting losses.
Full disclosure, I only do passive (long) index investing.

[MustacheAndaHalf]

What sucks about calls in particular is that the volatility component of their price contributes more to their value during a correction or crisis, so just at the moment when you think the bottom is in and you'd like to leverage up on calls, the calls get more expensive - to the point you can lose money while being correct about the underlying asset's recovery.

That's true of ATM calls, which are mostly time value.  But switching to deep in the money calls can solve that problem.  SPY $445 calls have $1 of intrinsic value, and about $48 of time value.  But switch to SPY $250 calls, and you pay at most $200/sh, only $4 of which (2%) is time value.

For those wondering, there isn't a free lunch here - the deep calls require 4x as much initial investment.  But that also means you avoid professional traders, who want to invest the least and gain the most (when they're right).  So if you want to avoid spending too much on time value, go for call options around half the price of the index.

Buying ATM Leaps on FAANG stocks would have returned 120% yearly return post taxes. Why not do such a thing with say 5-10% of your portfolio instead of settling for SPY average return?

Is it still 5-10% of your portfolio after it goes up?  Do you allow FAANG calls to become 33% of your portfolio, by never rebalancing?

Your chart shows 12 month returns, suggesting the use of 12 month LEAPs.  Are you aware a 1% net drop wipes you out?  They might have 6x leverage on the upside, but it's 100x leverage on the downside.  You might gain +50% instead of +10%, but a net drop of -1% and you lose everything.  Calls expire worthless if the stock ends up below the strike price at expiration.

[Financial.Velociraptor]

Note for those considering deep in the money calls on the index for the first time.  Buying at a strike half the underlying's value gives you approximately 2x leverage.  That cuts both ways.  If the index falls 20%, your calls will fall 40%.  Thus, this is appropriate for small allocations.  100% deep in the money calls will savage your portfolio in the next 50%+ market crash.

[whywork]

Is it still 5-10% of your portfolio after it goes up?  Do you allow FAANG calls to become 33% of your portfolio, by never rebalancing?

Your chart shows 12 month returns, suggesting the use of 12 month LEAPs.  Are you aware a 1% net drop wipes you out?  They might have 6x leverage on the upside, but it's 100x leverage on the downside.  You might gain +50% instead of +10%, but a net drop of -1% and you lose everything.  Calls expire worthless if the stock ends up below the strike price at expiration.

The plan is to use a fixed percentage every time. Say 5% money in LEAPS on FAANG stocks. If I lose all of them, then use another 5% next year. If I double that money, still use 5% next year.

[whywork]

My IKBR account has portfolio margin. With a regular margin, the overnight is 2X and day trading is 4X. Does anyone know what is the overnight margin limit with a portfolio margin?

Also with a regular margin, usually using 30% margin is safe enough to avoid a margin call. For portfolio margin, how much is a safe margin to avoid margin call?

[specialkayme]

Seconding @Financial.Velociraptor. #1 and #3 are the choices newbies on Wall Street Bets make when they don’t realize the extent of their disadvantage against counter parties who definitely have teams of analysts and supercomputers on their side and maybe insider information too.

I'm going to go against the grain a little bit here, as I generally agree with @Financial.Velociraptor, @ChpBstrd and @MustacheAndaHalf , but I actually think option #1 isn't a horrible idea, if implemented correctly.

Sell a weekly OTM put on SPY, cash secured. How far OTM is up to you, but I'd focus on somewhere between the -10 delta and the -30 delta. The -10 delta will give you smaller returns, but a less wild ride, while the -30 delta will give you greater returns but greater risk with greater draw downs when things go bad (which will eventually happen). Buy it back at a set percentage (50%, or 75% typically). Wash and repeat. If you get a loss, you can choose to get assigned and sell calls on it, or close it for a loss (personal preference).

The keys here, which are crucial, are:
1. CASH SECURED!!!! Do not use margin.
Eventually, in 3, 6, 18 months you'll get the hang of pricing, at which point you may choose to not have it fully cash secured. Ease into it though. But at that point it's usually best to use a cash settled etf like SPX, and use spreads instead of naked. DO NOT RUSH TO GET HERE THOUGH. If you ignore this, you will blow up your account.
2. Record every trade. Record the time you get in and out, the price of SPY when you get in and out, the VIX when you get in and out, and the % OTM at the time you got in, at a bare minimum. Review your records monthly. 

There are a ton of people utilizing this strategy, or similar ones. Earlyretirementnow.com uses something similar, WeeklyOptionsTrading does too. I've used a comparable strategy for some time now, and it's overall profitable. 95.98% win rate, average gain of $354, average loss of $4,058. Which means I have positive trade expectancy of about $176 per trade. But the big losses come (biggest on this strategy was $9,600 . . . so far), and they can come multiple times. They hurt, and you MUST be prepared to absorb them and keep trading. The point is you have to trade mechanically. If you're trading SPY you'll see the option go from $1.20 to $1.00 to $3.00, sometimes up to $5.00. If you panic and sell, you're screwed. If you throw in the towel when you get bad losses, you're screwed. You have to keep trading, and you have to have enough cash reserves to absorb 3 or 4 full, or near full losses in a row. To many on here, risking $10k to gain $350 is insane, and generally I agree . . . except when you factor in the win rate that provides positive trade expectancy.

If you keep with the strategy, eventually you'll notice a few things. Namely that options are not always priced rationally. Opportunities exist, but you don't see them currently. After a years worth of records, you'll be able to see trades to take and trades to avoid. For example, the -10 delta 2-3 dte options on SPX are typically priced 2% OTM. Occasionally fear will be pushed into the market, and suddenly option prices will inflate, even if VIX doesn't. Then the market realizes its an over reaction, and goes back up. The same -10 delta could be priced 6-9% OTM at this time. It's typically a mispricing due to fear. But not always, as sometimes the market knows when a crash is about to come. It takes experience to read the difference. Other times the market will get into "calm seas" and that same -10 delta might be priced 0.5% OTM. That's dangerous, and a trap for a big loss if the market suddenly gets fear pushed into it. Just some examples though.

One reason I think weekly SPY trades are helpful, is you get more trades in to get more experience. If you stick with LEAPS, it can sometimes be hard to learn opportunities, as it can take months if not years to see a pattern, and you need to se 5-10 patterns repeat before you can feel comfortable using it.

Covered calls are another way to accomplish the same thing. But I've generally found covered calls to be less profitable than selling puts. YMMV though.

I'll likely get stoned from this group for saying all this though.

Also with a regular margin, usually using 30% margin is safe enough to avoid a margin call. For portfolio margin, how much is a safe margin to avoid margin call?

Please don't take this as offensive, but this gives me giant warning signs that you're about to blow your account. Please please PLEASE do not go anywhere near what you think might cause a margin call at this stage in your trading journey, and preferably don't use margin at all.

[waltworks]

I'll likely get stoned from this group for saying all this though.

Not at all. I just want to point out, though, that for most of us, what you're describing (especially the years of training yourself to get it right/figure it out) sounds like...a job.

I'd hazard a guess that most folks who have the mental fortitude and smarts to successfully trade options (and I think there are lots of them on this forum) could also just do a W2 or 1099 job that paid them a lot better with zero risk (and probably also much less stress), then simply plow the money into boring passive investments and ride off into the FIRE sunset in short order.

-W

[BicycleB]

PTF.

I'd rather watch someone else's margin meltdowns than have one myself. OP, keep us posted!

Sort-of-jokes aside, good luck in your journey.

[waltworks]

OP, keep us posted!

OP posts these sorts of wacky ideas regularly. It's not clear to me that he/she will ever implement any of them (and it would probably be best if they did not).

-W

[ChpBstrd]

I'd hazard a guess that most folks who have the mental fortitude and smarts to successfully trade options (and I think there are lots of them on this forum) could also just do a W2 or 1099 job that paid them a lot better with zero risk (and probably also much less stress), then simply plow the money into boring passive investments and ride off into the FIRE sunset in short order.

I’ve studied the hell out of options, read textbooks about Black-Schoales, made over a hundred trades across all sorts of market conditions, and even earned an MBA with a 4.0 GPA. I swear to you all that “mental fortitude and smarts” have basically nothing to do with the outcomes of options trades. Nothing. No matter how smart one might be, they are playing against supercomputers. If one can’t beat computer chess on the “hard” setting, why think one can beat a perfect probability weighting system that pulls in and processes data such as earnings and economic data within nanoseconds, and which has been undergoing a process of perfection for the last 4 decades?

For individual investors, options are awesome tools for hedging precisely because they are efficiently priced. As speculative gambles, options are traps for people who observe or feel they are smart and then hear advice about how only smart people should try to speculate with options. Challenge accepted! a bunch of smart people say, prior to losing thousands at a time. From experience I can tell you: the losses don’t stop until the person quits believing that assumption about options.

We’re doing these individuals a big disservice when we insist that it is possible to outsmart the other players at a game that is comparable to roulette, except with rewards for doing math really fast. One might get a lucky streak, but to sell a covered call and think one has done anything other than received some amount less than the exact probability weighted value of a future outcome is pure hubris.

[specialkayme]

I just want to point out, though, that for most of us, what you're describing (especially the years of training yourself to get it right/figure it out) sounds like...a job.

It's probably more of a job than most who visit this forum will ever actually have.

Read dozens of books (some pretty expensive and not possible to find at the local library *gasp*), find a strategy that works for your personality and risk tolerance, paper trade it for a few months, find out it didn't work, read a few more dozen books, refine a new strategy, paper trade that one for a few months, prove the concept, live trade it only to find out live trades don't match up with paper trades and lose money, read a few more dozen books, backtest a new strategy, paper trade that one, and then maybe, just maybe you'll end up positive on that strategy after commissions.

All in, it probably takes years, thousands of hours of work, and thousands of dollars in losses (at best) before you figure out something that works for most. And when you figure it out, you'll be behind the 8 ball compared to the guy that put that same initial seed money into VTSAX, not counting the thousands of hours of work.

But, that's when you hit the tipping point. If you make it that far, which is a big if, you can make significantly more trading than you can at your day job. YTD I've made more money trading than I have in my 9-5 job, and I have a pretty good 9-5 job. Jury is still out though, as we have 4 months to go in the year. But the point is it is another path to financial independence, which is kinda the whole point, right?

For me, I enjoy reading those books, running the backtests, figuring out a strategy and tweaking it. It's more entertaining than video games or reading People Magazine, and it puts cash in my pocket. If you don't find it entertaining, it may not be for you.

[specialkayme]

No matter how smart one might be, they are playing against supercomputers. If one can’t beat computer chess on the “hard” setting, why think one can beat a perfect probability weighting system that pulls in and processes data such as earnings and economic data within nanoseconds, and which has been undergoing a process of perfection for the last 4 decades?

You're playing against supercomputers with flawed programming though. Sure they're able to use high frequency trading to get better fills, and you can't compete with them on arbitrage opportunities. There's no competition there. But the underlying programming on how they value options is inherently inaccurate. The Black-Schoales model is flawed, and everyone knows it. It was the reason why the founder of the model formed Long Term Capital Management (along with as many doctorates in economics as he could find) to implement the formula in trading, use super computers and beat the market. And the fund went belly up in the late 90's. Because the model doesn't work. And yet, it continues to be the basis behind how all of the supercomputers use to calculate the value of options (in one way or another).

Option pricing models (BS included) utilize implied volatility of an underlying option and present that volatility over a probability curve to get expected outcomes. Computer programs then use the expected value on this probability curve as the basis of trades. Except (1) Implied Volatility is significantly overvalued compared to what realized volatility becomes, as has been proven multiple times across the industry, one such group being the OptionAlpha people (just as those that present it in a very easy to follow format, for those looking to learn more), and (2) the market doesn't follow a standard probability curve.

Mandelbrot's work theorized the market follows a fractal pattern, but his work is largely ignored. According to standard probability curves, between 1916 and 2003 the DJA should have seen daily moves further than 3.4% (up or down) a total of 58 times, when in reality it saw moves that far 1,001 times. The curve should have shown 4.5% (up or down) daily moves 6 times, when 366 times it actually occurred. And the curve predicts moves greater than 7% (in either direction) in any one day to be impossible, occurring once every 300,000 years at best, when in reality it did it 48 times in the past 100 years. To account for those problems, the probability curve attempts to create larger legs, but statistics can't keep up with actual trades, as it causes the curve to significantly under-estimate very small daily moves. In the end, the probability curve significantly under estimates very small daily moves, significantly over estimates moderate daily moves, and significantly under estimates massive daily moves.

Add to that the fact that these supercomputers often must take trades that it knows are losing trades in order to maintain its overall strategy. It will buy an OTM put that it doesn't believe will actually ever be profitable simply to balance out it's greeks through dynamic hedging, thus avoiding a potentially larger overall loss.

Supercomputers are not infallible, and options are not always efficiently priced. If you believe I'm wrong on either of those, I agree you shouldn't trade options at all.

[ChpBstrd]

No matter how smart one might be, they are playing against supercomputers. If one can’t beat computer chess on the “hard” setting, why think one can beat a perfect probability weighting system that pulls in and processes data such as earnings and economic data within nanoseconds, and which has been undergoing a process of perfection for the last 4 decades?

You're playing against supercomputers with flawed programming though. Sure they're able to use high frequency trading to get better fills, and you can't compete with them on arbitrage opportunities. There's no competition there. But the underlying programming on how they value options is inherently inaccurate. The Black-Schoales model is flawed, and everyone knows it. It was the reason why the founder of the model formed Long Term Capital Management (along with as many doctorates in economics as he could find) to implement the formula in trading, use super computers and beat the market. And the fund went belly up in the late 90's. Because the model doesn't work. And yet, it continues to be the basis behind how all of the supercomputers use to calculate the value of options (in one way or another).

Option pricing models (BS included) utilize implied volatility of an underlying option and present that volatility over a probability curve to get expected outcomes. Computer programs then use the expected value on this probability curve as the basis of trades. Except (1) Implied Volatility is significantly overvalued compared to what realized volatility becomes, as has been proven multiple times across the industry, one such group being the OptionAlpha people (just as those that present it in a very easy to follow format, for those looking to learn more), and (2) the market doesn't follow a standard probability curve.

Mandelbrot's work theorized the market follows a fractal pattern, but his work is largely ignored. According to standard probability curves, between 1916 and 2003 the DJA should have seen daily moves further than 3.4% (up or down) a total of 58 times, when in reality it saw moves that far 1,001 times. The curve should have shown 4.5% (up or down) daily moves 6 times, when 366 times it actually occurred. And the curve predicts moves greater than 7% (in either direction) in any one day to be impossible, occurring once every 300,000 years at best, when in reality it did it 48 times in the past 100 years. To account for those problems, the probability curve attempts to create larger legs, but statistics can't keep up with actual trades, as it causes the curve to significantly under-estimate very small daily moves. In the end, the probability curve significantly under estimates very small daily moves, significantly over estimates moderate daily moves, and significantly under estimates massive daily moves.

Add to that the fact that these supercomputers often must take trades that it knows are losing trades in order to maintain its overall strategy. It will buy an OTM put that it doesn't believe will actually ever be profitable simply to balance out it's greeks through dynamic hedging, thus avoiding a potentially larger overall loss.

Supercomputers are not infallible, and options are not always efficiently priced. If you believe I'm wrong on either of those, I agree you shouldn't trade options at all.

If you can spot systematic errors in options pricing you should be programming supercomputers for hedge funds rather than retail trading for peanuts! You might be surprised to learn the computers aren’t pricing on the 1970’s B-S model at all, and have moved on to AI and analytical/statistical technologies we’ll only know about in a couple of decades. The force of evolution is real in this space, and any system with even a slight edge will rapidly out-compete the others. Given the riches at stake, some of the world’s smartest people have been optimizing these machines for literally decades. I suppose it’s possible all those thousands of geniuses competing against each other and working billions of hours over the years missed one simple thing such as the model distribution being too tall, or that they are spinning off arbitrage opportunities worth more than the penny-sized margins they are chasing every day, and perhaps somebody armed with Microsoft Excel and making decisions on the scale of tens of minutes could find such inefficiencies, exploit them while nobody notices, and then of course spread the good news about the exploit on social media so others can join the fun and it goes on for years?

Or one could come to my grandfather’s conclusion about his favorite casino: “There are lots of pretty flowers out front, and I paid for them.”

[specialkayme]

If you can spot systematic errors in options pricing you should be programming supercomputers for hedge funds rather than retail trading for peanuts! You might be surprised to learn the computers aren’t pricing on the 1970’s B-S model at all, and have moved on to AI and analytical/statistical technologies we’ll only know about in a couple of decades. The force of evolution is real in this space, and any system with even a slight edge will rapidly out-compete the others. Given the riches at stake, some of the world’s smartest people have been optimizing these machines for literally decades. I suppose it’s possible all those thousands of geniuses competing against each other and working billions of hours over the years missed one simple thing such as the model distribution being too tall, or that they are spinning off arbitrage opportunities worth more than the penny-sized margins they are chasing every day, and perhaps somebody armed with Microsoft Excel and making decisions on the scale of tens of minutes could find such inefficiencies, exploit them while nobody notices, and then of course spread the good news about the exploit on social media so others can join the fun and it goes on for years?

Or one could come to my grandfather’s conclusion about his favorite casino: “There are lots of pretty flowers out front, and I paid for them.”

I'm far from the first to point these exploits out. Taleb's work is entirely focused on it. He regularly wrote/writes about how he used/uses the inefficiencies in option valuations to make big dollars against "supercomputers" and hedge funds. The only difference is he focused on tail events. But with standard probability models, everything under the curve must equal 100%. Which means if the model thinks a tail event will be 0.01% probability but it's actually 0.10% probability, the remaining 0.09% needs to be made up somewhere else, so it's overvaluing something (or collectively everything). Which creates further opportunities for inefficiency in option pricing. Same premise, just different analysis.

But it seems pretty asinine to think that there are "AI and analytical/statistical technologies we’ll only know about in a couple of decades" and use that as the basis for believing the system is rigged against you so you choose not to play. You're using the anchoring point of efficient market hypothesis, believing inefficiency is an impossible profitable point, and claiming there is "unknown" technology to justify the theory. Impossible to verify, impossible to dispute, impossible to trade against. I hear the same arguments from those that believe the loch ness monster or bigfoot is real. The only way to prove its correct is to capture it. Until you do, you can't disprove it's existence.

In the end, I'll just shrug my shoulders and keep making my profits. Been working for years for me. Maybe I'm a statistical anomaly. Maybe I just don't listen to those that tell me I can't do what I'm doing. Who knows.

[MustacheAndaHalf]

There are a ton of people utilizing this strategy, or similar ones. Earlyretirementnow.com uses something similar, WeeklyOptionsTrading does too. I've used a comparable strategy for some time now, and it's overall profitable. 95.98% win rate, average gain of $354, average loss of $4,058. Which means I have positive trade expectancy of about $176 per trade. But the big losses come (biggest on this strategy was $9,600 . . . so far), and they can come multiple times. They hurt, and you MUST be prepared to absorb them and keep trading. The point is you have to trade mechanically.

Why do you prefer cash secured over selling a put spread?  If you sell one just OTM, could you buy another as insurance, even deeper OTM?  That would at least smooth the worst case returns, while incurring additional costs.

[specialkayme]

Why do you prefer cash secured over selling a put spread?

They are different concepts. You can have cash secured naked vs. margin naked, or cash secured spreads vs. margin spreads. I know you know the difference, but I'm just pointing it out to those on here with less options experience that may not.

But to answer your question, it depends on the time left on the option and the underlying. You need to look at how far the option could go, and understand if you're alright with that level of loss or not. If not, I'll turn it into a spread over naked.

Some examples may help.
1. I sell an SPY put, -10 delta. SPY is currently sitting at 452.76. The option expiring Tuesday (9/7) -10 delta put would be the 448 put, selling for $0.15. Now I could sell that option, cash secured, which would require me to hold onto $44,800 in cash in the event I'm assigned. But SPY has a floor in a 1 day move. It can only drop 20% before trading would be halted. Which means at worst, SPY would hit $362. So I don't need the full $44,800, as my max loss is $8,600. I could reduce my max loss to $1,000 by turning it into a spread and buying the 438 for $0.05, but it also cuts out 1/3rd my potential profit. And I'm only buying protection for an event where SPY drops MORE THAN 3.2% in a single day. The odds are really small it will move more than 3% in a day. What you'll find is when you have a loss, SPY will often move lower than your sold put, but not low enough for the buy put to make a difference. Which just means you're leaving cash on the table. So if SPY drops 3% in one day, the person that sold the naked put and the person that sold the 10 pt spread have the same loss ($1,000), but the naked made 33% more on every day the SPY didn't drop 3%.

2. I sell an SPX put, -10 delta. SPX is currently sitting at 4,535.43. The option expiring Tuesday (9/7) -10 delta put would be the 4,480 put, selling for $1.95 (mid). SPX has the same 1 day floor. So cash secured would require me to hold onto $448,000 in cash. Max loss (20% drop) would "only" be $85,200. Realistically speaking, the market rarely drops more than 3% in a day, so my real life possible loss is closer to $8,000, although it obviously isn't limited to that. Same analysis as above, but with more money involved. If I wanted to keep it as cash secured, but didn't feel comfortable with $448,000 being held in cash to make a max of $195, I could buy a leg to free up my cash secured requirements. But it cuts into my profitability. Again, absent a dooms day event, the naked and the spread seller will have the same realized loss, but the naked seller will make more. By making more, they can better withstand the loss whenever a greater than 3% loss day does come.

Note: for both above, buying a leg reduces your max loss, but increases the probability that you'll hit your max loss. For example, a naked SPY put may have a max loss $8,600, but it requires a single day 20% drop which occurred what, once ever? Or I could turn it into a spread, but I would hit my max loss of $1,000 if a 3.2% one day drop occurs, which has happened thousands of times in the past 100 years. With this strategy you need to be able to survive multiple drops and keep playing. If you have, say $10,000 to invest, you could go with one naked or 10 spreads. And it's so easy to ramp it up to 10 spreads. But when that 3.2% down day comes, naked takes a loss and keeps rolling while the 10 spreads files bankruptcy. So the goal is NOT to trade more spreads than naked, just because the collateral requirement is less.

3. I sell an SPX put, -10 delta. SPX is currently sitting at 4,535.43. This time, instead of looking at the 1 dte option, I look at the 7 dte option (expiring 9/13). The -10 delta put is the 4415 strike, for $4.2. Cash secured would still require $441,500 in cash in the account, but this time my "real" max loss is different. The 4415 strike is 2.6% OTM. It also gives me 5 days of possibilities. So in theory, I could have 5 straight days of a 20% drop each (incredibly unlikely, obviously), which means my "real" max loss is closer to $304,900 (forget for a second that if the market dropped 20% each day for 5 straight days, we're probably living in a "Mad Max" type world, where money in accounts is meaningless). Not only that, but if I see a 5% drop on ANY day in the next 5 days, I hit my max loss. So the odds are a little different. In that instance, I could buy a 50 pt leg, and it'll cost me $3.00. Max loss is $5,000, and max profit is $1.20. A better risk to return rate than the 1 dte option in #2 above. So the spread makes more sense.

In the end, spreads allow you to reduce your potential max loss, but increase the probability you'll hit the max loss. Spreads reduce your profit potential too, but may allow you to sleep better at night. I do both though, depending on how far OTM the short strike is, how many days are left, and how much risk I find acceptable.

[12gauge]

I only sell put options on stocks i'd like to own, I sell them from anywhere from 1 month out to 2 years even sometimes(mostly did that back in march/april of 2020) on good stocks like microsoft, apple, etc.  Only once in awhile am I actually assigned a stock.  This summer I was assigned draftkings at 50$ when it traded at 45$.  no big deal since I also got paid 5$ for the put.   Its now up to 60$.   I wanted to buy draftkings, but I didnt want to pay the going rate at the time so I sold a put on it.   

I used to do covered calls as well, but I lost Square, NVDA, AMD doing that and lost out on 300% returns.   So now I only do do covered calls if its a stock i'm looking to clear out eventually for cash for other opportunities.

[talltexan]

I was going longer term, but I've tried to focus the puts I sell on a data that is 1-3 months out, hoping for the most rapid deterioration of the time premium.

[specialkayme]

1-3 months out, hoping for the most rapid deterioration of the time premium.

7 & 14 days has had better profitability for me overall than 30, 45 or 60 days, in both backtested data, paper trading and live account. It makes sense, when you think about it, due to rapid theta decay.

Although the delta used has had a larger correlation on profitability than days to expiration. Not what I expected.

[MustacheAndaHalf]

specialkayme - Thanks for the detailed analysis, earlier.  I had no idea you considered 1 day options, but there the max loss calculation makes sense.  The third scenario was more what I was thinking about, that maximum loss can wipe out profits quickly.

7 & 14 days has had better profitability for me overall than 30, 45 or 60 days, in both backtested data, paper trading and live account.

I wanted to highlight this for casual readers going into options trading.  When people see "backtested data" and "paper trading", that implies discipline.  If there's some psychological test for level of discipline, that might be a crucial test before someone tries to start options trading.

Which might come off as an empty statement, but it matches my experience.  When I invested in beaten up stocks, I created spreadsheets and used less risky investments to support riskier investments.  I bought OOM calls on beaten up stocks and did extremely well as the market realized it's mistake in Nov 2020.  I measured my risk and sold calls as GME was over $200 back in Jan, and GME stock fell below $50 soon after.  That worked well... then I ignored risk control, and simply sold calls like they were a sure thing.  That turned out badly in late Feb, when GME stock doubled overnight.  So it's been my experience that disciplined investing where risks are considered tends to win out, but if that discipline slips it can turn out badly.

[ChpBstrd]

Since September 17, 2020, the average daily return for the first 14 days of a month has been +0.26439%. For days 15 and greater, the average daily return has been -0.011477.

If anyone is looking for an options gamble, it might be to do bull spreads in the first half of the month and bear spreads in the second half - at a safe distance and with a safe allocation of course.

[specialkayme]

specialkayme - Thanks for the detailed analysis, earlier.  I had no idea you considered 1 day options, but there the max loss calculation makes sense.  The third scenario was more what I was thinking about, that maximum loss can wipe out profits quickly.

What's really interesting though is once you hit max loss. If a 5% drop over a 7 day time period gets you to max loss, you're going to see IV rise. When that happens, the bell curve will flatten out a little bit. The same delta put will be even further out of the money, and will be more expensive. So once you hit max loss, you actually start making money back faster, all by running the same strategy.

Say you sell a 50 pt put spread, targeting the 10 delta. Maybe the put you're selling is 3% OTM, and you're selling it for $2.20. Then you hit a max loss event. The next round of put spreads will be for 10% OTM, and you're selling it for $4.50. So you get to choose your adventure: 1) continue to sell at 3% OTM (but at a larger delta at that point) in an attempt to make even more money, 2) continue to sell at the same delta (but a larger percentage OTM) in an attempt to make more money (but less than #1), or 3) continue to sell for the same premium (but even less OTM and lower delta), for the same profitability but less risk. It's all a risk to reward analysis at that point.

I've had good success identifying those moments, and risking that the volatility is overstated. It's a risk, obviously, and next time it may not pay off. But the market truly has irrational days, and I like to be able to hold back, watch, and push some chips onto the table when the moment is right. It's been worthwhile for me. But you need the experience to know when the market is being irrational and overstating fear, and when shits going down and it isn't irrational fear that's happening.

[specialkayme]

Since September 17, 2020, the average daily return for the first 14 days of a month has been +0.26439%. For days 15 and greater, the average daily return has been -0.011477.

If anyone is looking for an options gamble, it might be to do bull spreads in the first half of the month and bear spreads in the second half - at a safe distance and with a safe allocation of course.

You gotta be careful with this. If you torture the data enough, it'll tell you anything.

I've seen a bunch of people trying to backtest timings in and out of the market down to the minute. To the extent they see if they can sell a spread in the morning and buy it back in the afternoon if its more profitable to sell at 10:10am or 10:12am, or buy back at 3:08pm or 3:04pm. In the end you need to think, is this a pattern that is repeatable or not. If you think it's repeatable, why? Would you be able to identify when it stops repeating, and be able to tell if it will no longer repeat again or is just on "pause"?