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The Lazy Trader by Henrik - 2d ago
Trade Details:

4 Apr RUT 1400/1390 Credit Put spread @0.65 credit each
3 Apr RUT 1675/1685 Credit Call spread @0.95 credit each

3 Feb IWM 165 Long Calls @0.64 debit each

Net Credit: $353
Max Risk: $3,647

Risk Profile


RUT Chart for future reference:



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This article appeared first on enhanced-investing.com (February 5, 2019)
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During the month of January, we got to close 23 Short Puts successfully for a total gain of $752 ($722.79 net after commissions). This is on a small $25,000 account (2:1 margin) with Tastyworks as the broker. Below is a summary of each position that was closed:

No stock assignment took place. There are currently no stock positions and therefore no dividend income either.

I consider this month a success. Repeating a $722.79 positive cash flow for 12 months results in $8673.48 for the whole year. That’s a +34.6% total account return, which is phenomenal, especially if it is done like this month with zero equity position risk.

At the same time the market was substantially up with the S&P500 Index now at +7.87% for the year. This is of course not sustainable and I don’t expect it to continue month after month.

Looking forward, we have 8 nice positions established at the moment at decent premiums and with good likelihood of bringing more profits. Volatility in the markets has gone down significantly, with the VIX now at 16.57 (January 31 Close). That, coupled with an earnings season that little by little comes to an end, will start making our plays less attractive as Options’ premiums will be lower. However, this VIX value is still not too bad for our purposes and nice opportunities can still be found.


If you enjoyed this content, consider acquiring the Enhancing Investing Course. Where you will learn to properly value companies and adopt strategies that truly minimize your risks while increasing your probabilities of making money. Read more details.

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This article appeared first on enhanced-investing.com (January 22, 2018)
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Despite the fact that a disciplined covered call strategy can out perform an equity index in the long run and do it with less volatility risks obviously exist as with any strategy.
  • When you sell a Call on a stock that you are holding, you are limiting your upside potential. It gets capped at the short strike price of the Call you sold, so you will not participate in an entire stock rally. However, you are still exposed to downside moves just as a regular shareholder.
  • When you are short Calls, you are also short volatility (Vega). A strong decline in the stock may actually make the Call more expensive or not lose that much value do to the expansion of volatility. Of course, this is irrelevant at expiration date when all that matters is whether the stock is above or below the strike price of the Call option.
  • Because it is an active strategy, profits are taxed at higher rates than say dividends or capital gains. This is something to take into account if you want to avoid active trading taxes. In that cases it is better to apply the strategy in tax sheltered accounts such an IRA.
  • Also, because it is an active strategy you will incur more trading costs than a pure passive Buy&Hold Investor. It is important for this reason to use a broker than charges reasonable commissions of less than $1 per contract and no Order Ticket charge.
All that said, Covered Calls help you mitigate your equity losses and can also provide regular cash flow. Evidence shows that a systematic Covered Call approach on the S&P500, selling the 30 delta Out of the Money Call every month while holding the underlying instrument, beats the index handsomely and with less volatility. Read this article about CBOE’s BXY index.
The disciplined investor will simply have to fight the frustration of missing huge rallies, knowing that for each one of those, there will be dozens of stocks doing nothing, sometimes for years. So, things tend to even out in the end and turn out a little better for the Covered Call seller.
 

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This article appeared first on enhanced-investing.com (January 15, 2018)
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Last week I finally closed a Short Put position on JM Smucker Co. (SJM) after a 42-day battle.
On November 30, the company closed at 104.51. My analysis told me that it was slightly undervalued and I decided to sell a January 95 Put for which I obtained a credit of $91. The broker froze a Buying Power of $1,335.65 for me to carry this short position.
After that, the market went to s**t, and SJM was no exception.


SJM Price action (second half of 2018 – early 2019) On December 27 SJM hit a low of $91.32. Now, here’s the power of short Puts: At the close of Dec 27, the short January 95 Put was trading at a mid price of 3.65 ($365). Remember I initially sold it at 0.91 ($91). Therefore, my open loss at that point was $274. Contrast that with the alternative scenario of having purchased 100 shares on November 30 at 104.51. I would have been losing more than a thousand dollars on December 29.
SJM recovered little by little and last week (January 10) I finally closed the short Put for 0.27 debit ($27). The profit was therefore $91 – $27 = $64 dollars. On a $1,335.65 margin, that’s a +4.8% return on margin. It may not sound like much, but make 4.8% on margin every 42 days for a year and we’re talking about a +41.6% annualized return.
On January 11, 2019 SJM closed at $102.19. The buyer of 100 shares on November 30, not only suffered more during the correction, but he is still losing money.
If you enjoyed this content, consider acquiring the Enhancing Investing Course. Where you will learn to properly value companies and adopt strategies that truly minimize your risks while increasing your probabilities of making money. Read more details.


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The Lazy Trader by Henrik - 1M ago
Trade Details:

4 Mar SPX 2375/2385 Credit Put spread @0.60 credit each
2 Mar SPX 2830/2840 Credit Call spread @1.00 credit each

2 Mar SPY 284 Long Calls @0.56 debit each

Net Credit: $328
Max Risk: $3,672

Profit/Risk Profile


SPX Chart for future reference:





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This article appeared first on enhanced-investing.com
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With the introduction of the BXM and PUT indexes by the CBOE in 2003, it became apparent to many investors that selling Options around equity positions could indeed become a smarter way to invest for better returns in the long run and less volatility. Based on the interest provoked by the launch of these indexes, it was only a matter of time before investors started inquiring about other potential approaches to options selling.



So, in 2006 the CBOE came up with BXY, which is another Covered Call selling strategy on the S&P500, similar to BXM already discussed here.

The difference is that, BXY uses Out of the Money Call options with a strike price that is 2% higher than the current SPX Index price. BXM, on the other hand, uses the nearest At-The-Money Call option every month (or first one of the money if no exact ATM strike is found).

This is an important distinction because on a monthly basis, BXY accumulates less premiums from the Call options sold as they are worth less credit than “near at the money options” used by BXM. However, in exchange for this, BXY expects to participate a little bit more in market rallies without capping the capital gains as quickly as BXM does.

Every month, BXY has a 2% upside potential in equity appreciation before the strike price of the Covered Call option sold is hit. It is not hard to conclude that during strong years, BXY will outperform BXM. And during negative years, BXM should out-perform BXY as both lose money on the underlying index position but BXY is able to mitigate the losses better, thanks to the larger credits obtained from selling ATM Options.

In recent years of a strong bull market BXY has easily outperformed BXM.

Going back to June 1, 1988 (date where BXY was initialized in the back-test at an initial price of 100), and going to March 2006 (when BXY was officially created by the CBOE), the performance of BXY is superior to that of BXM, although with a little more volatility:

Taken from this CBOE link

Selling Covered Call options tends to outperform the index in the long run. Choosing 2% Out of the Money options results in even better performance than if you use close to At-The-Money options, although the latter approach offers a smaller volatility.

For more details about the BXY methodology, consult this paper published by the CBOE.

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The CBOE’s CNDR index is a benchmark that tracks the hypothetical performance of a monthly SPX Iron Condor with short options at ~20 deltas, and long options at ~5 deltas.

Let's have a look at its historical performance, illustrated on the CBOE website at http://www.cboe.com/index/dashboard/CNDR#cndr-performance


A quick looks tells us that, yes, it has been an overall profitable strategy, but there is definitely a big different between the first 22 years and the last 9.

The period from January 1988 to January 2010 saw the index take off from 99.29 to 771.31. That's a +9.77% Compound Annual Return. Not bad. However, from January 2010 to January 2019 the index has gone nowhere. In fact it is slightly down from 771.31 to 713.49. That's a Compound Annual Return of -0.86%. And these last 9 years have taken the Compound Annual Return down to 6.57% for the whole 31-year period (1988-2019).

Now, you can use different Iron Condor variations. You know: different distances, entry rules, adjustment strategies and so on. But regardless, to me, the chart above is telling one undeniable truth: The environment of the last few years has not been ideal for the Iron Condor strategy. At least not on the SP500 Index. I suspect that due to the high correlations, and persistent historically low volatility of the last few years, the same thing would have happenned with the Dow Jones, The NASDAQ or the Russell.

Are Iron Condors dead? Did they permanently stop working?

Just when you are about to abandon a strategy, cycles of out-performance may be around the corner. CNDR may take more time to get out of this slump. But saying that a particular approach is permanently "dead" is usually a mistake. All strategies go through periods of draw-downs. It is inevitable. Sometimes, these periods last years and that's hard to swallow, but it is a lesson to always use different strategies and to not get married to only one.

For more information on the CBOE CNDR Benchmark Index:
Methodology Paper
CBOE S&P500 Iron Condor Index (CNDR)



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2018 was a disastrous year for what I call LTOptions (Credit Spreads, Iron Condors, Elephants) at -45%. There is no other way to put it, and although there were many issues at the personal level that affected me deeply, I don’t like to be complaining and using excuses. Time is more effectively used looking at the problems objectively and defining the proper course of action going forward.

These were the main problems in 2018:

 -        Excessive risk concentration. In February I got to have 5 positions on at the same time and 100% capital committed. At the time I knew it was a mistake but thought that I would have to be extremely unlucky to be affected the one time I have so much exposure, when for years I have always carried 2 – 3 positions. Well, the market works in mysterious ways and seems resolute to punishing every little mistake you make. The February sell-off caught me so exposed, that I found myself defending four positions simultaneously, two of them had to be closed at a loss even without any redeployment attempt for a defense. February alone brought a 15% loss but it also left less than ideal March positions, which later resulted in further losses. The “year” was lost there. It is not wise to follow an approach where the “year” can be gone with just a couple of mistakes.

-        Excessive greediness. Long Call positions as well as long Synthetic stock positions were deployed in February during the market sell-off. At one point later in the year these positions had accumulated gains around $10,000 dollars. Or in other words, +10% for the Portfolio. This, instead of resulting in a near 10% portfolio loss by the end of the year. That alone, (changing a -10% influence by a +10% influence is a 20% swing in the portfolio results). Long options plays should definitely be taken off more actively, as gains can evaporate with market moves and time decay.

I’m not going to say, “if both things above hadn’t happened, then,………..”  I’m not going to go there, because, well, they happened. I also think that even without those big mistakes, it would have been a negative year. Certainly not as bad as -45%, far from that. But a negative year nonetheless.

Looking at the CBOE’s CNDR index (a benchmark index that tracks the hypothetical performance of a monthly SPX Iron Condor [short options at 20 deltas, and long options at 5 deltas]) we can see that it was a negative year for the strategy (about -7%).


Going further back, to the beginning of 2012, the CNDR benchmark index is down 5.4% in 7 years:
 
Of course, not everyone trades this particular approach that CNDR uses. But still, as a benchmark, it is a good indication that tells the world “hey, the Iron Condor strategy was pretty tough to pull off during this period”. You may tweak, optimize, change here and there, but the fact remains that the last few years have not been ideal for Iron Condors.

Still, it usually happens that the good times are about to start rolling right before you are about to abandon a strategy. 2019 could be the beginning of a new era where two sideways trading is more handsomely rewarded.


MAIN CHANGES

-        The main one is that I’m reducing my capital allocation. Putting more money in long-term investments, as I’ve learned I’m more of that than an active trader. My LTOptions positions will be around $4K - $5K each.

-        I’m back to carrying just two positions in the inventory. No more than that, ever. At around 8 weeks to expiration I will look to deploy a new position in a new expiration cycle, provided no position already exists on that cycle. A Credit Put spread will be used during Oversold Extremes, otherwise an Elephant. I may consider Unbalanced Iron Condors 4:1 ratio of Puts to Calls during overbought markets.

-        Another important point will be to take gains off much sooner. During volatile markets, with lots of back and forth price action, strike prices may never actually be penetrated. Yet, they may be reaching ‘adjustment/defense’ points constantly. As a result, you end up unnecessarily taking many losses. If you are going to cut losses early, then it will also be vital to take gains early as a mechanism to eliminate positions that may become problematic. It is either that or play much smaller positions where you never intend to ‘adjust/defend’ early, but this would require a much greater number of positions that I honestly can’t handle due to my full-time job commitments. So, I will be taking gains off at a little over 50% of max profit. At the same time, I will avoid being in a position at less than 2 weeks to expiration.

-        As soon as I close a position. i.e. because I took gains early, I will look to redeploy the capital. I may deploy in the same expiration cycle if it is still 5 or more weeks away from expiration. Otherwise I will go to the next monthly cycle. This means that, in some cases, positions will be initiated at more than 8 weeks to expiration. Maybe 9 or even 10. I expect that in those slightly longer-term plays, the 50% of max profit level will be reached with quite a few days to expiration still, leaving me a chance to eventually deploy a new position in that same cycle.

-        For Elephants I will take the Call sides off individually when they reach 70% or so of the max profit on that side. That will give opportunities for potential re-deployments on eventual rebounds.

-        The rest remains similar in terms of adjustment techniques and not defending the Call side of Elephants.
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This article appeared first on enhanced-investing.com
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One of the cons often mentioned about Put selling strategies is that you miss out on the larger gains that a stock rally would have provided.

It is true, that in the event of a strong rally (be it a stock or an index), holding shares directly lets you participate in potentially larger gains. However, not all stocks or indexes for that matter are constantly rallying. In many instances they face long periods of sideways back and forth, sometimes even years.
The S&P500 Put write index (symbol PUT) was created by the CBOE years ago and it aims to simulate a permanent Short Put strategy on the S&P500. Taken from the CBOE site:


“PUT is an award-winning benchmark index that measures the performance of a hypothetical portfolio that sells S&P 500 Index (SPX) put options against collateralized cash reserves held in a money market account. The daily historical data for the PUT Index now extends back to June 30, 1986.”

As specified in the methodology by the CBOE: “The SPX puts are struck at-the-money and are sold on a monthly basis, usually on the 3rd Friday of the month…”

The results over 30 years (1986-2016) show that this simple methodology outperforms pure holding of the S&P500 index.

Taken from the Put Write Index Fact Sheet
Not only does it outperforms, but it also does it with a smaller standard deviation (less volatility).
In years of strong Bull markets, the PUT strategy tends to underperform as it collects less premium from the Options, than the gains the markets are making. However, the index outperforms in flat years and negative years, and even in some bullish years:


Notice how PUT outperforms in 2008 during the global financial crisis. It had a negative year, but definitely less so than the S&P500. Then in 2009 it also outperformed despite the strong recovery of the equity markets. However, it generally under-performs in strong years. Which is what has happened in recent years. Notice also the out-performance in 2015, a pretty flat year. This is expected. 


This is a clear example of how a simple active Put selling strategy outperforms the stock market S&P500 index with smaller risks.


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The Lazy Trader by Henrik - 1M ago
This article appeared first on enhanced-investing.com
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One of the cons often mentioned about Put selling strategies is that you miss out on the larger gains that a stock rally would have provided.

It is true, that in the event of a strong rally (be it a stock or an index), holding shares directly lets you participate in potentially larger gains. However, not all stocks or indexes for that matter are constantly rallying. In many instances they face long periods of sideways back and forth, sometimes even years.
The S&P500 Put write index (symbol PUT) was created by the CBOE years ago and it aims to simulate a permanent Short Put strategy on the S&P500. Taken from the CBOE site:


“PUT is an award-winning benchmark index that measures the performance of a hypothetical portfolio that sells S&P 500 Index (SPX) put options against collateralized cash reserves held in a money market account. The daily historical data for the PUT Index now extends back to June 30, 1986.”

As specified in the methodology by the CBOE: “The SPX puts are struck at-the-money and are sold on a monthly basis, usually on the 3rd Friday of the month…”

The results over 30 years (1986-2016) show that this simple methodology outperforms pure holding of the S&P500 index.

Taken from the Put Write Index Fact Sheet
Not only does it outperforms, but it also does it with a smaller standard deviation (less volatility).
In years of strong Bull markets, the PUT strategy tends to underperform as it collects less premium from the Options, than the gains the markets are making. However, the index outperforms in flat years and negative years, and even in some bullish years:

Notice how PUT outperforms in 2008 during the global financial crisis. It had a negative year, but definitely less so than the S&P500. Then in 2009 it also outperformed despite the strong recovery of the equity markets. However, it generally under-performs in strong years. Which is what has happened in recent years. Notice also the out-performance in 2015, a pretty flat year. This is expected. 


This is a clear example of how a simple active Put selling strategy outperforms the stock market S&P500 index with smaller risks.


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