Options- Combination Writing

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Jul 5, 2006 8:57 pm

hey NASD-


you mentioned that you've sold 10 GOOG puts and 10 GOOG calls for July-


give me an idea of your strike price selection strategy- you've probably been tracking GOOG pretty closely over several months and are comfortable with the stock's price action- and you are obviously cashing out of the stock's time value at expiration and hope that the close at expiration is within the channel you've selected-


(i don't know what options you've sold, so i'll just guess:)
why did you select to sell the 10 GOOG:
July 390 calls and
July 440 puts
instead of the 380 calls or 450 puts?


what are you using as the criteria for your selection?
- 50 day and/or 200 day averages, what else?
and why GOOG? 

do you research others, and are you looking for channeling time periods of a certain duration, say 3 mos, 6 mos?




Jul 6, 2006 9:03 am

Jul 6, 2006 9:24 am
TexasRep:

hey NASD-


you mentioned that you've sold 10 GOOG puts and 10 GOOG calls for July-


give me an idea of your strike price selection strategy- you've probably been tracking GOOG pretty closely over several months and are comfortable with the stock's price action- and you are obviously cashing out of the stock's time value at expiration and hope that the close at expiration is within the channel you've selected-


(i don't know what options you've sold, so i'll just guess:)
why did you select to sell the 10 GOOG:
July 390 calls and
July 440 puts
instead of the 380 calls or 450 puts?


what are you using as the criteria for your selection?
- 50 day and/or 200 day averages, what else?
and why GOOG? 

do you research others, and are you looking for channeling time periods of a certain duration, say 3 mos, 6 mos?



The reason that I chose the 440 put and 390 calls is because the time premium was greater than the two you suggested--the 450 put and 380 call.


I operate on the assumption that the stock will remain between the strikes--and the time value reward versus percieved risk was more attractive to me.


I am not a major fan of technical analysis--and I think that it's almost impossible to employ with a stock like Google because it's one of those oddball trading stocks that can move twenty or thirty points if somebody sneezes.  That said I do watch charts looking for support and resistance levels--and in so doing you're going to see the moving averages, but as I said I dont' think they're very valid with GOOG.


I set stops when I am away from my computer, but cancel them if I'm going to be spending the day nearby.  The Fidelity Pro Trader system can be set so that my computer begins to beep if the stock moves up or down by predetermined amounts and I've been around long enough to understand the old adage, "Don't fight the tape--so I'll roll up or roll down if necessary.


Because of the volatility in the stock if it moves to a breakeven point it seems, at least for me, that I can roll up or down for net even unless it's within the last ten days or so, in which case I move to the next month.


In the "old days" we had only four cycles and there were no cheap commissions--so this was much more difficult.  But these days with $8 plus 75 cents per contract commissions and an expiration within thirty days it's far more interesting.


I do not--NOT--believe this game is for everybody.  I've been around since the very beginning of the CBOE, I've got some money to "play" with, and I have the time to be around the beeping if it happens.


Don't even try this stuff if you're not able to be around to react--especially with a stock like GOOG which, as I say, can run a lot of points very quickly.


I keep reminding myself that forty points in GOOG is like three points in a thirty dollar stock--which is why it is so exciting and so scary at the same time.


I only do GOOG these days.  I've tried to do as many as fifteen different issues at once.  Some worked some didn't--but over time I've decided that I'll just do GOOG as long as it's as volatile as it is.  If they split it I will be disappointed.

Jul 6, 2006 9:52 am
NASD Newbie:

...............I only do GOOG these days.  I've tried to do as many as fifteen different issues at once.  Some worked some didn't--but over time I've decided that I'll just do GOOG as long as it's as volatile as it is.  If they split it I will be disappointed.




good post---


you only write combo's on GOOG, but is combination-writing the only options-game you play?



Jul 6, 2006 10:09 am
TexasRep:
NASD Newbie:

...............I only do GOOG these days.  I've tried to do as many as fifteen different issues at once.  Some worked some didn't--but over time I've decided that I'll just do GOOG as long as it's as volatile as it is.  If they split it I will be disappointed.




good post---


you only write combo's on GOOG, but is combination-writing the only options-game you play?



Nope.  My wife and I both have had self directed IRAs since they showed up in the tax code--twenty five years ago?  Longer?  Can't remember when it was but not just the other day.


Covered call writing in those--simple stuff, enhance the dividends, remove some of the volatility.


My wife has a margin account at Fidelity--she writes calls and uses margin--mostly on stocks she researchs herself.  Her biggest position is in Fortune Brands which she owns at an average somewhere in the high twenties.  She  had about 1200 CCL for a number of years but was stopped out on it's most recent decline.


I also run my parent's accounts--they're doing covered call writing with some calendar spreads on the same issue anchored by LEAPS in lieu of shares so that they are not naked.


I love this schidt.

Jul 6, 2006 10:31 am

[quote=NASD Newbie

Nope.  My wife and I both have had self directed IRAs since they showed up in the tax code--twenty five years ago?  Longer?  Can't remember when it was but not just the other day.


Covered call writing in those--simple stuff, enhance the dividends, remove some of the volatility.


My wife has a margin account at Fidelity--she writes calls and uses margin--mostly on stocks she researchs herself.  Her biggest position is in Fortune Brands which she owns at an average somewhere in the high twenties.  She  had about 1200 CCL for a number of years but was stopped out on it's most recent decline.


I also run my parent's accounts--they're doing covered call writing with some calendar spreads on the same issue anchored by LEAPS in lieu of shares so that they are not naked.


I love this schidt.


[/quote]


what's wrong with your spell check as that's not the way one spells fecal matter.


I also assume your wife disclosed her account to your firm and you about your parents?

Jul 6, 2006 10:46 am

That's a non-issue if you're retired...and I thing "newbie" is...

Jul 6, 2006 10:49 am
Indyone:

That's a non-issue if you're retired...and I thing "newbie" is...


You're right it is a non-issue.  But before I was it was all revealed as it should be.

Jul 6, 2006 10:55 am

thing=think...damn typos...

Jul 6, 2006 4:05 pm

Today's movement in GOOG is instructive of why writing options is a better idea than buying them.


They are a wasting asset if you own them, and a wasting liability if you wrote them.


When the market moves sideways--as GOOG did today, up a buck or two is nothing for a stepper like that--the calender moves one day closer to expiration.


One day less for the buyers to be right, one day less for the writer to be wrong.  Remember, the writer knows going into the trade what his maximum profit is going to be so he wants the time to fly by.


The buyer starts the trade losing because he paid commissions and every day that goes by without the stock making a significant move is one less day for him to be able to root for a winner.


Regarding the two options that are being discussed--the 390 call went up 1.20, which was the wrong way.  However the 440 put went down 1.70 which was good.  Net gain for the day 1/2 point.  On ten contracts that's $500.


Not enough to get all excited about, but better than a sharp stick in the eye.

Jul 6, 2006 4:35 pm
NASD Newbie:

Today's movement in GOOG is instructive of why writing options is a better idea than buying them.


They are a wasting asset if you own them, and a wasting liability if you wrote them.


When the market moves sideways--as GOOG did today, up a buck or two is nothing for a stepper like that--the calender moves one day closer to expiration.


One day less for the buyers to be right, one day less for the writer to be wrong.  Remember, the writer knows going into the trade what his maximum profit is going to be so he wants the time to fly by.


The buyer starts the trade losing because he paid commissions and every day that goes by without the stock making a significant move is one less day for him to be able to root for a winner.


Regarding the two options that are being discussed--the 390 call went up 1.20, which was the wrong way.  However the 440 put went down 1.70 which was good.  Net gain for the day 1/2 point.  On ten contracts that's $500.


Not enough to get all excited about, but better than a sharp stick in the eye.



but at the end of the day (or option period) GOOG has to move more than 77 pts below your call or above your put to make the strategy fail to breakeven (not counting the trade costs)-


"....Because of the volatility in the stock if it moves to a breakeven point it seems, at least for me, that I can roll up or down for net even unless it's within the last ten days or so, in which case I move to the next month...."


meaning that you may thru your own intuitiveness, possibly hang in there if it's early in the contract, but if its late, you'd likely buy-out of the position and look to next months offerings and do it again?





Jul 6, 2006 6:20 pm
TexasRep:

meaning that you may thru your own intuitiveness, possibly hang in there if it's early in the contract, but if its late, you'd likely buy-out of the position and look to next months offerings and do it again?

Correct.  Even if you're wrong you can establish the same position with a month more time and get a credit that will exceed the cost of buyng back the option that is eating your lunch--due to the time value of the future contracts.


Theoretically you can keep rolling from month to month and bring in more for the future month than it costs to buy back the near month.

Jul 6, 2006 6:49 pm

Thank you NASD for a valuable contribution to this board!  It was very helpful.

Jul 6, 2006 8:50 pm

Amen...this is the reason I don't like seeing you killed off again...and again...and again...

Jul 16, 2006 5:09 pm


What will you write for August? 


GOOG:
Aug 380 calls
Aug 420 puts


the time premium doesn't appear as nice- will that change Monday morning?


Jul 16, 2006 5:24 pm
TexasRep:


What will you write for August? 


GOOG:
Aug 380 calls
Aug 420 puts


the time premium doesn't appear as nice- will that change Monday morning?



If you don't get your bid/ask information during market hours, or shortly after, you won't have a very realistic picture.  Especially if you're looking at deep in the money options because what you're looking at for last trade information can be very old.


I have no idea what I'll roll the Julys to--but it will be down.  I don't like the action going into earnings-although holding up as well as it has in light of the uncertainty in the Middle East could be considered quite Bullish.


I think I'll go into earnings a bit out of balance--net short by covering two or three of the puts.  I don't suspect that I'll need all that upside protection from down here even if earnings are great and the puts could bite me if earnings are a bust.


I am actually quite bearish on the stock--it's a search engine.  Nothing more and nothing less--there are lots of very smart people who are studying how it does what it does and one of these days somebody is going to come along with a better way to kill a mouse and I want to be short when they do.


As those who short know--the market moves up in a see saw manner, but it moves straight down when it wants to go that way.


What fun it can be to ride a stock straight into the ground.

Jul 16, 2006 11:28 pm

so will you sell tomorrow, or will that depend on the premium you can receive? does waiting a day or two sometimes work for you (esp b/f earnings)?


you've been able to squeeze $17-$18,000 per mo on a 20 contract write--


post your process tomorrow, if you would.


Jul 17, 2006 1:31 pm
NASD Newbie:

Today's movement in GOOG is instructive of why writing options is a better idea than buying them.


They are a wasting asset if you own them, and a wasting liability if you wrote them.


When the market moves sideways--as GOOG did today, up a buck or two is nothing for a stepper like that--the calender moves one day closer to expiration.


One day less for the buyers to be right, one day less for the writer to be wrong.  Remember, the writer knows going into the trade what his maximum profit is going to be so he wants the time to fly by.


The buyer starts the trade losing because he paid commissions and every day that goes by without the stock making a significant move is one less day for him to be able to root for a winner.


Regarding the two options that are being discussed--the 390 call went up 1.20, which was the wrong way.  However the 440 put went down 1.70 which was good.  Net gain for the day 1/2 point.  On ten contracts that's $500.


Not enough to get all excited about, but better than a sharp stick in the eye.



NASD, for someone wanting to learn options strategies are their(just kidding) any books you would recommend?

Jul 17, 2006 3:06 pm
TexasRep:

so will you sell tomorrow, or will that depend on the premium you can receive? does waiting a day or two sometimes work for you (esp b/f earnings)?


you've been able to squeeze $17-$18,000 per mo on a 20 contract write--


post your process tomorrow, if you would.



I generally favor doing nothing if the stock is above the call strike and below the put strike--by doing nothing you're assured that you will be assigned exercise notices on both sides of the trade but the commissions will be only $8 on buy and $8 plus a few cents for taxes on the sell.


Then sometime Monday or Tuesday you can put the legs down again.


Right now the August contracts seem to have about 76 to 77 points available for a sixty point combo--370/430 or 380/440


Not as good as last month, but perhaps by Monday things will have changed.


I think I will be less aggressive with the August contracts, at least initially because the one thing you know is going to happen is it will run one way or the other after earnings.  Prudent man stuff would say to have very wide combos--instead of sixty points maybe 80 or even 100.


Then wait for the move--cover the losing option which will be expensive but will have gone much deeper in the money which squeezes out the time value.  Pay for most of it by writing one that narrows the strike price differentials.


Jul 17, 2006 3:41 pm
NASD Newbie:

I generally favor doing nothing if the stock is above the call strike and below the put strike--by doing nothing you're assured that you will be assigned exercise notices on both sides of the trade but the commissions will be only $8 on buy and $8 plus a few cents for taxes on the sell.


Then sometime Monday or Tuesday you can put the legs down again.


Right now the August contracts seem to have about 76 to 77 points available for a sixty point combo--370/430 or 380/440


Not as good as last month, but perhaps by Monday things will have changed.


I think I will be less aggressive with the August contracts, at least initially because the one thing you know is going to happen is it will run one way or the other after earnings.  Prudent man stuff would say to have very wide combos--instead of sixty points maybe 80 or even 100.


Then wait for the move--cover the losing option which will be expensive but will have gone much deeper in the money which squeezes out the time value.  Pay for most of it by writing one that narrows the strike price differentials.



lets say you're wrong (wait, can that happen?) about GOOG and earnings come out big after you've written 10 and 10 on the 370/430-- GOOG zooms towards 450-ish:


explain your reaction:
....cover the losing option which will be expensive but will have gone much deeper in the money which squeezes out the time value. 


then:


Pay for most of it by writing one that narrows the strike price differentials.