Options- Combination Writing

Jul 6, 2006 12:57 am

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 1:03 pm
Jul 6, 2006 1:24 pm

[quote=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?

[/quote]

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 1:52 pm

[quote=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.

[/quote]

good post---

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

Jul 6, 2006 2:09 pm

[quote=TexasRep][quote=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.

[/quote]

good post---

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

[/quote]

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 2:31 pm

[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 2:46 pm

That’s a non-issue if you’re retired…and I thing “newbie” is…

Jul 6, 2006 2:49 pm

[quote=Indyone]That's a non-issue if you're retired...and I thing "newbie" is...[/quote]

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

Jul 6, 2006 2:55 pm

thing=think…damn typos…

Jul 6, 2006 8:05 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 8:35 pm

[quote=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.

[/quote]

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 10:20 pm

[quote=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?

[/quote]

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 10:49 pm

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

Jul 7, 2006 12:50 am

Amen…this is the reason I don’t like seeing you killed off again…and again…and again…

Jul 16, 2006 9:09 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 9:24 pm

[quote=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?

[/quote]

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 17, 2006 3:28 am

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 5:31 pm

[quote=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.

[/quote]

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

Jul 17, 2006 7:06 pm

[quote=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.

[/quote]

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 7:41 pm

[quote=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.

[/quote]

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.


 

Jul 18, 2006 12:06 pm

[quote=TexasRep][quote=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.

[/quote]

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.


[/quote]

If the stock is in the 450 range the option that will be "killing me" is the 370 call.  It will be worth about 85--80 points intrinsic value, 5 points time value.

The 380 will be worth about 8 points less--so it could be sold and you would have spent 800 to save 1000, a 25% return on the 800.  The 390 would probably be worth about 15 less--so you spend 1500 to save 2000 which is a 33% return on the 1500.

I am not wild about doing that because of the whipsaw that seems to occur in these volatile issues--next thing you know the stock is back below 390 and you didn't save at least 2000 with the 1500 you threw at it.

Remember I'm talking about a single option here--if you do two of them everything doubles and so forth.

For my money a better strategy is to simply pull the entire position up.  Let's assume the stock is at 450 as you suggested.

Buy back the deep in the money call for a huge loss, but buy back the now out of the money put for a huge gain--then assume essentially the same risks as you had before but at different points by selling a 400 call and a 460 put.  Those two sells will not bring in as much as you had to pay to get out of the earlier two positions--but it's not working out so you're going to take a loss in that you won't be able to make as much as you figured you would initially but you're still making money.

In other words if you sell a 60 point combination for 77 and have to roll it up for, say, 5 you're still selling a 60 point combination for 72 and that's not all bad.  Especially since the first one didn't work.

If you were willing to roll the position out as well as up you should be able to bring in even more money--but you take on the exposure for more time as well.

Jul 18, 2006 3:11 pm

are you going to wait until after YAHOO announces?

Jul 18, 2006 9:23 pm

Spent the day day-trading--lots of volatility.  At the end of the day I am short ten July 380 calls and short six July 440 puts--net short 400 shares with fingers crossed that it pulls down tomorrow and I'll cover some of the calls.

It gets fun in the last week--earning due Thursday after the close--they do that on purpose.  It killed me in October of last year--huge gap in after hours--can't recall, maybe 40 points in the after hours session.  I was on a plane.  Screwed but not in the mile high club.

Jul 20, 2006 1:29 pm

[quote=NASD Newbie]

Spent the day day-trading--lots of volatility.  At the end of the day I am short ten July 380 calls and short six July 440 puts--net short 400 shares with fingers crossed that it pulls down tomorrow and I'll cover some of the calls.

It gets fun in the last week--earning due Thursday after the close--they do that on purpose.  It killed me in October of last year--huge gap in after hours--can't recall, maybe 40 points in the after hours session.  I was on a plane.  Screwed but not in the mile high club.

[/quote]

GOOG treading water before earnings- ?

Jul 21, 2006 1:18 pm


what are you doing today?

GOOGLE INC (GOOG: NASDAQ) Technology : Computer Services     Extended Hours: Last  386.23 Change  -4.32 (-1.11%)
Jul 21, 2006 6:06 pm

I'm out--with more than the 18 points that I anticipated because I covered some of the puts before it came down.

I covered the calls this morning, and then started to short the stock at various levels to cover the naked puts that are still out there.

It will be put to me this evening at 450--but I ended up with a bit more than $20,000--but that's a short term gain.

So I'm flat right now--will wait till Monday or Tuesday to put some August legs down.

Jul 24, 2006 8:28 pm

It's Monday and for those who are following along.

Legged into seven August 380c and 450p for a total credit of 84.60.  Plan to do a total of twelve

It was scary because the stock was steady to up in the premarket, got weak before 10 AM, tried to rally but failed, got even weaker around 2:30 and than finally got in line with the soaring Dow after 3:30.

I was lucky today, but as they say "I'd rather be lucky than good anytime."  I must have entered and cancelled at least 40 orders.

Legging into these thiings is always challenging.

Aug 15, 2006 8:37 pm

Just an update for those who are following along--covered the short combination today at an average of $74.20--not as good a month as July, netted a bit less than ten grand--but a few days ago it looked like netting nothing when the stock was in the high 360s.

The stock is settling down a bit, and the premiums are coming out of the options.  It looks like I'll be lucky to get $80 for a 70 point combo for September--still bearish in spite of what happened today.

Been through too many bull traps.

Sep 8, 2006 7:40 pm

Here we are a month later and it's getting to be time to move the September combos.

October will be earnings season so the Oct contracts have some pretty good water in them.

Here's a good idea--called a strap.  Write 20 Oct 350 calls for a total of $70,000 and also write 10 Oct 400 puts for a total of $27,000.

You'll have $97,000 in your account.

If the stock plunges on earnings you'll have to buy 1,000 for $400,000 but you keep the $97,000 so your cost will only be $303,000 or $303 per share--it's at 378 right now.  It hasn't been as low as 303 this year.

On the other hand if the earnings come in strong and the stock soars you'll have to sell 2,000 for $700,000.  You keep the $97,000 so you'll  have $797,000 to buy the shares, or $398.50 per share.

Now clearly that is a risk--so place a stop order at $400, but hope you don't get whipsawed.

Finally what's the maximum gain?  Well if the stock is at $350 on the third Friday of October you will have to buy 1,000 for $400 which you can sell for $350--that will cost you $50,000, but you get to keep the $97,000 so you're going to be ahead of the game by $47,000 or a bit more than $10,000 per week while you wait.

What you can do while you wait is play around with the message boards--just have your Fidelity Pro Trader alerts turned on and spend the day posting on this forum.

Sep 8, 2006 7:48 pm

Newbie did you realize that you could actually be a valued and productive contributor to this forum if you managed to limit your posts to topics about which you had some knowledge?  Some useful contributions?  Instead of editorializing on use of emoticons and people’s spelling, and trying to be a lawyer?  ::rolls eyes::

And you talk all the time about how (you think) people paint a picture of my from my postings…