3 ms·

1 or 2 lots? The margins after commissions are going to be crap (if anything) for big indexes. I know the phrase "efficient market" gets thrown a lot but its pr

by jcdavis 12y ago

1 or 2 lots? The margins after commissions are going to be crap (if anything) for big indexes. I know the phrase "efficient market" gets thrown a lot but its pretty relevant here - there simply isn't much, if at all, to be made doing this. Lets say you have 100 shares of SPY - $19.6k. You propose what - Writing Nov 22 calls? Look at the chain - $0.31 bid for 204, for instance, which is pretty high-risk already, but 205 is to $0.23, 206 down to $0.15. You can even find an index that does this for you - http://www.cboe.com/micro/bxm/ http://www.cboe.com/micro/bxm/ . I'll save you the looking, but it underperforms SPY at 1,5,10 years + inception. Options are valuable tools for certain situations, but average investors shouldn't touch them with a 10 foot pole.

encoderer 12y ago
It seems you're arguing theoretically, and that maybe I moved a little too quick in my previous post and wasn't clear. What I actually suggested above was buying the SPYs and selling covered calls. The only risk you're taking on is limiting your upside to your strike price. Tell me this: what can an investor do to increase his probability of success in a trade other than reducing basis? The argument for reducing basis is simple: Reducing the amount you've paid for the shares, making them cheaper for you than somebody just buying the stock, gives you an edge. The monthly sd in SPY is $9. So yes, if you sell the $205s, 85% of the time the calls you sell will expire worthless OTM, and when that happens if you roll your position forward another month, doing that will increase your total profit over just holding the stock. Limiting upside to increase odds of profitability is the lynchpin of professional trading strategies. And that's what you're doing here. And yes, selling 1 and 2 lots, commissions do absorb a larger percentage of your PL than on bigger transactions. And complex strategies that require 4 legs like an Iron Condor won't be profitable at that size, it also happens that an IC is a low-risk strategy (and thus small effect on your buying power) so in those cases you can increase the leverage or widen the strikes. Your attitude about options is understandable given the way they've been portrayed to the retail investor. And everybody should think about what's right for them. But most retail investors buying stock, making directional bets, buying netflix at $500 a share, you think that's less risky than buying a $100 debit spread on NFLX with a higher probability of success and massively less capital. And you think that way because it's how you and the retail sector has been conditioned for 20 years. And, like I said up top here, the retail sector has underperformed the market. And it's not because of evil HFT firms who do nothing but cheapen transaction costs for everybody. It's because of the way we trade. It can be better. Check out this TastyTrade video covering a study they've done on reducing cost basis with covered calls: http://www.tastytrade.com/tt/shows/market-measures/episodes/cost-basis-reduction-probabilities-05-06-2013?utm_campaign=learn&utm_medium=link&utm_source=social-share http://www.tastytrade.com/tt/shows/market-measures/episodes/...

by jcdavis 12y ago

encoderer 12y ago

It seems you're arguing theoretically, and that maybe I moved a little too quick in my previous post and wasn't clear. What I actually suggested above was buying the SPYs and selling covered calls. The only risk you're taking on is limiting your upside to your strike price. Tell me this: what can an investor do to increase his probability of success in a trade other than reducing basis? The argument for reducing basis is simple: Reducing the amount you've paid for the shares, making them cheaper for you than somebody just buying the stock, gives you an edge. The monthly sd in SPY is $9. So yes, if you sell the $205s, 85% of the time the calls you sell will expire worthless OTM, and when that happens if you roll your position forward another month, doing that will increase your total profit over just holding the stock. Limiting upside to increase odds of profitability is the lynchpin of professional trading strategies. And that's what you're doing here. And yes, selling 1 and 2 lots, commissions do absorb a larger percentage of your PL than on bigger transactions. And complex strategies that require 4 legs like an Iron Condor won't be profitable at that size, it also happens that an IC is a low-risk strategy (and thus small effect on your buying power) so in those cases you can increase the leverage or widen the strikes. Your attitude about options is understandable given the way they've been portrayed to the retail investor. And everybody should think about what's right for them. But most retail investors buying stock, making directional bets, buying netflix at $500 a share, you think that's less risky than buying a $100 debit spread on NFLX with a higher probability of success and massively less capital. And you think that way because it's how you and the retail sector has been conditioned for 20 years. And, like I said up top here, the retail sector has underperformed the market. And it's not because of evil HFT firms who do nothing but cheapen transaction costs for everybody. It's because of the way we trade. It can be better. Check out this TastyTrade video covering a study they've done on reducing cost basis with covered calls: http://www.tastytrade.com/tt/shows/market-measures/episodes/cost-basis-reduction-probabilities-05-06-2013?utm_campaign=learn&utm_medium=link&utm_source=social-share http://www.tastytrade.com/tt/shows/market-measures/episodes/...