Wednesday, February 25, 2015

Selling SPY Puts: Managing Margin (Buying Power) and Theta in Tax-Sheltered Accounts

NOTE: I don't like any of the strategies outlined below; this is just thinking aloud.

Today I'm looking at selling naked puts on SPY in my IRA.

Selling a front-month at-the-money (Mar $211.5) put brings in $260 in premium, but 'costs' $21,150 in buying power. The problem is, I don't want to tie up that much money.

I have had success with using a long out-of-the-money LEAPS put to partially secure selling front-month options. I can often put on a long 1-year diagonal put spread for a small credit, while reducing the margin requirement 'hit' to my buying power to maybe 10% of the short strike.

So what's that look like in SPY?

  • sto -1 Mar'15 $210 put for $ 90 credit
  • bto +1 Jan'16 $195 put for $780 debit

I can put on a +1 Jan'16 $195 / -1 Mar $210 put spread for a debit of $590. That is not a small credit, that is a big debit! Plus the $1,500 difference between the long and short strikes makes -$2,090 buying power. If I expected SPY to stay around $2100 I could roll the short $210 put out regularly for 10 months or 43 weeks, and hope to make back the $590 debit, plus another $150 or $200 return on the $1,500 margin requirement, say $775 total put-selling income needed to be profitable.

But I actually want to position for a 10% drop in SPY.

I recently bought a Jan'16 $195 put for $905, and in two weeks it has lost me $125 while I have waited for a correction that may be a long time coming. My theta is -.0216, or $2.16/day cost. Can I reduce my theta while I wait?

Another way to get long a put in the Jan 2016 series is to buy a ratio spread:

  • sto -1 Jan'16 $210 put for $1,250
  • bto +2 Jan'16 $195 put for $1,560 ($780 * 2)

Net debit is $310 plus the $1,500 margin requirement, or -$1,810 in buying power.
Net Theta is -.0203, or $2.03/day cost.

Now I am net long the Jan'16 $195 put, and I can sell the front-month $195 put with pretty good downside protection against a 10% correction. (I don't mind possibly being $5 in the money if SPY goes to $190; rolling for dollars should still be profitable.) Furthermore, with a smaller initial debit I need only $495 put-selling income over 10 months or 43 weeks to make this position profitable.

  • sto -3 Jan'16 $200 put for $2,730 ($910 * 3)
  • bto +4 Jan'16 $195 put for $3,120 ($780 * 4)

Net debit is $390 plus $1,500 margin requirement, or -$1,890 in buying power.
Net Theta is -.0188, or $1.88/day cost.
$575 put-selling income over 10 months or 43 weeks to make this position profitable.

Probably the smartest thing to do is wait for the correction, then buy a deep in-the-money diagonal for only the number of months I think it will take SPY to recover. ((maybe 200/190 x 3 months, probably for a small credit.)

Sunday, February 22, 2015

Looking for a New Options Broker: My Trading Style and Needs

Ticket size and commission structure:

As I've succeeded in options trading my contract size has grown. Thinkorswim gives me options trades at $1.50 per leg, but at 20-size, I would be better off paying $4.95 + $0.50 per leg ($30.00 vs $14.95) as at tradeMonster or OptionsHouse. Interactive Brokers charges a flat $0.70 per contract.
  • To open/close: 5 contracts typical
  • roll/adjust: 10 to 20 contracts typical

Account Types:

  • Margin
  • IRA (traditional)
  • Roth IRA

Trading Platforms

  • Web
  • Mobile
  • Desktop

Order Types

  • Single
  • Calendar/Diagonal
  • Vertical
  • Ratio/Backspread
  • Covered Call/Married Put
  • Butterfly/Broken-wing Fly
  • Unbalanced Fly
  • Vertical Roll (+Unbalanced)
  • Collar

Advanced Orders

  • OCO
  • Blast


I make heavy use of ToS chart features:

scale: from 1 minute x 10 days up to 1-month x 20 years
  • text notes
  • trendline
  • regression channels
  • price level
  • rectangles
  • Volume
  • Moving Averages
  • Bollinger Bands
  • IV
  • MACD, Ultimate Occillator, Stochastics
  • Rate of Change, Momentum

Alerts by price, etc.

Friday, February 06, 2015

Market Breadth on : New Highs - New Lows Chart vs Price

One skill for success in trading: making good estimates of future price movements.

I'm studying Market Breadth as an aid to adjusting my hypotheses for markets. One market breadth indicator is the New Highs - New Lows Ratio.

Here's a chart showing a 2014 divergence: the S&P 500 Market is making higher highs while the H-L ratio is making lower highs. (Current Chart, different layout)


I read this as another sign that the market is getting toppy.

Wednesday, January 21, 2015

Teddi Knight :: Staying Out Of Harm’s Way – Patience Equals Profits

[Edited for brevity]

Investors tend to be impatient when market direction is [uncertain].

I saw on the forum a posting from an investor anxious to get his capital working.

My Reply: Think Safety and Have Patience

This past weekend I was asked how I have managed to do so well over the past decades. The answer of course is simple. I have a lot of patience and I know that successful investing is about protecting your capital.

Making money in stocks since the spring of 2009 has been easier simply because stocks had room to run higher after losing more than half of their value in the bear market. But with the Fed pulling liquidity out of the markets, the hint of interest rates rising on the near horizon, an economy that is expanding at home but not abroad, problems in Europe, Russia, Asia, the rise of the US Dollar, collapse of oil and commodity prices, investors, I think, need to step back a bit and keep cash at the ready.

Investing is not always having your capital tied to the market and hoping it works out. There will be opportunities ahead but I prefer a cautious stance right now. Over the past 2 week I have posted a dozen trades but all are conservative and smaller than usual.

Think Beyond A Few Weeks

When it comes to investing, think longer term than a day, week or month. Think years. 2015 right now looks volatile.

VIX Index For January

So far this month we have had just 11 trading days and on none of those days has the VIX Index fallen below 16, let alone below 14 or 12 where I prefer to set up trades. Above 20 in the VIX Index is a definite warning to be cautious, build cash and keep it at the ready but safely out of harm’s way.

Review and Plan

This is an ideal time to review last year’s trades. It’s a perfect chance to figure out what trades worked and why and which ones failed and how they could have been corrected. It is also a chance to remove stocks from your watch list and add new ones. It’s an opportunity to decide which stocks you want to be trading this year. It is also a great opportunity to adjust longer-term trades and figure out where you will be placing your capital next, depending on what direction the markets may be heading.

Investing is about becoming a better investor, not just always being invested.

Patience Equals Profits

Patience can create profits. Once the market direction becomes clearer there will be more opportunities for profits. Until then I think the better course of action is to do some review, plan for some upcoming trade possibilities, take on smaller positions and keep much of my capital tucked safely out of harm’s way.

Saturday, January 17, 2015

Lawrence G. McMillan Option Strategist Newsletter 2014 Market Review

Full Article:

My trimmed-down version:

2014 Recap

  • About a 12% gain for 2014.
  • Corrections were fast and somewhat nasty – especially those in January, October, and December.

Some McMillan Market Timing Systems:

$VIX Spike Peak Buy Signals

A $VIX spike peak buy signal occurs when the CBOE’s volatility index ($VIX) rises swiftly and then snaps back down, leaving a spike peak on the chart. We have specific rules as to what constitutes a buy signal, but they are too long to list here.

We buy at-the-money options, with a duration of one month or more, and we are out of the trade after 22 trading days at most.

“modified Bollinger Bands” (mBB)

mBB signals occur when $SPX exceeds +/–4-sigma (σ) from its 20-day moving average and then moves back inside the corresponding +/–3σ Band. Both buy and sell signals can occur.

In designing this system, we were hard-pressed to find an “optimum” stop. The best result is when $SPX trades all the way from the signal to the opposite 4σ Band. That terminates the signal for a profit. It’s the signals that wander in between that are more difficult to quantify.

Total Put-call Ratio

The total put-call ratio gives rare buy signals after extreme oversold conditions. Each buy signal targets a 100-point gain for $SPX. There is also a secondary, short-term system, whereby one-day oversold reading generate one-day buy signals.

Volatility Crossover

This system centers on the relationship of $VIX and $VXV. This system – like many of the others – has two facets: when $VIX crosses above $VXV, one can short the market, and when $VIX later crosses back below $VXV, one can buy the market. They sometimes come in groups or “bunches.”

Wednesday, November 26, 2014

Rules for rolling deep in the money naked puts

excerpt from
  1. If you are deep in the money you should roll out two to three weeks before the options expiry takes place.
  2. If you are deep in the money and the underlying stock pays a dividend you should check the date of dividend and amount being paid. If the amount being paid exceeds the [extrinsic?] value of your naked puts, roll out at least 3 months to avoid being assigned shares.
  3. The deeper in the money you are with your puts, the further out in time you should be. For example for investors holding naked puts at the $35 strike in CLF Stock you should be at the least, sitting in July for July 20 2013 options expiry. At the time of writing this article, CLF has closed the day at $17.53 (Apr 18 2013).