Just thinking theoretically here, but would the strategy for option writing (for addtl income) be to use the BCC timing signal to write (cash covered or otherwise) puts when bullish and write calls when bearish?
Has anybody here studied this, @DR BOB?
Just thinking theoretically here, but would the strategy for option writing (for addtl income) be to use the BCC timing signal to write (cash covered or otherwise) puts when bullish and write calls when bearish? Has anybody here studied this…
Nope, but it sounds like my next project (although in the summer I spend more time gardening).
DB2
Just thinking theoretically here, but would the strategy for option writing (for addtl income) be to
use the BCC timing signal to write (cash covered or otherwise) puts when bullish and write calls when bearish?
I think the problem is that the timing signals are never going to work as well as in the backtests.
They will be wildly wrong sometimes.
Short options can lose a lot of money quite rapidly, and you definitely want to avoid that “picking up pennies in front of a steamroller” effect.
This is particularly a risk if you’re seeking an “income” portfolio, suggesting you’re keen to avoid big market value swings for some reason.
The timing signals might give you an edge–I’m willing to believe that returns will on average be higher when they’re bullish than when they’re bearish.
But you have to find a way to use that information so that it doesn’t leave you exposed when they’re wrong.
But, as to your original question, there is probably a way to test at least part of it.
I believe that you might be able to find historical data on the results of the CBOE buy-write index.
This is a strictly defined strategy that they simulate.
I think there are two variations, BXY and BXM, but I haven’t looked into it in a while.
I think one writes first out of the money, the other is 2% out of the money.
As with most buy-write strategies, the only time it is expected to underperform the index is during a zooming bullish market.
If you can use a timing signal to identify those strongly bullish stretches, you might find a strategy that
switches between something bullish in those very bullish times, and the buy-write the rest of the time.
If you can get the index data, it wouldn’t be hard to line it up with the signal dates and see how it worked.
I think (?) the buy-write strategy is tracked by at least one ETF.
The “traditional” S&P one, and also a Nasdaq 100 one.
Or, you could do it yourself.
The simplest might be something like this:
Own QQQ or QQQE all the time. (if it’s called away, replace the position right away).
On each monthly option expiration date, check the state of the bear catchers.
If it’s bearish, and in particular the NH-NL part is bearish, write a call expiring a month later to turn it into a covered call position.
If not, don’t write an option.
You might also want to add the proviso that you write the option only if the option premium is over some minimum X% of the value of the underlying.
I’m more willing to pick up gold coins in front of a steam roller than I am willing to pick up pennies.
Jim
The simplest might be something like this:
Own QQQ or QQQE all the time. (if it’s called away, replace the position right away).
On each monthly option expiration date, check the state of the bear catchers.
If it’s bearish, and in particular the NH-NL part is bearish, write a call expiring a month later to turn it into a covered call position.
If not, don’t write an option.
You might also want to add the proviso that you write the option only if the option premium is over some minimum X% of the value of the underlying.
I’m more willing to pick up gold coins in front of a steam roller than I am willing to pick up pennies.
Wouldn"t holding QQQ all the time result in very large draw downs?
Have you been able to test this strategy?
The simplest might be something like this:
Own QQQ or QQQE all the time. (if it’s called away, replace the position right away).
On each monthly option expiration date, check the state of the bear catchers.
If it’s bearish, and in particular the NH-NL part is bearish, write a call expiring a month later to turn it into a covered call position.
If not, don’t write an option.
You might also want to add the proviso that you write the option only if the option premium is over some minimum X% of the value of the underlying.
I’m more willing to pick up gold coins in front of a steam roller than I am willing to pick up pennies.
…
Wouldn"t holding QQQ all the time result in very large draw downs?
Have you been able to test this strategy?
Hey, cheer up. Every strategy involves very large drawdowns.
If you aren’t prepared to lose half the market value on a periodic basis, don’t be an investor.
The art isn’t avoiding the drawdowns, but rather picking the assets that will come all the way back up, and more, with the highest certainty.
That’s the charm of almost any index, despite the many disadvantages of index investing. They don’t slide down to zero and stay there.
And you know this in advance without having to learn anything about how specific businesses work.
No, I haven’t tested the strategy.
But I have studied the long term value and price behaviour of QQQE, and the modest reliability of NH-NL timing signals.
I know a lot about what option writing does to the profile of returns.
I would expect long run returns to be quite good, mainly because I expect long run returns from QQQE to be good, which it would track almost exactly.
Historically the value has risen around inflation + 8%/year based on cyclically adjusted earnings, plus ~0.5% dividends.
At a guess, I would expect the suggested approach might improve long returns maybe a further 0.5%/year, appearing primarily as very slightly milder bear markets.
“Quite good” plus “maybe half a percent” isn’t so bad.
Bear in mind that the suggestion was not a way to manage a portfolio versus all other ways.
But rather, a suggestion of how one might do a buy-write strategy by one’s self, which was specifically asked about.
Jim