Pete: Trading Options, especially the weeklies?

Investing Strategies Technical Trader's Sanctuary
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Pete,

Am I remembering right that you trade options on a weekly basis?

Rather than use inverses to hedge my ETF longs, I’m thinking to use options instead. Of the 3,500 ETFs, 1,600 are optionable. I checked a few, and they seem to have weekies as well as the standard expirations.

It’s been years since I’ve used options. (I’d go long a high-yield bond and then short the common directly or buy a put. Made money, but there weren’t many opportunities to do the trade.)

My trading permissions are still in place at Schwab, IB, and maybe even Fidelity, which doesn’t mean that I know what I’m doing, only that I have permission to do it. LOL So I ordered T R Lawrence’s book on trading weekly options, and I’m working my way through Pestrichelli and Ferbert’s Buy and Hedge.

Thanks in advance for any comment you could make.

Charlie

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Charlie, this Pete does not trade weekly options, or really options in general. Sorry.

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Charlie,

I’ve read that book. It’s not very general and it’s kind of simple in some respects, but the trade he’s advocating is intriguing. He mostly focuses on his one (Cha-ching if I recall correctly?) trade. It’s a very quick read that may not meet your needs.

Note: He (and others) point out that ETF weeklies exist but many have very low volume. Stay away from the weaker volume bc you can get trapped in a position. Weeklies can whipsaw violently. Obviously, volume is not often a problem with SPY and its like.

A good chunk of the small book is devoted to his favorite trade. He basically writes a diagonal (bullish) put spread repeatedly over time.

He buys an OTM 90 day put to fairly cheaply cover his downside. Then he writes weekly ATM/NTM puts, pocketing that premium. After expiry, he writes another weekly ATM, and another… It adds up over the weeks to cover the cost of the long put, eventually banking profit.

To work ideally, he looks for strong stocks consolidating off their highs and moving sideways. He’s also looking at high IV options, so that they have enough open interest and premium for the weekly to fetch a good chunk of the premium he’s paying on the 90 day put.

If the stock moves too much, he rolls the long put out and up or down as required to control risk. That’s why he’s ideally looking for sideways movement in the underlying. Less adjustments to the long leg of the diagonal…

His method is predicated on collecting premium, which is why he uses a bull put spread. In principle, the same strategy could work with a bear call spread. But that requires higher options approval at most brokers (no problem, except that you need to apply). There’s also little point, since he focuses on high IV options with the underlying caught in sideways patterns.

Peter

(Not the same Pete)

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P.S. This book is definitely more comprehensive. However, it is anything but a quick read.

Options As A Strategic Investment book by Lawrence G. McMillan (thriftbooks.com)

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Peter,

Much, much thanks for your detailed comments.

My interest in using options is to hedge positions --i.e., buy insurance-- as opposed to profiting from trading options, which is a game I just don’t have a feel for, no matter how many seminars on them I attend or books on them I try to read. (As the lame joke goes, “Option math is all Greek to me.”) But I understand position insurance and see the need for making it a part of my investing program.

Charlie

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I own McMillian’s book, plus a half dozen others. I need to revisit them.

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I think you’ll find most everything you need in McMillan’s book when you go back through it.

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Hi @Arindam,

I sell calls for a 4 day to same day duration.

Example: This morning I sold a bunch of $130 ENPH, $126 DDOG and $160 SNOW 5/24/2024 calls. The total per contract was small but it gave me over $400 cash for the bunch for less than a single day. Closing prices: ENPH 125.18, DDOG 123.60 & SNOW 156.16.

In the past I had shares called away a few times but the next week I bought them back at a discount. That is the nice thing about the bouncy markets.

I often look on Tuesday and Wednesday to do the sells. At times, I can buy them back before Friday for 50% or less.

This week, I bought them all back on Thursday. Then this morning, I dipped in again.

A few weeks ago, I had sold some $325 calls on ANET for $80/contract. On Friday, it was looking close and I rolled up to $330 for the next Friday for a $220 credit/contract. The next Wednesday I closed them for $44/contract.

So:

  1. Short period of 4 to zero days.
  2. Some safety by choosing a higher strike.
  3. Enough money to make it worth a few minutes of my time.

Since the majority of our holdings are in Roth IRA’s, I don’t worry about tax implications.

Does that help you?

Gene
All holdings and some statistics on my Fool profile page
https://discussion.fool.com/u/gdett2/activity (Click Expand)

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Gene,

Thanks. Good to hear that someone is doing something other than buying the Motley Fool’s over-priced stocks and hoping it will all – somehow-- work out for them.

Right now, I’m not sure how much effort I want to put into finding a niche for myself in the options world. My lack of knowledge and expertise creates a sense of guilt. (“Real” investors use options as a portfolio tool, right?) But it’s a guilt I might want to learn to live with, so I can free up time for other things, like boat-building.

Charlie

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Options seem complicated and some positions certainly can be. Very complicated. But others are actually very simple.

IMO options aren’t complicated. They’re confusing. There’s a difference. All the terminology and mumbo-jumbo make things inaccessible. What you come to realize through using them a little is that you don’t need to use all the bells and whistles. Then one day, you begin to understand that one or two of those bells has value. And you begin to understand more. It’s just math, probability and using as many tools (or as few) as you need/desire.

You can build a boat. But you can’t build every boat. Turn out any aircraft carriers lately? It’s a lot different than building a canoe. (I assume, anyway. I can’t build a canoe.) Option positions can be as simple or as complicated as you can imagine. Writing ratio calls is a lot different than banking change on a deep-in-the-money NVDA covered call. You just have to get through all the obfuscation to find the practical.

Personally, I can’t really understand all the backtesting and strategy that you and Quillnpenn go through/exploit. What trendlines or indicators to use for what stock? Why does one candle scream buy with such authority that I’ll risk $10K on it? I think it’s much more complicated than writing covered calls of short duration on highly desired, popular stocks. And requires much more homewerk. :grinning:

JMO,

Peter
(I only “trade” options for lunchmoney, so I’m certainly not an authority on the topic.)

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Peter,

Much thanks again for your detailed, persuasive pitch to consider making options a part of any investor’s tool kit.

I’d fully agree that with regard to options – or technical analysis, or boat-building-- there’s a range of difficulties, from simple to very complex. And, often enough, what is scary about learning something new is simply its unfamiliarity. (The standard example is learning to ride a bike.)

Some of the scariness the various investing/trading techniques can be mitigated though making the money involved be small as a percentage of one’s assets under management. But most of the scariness has to be confront and quelled directly by actually engaging with the activity. Or as my favorite bon mot goes, “No hay camino. Se hace camino al andar.” (Roughly, “There are no roads but by walking”.)

That weeklies option book should be arriving to my porch today. Meanwhile, there’s Tuesday’s market to prep for and more back-testing to be done (plus a bike ride or two).

Enjoy the long weekend.

Charlie

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Peter,

Things are looking up. Just discovered the CBOE has a list of the ETFs for which there are weekly options. The major asset classes are covered. Also, they list the stocks with weeklies. Target rich environment.

https://www.cboe.com/available_weeklys/

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Be careful to get some volume data on candidates. Trading weeklies you want to be able to get out of a position if it goes against you. Thinkorswim has good options data that may help you as well. I believe you mentioned that you had a Schwab account?

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I get that you are looking to purchase insurance but selling covered calls is the easiest and safest options (IMO) you can trade so you might start there as a means of gaining more comfort with buying puts (typical insurance).

I often sell deep out of the money covered calls for some nice bit of extra premium and the worst thing that can happen is for those calls to get exercised and make me a fat short term profit.

For example, I recently purchased TSLA at $165 and sold 7/19 $215 calls for $2.79. Two contracts netted me roughly $560 on a $41,200 investment, or 1.35% over the next two months. If TSLA actually goes up 30% between now and then, even better. I will gladly bank my 31+% return in two months and find a new investment. If the options expire worthless, or become basically worthless, I will buy them back and sell more a few months out and and do this all again.

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Peter,

The more I think about it, the less interested I’m becoming in the insurance function of options or the income function of options.

This is how my current portfolio is structured (target allocations):

Cash, 0.5%
MM funds, 0.2%
T-Bills, 55%
Bonds (corps, munis, agencies), 40%
Open-end mutual funds, 0.1% (This is a hobby project, not yet a serious investing campaign. But the money can be fabulous.)
Stocks/ETFs, 2%-3% (Another hobby project. I’m profitable, but not remarkably so.)
Unallocated, 1%-2% (This is money I could use for option trading. But do I really want to do the work it would require?)

I used to run 98% to 102% in bonds (300 plus positions, across the yield-curve and up and down the credit spectrum). But I’ve been massively called the past several years, and what remains tends to be too long-dated to try to sell in the present interest-rate environment. So that portion of the portfolio is “Clip coupons while waiting for maturity”).

I’m good at staying on top of the T-bill portion of the portfolio, and I’m typically buying twice weekly at the various actions, especially focusing on the 8, 13, and 17-week bills and the 42-day CMB.

I tend to be irresponsibly lackadaisical about the stocks and ETFs I own, a bunch of the gold and silver miners, a slug of PFDs, some option strategy ETFs, and bets on ag and energy.

Due to having a debt-free, beer-and-bait life style, I can live comfortably on just my SSI, or my pension, or the coupons from my T-bills and bonds. So, I don’t need more money than I have, and I don’t even want more. (I’ve got Enough, and I know I’ve got Enough.)

But markets are hugely interesting, and its casinos are becoming easier and easier to access (compared to former days). So there’s always the urge to engage them to see how one might do. OTOH, if I would do the work needed to put everything on auto-pilot, I could probably cut my back-office hours down to 4 hours a week, split between two work sessions. That has its appeal, too. That would mean backing away from options and dropping most of the other financial research I’m constantly doing.

Charlie

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Enjoy. Catch a fish for me.

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I thought I would post a quick update on this. As market close today, TSLA is trading at a ridiculous $246. So when (not if) my calls are exercised, I will bank that 31%. Of course I will miss out on the extra 20% these calls cost me but I cannot honestly say I would have sold them myself to bank that profit absent these calls. Maybe if I was smart I would have put on a trailing stop but who knows with hindsight.

Hawkwin
Not crying over the 20%+ he might miss. Happy with his 31%+ for 2 months.

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