There are a few option writing CTA programs. They generally do well when there is low volatility. However, investors can get wiped out when there is freakish volatility every 5-7 years. Case in point is a CTA called " LJM " You can see the massive profits and drawdowns of these and other option writing, professional CTA's at the following FREE websites:
I prefer Attain Capital, because they provide a weekly email newsletter, and explain why certain CTA programs should be avoided.
Safety of capital should be placed above your desire to make a capital gain. Attain promotes similar values.
Options have a place, as insurance. Not as a stand alone investment philosophy. I would also suggest you talk to Frank Petricca, at http://www.crosslandllc.com/index.php?q=node/14 for his option strategies.
Option selling is a silent killer. There's a good chance you will win on 8 out of 10 trades when selling options. You may even go months without a loser. The problem you will have is keeping the losses smaller than the gains. In 97’ I got into selling options. I started with 10k and within 7 months had 40k in profits. Almost all of that was from selling options. Mostly I was selling coffee calls and S&P 500 puts (back when 1 handle = $500).
Coffee was on a tear for the first half of 1997 because of freezing temps in South America; the “world” went long. Well, everyone except for me. I didn’t feel like I had the account size needed to trade such a volatile market at $375 a handle. It’s always the trades you miss that wear on you. I watched it go the whole time knowing I should have been long.
I can still remember like it was yesterday when that parabolic move came to an end. I was sitting in a crowded brokerage firm where I worked and everyone was going crazy. One of the brokers had a client that was long and he was scrambling to get the client on the phone so he could sell the position. The rest of us where relived we didn’t have a position!
By the end of the day I was confident we had seen the high. Margin calls where being sent out to brokerages across the board so forced selling would follow. I decided to take a look at the call options and sure enough, they were through the roof. Around the 400 level calls where selling for something like 2 cents ($750). Out another 50 cents they were around a penny.
That’s when it started, I was short coffee calls nonstop for the next 4 months. I raked in around $25k without a losing trade. Things were going so well I decided to start selling S&P puts. Why not, I could sell puts a full 200 points away from the market and bring in $400 or $500 per option. As my account balance grew I started selling them at 5 and 10 at a time. I was on top of the world on my way to becoming a market wizard.
The house of cards came tumbling down on October 21 997. I was short 12 S&P 800 puts and I was about to leave town to get married. I didn’t want to leave with a position on and I was a little nervous about stocks. The market had just made an 8 day sharp pullback followed by an even sharper throwback. I really felt like that was the end of the up move and I should get out. I had been watching the 800 puts bid/ask all day and only a few contracts had traded. There was about an hour left in the day and I was leaving town that night. I really did not want to leave town with that position!
I put in an order to buy back all 12 puts and put in another order to short 1 NYFE futures stock index. Don’t ask me why I wanted to short the NYFE. I was supposed to get out of the market so I could leave town with a clear head but I was so convinced the last sharp pullback was just a quick throwback before the newly started downtrend continued. I watched the NYFE trade within a dime of my limit and then start falling back. I looked over at the S&P 800 puts and sure enough, 12 had traded at my limit price!
Now back then you didn’t get instant fills on your computer. You had to wait for the floor broker to call in the fill.
The S&P pit was usually fast reporting our orders. I sat around for 45 minutes before I finally decided to call myself for the fill. I was told there was no fill but they would look into it. With about 3 minutes left before the close I get a call telling me those 12 were not mine!! I flew off the handle “What, only a few contracts had traded all day and exactly 12 went off at my price and you’re telling me they aren’t mine” – I was furious. I was absolutely convinced that order was mine but when the market immediately backed off after the fill the floor broker decided to keep it for himself.
I was burning hot with anger. Someone had just stolen from me and there wasn’t a damn thing I could do about it. So what does an angry trader do – he gets even – so I decided right then and there to hold the 12 puts and keep 100% of the premium when they expired worthless. That would teach those SOB floor brokers.
As you can see from the chart I was the only one that was taught a lesson. I lost 102% of my account balance and it ruined my wedding.
The only good thing is my total ruin didn’t happen until the week following my wedding. I was crushed, 7 months of profits plus my start-up capital was gone in a matter of 3 or 4 days.
As the years went by I convinced myself that I really did have a good plan selling those options. I just got too greedy at the end and left town with a large position on which was a huge mistake. So I decided to go back into the option selling business. The result was the same as before only I was smart enough to pull the plug after losing “only” 80% of my account that time!
My advice is to stay away from naked option selling.
Option spreads is an entirely different thing though. In fact trading spreads is probably the perfect trading strategy for options traders as long as the markets you are trading has good trade volume. Many futures markets lack the volume needed. You can also look for ETFs for several commodities that do have decent volume. Options traded on stock exchanges actually trade much better than options on futures so I would look there first for a match.
Hedger said it best in his post – “Safety of capital should be placed above your desire to make a capital gain”
If you follow that one bit of advice consistently you’re 90 % of the way there!
Shay Campbell
Timing Charts, LLC
The trend is your friend until the end, when it bends.
Thanks for sharing your experience. It certainly points out the risks that such strategy holds however,
it seems like a number of rules
were constantly violated. Chiefly among them is "overtrading".
I wonder if a well prepared plan together with money management could lead to a less traumatic experience.
I'm not immune to these mistakes therefore, with your permeation, i'm going to print and frame this message and place it over my
trading workstation, never to lose that fine line...
All the best
I hope my story can help you in your trading! If you do go down the road of "naked writing" I would suggest you take a look at Liberty Trading Group. You can sign-up for a weekly email that's sent out on Fridays. Very well written and great analysis. They sell options with much more time on them than most do (around 6 months I believe) which allows them to stay far away from the market. This does not mean they hold them for 6 months. They could potentially be closed out after just a few months. The idea is to stay far enough away from the current price to allow room for those shocks that WILL come. I think it's a smart strategy but still prefer spreads over naked shorts!
Shay Campbell
Timing Charts, LLC
The trend is your friend until the end, when it bends.
There are a few option writing CTA programs. They generally do well when there is low volatility. However, investors can get wiped out when there is freakish volatility every 5-7 years. Case in point is a CTA called " LJM " You can see the massive profits and drawdowns of these and other option writing, professional CTA's at the following FREE websites:
http://www.attaincapital.com/
http://www.autumngold.com/Advisor/Statistics/cta_profile.php
http://www.cta-index.com/
I prefer Attain Capital, because they provide a weekly email newsletter, and explain why certain CTA programs should be avoided.
Safety of capital should be placed above your desire to make a capital gain. Attain promotes similar values.
Options have a place, as insurance. Not as a stand alone investment philosophy. I would also suggest you talk to Frank Petricca, at http://www.crosslandllc.com/index.php?q=node/14 for his option strategies.
Option selling is a silent killer. There's a good chance you will win on 8 out of 10 trades when selling options. You may even go months without a loser. The problem you will have is keeping the losses smaller than the gains. In 97’ I got into selling options. I started with 10k and within 7 months had 40k in profits. Almost all of that was from selling options. Mostly I was selling coffee calls and S&P 500 puts (back when 1 handle = $500).
Coffee was on a tear for the first half of 1997 because of freezing temps in South America; the “world” went long. Well, everyone except for me. I didn’t feel like I had the account size needed to trade such a volatile market at $375 a handle. It’s always the trades you miss that wear on you. I watched it go the whole time knowing I should have been long.
I can still remember like it was yesterday when that parabolic move came to an end. I was sitting in a crowded brokerage firm where I worked and everyone was going crazy. One of the brokers had a client that was long and he was scrambling to get the client on the phone so he could sell the position. The rest of us where relived we didn’t have a position!
By the end of the day I was confident we had seen the high. Margin calls where being sent out to brokerages across the board so forced selling would follow. I decided to take a look at the call options and sure enough, they were through the roof. Around the 400 level calls where selling for something like 2 cents ($750). Out another 50 cents they were around a penny.
That’s when it started, I was short coffee calls nonstop for the next 4 months. I raked in around $25k without a losing trade. Things were going so well I decided to start selling S&P puts. Why not, I could sell puts a full 200 points away from the market and bring in $400 or $500 per option. As my account balance grew I started selling them at 5 and 10 at a time. I was on top of the world on my way to becoming a market wizard.
The house of cards came tumbling down on October 21 997. I was short 12 S&P 800 puts and I was about to leave town to get married. I didn’t want to leave with a position on and I was a little nervous about stocks. The market had just made an 8 day sharp pullback followed by an even sharper throwback. I really felt like that was the end of the up move and I should get out. I had been watching the 800 puts bid/ask all day and only a few contracts had traded. There was about an hour left in the day and I was leaving town that night. I really did not want to leave town with that position!
I put in an order to buy back all 12 puts and put in another order to short 1 NYFE futures stock index. Don’t ask me why I wanted to short the NYFE. I was supposed to get out of the market so I could leave town with a clear head but I was so convinced the last sharp pullback was just a quick throwback before the newly started downtrend continued. I watched the NYFE trade within a dime of my limit and then start falling back. I looked over at the S&P 800 puts and sure enough, 12 had traded at my limit price!
Now back then you didn’t get instant fills on your computer. You had to wait for the floor broker to call in the fill.
The S&P pit was usually fast reporting our orders. I sat around for 45 minutes before I finally decided to call myself for the fill. I was told there was no fill but they would look into it. With about 3 minutes left before the close I get a call telling me those 12 were not mine!! I flew off the handle “What, only a few contracts had traded all day and exactly 12 went off at my price and you’re telling me they aren’t mine” – I was furious. I was absolutely convinced that order was mine but when the market immediately backed off after the fill the floor broker decided to keep it for himself.
I was burning hot with anger. Someone had just stolen from me and there wasn’t a damn thing I could do about it. So what does an angry trader do – he gets even – so I decided right then and there to hold the 12 puts and keep 100% of the premium when they expired worthless. That would teach those SOB floor brokers.
As you can see from the chart I was the only one that was taught a lesson. I lost 102% of my account balance and it ruined my wedding.
The only good thing is my total ruin didn’t happen until the week following my wedding. I was crushed, 7 months of profits plus my start-up capital was gone in a matter of 3 or 4 days.
As the years went by I convinced myself that I really did have a good plan selling those options. I just got too greedy at the end and left town with a large position on which was a huge mistake. So I decided to go back into the option selling business. The result was the same as before only I was smart enough to pull the plug after losing “only” 80% of my account that time!
My advice is to stay away from naked option selling.
Option spreads is an entirely different thing though. In fact trading spreads is probably the perfect trading strategy for options traders as long as the markets you are trading has good trade volume. Many futures markets lack the volume needed. You can also look for ETFs for several commodities that do have decent volume. Options traded on stock exchanges actually trade much better than options on futures so I would look there first for a match.
Hedger said it best in his post – “Safety of capital should be placed above your desire to make a capital gain”
If you follow that one bit of advice consistently you’re 90 % of the way there!
Shay Campbell
Timing Charts, LLC
The trend is your friend until the end, when it bends.
Thanks for sharing your experience. It certainly points out the risks that such strategy holds however,
it seems like a number of rules
were constantly violated. Chiefly among them is "overtrading".
I wonder if a well prepared plan together with money management could lead to a less traumatic experience.
I'm not immune to these mistakes therefore, with your permeation, i'm going to print and frame this message and place it over my
trading workstation, never to lose that fine line...
All the best
I hope my story can help you in your trading! If you do go down the road of "naked writing" I would suggest you take a look at Liberty Trading Group. You can sign-up for a weekly email that's sent out on Fridays. Very well written and great analysis. They sell options with much more time on them than most do (around 6 months I believe) which allows them to stay far away from the market. This does not mean they hold them for 6 months. They could potentially be closed out after just a few months. The idea is to stay far enough away from the current price to allow room for those shocks that WILL come. I think it's a smart strategy but still prefer spreads over naked shorts!
Shay Campbell
Timing Charts, LLC
The trend is your friend until the end, when it bends.