Actively trading options?

drdan said: "I see this part of the forum is still going but seems rather sparse. Anyone actively trading options? I personally like trading credit spreads on the SPX, OEX, and RUT. What strategies are you all using?"

SnowPro said: "I prefer time spreads as a core strategy in this environment. I also use backratio call spreads on volatility drops, and butterflies and variations on IV spikes.. Some credit spreads, some debit verticals too. I trade what is gets generated from my scanner. If it is optionable, I will consider trading it. SP"

drdan said: "What scanner are you using? You are doing some complex option strategies which is great. I understand them I just want to keep things simple with my trading. What is funny is that some people consider trading verticals complex so maybe your back ratios and butterflies are not as complex as I think they are. Keeping track of four positions and how to adjust out if necessary makes for more complex thinking in my opinion. I also tend to focus on only a couple of strategies and master them. I realize I am short changing myself and possibly not using the absolute best strategy for market conditions, but I am more comfortable using the strategy I know and adjusting it to market conditions. I guess I am a simple person at heart. I would like to learn more on what exactly you are doing though."

dabrozio said: "I'm a naked option seller of both puts and calls. While many believe that this strategy is extremely risky due to the so-called "unlimited risk" factor, there's really no more risk than any other options trading strategy. In fact, with good money management and carefull monitoring of open positions, I consider option selling as relatively safe. The big advantage of this strategy is that time is always in my favor."

drdan said: "If I had the trading capital I would love to trade naked puts on stocks that are fundamentally sound and going through a downturn. Making money no matter if the stock goes up or down. Sell the put just above the price you want the stock. If it does not make that price you keep the premium and you did not purchase a stock you thought was too pricey, if it does and you are put the stock you have a stock you bought at a price you thought was acceptable. Good strategy, just need the capital to do it."

SnowPro said: "DrDan, I use two scanners. One is from Optionetics Platinum, the other is on the ThinkorSwim desktop. I have been tweaking the parameters on my searches for a few years now. I have them pretty dialed. Stuff like Iron Condors, and butterflies are really nothing more than two vertical spreads. I have found when I look at them like that, it opens up mind to constructing them in many different ways. I have also found that getting better at these offers me less competition in the market. It seems as though everybody wants to play a stock/the market going up or down. I believe, there are better (smarter) ways to play the market. As far as complexity and multiple option strategies, I believe it is important to learn at least one strategy for Up, down, sideways, and Volatile markets. From that point I can become proficient in one or two new strategies every few months. And my core strategies are low risk, high reward, high probability. This helps me sleep at night, and wake up excited to find more opportunity in the market. As far as naked strategies are concerned, the probabilities are very high of success, but the Black Swan event kinda freaks me out. I'd rather have a limited risk strategy on. And as far as premium goes, I like selling front month, ATM high Extrinsic options and then hedging my risk. I have found calendars and calendar diagonals being the best way to do that. sp"

dabrozio said: "Snowpro, Can you give more information about the Black Swan event you mentioned? I'm curious what made you freak out of selling options because of it."

SnowPro said: "Here are a few recent Black Swans. i.e No one could have forseen. WCG - Oct 24, their office gets raided by federal agents. Healthcare was a pretty bullet proof industry until this point. The stock drops over night from 115 to to 21 in a matter of days. When it opens it gaps down to 80 then 50 in short order. Ouch if your naked puts. Markets - Jan 21st, Monday, US Markets closed - Jerome K of SocGen announces 7B in trading losses when the US markets are closed on Monday. The markets open down huge on tuesday. Fortunately for many, that came back due to extreme Fed action BSC - Over the weekend a from Thurs Mar 13 to friday the stock drops from 60 to 30. Then over the weekend from 30 to 3. I guess my thoughts are why not cover using a farther OTM option (credit spread) to restrict one's loss."

dabrozio said: "Oh, I see what you mean by Black Swans. You can add to the list the recent Bear Sterns debacle. But there is a way of avoiding the Black Swans and that is by staying away from selling options on stocks of companies. In my case I only sell naked options on ETFs and Indexes and as you well know, like mutual funds, these issues rarely gap out widely as would normal stocks. And with a good system of hedging against negative forces naked option selling is very profitable and I would dare say quite safe. Visit the site listed in my sig and see how hedging can be done with naked options profitably and safely."

SnowPro said: "D, I have visited you site in the past. I understand where you are coming from with indexes and ETFs, but why wouldn't you use Bull put spreads and Bear call spreads instead of naked options? It would limit the risk dramatically and only slightly reduce the return without killing the margin. It would still offer you much of the upside. The risk graph is extremely important to me. And limited reward, and unlimited risk trade may not let me sleep easy. i.e naked options, or long stock without a hedging plan. That said, most anything can work if the trader has a plan in place, and executes it when the parameters are hit. As I shared, the Jan 21st event probably shook some put sellers in the indexes, the next day wasn't too comforting either. I put on a few BWBs on that day. It was very nice day indeed."

dabrozio said: "I've tried bull put spreads and bear call spreads in the past and I've also backtested these strategies in past years when the market took dramatic advances and declines. In terms of return on invested capital these strategies are pretty good but my comprarisons show that naked option writing far outperforms them with no additional risk if none knows what he is doing. I can hear you saying the price for excellent returns in naked option writing is very high risk. Not necessarily so. As you so aptly said when a trader has a plan in place and follows a disciplined system within strict parameters like I do with my system, the risk is greatly minimized to such a low level as to be neglible. I'm not trying to win anybody to my system, I'm just trying to tell people that the so-called "risk of unlimited losses" in naked options is a myth! It can be reduced and limited to the same levels as other option trading strategies but with a greater potential for high rewards."

SnowPro said: "D, thanks for your posts, and your backtesting work. It is much appreciated. And it is a credit to the quality of this forum. j"

arcolino said: "hello all I am new to sight. I bought some visa options. I was wondering is anybody else is into visa. this one should be a good one. if it follows the trend of master card."

SnowPro said: "Arcolino, what kind of stops/exit plan do you have going into this trade? Loss/Profit/time Are you using ITM/ATM or OTM calls? Did you buy a spread or individual options? How far out did you buy the options? What is V's Volatility doing in that month and strike? thanks, sp"