Batting .937 with conservative option writing
Option traders fall into one of two camps. Their mindsets are disposed to either buying or selling. Very few people feel comfortable doing both on a regular basis.
Buyers like the limited risk, enormous leverage, relatively small capital outlays and the typically short trade durations.
They accept the risk that many of their trades will lose 100% of their value while hoping for some huge winners to offset the write-offs.
Option sellers hate to pay for time, understand the unique risk factors and higher capital requirements. Unlike option buyers they often take longer-term views.
Call & Put buyers are trying for home runs. They strike out a lot. Put & Call writers are more like spray hitters. They rarely crush the ball but usually can post excellent batting averages.
Neither technique is always better. Everything works sometimes... but nothing works every time.
I had the privilege of managing the Market Shadows Virtual Put Writing Portfolio from its inception on January 6, 2013, through this past summer.
My preference falls firmly into the "option selling" mentality. The only trades we made were short sales of puts on underlying stocks I deemed to be good bets to rise, or at least not to decline signficiantly.
This portfolio was a teaching tool so I kept the contract exposure light enough to allow beginners to mimic our trades if desired. Each trade was documented within minutes of being executed. Click to see full details.
My time at the helm is now over. I am proud to present the track record of every single closed-out trade from inception right through the Sep. 20, 2014, expriation date.
During the past 20 months we made 48 individual option sales. They produced 45 winners against just three losses. That 93.7% success rate was well above my career average of about 80%. It produced very gratifying net gains for anyone who followed along with us.
To sell puts you need to maintain enough paid-up marginable equity to cover any possible executions. Pre-existing stock, bond and T-bill portfolio holdings can serve nicely to fulfill this requirement.
When you buy anything in life, you need to pay for it. Selling, though, generates cash. That was the case with our Put Writing Portfolio. We collected a total of $40,385 in premiums (cumulatively) on the 48 put option sales. It only took $12,129 in total to close out the non-expiring trades to avoid being exercised.
Since we used existing positions as collateral we ended up earning a net profit of more than $28,000 without ever making a net cash outlay.
Nice work if you can get it.
