Boosting Your Risk-Adjusted Returns By Selling Options

* Rolling The Untested Side

If one side gets breached, it would normally be at the end of your holding period (after one month, I'd like to roll out the position) which means that you won't have lost/gained money on that position that month (in case of a decline, the puts will have tripled in value, while the calls are worthless, net you have double the put premium to buyback which is roughly the equivalent of one call and one put). To put some context around that, I currently have on the 210/250 strangle in NEE. That stock has to fall by 10% in one month before I start incurring losses on that position, because by that time a lot of time decay has already eroded both the put and call value. So, as long as price changes remain moderate we collect net time value and then roll out the position. It's hard to say how much you eventually realize as profit. My goal is 50%-65% over a one-month time frame utilizing 60-day options. If one side gets breached before the date of rolling, roll the untested side and check on the contract size and importance of that position for the portfolio. In short, don't over-allocate to one position no matter how great the opportunity might be.

For example, ATO one of the names we sold options on has depreciated 4% since selling options on it as we saw a shift from boring utility stocks to exciting securities. The impact on our portfolio over that time frame (one week and a half) ? 0.07%, which has been easily made up for by other positions. If you just owned the stock instead of selling strangles on it, you were down 0.20% assuming you have 20 different positions. However, from a risk management standpoint, I decided rolled down my calls from 115 to 110; the put strike is 105. As a result, I collected more premium on the call side and used it to reduce my strangle size. I bought back the calls for a decent profit and used it to buyback some puts that were at a loss. Consequently, no change in my cash position but my exposure to the downside on ATO shares has been reduced by 50%. Just a way of managing risk. Another big advantage of only selecting low-volatility stocks for your short strangle portfolio is that your margin requirements can be kept under control as price changes are smaller.

1 2 3 4
View single page >> |
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.