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Michael, Moshe, Ed, et al
I'm getting inundated with opinions and am trying to read and understand
them all. :) I even brought out my Schwab Option Crib Notes.
I should emphasize that while our system has been running at slightly better
than 4 out of 5 trades profitable, this is better than our long term history
of 3 out of 4.
Second, while we are playing probabilities and feel quite confident that we
will make money approximately 75% of the time (or better), we have
absolutely no idea as to the magnitude of a particular move. It might vary
from 1 point up to 150 points, so we'll need a strategy to handle that type
of trade. For 2000, our average profit was 45 points per trade (19), while
our average loss was 62 points per trade (3). These average losses are
larger than normal as our average profit/loss ratio was 39/36 (for 20
profitable trades out of 24) in 1999.
So keeping in mind that we have absolutely no idea of the magnitude of a
move, how would you strategize our trading?
Guy
Never be afraid to try something new. Remember, amateurs built the ark,
professionals built the Titanic.
-----Original Message-----
From: owner-metastock@xxxxxxxxxxxxx [mailto:owner-metastock@xxxxxxxxxxxxx]On
Behalf Of Michael Suesserott
Sent: Thursday, August 10, 2000 5:40 AM
To: metastock@xxxxxxxxxxxxx
Subject: AW: What options to sell?
Guy,
as a professional option trader, I would concur with Ed in that I believe a
simple outright purchase of puts is probably the best strategy here. Risk is
limited, profit potential is unlimited, and there is no margin. And, as Ed
points out, time decay, though not on your side, could be kept minimal by
purchasing slightly longer term options.
A sale of naked options would probably greatly impair, if not annihilate,
the success of your trading system. As I understand it, the system makes up
for rare, but substantial, losses by raking in large profits 4 out of 5
trades. If that is the case, selling naked options leaves losses unprotected
(they remain the same size as before with futures), whilst minimizing
profits to the premium received. The pain's still the same, the rewards
aren't.
As regards the diagonal credit spreads Ed mentioned, this is a different
animal again. Profits and losses are both limited (though potential loss is
considerably greater than potential profit), and, to comment on Ed's
example, about a 25 pt. move of the market (down) would be required to at
least reach breakeven. If you expect a 50 pt. move within a week or so, and
if it does occur, then that position would be at its best. More of a move
would result in somewhat less profits again.
Kind regards,
Michael
PS. Just read Moshe's post. Words of wisdom, to be heeded by any aspiring
option seller, IMHO.
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