|TradersCALM - Regular profits - Method 1
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Regular profits require both fully understanding a method and the discipline to apply a repeated service.
This page outlines (not fully details) just one such disiplined service employing equity index option spreads.
Yes, this means you have to think - if this is too much for you then stop reading now!
The method employs call options only. The method uses a spread of a purchase of long-dated options more than one month to expiry and sale of equal number of options for a lesser period. You are never net short options and rarely net long options for more than a few moments - so no unlimited risk is ever incurred.
Usually the sold option is for the near month,
sometimes for the next month out from the near month. The purchased
option is always for a greater period to its expiry than for the sold
The best return on margin etcetera delivered for each spread including near month is often when short option strike is about 1% to 3% above the underlying cash/future - this means it is out of the money and the long option even further out of the money. This consideration does not apply when any opportunity to lengthen longs is found.
For the first time (and only for the first time) each short option becomes close to being in the money or is in the money, an additional spread is opened subject to the same considerations as before. An additional spread is only incurred for this eventuality - else no action is required except perhaps for an existing spread to have its long lengthened as described above.
The portfolio of spreads is kept until expiry of the shorts and then the longs are quickly liquidated if they have now become the near month. If the longs are still more than one month to expiry and suitable near month shorts can be found to give zero net premium spreads (at the market prices of the longs) at reasonable cost in strike difference, then new shorts are taken against the remaining market value of the remaining longs. Else the remaining longs are quickly sold.
If you understand the attributes required and have the discipline to follow the method it will be a rare month when a good profit is not achieved on the capital required to support a portfolio of up to seven spreads.
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