|TradersCALM - Regular profits - Method 2
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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 put options only. The method uses a spread of a purchase of long-dated options more than one month to expiry and sale of lower number of options for a lesser period. You are never net short options and always net long options - so as the long options are purchased before selling any options, 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
options. The long spread is acquired in a quantity so that the net long
premium is as near to the net short premium. This usually leads to a
ratio of about 3 to 2 in favour of the long option quantity to the
short option quantity.
The best return on margin etcetera delivered for each spread including near month is often when short option strike is typically about 1.5% to 2.5% above the underlying cash/future - this means it is in the money and the long option has a strike about 1.5% to 2% lower and so is out of the money.
When the market moves by at least 1.5%, an additional spread is opened subject to the same considerations as before. An additional spread is only incurred for this eventuality - else an existing spread can be closed at a profit if desired, but the intention is to acquire a set of spreads with short options at a range of prices about 1.5% apart.
Any 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 and using a roughhly a 3 to 2 ratio of size) 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 at expiry of the shorts
Each described spread typically has rather unusual attributes:
* the relative time decay means that a small profit or a small loss is made it the market expires close to the price the spread was intiated,
* the spread initially benefits from a rise in the underlying,
* a rise in the underlying to above the strike of the short make the spread benefit from a fall in the underlying,
* the spread shows losses if the underlying falls moderately following the initiation of the spread,
* the spread benefits from a large fall as each spread is net long puts.
In summary acquiring a portfolio of the described spreads enable a kind of market maker style but with limited liability and a bonus if the market crashes. If you understand the skills required and have the discipline to follow the method it will be a rare month when a reasonable profit is not achieved on the capital required to support a portfolio of up to seven spreads. Note that a maximum of five spreads into a rise is usually employed as each spread is initally biassed to the upside.
Remember at no point is unlimited liability incurrered as it is strongly recommended that you sell only options that cannot be exercied which means European options or trade via a broker/principle that employs an "exercise free zone".
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