I like to separate the Option Trading Business into three buckets. Bucket #1 Long Term Monthly Income: These are moderately bullish trades like covered writes that you put on in good stocks that you like for the next year or two. Bucket #2 Monthly Income Non-Directional – These are trades like calendar, butterflies, and Iron Condors that I would put on in stocks, ETF’s, or Indexes every month with a non-directional approach. Bucket #3 Speculative trades – These are trades like long options, vertical spreads, etc. that I would put on in anticipation of a move by the underlying.
Trade Idea Bucket #1 Long Term Monthly Income: An example would be AMZN, currently trading around $215. The stock dropped a bit on recent earnings and has started to work its way up a bit. The stock has traded as high as $246 on October 14 and as low as $198 on October 26 after earnings were released. If I think AMZN will continue to work its way up to pre-earnings levels of around $235, I can sell the December 190 puts around $4.00. This 40 day plus trade would allow me to buy AMZN for $186 if the stock dropped under $190 over the next 35-40 days. Premium levels aren’t what they were before earnings, but they aren’t bad at around the 46 (implied vol) level for the December 190 puts. If AMZN doesn’t drop under $190, I collect the premium. I would not consider this if I wasn’t absolutely giddy about buying AMZN stock if I got assigned!
Trade idea Bucket #2 Monthly Income Non-Directional: An example would be an iron butterfly in SPX with the the index currently around 1245. This trade might consist of selling the 1245- 1285 call credit spread in December and selling the 1245- 1205 put credit spread in December. At these prices today, the total credit would be around $3400 with maximum risk at $600 ( spread strike width minus the credit). One possible adjustment I would employ in this market would be to roll up the credit spread on the bad side if the market starts moving too far. For example, if the SPX started moving up over the 1265 level, I would consider rolling the call side up. On the downside, I would wait a bit longer to roll because of the slightly bearish profile of an at-the money iron butterfly. I might wait till SPX drops to around 1210 to roll the put side. The risk/reward on this trade is a potential maximum reward of $3400 and a maximum possible loss of $600, so in this volatile market, this spread has a risk/reward profile that I would consider very palatable. This is a mouthful to digest, just wanted to give you a taste of how I look at Monthly Income Trading. If this approach seems interesting to you and you would like more information, just shoot me an e-mail.
Trade Idea Bucket #3 Speculative Trade. An example might be in IBM, currently trading around $185.5. The stock over the last year has soared from the low 140 levels to its current price, just short of its yearly highs of 190 reached on October 14. If I believe the stock might be in a range between 173 and 192 over the next 40 days or so, slightly bearish perspective, then I might put on a slightly bearish trade. Here it is: sell 1 December 190 call and buy 1 December 195 call, sell 1 December 175 put and buy 1 December 170 put. The call credit spread would be a bit closer to the current price of $185 than the put credit spread. This would give the trade a bearish flavor. I am looking at a credit of around $2.50, with total risk at $250 (difference between the strikes – 5 points – minus the credit $2.50).
This is a business and a craft, and if you want to be successful long term, I believe you have to have this mind set. Have a great day!