Here’s Why I Sell Options
Hi, I’m Mark Melin and
I’m happy to be contributing to TradingMarkets. In the coming weeks
I’ll show you my system for short selling options and then directionally trading
within this short options position. We’ll take a look at my daily support and
resistance numbers as well as my intraday pivots.
The reason I short sell options is because it more consistently generates
profits than trading futures alone. Our system works by primarily short-selling
options and collecting the time premium. We do this because options are a
depreciating asset – every day they loose value regardless of the direction of
the market. Because of this “time decay” factor, we can make money when the
market moves with our predicted direction, when the market stays virtually flat
and even when the market moves against our position. In other words, this system
puts the “odds” in our favor and is very forgiving – even if we are wrong on the
direction of the market.
This system is different than that used by many options “writers” who short the
market and then hope for prices to stay the same. We directionally trade the
market, often adjusting our options position or trading futures within our short
options portfolio to match our directional outlook on the market. When shorting
options, we like to use a form of an “iron condor” that essentially sells
options on both sides of the market. This way, when one side of the market goes
up the other side goes down.
To use a baseball analogy, trading a portfolio of short options with a futures
hedge is rather like a baseball player focusing his efforts on a high batting
average, getting several hits every day, rather than “swinging for the fences”
in hopes of occasionally hitting a home run.
Our trading objective is to make money on a daily and weekly basis rather than
have those few and far between major gains. Some call this trading strategy
“playing the percentages” because our objective is to put the odds of making
money in our corner on a consistent basis. From a trader’s standpoint, it’s
easier to trade a method that makes consistent profits week in, week out as
opposed to a de facto investment strategy that relies on the trader catching the
few “home runs” the strategy hits throughout a year. We primarily trade the all
electronic mini Dow futures and the mini Dow options traded at the Chicago Board
of Trade.
The market started the day gap higher, testing resistance. It traded for
approximately two hours near resistance, and the fact that it couldn’t get the
momentum to break out was sort of disconcerting. Unable to build on gains, the
market then stair-stepped lower into a consolidative region near 10050 on the
cash Dow, then bounced to once again challenge resistance. For the balance of
the afternoon the Dow stair-stepped to make higher highs, moving along trendline
resistance. When the Dow couldn’t break resistance, it sold off hard and fast at
the end of the day to settle at 10063, virtually unchanged.
Like the Dow, the NASDAQ had a difficult time at resistance. The fact that the
tech index couldn’t even pull it’s head above the gap was disappointing and
likely kept a lid on the market as a whole.
In a similar fashion to the Dow, the S+P had difficulty at resistance. If this
resistance is broken, we could see a move into the 1100-1116 region.
Prediction for Wednesday:
We could touch both sides of the flat line on Wednesday. In fact, I wouldn’t be
surprised to see an important test of resistance. Foremost we’ll watch the 200
day moving average on the NAS, then the softer 10,000 level on the Dow. I think
that before breaking out of resistance, there is a healthy chance we need to
test this resistance first. If the market bounces at resistance — and there is
a 65% chance it could bounce — it might have enough steam to get above
resistance and then move
into our previously predicted upside targets. If we break resistance, we could
move down hard and fast. On the Dow I would then target 9900 and 1165-73 on the
S+P. Over the long haul I wouldn’t be surprised if we touch these levels.
Portfolio Strategy: Yesterday our short options portfolio was delta positive,
and we moved to delta neutral. Today we’re going to watch what happens at
support and resistance and may have some intraday trades.
10500 April Mini Dow Put Options: On 3/16/04 we sold 2 mini Dow put
options for 397 points (each point is worth $5). Yesterday this option
closed at 490, down 5. Today we bought one put back for 458, netting a profit on
this trade of 37 points or $185. Profit yesterday with this position was $210.
10000 April Mini Dow Put Options: On 3/16/04 we sold 2 mini Dow put
options for 137 points (each point is worth $5). Yesterday this option
closed at 165, down 5. Profit yesterday with this position was $50.
10400 April Mini Dow Call Options: On 3/16/04 we sold 2 mini Dow call
options for 94 points (each point is worth $5). Yesterday this option
closed at 32, down 13. Profit yesterday with this position was $130.
10100 April Mini Dow Put Options: On 3/19/04 we bought one mini Dow put
option for 155. Yesterday this option closed at 210, down 5. Loss
yesterday with this position was $25.
Mini Dow Futures: On 3/22/04 we sold two mini Dow futures for 10057 and
bought one future for 10033. We are now short one mini Dow future. Yesterday the
future closed at 10027, down 10. Profit yesterday with this position was $50
I hope you follow along with me over the next month as I expose you to what for
many will be an eye-opening look at an entirely different – and more consistent
– method to trade.
Mark Melin