Writing Options

Hi there,

I was wondering if anybody could share their experience with writing (selling) options, and the strategies they've employed. :)

I've never followed such a strategy. I've mainly taken long positions in stocks before, and have bought call options before (only a very small amount, unsucessfully), but am currently looking into incorporating writing options into my strategy.

Many thanks!

- Thomas Rice.

> I was wondering if anybody could share their
> experience with writing (selling) options,
> and the strategies they've employed. :)

Can’t say I’ve jumped in yet, Thomas. I’m still in the studying phase.

> I've never followed such a strategy. I've
> mainly taken long positions in stocks
> before, and have bought call options before
> (only a very small amount, unsucessfully),
> but am currently looking into incorporating
> writing options into my strategy.

> Many thanks!

> - Thomas Rice.

You’re in luck though. I am in a period of intensive study regarding options strategies. So if you or anyone else is interested in learning more about the strategies (which are relatively simple after studying a little) and ideas about money management and trading psychology (which get a little trickier), then I've got a few different resources for you.

Some things to look into - option spreads, option spreads, and option spreads.

Here's some good books:

"A Common Sense Approach to trading options."
By: Fred Strickland $20, well worth it!, pay particular attention to his 2 rules. http://graymetalbox.com/main/promo.htm

The New Market Wizards

Getting Started in Options by Michael Thomsett

I also read the Conservative Investor's Guide to Options recently. It was well, too conservative, but he did objectively include more aggressive strategies in a section called "Not for conservative investors".

Picture me sitting in a library surrounded by piles equaling a total of 50+ books. Every options book in the place. Now, I narrowed them down, took my recommendations list out, skimmed the 40 I discarded and took the rest with me.

And waiting to be read by me is:

The option secret: Volatility
Trading for a living by Alexander Elder
Trade your way to financial freedom by Van Tharp
Trading in the zone by Mark Douglas
The mind of the trader by Alpesh Patel

This is an article I was reading last night. It has some very, very good points. Although I feel I’d still fall on the Neiderhoffer end of things in the end.

http://www.gladwell.com/2002/2002_04_29_a_blowingup.htm

Sorry I don’t have any actual experiences to share, Thomas.

I do however have a link I can give you to a set of the absolutely most amazing, superb, brilliant, freethinking, honest articles on options that I have found. They were written by a man named Greg Donio. Maybe you’ve been fortunate enough to have been exposed to them before.

http://www.ctcn.com/options.htm

This is the best I can do right now. However, if this was a few months in the future, I’m sure I’d have a little more first hand experience to give you.

Success,

Erik Lukas

I've read many of the books on your list, including Niederhoffer's autobiography. And I attended a trading seminar by Van Tharp about six years ago - very interesting. I really enjoyed the article about Nassim vs. Niederhoffer!

I've written small position options and made money most of the time - only blew up once (luckily for not a lot of cash). I learned my lesson and trade spreads when I get the urge.

The biggest thing I got from all I've read and learned from talking to traders is the key of money management and not trading with "scared" money. The guidelines given on percentages of money risked versus percentages in reserve are, to me, critical.

Regards,
Bob

> I've read many of the books on your list,
> including Niederhoffer's autobiography. And
> I attended a trading seminar by Van Tharp
> about six years ago - very interesting. I
> really enjoyed the article about Nassim vs.
> Niederhoffer!

Do you remember what Niederhoffer's autobiography was called off the top of your head?

> I've written small position options and made
> money most of the time - only blew up once
> (luckily for not a lot of cash). I learned
> my lesson and trade spreads when I get the
> urge.

> The biggest thing I got from all I've read
> and learned from talking to traders is the
> key of money management and not trading with
> "scared" money. The guidelines
> given on percentages of money risked versus
> percentages in reserve are, to me, critical.

Thanks for sharing your experiences, Bob. And that money risked vs. percentage returned is one of the reasons I thought Fred Strickland's book was so good. Basically, I'd never heard that idea before and it made complete sense to me.

What kind of ideas and rules have you made for yourself about % risked vs. reserve and how much to devote to any one trade? I'm very curious about learning how other traders are going about setting rules for themselves. If you're not in the market this instant, what percentages do you think you would feel comfortable with?

That's one thing I liked about the New Market Wizards (I didn't read the first edition yet!) is that I was presented with the stories of a few dozen of the world's best traders and they talked about their money management as well as strategies. Most of them talked about when testing a new system, not using more than 1% of your total capital on any one trade. I believe someone said to make the trades so small that they hardly seem worth it.

That 1% rule seems like a good idea if you're managing a fund or a very large personal account, but for me, and most other investors, I think we may have to devote a bigger % of our capital to any one position.

Greg Donio has got me interested in calendar spreads, but I'm not quite comfortable enough with them to jump in. I still don't quite feel like I can understand and predict the spreads gap movements in relation to the underlying stock price. He's a small investor and his personal max risk is 10% on any one trade. But that's him. What about you, Bob? Anyone else?

Success,

Erik Lukas

are the keys to long-term success in the markets.

You can flip a coin to determine whether to go long a stock - or sell it short - and make money ... IF you let profits run when you are correct (with a running stop-loss order in place, of course) AND you only risk 2% of your capital, for example, when you are wrong.

This oversimplified "system" works even better if your odds of making the correct buying or selling decision are greater than 50%.

Best wishes,

Robert M. Campbell




New book coming in 30 days: Timing the Real Estate Market

Erik - sorry about the late reply - been real busy!

> Do you remember what Niederhoffer's
> autobiography was called off the top of your
> head?

Education of a Speculator - here's the Amazon link: http://www.amazon.com/exec/obidos/tg/stores/detail/-/books/0471249483/reader/1/ref=lib_dp_TFCV/104-0041697-2307172#reader-link

> What kind of ideas and rules have you made
> for yourself about % risked vs. reserve and
> how much to devote to any one trade? I'm
> very curious about learning how other
> traders are going about setting rules for
> themselves. If you're not in the market this
> instant, what percentages do you think you
> would feel comfortable with?

I used a 2% to 5% with trailing stops at various settings depending on the market at the time. Van Tharp has good info on creating systems to follow, as well as money management.

The key is to minimize the potential for wipeout by taking too large positions. And it's also dependent on the size of your initial capital stash that you can afford to put at risk.

> That's one thing I liked about the New
> Market Wizards (I didn't read the first
> edition yet!) is that I was presented with
> the stories of a few dozen of the world's
> best traders and they talked about their
> money management as well as strategies. Most
> of them talked about when testing a new
> system, not using more than 1% of your total
> capital on any one trade. I believe someone
> said to make the trades so small that they
> hardly seem worth it.

Sounds good to me. Then, once you've tested it and it works to your satisfaction (and risk tolerance) stick with it.

Tharp had a great exercise in his workshop where we devised systems for pulling random marbles of various colors from a bag, with a monetary payoff to the top two teams. It got interesting as there were twenty or so discreet "trades" (ie. marble draws) over time, and we could change systems if we desired between draws.

I was a team captain (by drawing straws:-)) and had some very experienced floor traders on my team. Another guy designed trading systems for a living! So, we came up with our system, and I had to fight them tooth and nail to stay with it. The floor traders got antsy and the designer wanted to tinker to "make it better".

I held them to one adjustment and we came in second behind a team who made no adjustments. We still won $50 each, but might have made $100 each had we stayed the course. An excellent lesson in designing, testing and then trusting your system. The idea was to make trading boring and automatic. If you're in it for the excitement, go to Las Vegas:-)

> That 1% rule seems like a good idea if
> you're managing a fund or a very large
> personal account, but for me, and most other
> investors, I think we may have to devote a
> bigger % of our capital to any one position.

Depends on your initial funding and the markets you're involved in and the situation at the time.

> Greg Donio has got me interested in calendar
> spreads, but I'm not quite comfortable
> enough with them to jump in. I still don't
> quite feel like I can understand and predict
> the spreads gap movements in relation to the
> underlying stock price. He's a small
> investor and his personal max risk is 10% on
> any one trade. But that's him. What about
> you, Bob? Anyone else?

I'd recommend paper trading various types of spreads, etc., to get the fundamentals down so you really understand why and when they work. Then start trading with small amounts - you'll find that when your cash is on the line, it's different from just pretending. But, if you treat paper trading like training camp and learn the fundamentals of your system, you'll be much better prepared for the real thing.

There are software programs out there that let you simulate. I think there are some online. Don Fishbeck has a good program that's testable - I think it's called ODDS. George Angell also has a lot of books and systems. Van Tharp is also good.

Anyway, do your homework, design a system that matches your personality and you truly believe in, test it on paper or with software/online, then start small and remember money management.

Another thought - your attitude toward gambling will reflect your attitude toward trading. So, what's your style playing blackjack or craps or poker? Impulsive? Conservative? Go for broke? Scared to lose? It's a good mirror for you, IMHO.

Hope this helps and apologize for rambling on too much:-)

Good luck,

Bob

> Success,

> Erik Lukas