Option Trading Articles: Re: [ConservativeOptionStrategies] Question to Dr Joe About CSP strategy

Dr Joe - Thank you for yet another interesting strategy for us to consider. Would you please clarify something for me? When you wrote "over the past 194 months from Jan 1994 to present IWM dropped greater than 5% only 30 times, greater than 10% only 8 times and over 15% only 3 times" were these drops over a 1 month period? Or were the drops over a 3 month period? That would then coincide with your 90 day out expiration. I'm just not sure. Also, did you track this yourself or is this information available via some website? I'm not questioning the data but I would like to see how the other major indices did as well. Thanks again for all of your posts to the group and your willingness to share so much information. - Bob C.

From: joe & leigh <gass20@aol.com>
To: ConservativeOptionStrategies@yahoogroups.com
Sent: Thu, March 25, 2010 10:09:47 AM
Subject: [ConservativeOptionStrategies] Re: strategies

Re: strategies

mike my basic strategy for cash-secured puts is below: i do vary it on a
regular basis but
much the basic principles i use to trade it. i use almost exclusively trade
iwm. as you will read below i sell atm, 5%otm and 10%otm puts with equal lots
of each. over the past 194 months from jan 1994 to present iwm dropped greater
than 5% only 30 times or 15.5%, greater than 10% only 8 times or 4.1% and over
15% only 3 times or 1.5%.

CASH-SECURED PUT STRATEGY

INDEX
Diversified ETF: SPY, IWM (favorite), EFA, EEM, QQQQ, for example.

POSITION SIZE
Determine the size of the position if you were buying that index
for your buy-and-hold strategy. Do NOT leaverage !!!!!!!
If you wanted 8100 shares in your portfolio, then do not STO
more than 81 contracts. Assuming you have no shares currently.

EXPIRATION
Ninety days (90)
Leg in 1/3 of calculated position size every 30 days
ie. If 27 contracts is your determine final position size, then
Nov expiration STO 9 contracts Feb expiration
Dec expiration STO 9 contracts Mar expiration
Jan expiration STO 9 contracts Apr expiration
Feb expiration initial 9 expiring to be managed

STRIKE
1/3 or 9 contracts ATM
1/3 or 9 contracts 5% OTM
1/3 or 9 contracts 10% OTM

FUNDING
100% secured with cash or 50% cash account and 50% in
fixed income ETF

MANAGING OPEN POSITIONS

BEFORE EXPIRATION

If stock is above put strike no management required.
What are the options if the index is decreasing in price?

1. Close position at a loss
2. Buy leap puts for protection
If decreases 5%, purchase 50% leap puts
If decreases 10%, purchase other 50% leap puts
Strike at CSP (cash-secured put) strike price or
at current stock price based on your risk

Since the above 3 strikes gives one 5% protection
and I am willing to accept some loss, I place a contingent order in
the initial setup to purchase leap puts when stock decreases 10% and
I choose a strike that is 10% ITM. Ie. Initial setup stock was $100.
The initial strikes would be $100, $95, $90 (0, 5%, 10% OTM)
I woud put a contingent order in to purchase the leap put with a strike
of $100 when underlying decreases to $90.

3. Roll the CSP
Roll out and down and decrease number of contracts
Can be done for net credit or approx break even

example: based on Dec 2, 2009

IWM @ $58.99
CSP is Feb 58 Put @ $2.84 ---10 contracts

Look at June 56 Put and Sept 56 Put
June 56 @ $4.35
Sept 56 @ $5.55

Market drops 5% today to $56
Using option calculator the
June 56 increases to $5.57
Sept 56 increases to $6.67
Feb 58 increases to $4.32

BTC Feb 58 for 1000 * $4.32 or $4320
STO June 56 - 8 contracts for 800 * $5.57 or $4456
You have reduced your risk 20%
or
STO Sept 56 - 6 contracts for $4056 or
7 contracts for $4732 reducing risk 30-40%

Regarding rolling CSP's: each time you roll you should be able
to decrease your exposure. First roll usually can decrease 10
contracts to 7 or 8, second roll the 7 or 8 to 5 or 6 and a third
roll the 5 or 6 to 3 or 4. All without adding new money and
frees up margin each time

4. Do nothing until expiration

AT EXPIRATION

Stock > put strike price
Continue selling CSP same as above

Stock < put strike price and assigned
Sell covered calls 3 months to expiration
Strike NO less than cost basis, ie put strike at assignment
If premium is small because stock has dropped
significantly, sell at a strike less than cost basis if you
understand how to manage covered calls and prepared to
roll out to avoid being exercised before expiration
below your cost basis

GOAL be exercised at or above cost basis and go back to selling CSP's

--- In ConservativeOptionS trategies@ yahoogroups. com, "optionsmike" <michael@... > wrote:
>
> Dr Joe,
> I'll start it off. I like writing front-month cash-secured puts. I like to do them on somewhat high-beta stocks (e.g. TSL, IPI) and well as more stable stocks such as PFE, MRK, XOM. I tend to avoid samll drug and biotech stocks becase of past dissapointment. I try to enter these csp's on down days. I will take a profit at .05 to .15, if reached, before expiration. I write only enough puts (3 to 10 depending on the strike price) that if assigned I'm equally happy and then will write calls on these. I will consider putting a protective collar on some of these if they advance far enough although I prefer to be called out. I do this in a tax-deferred account. In my taxable account I like to do front-month credit spreads on ETF's.
>
> Michael
> www.safe-options- trading-income. com
>
> --- In ConservativeOptionS trategies@ yahoogroups. com, "joe & leigh" <gass20@> wrote:
> >
> > i really would love to hear from people who are doing dls (calls) and short puts selling cc's if assigned,,,, ,,their entries, exits, adjustments etc....do you use protection with long puts....maybe we can get a discussion going....drjoe. ....and by the way the person posted political has been deleted
> >
>