I just took a position with a condor on VVUS. It is an unusual play due to its high volatility, but I'll use this as an example.
The premium received was $50 (I originally asked for 60, but when it wasn't getting picked up I just went with the bid price @50).
So I have a position with a max profit of $50 and a max loss of $50 at expiration. Now for the scenario:
(1) Let's assume I am working with $40,000 and my normal portfolio would be roughly 10 diversified positions @ roughly $4000 each, with CC's on each position.
(2) I would like to receive an overall relatively safe return of 5% a month ($2000) and feel it would be possible if I use an options based strategy.
(3)Using the VVUS condor as an example (regardless of the fact that it is an anomaly, the numbers should serve as an adequate example), the stock was about $9.70 when I entered the condor trade. If I had been purchasing the stock, (again I am just using this for simplicity's sake, since I would never put everything on one company) I would have purchased 4000 shares ($40,000/$10).
(4) I would use the same ratio to enter 40 option positions at a total premium of $2000, with a total risk of $2000.
(5) Conservatively I would assume a max profit of half of the potential, or $1000, so I would have to enter additional positions with different underlyings to reach my goal.
(6) From a money management point of view, I am risking 5% of the portfolio on one position, considerably more than the 2% that I consider prudent so I have some work to do on that issue.
(7) Most of the original 40K would be unapplied at this point so I would be looking at that. The idea of stable dividend payers is one idea that comes to mind.
(8) Spreads, condors and butterflies are my preferred options. I realize that the realities would be considerably different from the VVUS condor, but used that as the example because the numbers were handy.
So...the questions are: can I reasonably expect a 5% monthly return? can I do this without risking more than 2% of the entire portfolio on any one position? would it be reasonable to devote an entire portolio to options or does that raise the risk factor exponentially?
And lastly, is this making any sense at all :-)?
Lou
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