Selling Put Options in Smaller Trading Accounts

on what else you got a nine o'clock we've know we know from past studies that put selling strategy outperforms other traditional strategies we're gonna like I said we're gonna expand on that a lot in the next in the coming segment and it's not that we're just sitting here - we're bearish on the market talking about put selling strategies I know that seems like they're you know that's a little almost kind of counterintuitive or we're almost hypocritical to a certain extent but it's not but that's not on the market um we're just throwing out examples because in order for us to get everybody to the next level this stuff has to be kind of almost second nature you have to believe it um the one thing we do I think better than anybody else is is that we stay on a subject long enough for everyone to really understand you know kind of all the guts like like most of our listeners can recite the numbers and that's powerful right um so we know from past studies that we already do that one here with the advantage of only having to put up roughly 20% the underlying we can take advantage of the strategy accounts with limited capital as well we wanted to look at specifically to see if a particular strike was better than another from a buying power reduction standpoint because the email that we get the most with respect to smaller accounts is um number one I have I'm trading in an IRA account so I have limited capital to use or number two you know I can only trade smaller stocks because I have certain permissioning limitations all this kind of stuff so we're just that okay let us let us hammer down to the tightest specific bit of information so if you need ever need to make the case or whatever it is you can do that good the further out of the money we sell a put the higher the probability of profit but the smaller the credit received assuming that we're bullish is it better to sell a closer at the money put to collect a larger credit and not have the room to the downside and is selling puts a viable strategy for smaller accounts so the number one email question is not so much as a viable strategy but is it better to collect a bigger credit have a lower probability of success or is it better to have a a smaller credit a higher success and we we struggle with the same thing so we stick around 30 35 percent level correct okay let's go to the next slide to test this we looked at four years of spy options from 2009 to 2012 okay a group when you understand it's a bull market but that's all we have to work with right now each expiration cycle we sold the one standard deviation put nearest to 84% of the money and then we sold the nearest out of the money put so essentially just something like let's call it just like an anthemic just one strike out of the money hmm we let them both expire to cash each cycle let's go next slide and we do that just so it's easier to do you don't think so it's it makes sense that the one standard deviation put had more winners in fact the one standard deviation put 49 winners and the two standard deviation I'm sorry and the at the money put 41 winners and how many instances is that I forgot what was the number of years it just let's check for years we looked at four years of s py ops from 2009 and 2012 each expiration cycle four years I'm just trying to think it has to be a little has to be longer than four years because there's 49 instances 12 times 4 is 48 so it's a little bit longer but whatever look we'll check it out ask just ask those guys to just I am us and tell us the exact number of cases there were um and percent winners 94 percent winners well we should be able to figure that out right there's gotta be 50 whatever it is 50 something small percent winners 94 1 standard deviation without remember this is a bull market and at the money puts 79% but here's the difference look at the PML Tony eighteen hundred and seventy eight dollars by selling the by having the higher probability of success and which it did work out that way too okay so yeah it's just more instances but it worked out that way and the standard deviation of returns 456 to 1407 this I felt was really cool information sure because if I'm a smaller trader and I'm trying to deal with the issue of Commission's and I'm trying to deal with e like that like the earlier emailer had I'm trying to deal with the issue of transaction fees Commission's and also trying to decide you know so the at the money put let's just say the nurse it was four has been include the first four months of 2013 okay so it's 52 yes okay if I'm if I'm looking at this and I'm thinking to myself why through all the years have we been picking the number between 30 and 35 percent now I've validated it right because the even though namely we get validated on something we've improved wrong a couple of times but now this validates it because the nearest out of the money put let's just say that that has somewhere between 50 and 60 percent and the one standard deviation push is 84% we've been doing something around 72 70 65 to 75 in that range and I kind of think that that's probably the sweet spot and sometimes you don't get to choose but from one out of the money strike from the nearest out of the money strike which obviously works better in a bull market to to further out to whatever that is three or four out of the money strikes look at the numbers well I had no idea that it's it's it's calm I mean it makes cut it's common sense that your percent winners is going to be much higher once their DBA sure but the PNL difference and the standard deviation of returns is extraordinary almost three times as great I mean that's amazing right so so the argument that we make all the time that you can you know sometimes sometimes people say well you know it's like picking up nickels in front of us steamroll they use that same line constantly and it's it didn't prove out to be that way but it did prove out that you're picking up nickels mm-hmm all right just I'm gonna come back to the slide let's go next one so the number of winning trades executed what was predicted by probabilities eighty-four percent and fifty five percent for the at the money put but part of this is due to our data which was from a period of consistent rallies longer data sets would likely show probabilities of profit closer to predicted values so what our own team is suggesting is that the 90 go back one slide linen for a second of 94 percent of seven the 94 percent should be closer to eighty five and the 79 percent may be closer to I think it's a little higher than 55 I think it should be around 60 and that's what our own teams even suggesting but they're saying here that do to do two that drones are our results are there are there and what's cool about this is let's just say we went into a prolonged bear market just for whatever reason you now have bullets you now have ammo of kind of where your short calls are going to be right if you use the same strategy but on the call side and if we think we make a very strong bottom at some point in the future we can go back and reach to this which again if you're trying to build up equity in a tasty bite-sized account this is a very interesting way to support the thesis the argument for you know for having some of that risk on yeah talk about maximizing returns let's go next slide so just go back for one second just quick seconds I just want to repeat this so again remember longer data sets will likely show probabilities of profit closer to predicted values but before we go the next one remember what it's like to sell premium there's always this little bit of extra edge every time we do a study no matter what we do the edge always proves out that our performance is greater than whatever the expectation is the implied volatility has a tendency to overstate actual volatility and that is the key let's go next slide the proportion of potential reward and the variance of that reward is about the same the capital requirement of the at the money put is also proportionately higher than that of the one standard deviation put by approximately in this case 1602 650 because you know the s py is a big product remember the way you figure out the amount of capital required you take your short strike and then you add the credit back to that short strike and you take about 18% of that that's probably 17 to 18% is generally speaking the number very good let's go next slide selling puts was effective even without management and entering the trade regardless of implied volatility we've shown that managing winners and selling premium when the implied volatility is above 50% can vastly improve ROC and probability of success so what what a future study is going to include is what if we only pick the spots when implied volatility exceeded the 50th percentile what would happen then right how much together how much risk would we take off the table and how would how much would we in of our return on capital and our probability success under better circumstances we sold bonds saying that because we've done market measures where when the Ivy percentile is above the 50% of today's absent statistics that our results are significantly better and and right so we didn't what we didn't do here was we didn't we didn't sort it by Ivy percentile if we sorted it by a B percentile we think we would have done better and which is why we're encouraging you to tune in daily for all this stuff because it's so valuable how it all connects let's go to left side while we did generate a greater return selling the at the money put 3.14 times more we also saw a greater variance in PL 3.08 times greater while both strikes proved profitable going further out of the money provides the best opportunity to manage a winner and the most efficient use of buying power and accounts with limited capital is in selling the one standard deviation put now there are huge takeaways from this one is it's all about strategy 2 is you can tweak the strategies over time to improve your chances across the board for all the stuff 3 we're learning that although the returns were so much greater for most people they're willing to take smaller returns it returned for greater chances of profitability and more management of that profitability and grip and smaller variance in pl listen they also to take away is just being a doer just do it as opposed to sitting there and being passive yeah our team is not suggesting at all that it's better to take the more risk just because there was more profit from there in fact after saying a bit of the opposite saying quite the opposite in that their minds and their all remember our research team is is young guys young people I should say guys but just young people and they have smaller accounts than Tony and I trade with and so they live this they live in the tasty bite world this is they don't live in the world of you know then who we wing them and how do we bring them in a big shot they live in the tasty bites world and from their standpoint this makes more sense to them to have the higher chance of success because they like managing winners there's a there's a much higher level of engagement there's a significantly better sleep and again it makes cinema tations of the account just because of its size also suits it too so anyway just throw all this information out there it's really fast and again I want to repeat that some of the keys to this segment and we'll move on um the at the money put generated three point one four more times return but we also saw greater variance in PL three point zero eight a smaller account that we'd be significant we did not we did not chop this up and do it based on implied volatility percentile which would further our which would further returns dramatically in in a positive direction okay so we were just um we didn't pick and choose at all correct pretty powerful yeah that's really pretty powerful in fact I think this is one of the best tasty bite segments that we've put together a long time because it really I'm taking stuff home from here bet mm-hmm I'm banking it no I'm put it up here

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Length: 12min 1sec (721 seconds)

Published: Wed Sep 04 2013