The Options Industry Council Announces New Study Finds Collar Strategies Outperform Buy And Hold

Chicago – September 23, 2009

The results of a new study examining the use of options in a collar strategy (both active and passive implementations) on the PowerShares QQQ™ exchange-traded fund (ETF) show it provides superior returns to the traditional buy and hold strategy while reducing risk by almost 65%.

The Options Industry Council (OIC) is pleased to note the study reaffirms the risk management potential of equity options, finding that during the entire 10-year study period, including the sub-periods around the tech bubble and credit crisis, collars significantly outperformed the QQQ, providing much needed capital protection.

“Loosening Your Collar: Alternative Implementations of QQQ Collars,” by Edward Szado and Thomas Schneeweis, looked at data from March 1999 to May 2009. It concluded that over the entire 122 month period the passive collar returned almost 150%, while the QQQ [...]

Hi,Like most people I have various accounts. The account in question is what I normaly “traded” out of. This is not my retirement account but an account to hopefully help build wealth not preserve. Historically I’d say I only used 5% of it toward option plays (and not whole 5% in one position) since I usually was naked and a 100% loss was possible. I haven’t been trading much of anything lately but do you feel your strategies are designed safe enough to utilize 100% of this type of account? I guess what I’m asking is once somebody says yes they are utilizing risk capital would you suggest devote entire sum to these type of plays or should some percentage still be in other growth tactics? Asking because I’m trying to simplify my life at this point, not make it more complicated.-Paul

I am not licensed to give specific advice. But [...]

Great question from a member:

Last time with MCD position you opened another Butterfly to bring the Delta Neutral. Which I have been following and I thought it is very interesting. And maybe that’s the reason to raise me this question.
So my question is related to Iron Condor. Why do usually we close the

 position and open a new one when the price comes after us, instead

of adding some positions to bring the Delta Neutral.
For example: our last RUT we closed 640/650 and opened 660/670.

If we had keep 640/650 and add something to bring the Delta low levels

 again would have similar effect??
I know since we are just handling low quantity is more difficult to create this kind of sceneario, but assuming that the quantity would be greater, do you think that the mechanism of adding positions to bring the Delta low has the same effect as to roll up/down the position?
Just trying to get a better understand from the options world.
 
Tks a lot,
 
Paulo

Excellent question.
 
You are right, the same adjustment can be used in a condor. You can add options to lower the delta. That is one of the adjustments I look at. And it can work. But it depends on what is going on in the market. This month, the market was advancing regularly. Just about everyday it was going up. Adding some calls would only protect the deltas for a couple days and we would then have to do something else. That is why I moved the calls. It is a more drastic adjustment but I thought it was warranted in this environment. if you have a condor where the market makes a huge move upwards in a day and it might go back down, that is when you can add some calls to lower your deltas. Or if there is fear of a big move you can lower your deltas before the move so that no matter what happens you do not get hurt. You can then remove the bought options after the fear has passed.
 
Allen

Monthly summary:  Beautiful month! The markets acted wonderfully. Even though they advanced they did so in a slow boring manner. And that resulted in 100% profitable trades that needed no adjustments. It can’t get any better than this.

Monthly result: Gain of 16.3%

Anytime you can make 16% without doing any work – it’s a good thing. This month the markets behaved so nicely that all I had to do was put the trades on. That’s it. They were never in trouble, I never had to worry about adjustments, and I made a very nice, market beating return.

Option Selling at it’s finest. Too bad every month is not like this. But then it would be too boring and everyone would want to be an option seller.

I frequently get asked which way I think the market is headed. Especially after the event of recent days where the markets have been on a sprint to the upside but with pull backs the last couple days.

I usually respond the same way every time.

“I don’t know.”

If I could predict the market I wouldn’t be here blogging, I would be out enjoying my billions.

Believe me, I have tried to learn how to predict the markets. That’s what technical and fundamental analysis is – an attempt to understand and predict market direction.  In the end, I gave up.

I cannot predict market direction. The pundits on TV and radio can’t do it, all the blogs and gurus online with their fancy explanations, charts, candles, lines, and waves can’t do it with any regularity and neither can the folks on Wall Street.

So why bother?

Why not trade in a way where it doesn’t matter which way the market moves?

Makes sense to me. And that is why I love option selling.  It does not matter what is going on in the market, what news comes out or doesn’t, the premium I sell loses value everyday, and I profit.

Let me give you an example. This month I have a McDonald’s (MCD) trade on. I want MCD to stay within a range. A couple days after I put the trade on, MCD moved higher and almost out of the range. So I adjusted the trade and made the range bigger.

That day a member emailed me with news that there is a rumor going around the MCD is going to raise its dividend. That might be why it went higher. And if the news about the dividend is correct, it might go higher still.

This member wanted me to know that this trade was not a good idea. He was warning me to what could happen. Thanks to this member, who had my best interests at heart, I began to worry about this position.

What if he was right and MCD shot up higher?

But after a while I calmed myself down and realized that it was not in my hands. If MCD went higher I would evaluate the position, adjust if possible or in the worst case scenario take a small loss. But the odds were on my side.

As it turned out, MCD has behaved fine since and the trade is right in the middle of the profit zone. Let’s hope it stays that way.

But my point is that it does not matter if the dollar is stronger or weaker. It does not matter what oil or gold do. The markets still move in ranges and if you play the ranges, 8 times out of 10 you will win. And those wins allow you to make much higher returns that you will in a savings account, a CD, a money market fund, or a mutual fund.

The first thing to determine is whether the trade is a debit trade, where you pay money for the trade, or a credit trade, where you get money. Iron condors and credit spreads are two examples of credit spreads. Butterflies and Calendar Spreads are debit spreads.

With a debit spread, the max you can lose is the amount you paid for the trade. The max you can gain is harder to determine. I do it using the Analyze tab on my broker’s platform. On a butterfly you can make up to 200% of the debit and sometimes more. On a Calendar you can make 100% of the debit. But you normally will not. At expiration, the profit zone becomes very narrow and the Greeks (delta, gamma, theta, and vega) become very volatile and option prices make huge swings up and down.

On either of these trades, 20% profit is a good number [...]

An interesting article today in the WSJ talk about how more and more small investors are trading options. The sad par tis most of these investors do not the true danger of the options they are trading. Only too late do they realize that buying options is a losing proposition.

The good news is the more options are traded the more liquidity they will have and the more competition among brokers will lead to lower commissions for all of us.

here is the article:

http://online.wsj.com/article/SB125202073403184971.html?ru=yahoo&mod=yahoo_hs#articleTabs%3Darticle

By JEFF D. OPDYKE

Most investors are hoping stock prices push higher. The short-sellers want stocks to sink lower. And then there is Marlene Sackheim: She hopes the market goes nowhere.

The 57-year-old chief financial officer of her husband’s pain-management clinic in Pensacola, Fla., trades options for herself and other family members. Her preferred strategy — colorfully dubbed a naked strangle — rakes in the money when the Standard & Poor’s [...]