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 [...]

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.

I just finished a book by Dean Koontz called The Good Guy.

It’s about a guy in a bar that gets mistaken for a hit-man. This guy then goes to find the person who is going to be killed and tries to save her, ultimately falling in love and dodging the killer throughout the book.

Anyway, there was one conversation the killer had with the hero that was interesting. The killer tells the hero,

” Good guys finish last, Tim” and the hero responds,

“Maybe not if they stay in the race.”

To me that sounds like adjusting option trades. When we get in an income option trade we want the underlying stock/etf/index to stay right where it is. It can move up and down as long as it does not stray too far from where we want it to be.

Sometimes though, it does move, and it hurts our position. That’s why we adjust. And [...]

Do Option Sellers Have a Trading Edge?

by John Summa,CTA, PhD

 While there are certainly many viable options-buying strategies available to traders, options expiration data I obtained from the CME covering a three-year period suggests that buyers are fighting against the odds. Based on data obtained from the CME, I analyzed five major CME option markets - the S&P 500, eurodollars, Japanese yen, live cattle and Nasdaq 100 – and discovered that three out of every four options expired worthless. In fact, of put options alone, 82.6% expired worthless for these five markets.

This study analyzes data compiled by the Chicago Mercantile Exchange (CME) for a special options report prepared for this my book, Options on Futures: New Trading Strategies (Wiley & Sons), co-authored by Jonathan Lubow, vice-president of Trader’s Edge, Inc., a futures and options brokerage based in Madison, NJ.
Three key patterns emerge from this study: (1) on average, three out of every four options held [...]

We hear a lot about how important portfolio diversification and asset allocation are to our investments. The financial planners tell us how diversification is the best way to invest. We should “Never put all our eggs in one basket,” they tell us.

Makes sense. If all our money was in one stock and the company went out of business, we would lose everything. Just ask the people who worked at Enron.

Search online and you will find millions of articles about how to diversify. Gold bugs will tell you to buy gold stocks and gold bullion. Conservative financial planners will tell you to buy bonds. Stock brokers will tell you to put your money into stocks but in different industries. Others will tell you to buy commodities [...]