Option Strategies update

As readers may be aware, I prefer selling options on the Russell 2000. The main reason for this is that the spread between implied volatility (the cost of the option) and historical volatility is normally greater for the Russell 2000 than it is for the S&P500, so you end up getting paid more for the risk you are taking. The RUT (Russell 2000 index) has pretty good liquidity too, so I rarely have a problem getting into and out of position.

With that, I’ve pretty much written everything I have to say about my option strategies (see here and here), so I think it’s about time I wrote about how I realize these option strategies in my portfolio.

 

2015 Option Strategies +32.0%

2015 was a good year, and marked the first time that the cash generated on my portfolio exceeded the income from my job. A little over half the returns came from RUT option strategies, with the rest from puts and calls on individual companies. I threw caution to the wind a little bit during the year, and began writing naked puts and calls on the RUT instead of iron condors. I was fed up of losing a ton of money on the short component of an iron condor leg, and having the long component do virtually nothing to hedge me. So instead, I drastically reduced the number of options I traded, and went naked. I feel way more at ease with my portfolio now. The chances of a large loss are much smaller now, even though the risk of a very large loss is slightly greater.

Still, I feel happier with these risks. I modeled my worst case scenario on 2008, and even with a drawdown in the markets on that scale, this options strategy performs better over the long term.

 

2016 YTD Option Strategies +6.92%

This year so far has been a bit of a frustration even though I spent the first three and half months traveling in India and South-East Asia (one of the perks of trading is having travel money, another is having time to enjoy it).

 

John and Simon Camel discussing option strategies
Hanging out with my camel, Simon, in the Thar desert of northern India. Getting reception for Interactive Brokers here was impossible.

 

I’ve been having a great deal of difficulty with selling calls on the RUT – every time I am about ready to pull the trigger, the market gyrates lower. In the January/February drawdown I chased the RUT lower, so even though my short puts miraculously survived, I was clobbered when the market came roaring back. I had to roll my calls up while in Goa, India, which wasn’t much fun. When the Brexit caused a sudden crash in markets, I sold some more puts. I knew I needed to wait for markets to come back up before selling any more calls. Right now the calls I sold prior to the Brexit vote may be needing some adjustment soon, so I am not ready to sell any more just yet.

In all, my RUT trades are down marginally on the year. This has been more than offset by my individual option strategies though. Naked puts (mostly cash-secured) and covered calls around Chevron and General Mills have been big positive drivers, and I’ve recently started selling puts on Chipotle Mexican Grill, which have been doing pretty well too. I eat there quite regularly, and I’ve been seeing customers coming back. The P/E ratio is not too bad (only 65% higher than the P/E ratio for McDonalds), and there is obviously much more potential for growth.

 


 

Right now the Russell 2000 is at 1177, and I’m looking for the market to take a breather and head back down. My current RUT calls are AUG 1200, and my puts are at AUG 1040 and AUG 1000. I’m a little reluctant to sell any more puts until we have a vol spike. Given that we’re about to enter Scary September, I am hoping I shouldn’t have to wait too long. In all, my option strategies are still performing, and I’m still very happy with the service provided by Interactive Brokers

 

 

 

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