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More short options trades 18.13% average return

The markets were closed yesterday for the Christmas Holiday.

music selection:  “The Banana Boat” — Harry Belafonte

weigh-in:  207.6 +0.4

First order of business today was to close the short position in AMG.  Shares rose to 204.35 and I was stopped out with a 1,297 capital loss.  That is 46.08% annualized.  I still think shares are going down but a rising tide lifts all boats.  It is simply a difficult market to be short in.

I’m in the process of increasing my standard position size from 10,000 to about 14,000.  The portfolio has grown dramatically in my five years of FIRE and it is time to make that adjustment.  Annualized returns have been falling for some time due to under investment.  When the yield curve inverts, it will be time to cut exposure again.

I sold BX180202C00034500 for 26 cents a share.  This trade will be in force for 39 days and yields an expected annualized return of 7.05%.  I also sold BX180202P00032000 for 88 cents a share to convert the position to a strangle.  That trade will also be in force for 39 days and yields an expected 25.74% annually while enjoying 3.83% downside protection.  The combined position yields an expected simple average of 16.40% annualized.

I increased the number of put contracts on Micron (MU) by selling MU171229P00042000 for 2.35 a share.  That trade will be my best performer out of today’s efforts.  The trade will be in force for 39 days and yields an expected 52.37% annualized while enjoying 5.75% downside protection.  A real winning proposition.

I converted Sirius XM (SIRI) to a strangle.  Liquidity seems to be falling for these contracts and I needed to go a little further out to find fills.  For calls I sold SIRI180216C00006000 for 7 cents a share.  The trade will be in force for 53 days and yields an expected 8.03% annualized.  There is room for 50 cents in capital appreciation as 5.50 strikes were not available on the monthly expiry requiring moving up to 6.00.  I also sold SIRI180216P00005000 for 10 cents a share.  That trade will be in force for 53 days and yields an expected 13.77% annualized while enjoying 10.42% downside protection.  The combined strangle yields 10.90% annualized.

I was finally able to eek out a few pennies on a Penny Mac (PMT) covered call.  Liquidity has dried up for these shares.  I continue to hold the underlying because of the high yield while hoping for a return of options interest.  I sold PMT180420C00017500 for 10 cents a share.  The trade will be in force for 116 days and yields an expected 1.80% annualized.  Risk of shares being called away seems very low with the current price at 16.62.

All together, the simple average of these options trades is an expected annualized return of 18.13%.  That is about double the long term average of the S&P 500.  I remain eligible to collect dividends on the shares held long for bonus return and have picked up eligibility for some upside capital appreciation in SIRI.  The future looks bright.

Devour your prey raptors!

{ 6 comments… add one }
  • Chris B December 27, 2017, 8:27 pm

    Interesting to see you move to strangles. Does this imply a range-bound outlook or are you looking for strategies with better “repair” opportunities than singles?

    Lately I’ve been troubled by the idea that options might be efficient probabilistic wagers. E.g. On a particular trade, you can expect to earn 10% on average 10 times and lose 100% the 11th time. Net expected value = 0. Another metaphor is betting on both black and red in roulette. You win small 99% of the time, but green is lurking out there to wipe you out 1% of the time. This seems like an excellent psychological trap. I wonder if I’m being conditioned by repeated sucess to get the little reward over and over again, while earning nothing in risk-adjusted terms -and being destined to quit the game when the big loss finally rolls around. A casino in reverse.

    This goes beyond the standard advice of keeping position sizes small. If the expected value is zero or negative, no position size makes sense.

    I’ve heard about the volatility premium, and how options tend to be overpriced on net. But I wonder if we are really earning that tiny premium, or at least much from it, compared to the market makers.

    These thoughts have led me to wonder if the opportunity to employ repair strategies (e.g. rolling the unchallenged side of a condor closer to the money to obtain a net credit) is the only edge available to ordinary lizards. Such an if-then algorithm would seem to have inherently better odds than holding single positions to the sometimes-bitter end.

    • The Lizard King December 27, 2017, 11:21 pm

      In this case, I’m just adding exposure to existing long positions. It made more sense to write a put than do a buy-write.

      Nassim Taleb has a good discussion in his book “Anti-Fragile” about the power of optionality. He concludes that in the options market, buyers recognize the inherent value in their asset and are willing to pay a fair price for it, e.g. the volatility premium is real. (Worth a read). There is an obvious advantage to using a strangle. Only one leg can be exercised at expiry. Surely, this improves your odds of a winning trade.

      I think your hesitancy is natural in the current low interest rate environment. In a higher rate environment, we would be seeing much fatter premiums for time value. Combine that with historically low ^VIX and we are looking at skinny premiums across the board. It has still been enough for me to beat a roaring bull market with just 60% of my portfolio (40% goes to fixed income.)

      If you want to improve your win rate at the cost of lowered returns, you can certainly do that by working with spreads. I’m personally trying to see if it makes sense to convert my UVXY long puts trade to a bear put spread trade. It is difficult to model since the volume on 2020 options are so thin. I will probably run another A/B test over several months.

  • The Spaniard December 30, 2017, 1:09 pm

    First of all, congrats for your success and thank you for your effort with this webpage, is really helpful.
    You have said that 40% of your portfolio is invested in fixed income. Do you include all these positions in your open positions page? If not, could you please give a us a hint on what kind of bonds, dividend stocks and so forth are you invested.

    • The Lizard King December 30, 2017, 4:18 pm


      I don’t track these on open positions, just options and bonds held directly. The fixed income is primarily in closed end funds such as: HNW, IGD, IIM, IIQ, NEA, NVG, PCI, EFR, GIM, GLO, JPS, and JRO. These positions average about 8% annualized and provide steady income.

  • The Spaniard December 31, 2017, 11:44 am

    Thanks for your response. So, I understand that you keep equally distributed positions in those assets, don’t you?

    By the way, I wish you a happy new year!


    • The Lizard King December 31, 2017, 3:56 pm

      They are equal on cost basis. I don’t typically rebalance them. Not worth the trouble.

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