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American Capital Agency Corp. Message Board

  • olee2116 olee2116 Dec 12, 2012 11:27 AM Flag

    Does anyone here make consistent money with options?

    I'm talking about over a long term (over 10 year period).

    Because I've lost my shirt, and I'm about to lose my shoes. I thought maybe it was because I was an idiot, but I've made an average of 10-12% with stocks from 2002-2011, the exception being 2008 when I lost 50% and 2010 when I made 130%.

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    • Just a helpful factoid. 90% of options expire worthless. Ergo, always sell premium never buy it unless you have inside information, then get ready for jail!

    • It is very tough to make money, particularly if you are buying options. My first foray into options, I lost everything. My second try a few years later, I lost 60%, then gave up and liquidated the account. These attempts were buying options only.

      My latest try has been the most successful because I am about 50% buying and 50% writing. One strategy that has worked this year is to buy calls a few days before ex-dividend on high dividend stocks (like VZ) and sell the calls on the last day before ex-dividend. I also tend to buy QQQ & SPY calls and puts in advance of big macro news and also because they have reasonable premiums/spreads (some individual stocks have premiums/spreads that are just too high to trade successfully IMHO). Ironically, most of my directional market bets have been profitable for me this year. I've had less success buying options on individual stocks but writing covered calls as a stock holding becomes fairly valued has proven to be a good strategy for most stocks.

      I've also written some puts which has proven to be a good strategy but you have to be careful because it can eat up your capital if you get put the stock. Calendar spreads work well too because you can buy a long dated option and then write multiple shorter dated options and earn the weekly premiums (and you are hedged). Everything is about timing if you want to be profitable trading options and I only trade options when my high threshold for initiating falls into place (good idea of direction of movement, a catalyst for movement, overall market conditions point in the same direction of movement, etc.).

    • Olee:
      Thanks for addressing a question I have often asked myself, and thanks to all who responded with open and intelligent postings. I often read this board because it has the most knowledgeable group of investors I have found, although the discussions are mostly about options.

      I have considered trading in options, but never have because of concerns I have had about the issues posted for this message. I no longer believe in holding stocks for very long term (over a year) as I used to, as I think that strategy went out long ago. I am not a fan of Cramer the Clown, but I agree with his statement that long term holding no longer works, which has been my experience. I have had too many nice gains melt away over time.

      I am also not a daily trader as such, but I have evolved into a short term strategy that has worked well for me, chasing high yield dividend stocks (8%-16%), how I discovered AGNC. I watch for the next dividend, either announced or anticipating the next announcement, then buy the stock in anticipation of the usual PPS increase in response to the announced dividend. I sell the stock one or two days before it goes ex, avoiding the ex-date adjustment and getting my money back to immediately use on other dividend stocks. I often make as much or more on the pre-dividend short term run-up as the amount of the dividend. I make gains most of the time, but if I lose money it is quite small. I hold these stocks for about two weeks max. I will never get rich doing this, but my short term returns have been quite good, much better than the market averages.

      I have placed some of my wife's IRA funds in AGNC for relatively LT holding, merely for the nice dividends. Hard to beat a 15% return on your money. I just watch the stock closely for dividend decreases or significant PPS decreases. I will move the AGNC money to another high yield dividend stock if AGNC declines, but it is the best and most consistent one I have found, and if AGNC declines I believe most other REIT's also will.

      Olee, I am assuming you are being honest about your personal set backs, and express my sympathy to you. Surprising to me that you have not done well with stocks and mainly options, as most of your postings indicate you are quite knowledgeable about options and I assumed you have done well. Your candid openness is refreshing to me only in the sense that it confirms to me that option trading is typically not as successful as many investors may believe. Yes, some very astute option traders like Doc may be successful, but I believe they are the exception. Like holding stocks LT, I believe the manipulation on Wall Street makes options difficult to consistently make a decent return on. It is always difficult to beat any experts at their own game, especially when they have all the advantages Wall Street has, the "home field advantage". The question is, why do we try? Human nature I guess, believing we can beat the odds.
      My belief has always been that Wall Street is simply the world's largest casino, in reality nothing more than an immense gambling arena with more games to be played than found in the major casinos, not truly investing. IMO the only difference is that the casinos are more honorable and ethical than Wall Street!

      GL2 All

      • 1 Reply to pappa_korn
      • Pappa,

        I've done very well buying shares. From 2002 I've always made money, the exception being 2008.

        Initially I made very good money trading options. I doubled my money in 2 months. That made me very careless and use far more leverage than I should have.

        Doc is a far more knowledgeable with options than myself. He lost all of his money 3 times.

        In the end it doesn't matter. We lose everything when we die, so I am learning this at a age much earlier than I thought I would have to. However, I realize that my life is a precious gift, a grace from God that I cannot return, so I will rebuild until it is my time.

    • If my humble opinion_if your stategies involve anything but covered positions and buying protection. You are just gambling and over the long run you will transfer your capital to the option writers (sellers).

      You also need to be cogzinant that since the CBOT eliminated the MBS futures contracts it is difficult to construct a leading indicator for mREITs. The Federal Reserve has published studies using rather sophisticated integral formulas to replicate the information discovery process deficit those contracts previously provided. I have clients (floor traders) that utilize the FEDs strategy and I would think the more efficient managed mREITS are doing the same.

    • When I first started using Thinkorswim (since bought by TDAmeritrade) around 2006 or so they offered free trading seminars. The main strategy they taught was Iron Condors on the S&P500 and how to adjust. They recommend closing positions a few days before opex.

    • I do Olee. Aside from playing options into the EX date, I write covered calls on existing shares sometimes (with the expecation they expire and you pocket the gain), and once in a while I write naked calls on some tech companies a few days out to OPEX with the preface being they will expire as well.
      My general rule of thumb for writing naked calls, is I only do it on bullish market days (never on down market days). And I usually just poke around to where I can get a premium to spread I'm comfortable with.
      Olee I used to write a lot of naked calls on AAPL for example since there was good premium.
      I don't so much any more as the premiums are not there like they used to be.
      Other good ones were GOOG, AMZN, and PCLN.

    • If it was easy to make money using options everyone would be doing it and making money. With stocks you basically have to guess only one variable - direction. Most people go long and hope the stock goes up. There are many more variables with options but in most cases you still have to be right on which direction the PPS goes. Even so-called neutral positions like condors and butterflys you are betting that the underlying stock doesn't move much. In fact you can get the direction right and still lose, for example if you pay too much for calls, the stock can move up but you lose on time value and volatility.

      Last quarter I used a married put, which is similar to a long call. I bought shares and bought a put for insurance against something catastrophic. I made 2.40 on the stock, minus 20-something cents on the puts. I tried the same this quarter but got squeezed out last week. I sold the shares for a 30 cent loss, then sold puts for .58. Am hoping to stay above 30 until opex. The wide bull put spread mention by Doc looks appealing. The way I was playing married puts there was a potential to lose over $3 per share before the puts kicked in. Doing it Doc's way there is still the upside potential but the downside is limited to a dollar or so. Plus there is the fact that most quarters there is a dividend run up so you should have more wins that pay more than the losses.

      • 1 Reply to duckman939
      • That makes sense. When I traded stocks, with the exception of Bank of America, I always made money. Even if I missed on the timing and ended up holding a stock for a year, I still made money because I did my work on the fundamentals.

        Stupid me. I lost my business because of cancer and lost all of my money due to a crooked insurance company. I used the only thing I had to pull myself out of this mess, my credit, and now I don't even have that.

        Stupid me, I should have used my credit to start another business instead of buying options. I took the easy way and I lost.

    • The people who make money on options in the long run are the people selling them. Think about it this way. If the fair market value of an option is based on the probability that the stock price will either go up or down by the difference between the current price and the strike price and you only win if it goes one direction then who has the advantage because it could go in either direction? And when a repeatable trend becomes apparent to many people then the options will become more expensive than the formula for fair market value would predict as the demand for the options goes up. The market maker never goes bankrupt. He is definitely part of the 1% and always will be. They say that 90% of all options expire worthless but I'm guessing that it is more like 75%.

      • 3 Replies to raybans2
      • RayB,

        We've talked about this many times. Only about 30% expire "worthless". 60% are traded out, like X's today, and 10% are exercised. Now what does "worthless" mean? Many of those are bought or sold as hedges, against long or short positions, as protection. Yes, those expiry, but are they "worthless". Is your term life insurance policy worthless as it expires without paying for your demise? Same deal. So the mantra out there about 80-90% of options expiring worthless is #$%$

        Yes, I make money selling options(Puts), as you described. As mentioned, you have to overcome the premium(not the price)of the Calls or Puts on long options before much money is made. You can make money on smaller moves, but most plan on overcoming the premium, when entering a position. Short options, OTOH, start making money immediately, on a move in your direction. The main obstacle is the bid/ask spread, which has to be overcome by a sufficient move, or sufficient time decay. That time decay, as mentioned, works "for" the short seller and "against" the long holder.

        So there are not the big home runs in short selling. The max gain is defined by your credit received, whereas the long option holder has stars in his/her eyes with possible unlimited gains.

        I trade 90% short Puts.

        Good luck to all longs,

        DocReits

        Sentiment: Strong Buy

      • Like raybans said, market makers consistently make money on options. But they do it on the bid-ask spread. When you buy or sell a contract you aren't necessarily matched up with a seller or buyer. If there is no one in the MM's queue he will take it and offset the risk until he can unload it on someone else.

      • Yeah I figured as much. I was foolish for thinking otherwise.

 
AGNC
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