I am not an expert in options but from friends I know it works. The thing is that you need a exit strategy. Even a Nobel prize winner in Economics blew up his account
Here is a great documentary (5 parts) about options and the Black-Scholes formula.
I am not trying to bash the use options, they are highly profitable. the downside is that makes you feel so confident that you will always win, and no matter what you do a black swan event will test your strategy
Thank you for your questions, feel free to ask any and all. I will not have all the answers but I can give my insights.
I have mentioned it before, you will find many references to the strategy but not details to it’s implementation. I do not think there are many…maybe even none that has really tested the strategy to it’s breaking point. My insights are based on what I have actually experienced personally and I have run quite a number of tests on this. I have so far not seen it break down.
As to what size and when to average in, that is something you would have to play around with until you find a formula that you can be comfortable with.
A good place to start is with using the the premium collected as the basis for a buy in and using a simple doubling. After a few runs you will be able to determine if this is good enough for you to sleep nights.
As an example, I start with an underlying at 1.32 and a call option at 1.32 for a day and get 52 pips, I will be looking at doing 2 lots of underlying if the market goes to 1.3148 and 2 calls at 1.3150 or 1.3145
Assuming I will get 50 pips at that point in time then my next watch level is for 4 lots at 1.3098
I hope that brings it somewhat into focus for you.
CallT
Thank you for your comments.
You are probably very correct in the need for an exit strategy and prudent in that.
I have just found that I do not really need one and to go through a lot of development and research to find one such exit strategy would be counter productive where I am concerned. Simply put, I can sleep well at night with the strategy as it is.
If you have a very severe risk aversion approach, you could use a percentage drawdown stop predicated by the amount of drawdown you are willing to risk. When that drawdown triggers, exit all positions.
You could further refine that if you think it too draconian an approach and use a 2 level soft-hard approach. Say a soft stop at 25% drawdown and a hard stop at 30%
The Black Scholes model is not used in FX Options modeling, it is the Garman-Kohlhagen that is actually used. If you understand well the Black Scholes the concept is very much the same.
As to Black Swan, I have actually experienced a Black Swan event with this strategy and the Black Swan did not die, it is alive and well.
CallT
Hello all,
We positioned ourselves for opportunity today, 2 lots covered calls underlying at 1.3361, premuim 58
Our watch level for 4 covered calls would be at 1.3303
We await the outcome and further action if needed.
CallT
It is now about 9 hours to the option deadline and it looks like we will be a winner for 116 pips.
If the underlying ends up anywhere above 1.3303, we will re-establish the covered call for another cycle. If it breeches 1.3303 we will cost average in for 4 lots.
CallT
Ya know Call…i was watching your thread with some real interest… but it seems to have died down. Did you get margined out? did you find the investment capital you wanted and are on to bigger and better things?
Personally, the way you were managing risk as posted up here, i was suspecting that things wouldn’t work out for this approach, and sooner rather than later, but, as I said to you once before I believe…I would love to be proven wrong.
Seeing someone succeed with such an approach would force me to expand my expectations of unlimited risk approaches when under proper circumstances.
Hope to hear back.
Jay
Hello Jay,
No I did not get margined out. In fact it was exercised out and that means that I take the profit and end up with a zero position so it is neutral and not possible to be margined out.
I am on a speaking circuit right now and that suited me just fine to just not put in any positions till I am free again and I will continue. The likelihood of a margin disaster would be very remote as I did sit through a situation once on this strategy through a 2400 pip move…yes 24 big figures and survived. That is the biggest ever move on the currencies to date and unless the currencies will make another such move at a greater scale, I do not see myself being margined out on this particular strategy.
CallT