August 20, 2017

Adding More Positions After a Rough Expiration Cycle

Well, it was a rough expiration for those of us who sell options. Unless you are a far out-of-the-money put seller, it was a difficult month to sell options. With volatility at seven year lows, options premium among the indexes, especially the S&P 500, is hard to come by.

So, we took a few lumps during this cycle. It happens. Nothing to hide here. Transparency is part of the process.

In fact, we should expect to see months like these on occasion. Because even though we use high-probability options strategies with typically an 80-85% chance of success, there is always the opposing 15-20% that will win. Believe me, over the long-haul, the probabilities will play out.

Just like a coin toss. Ten flips can have a wide variance. However, as you approach upwards of 10,000 flips the variance decreases significantly. The same applies for high-probability options trading. The more trades we make the more we should expect to fall around our stated probabilities, in our case 80-85%.

Which leads me to risk management. In hindsight, I can admit that we probably should have made a few adjustments or just taken off the trades altogether to avoid gamma risk. But, one could also argue rolling a position, thereby adding the potential for further losses, is not the best approach either. But it’s not good to dwell too long as we know over the long-term the probabilities will work in our favor.

That being said, we used the current overbought readings, as sen in the table below, to sell more premium. We used a few different underlyings this time around including Apple (AAPL), which with the recent 7-1 split has become an attractive vehicle for selling credit spreads.

High-Probability Options Strategy


If you are a believer in a statistical approach towards investing please do not hesitate to try my options strategies. I use simple mean-reversion coupled with probabilities for each and every trade. Give it a try, it’s free for 30 days.

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