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- Manlobbi
Investment Strategies / Mechanical Investing
No. of Recommendations: 5
I can't find my internet files on the 6/3 Options. Once candidates are found, purchase ~6-month-to-expiry slightly OTM Call options and sell at ~3-months-til-expiry?
What type of screens were "we" using for researching candidates? I'm looking at Tech Growers and "Saul-type" stocks, but putting some relatively tight moving average crossovers in place to try and avoid the 50-90% drops....
(And it seems like ensuring BCC>0 might not be a bad idear before initiating positions?).
Thanks.
Tails
No. of Recommendations: 10
I got this from my files - very old. It seemed to work great during the late 1990's internet boom, but didn't afterwords.
Taz
OPTIONS SIX-THREE CALL
This is derived from a concept proposed in a Motley Fool discussion group by Sparfarkle.
1. At no time invest more than 5% of the portfolio's total value in options. In order to keep total commission costs at a reasonable level (10% or less) buy at least 2 contracts on each company. (As of Feb 2001 Quick & Reilly charged $37.50 per option plus $1.75 per contract. So total buy-sale commission for one contract on XYZ is $78.50 and for three contracts was $85.50 ' only $7.00 for two additional contracts.)
2. If the overall market trend is either bearish or uncertain, (i.e., S&P500 index currently running below its' 200-day moving average) DO NOT purchase any CALL contracts. If the market is bearish, skip to the section below titled Negative FCF Screen for Selecting PUT Options to determine if the climate is right for buying PUTs.
3. If the market is trending bullish (S&P 500 daily index and its 50-day moving average both currently running above the S&P 200-day moving average), purchase 6-month call contracts on three to five of the CAPRS screen stocks that have published options (buy on the first Monday of the month and select 'Buy at Open', and buy equal dollar amounts of each option). Do not buy contracts on any equities that are already in the portfolio. Buy contracts around 10% out-of-the-money, i.e., strike price approximately ten percent higher than the current stock price. Buy the contracts in the early part of January, April or July. Do not buy any contracts selling at prices greater than 1/9 their equity share price (too much time value premium included). Hold the contracts for three months, and then sell them. (On the fourth Friday of the month, or the following Monday. Select 'Sell to Close'. (Do not sell any contracts that are worth less than the commision amount. Wait until they rise above the commision amount or let them expire worthless.) Occasionally, the underlying equity will skyrocket 20% or more in price during the time that the Call contract is owned. If this happens use the procedure defined below in 'Rolling Up Call Options' to determine if contracts should be repositioned.
4. Do not compound options profits year-to-year (see step 1). If, during any calendar year, the portfolio allocation for options is entirely lost then do not buy any more options until the next calendar year.
No. of Recommendations: 6
Part 2:
Rolling Up Call Options:
'Rolling Up' basically means to sell a call option (that is already owned) and buy another call option on the same underlying equity for the same expiration date but with a higher strike price. Occasionally, Call options purchased using the Options 6/3 criteria above will move deep ITM prior to the scheduled contract sale date. As this happens the contract price will move sky-high (as with most deep ITM options) possibly making the contract harder to sell and also causing the owned option's intrinsic leverage to fall to insignificant levels. If this happens use the following procedure to determine whether to a) stay with the current contracts until their scheduled sell date, b) sell the current contract and roll up into a new contract for the remainder of the period, and c) if rolled up, what contracts should be pursued.
Step 1, check the scheduled contract sell date. Do not roll up an option with less than one month to go before the scheduled contract sell date.
Step 2, assess whether or not the market predicts significant additional gains for the underlying stock. To do this, recalculate the current PEG and CAPRS screens to see if the underlying company is still recommended as one of the top ten companies satisfying the screening criteria. If it is, then continue on to steps 3 and 4.
Step 3, calculate the 'tradeoff ratio'. Subtract the current ask price of the Call to be bought from the bid price of the Call to be sold. This is the Gain. Divide the Gain by the difference in strike prices of the two contracts. Do the subtraction so that the result is a positive number (use absolute value).
¬¬ Bid Price of Call to be sold - Ask price of the Call to be bought > 0.7
| Strike price of Call to be bought ' Strike price of the Call to be sold |
Roll up options at least two strike prices, staying with a Delta of 0.9 or greater that will still have a qualifying Tradeoff Ratio higher than 0.7
An example: CSCO 85 Oct99 has a current bid price of 37 3/4. CSCO 95 Oct99 has an ask price of 30 1/2. The difference in bid/ask is 37 3/4 - 30 1/2 = 7 1/4. The difference in strike prices is 95 - 85 = 10. The tradeoff ratio is (7 1/4) / 10 = .72. The tradeoff ratio measures how much is gained for how much is given up. The transaction gains cash and gives up intrinsic value. To make 'rolling up' a call option something that is worth doing the tradeoff ratio should be greater than 0.7.
In order to qualify, an option must be very deep ITM (In the Money). For instance, AOL 95 Oct99 is already owned. AOL is presently about 147, so the option is about 35% ITM. It doesn't even come close to qualifying for rolling up. On the other hand, ANN 30 Jun99 is also owned. ANN is about 51, so the option is about 42% ITM. It not only qualifies to be rolled up, but it can be rolled all the way to ANN 50 Jun99 and still have a tradeoff ratio higher than 0.7.
Step 4, Use Delta to determine how far up to roll the option. Take the case of the ANN option. It can be efficiently rolled all the way up to ANN 50 Jun99, but the ANN 50 Jun99 option has a current delta of about 0.58. That means that the option will only increase in value $0.58 for each $1.00 that the underlying ANN stock increases. Not nearly good enough.
It turns out that the ANN 40 Jun99 option has a delta of about 0.9. and still satisfies the Tradeoff Ratio.
Also, never roll up an option just one strike price - i.e. going from a strike of 45 to a strike of 50. Even if the tradeoff ratio is over 0.7 - which would be rare - the gain isn't sufficient to provide any significant advantage. Roll up options at least two strike prices, staying with a Delta of 0.9 or greater that will still have a qualifying Tradeoff Ratio higher than 0.7.
No. of Recommendations: 20
I can't find my internet files on the 6/3 Options. Once candidates are found, purchase ~6-month-to-expiry slightly OTM Call options and sell at ~3-months-til-expiry?
My approach for the last 24 years has been:
Use the VL Timeliness 1+2 stocks (400 stocks) as a starting point.
Remove the 10% (40 stocks) with highest 5 day return.
Rank the remaining stocks by RRS126-2s. This means ranking by regression relative strength over the last six months, minus 2* price volatility over the last 12 months. i.e. looking for stocks with high price momentum and relatively low volatility.
Select the 5 highest ranking stocks that have options available and for which I don't already own call options.
For each stock select a call option that is 0 to 10% OTM (closer to 10% is better) and has an expiry 6 to 8 months away.
Invest a total of 1/9 of the portfolio in these five options. Sell the options exactly three months after purchase, and repeat.
This is done every month on the week after option expiration. Over a three month cycle about 1/3 of the portfolio is invested in options. The rest is held in cash or something close to cash.
Elan
