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Naked Options Selling!

  • #21
  • Edited 3:11pm Jun 4, 2007 2:40pm | Edited 3:11pm
Sold short GBP/JPY call, strike 243.65, expiry June 11th, 2007 for 23 pips.

Monday, June 4th: GBP/JPY looks toppy. While the ECB is expected to raise rates, the BoE is expected to hold steady. I considered NZD/JPY and AUD/JPY for possible short calls, but the premium was more attractive with the GBP. With the Chinese markets down significantly over the past few trading sessions, it'll be interesting to see how/when the carry trade will react.

update: Today makes exactly one month since I've embarked on this strategy. My account is up 13.8%. Total accumulated pips is 64. Pip & percentage stats will be updated monthly. Although GBP/JPY went past the strike (bad), the option had expired worthless at 10am, about an hour prior to the price spike. Close call (no pun intended).
  • #22
  • Edited 3:18pm Jun 6, 2007 2:42pm | Edited 3:18pm
update June 6th: Glad I didn't sell a call against NZD/JPY. I honestly did not believe that Bollard would rates. And soon after he tries to talk the currency down... what did he think would happen? As far as my position is concerned, the option is deep out of the money and essentially worthless.
  • #23
  • Jun 7, 2007 2:54pm Jun 7, 2007 2:54pm
update June 7th: Increased "risk aversion" in the markets precipitated GBP/JPY's correction. The option is deeeeeep out of the money. It would have been nice if I bought a put option, but then this thread wouldn't be called naked options selling... I don't feel comfortable buying options with very little time value left anyway...
  • #24
  • Jun 8, 2007 9:43pm Jun 8, 2007 9:43pm
update June 9th: Although a little more research is warranted, I'm *considering* selling a deep OTM call against one of the following pairs: AUD/JPY, NZD/USD, NZD/JPY, USD/JPY, and USD/CHF. Also *considering* deep OTM puts against EUR/USD, GBP/USD, and USD/CAD. I'm going to run some numbers over the weekend and then make my final decision Monday afternoon. Going into the weekend, the current open position on GBP/JPY is still deep out of the money.
  • #25
  • Jun 11, 2007 2:08pm Jun 11, 2007 2:08pm
Sold short AUD/JPY call, strike 103.59, expiry June 18th, 2007 for 12 pips.

Intervention from the RBNZ combined with the lack of MMEs (according to the calendar) for Australia leads me to believe that this pair is topped out at least for this week. I *wanted* to sell a call against a NZD pair (and because of the volatility would have received more pips), but because of the 100-150 pip drop between NZD/USD and NZD/JPY, the R/R for the trade is not as high as I would like.
  • #26
  • Jun 13, 2007 2:49pm Jun 13, 2007 2:49pm
I'm attributing the break of 103 to Triple Interest Wednesday. Hedge orders still firmly in place.
  • #27
  • Jun 15, 2007 3:38pm Jun 15, 2007 3:38pm
The carry monsters came in and *carried* out a devastating assault on the yen. In a spectacular display of wholesale destruction, the yen collapsed with its pants down and white flag waving, pitifully, in the air. But where does that leave me?

Long AUD/JPY, that's what!! But not for long, though... as soon as the option expires on Monday (hopefully in-the-money based on the way I've hedged the position) I will close all open positions.

Stay tuned... the story isn't over yet... you *won't* want to miss this!
  • #28
  • Jun 17, 2007 4:13pm Jun 17, 2007 4:13pm
In a feeble attempt to keep the carry monsters at bay for the 2nd time in less than one week, the RBNZ sold their currency. Not even a flood of kiwis will be enough to stop the raging fire-breathing beast. In much the same way that the yen has, they should throw in the towel and *yield* to the insatiable thirst for interest rate carry.

But where does that leave me? Stay tuned to find out... for I am only a few hours away from the inevitable... the inescapable... the TERRIFYING conclusion that is otherwise known as... "the New York cut".

Believe me... you do *NOT* want to miss this!
  • #29
  • Jun 18, 2007 2:45pm Jun 18, 2007 2:45pm
Ladies and gentlemen... the conclusion you've all been waiting for!

My long position in AUD/JPY was called away as the option expired in-the-money. The strike price matched the entry price, therefore I broke even on spot... but more importantly, I kept the premium I received for selling the option. Not only that, but I also collected interest premium overnight and that left me with a slightly greater profit than I had originally anticipated.

Now... the latest position:

Sold short GBP/JPY put, strike 242.78, expiry June 25th, 2007 for 32 pips.

As you can see, this represents a radical shift in my strategy. Up until now, I've only sold calls against the carry pairs... now, however, I'm selling a put. With little in the way of MMEs this week, I believe that this will benefit carry pairs. Additionally, BoE meeting minutes will likely be hawkish. Although one could make a case that this has already been priced in, even if there is a correction in GBP/JPY, I don't see it going past the strike (due to buying on dips). We'll see what happens.
  • #30
  • Jun 18, 2007 9:02pm Jun 18, 2007 9:02pm
How have you been doing with selling calls against GBP/JPY? Are you going to sell calls & puts or just puts now?


Frank


Quoting ragingbull94mtx
Ladies and gentlemen... the conclusion you've all been waiting for!

My long position in AUD/JPY was called away as the option expired in-the-money. The strike price matched the entry price, therefore I broke even on spot... but more importantly, I kept the premium I received for selling the option. Not only that, but I also collected interest premium overnight and that left me with a slightly greater profit than I had originally anticipated.

Now... the latest position:

Sold short GBP/JPY put, strike 242.78, expiry June 25th, 2007 for 32 pips.

As you can see, this represents a radical shift in my strategy. Up until now, I've only sold calls against the carry pairs... now, however, I'm selling a put. With little in the way of MMEs this week, I believe that this will benefit carry pairs. Additionally, BoE meeting minutes will likely be hawkish. Although one could make a case that this has already been priced in, even if there is a correction in GBP/JPY, I don't see it going past the strike (due to buying on dips). We'll see what happens.
  • #31
  • Jun 19, 2007 7:41am Jun 19, 2007 7:41am
Hi Frank, thanks for the reply!

The GBP/JPY calls were easy actually. It was the AUD/JPY calls that gave me the headache, not once but twice! I will sell calls and puts depending on my directional bias. For now, I only take on one position per week. If my account grows large enough, I will take on multiple (albeit small) positions, in addition to longer-term spread trades. Take for example, USD/CAD and USD/CHF... I wanted to sell a deep out-of-the-money call on one of the pairs yesterday (in addition to GBP/JPY), but felt that GBP/JPY offered a better R/R based on the number of pips between the strike and market price, as well as the premium received for the trade.
  • #32
  • Jun 19, 2007 12:50pm Jun 19, 2007 12:50pm
ragingbull94mtx,

Thanks for sharing your trades and how things are going. I'm considering to give this a try. But, I'm curious how you're hedging this if things go against you. Do you just buy the underlying as it approaches your strike price?

Or do you cover it with a FOTM all - vertical credit spread?

Or do you just sell, and hope/monitor closely?



Thanks,

Frank
  • #33
  • Edited 4:38pm Jun 19, 2007 3:05pm | Edited 4:38pm
Quoting frank99
ragingbull94mtx,

Thanks for sharing your trades and how things are going. I'm considering to give this a try. But, I'm curious how you're hedging this if things go against you. Do you just buy the underlying as it approaches your strike price?

Or do you cover it with a FOTM all - vertical credit spread?

Or do you just sell, and hope/monitor closely?



Thanks,

Frank
If things go against me, as they did with AUD/JPY last week, I cover the entire option position with a spot position. A previously set "if done" stop-loss order becomes active at the same time to prevent unlimited losses on spot. I usually set the S/L far enough away that the chances of a whipsaw (ie. moving back towards strike) taking you out is very low. If it did whipsaw (and hit the stop), I would repeat the same steps. As an alternative, I might buy an OTM put/call (less expensive, but then you can't collect swap depending on the pair).

I must've been living in a time warp or something! Originally I had said that I've demoed this strategy for 3 months or so prior to going live. According to my saved e-mails in Yahoo, I've been demo trading this strategy since Aug 2006 (around the same time I opened the MB Trading account). So combined demo/live experience is about 10 months! Time flies.

Also, with the hedge orders in place, I still hope/monitor closely! LOL
  • #34
  • Jun 19, 2007 11:09pm Jun 19, 2007 11:09pm
Would you say that you've been overall profitable with this strategy for the last 10 months?


Thanks,

Frank
  • #35
  • Jun 20, 2007 4:38am Jun 20, 2007 4:38am
Quoting frank99
Would you say that you've been overall profitable with this strategy for the last 10 months?


Thanks,

Frank
Absolutely. When a few of the drawdowns occurred (in the very beginning), they were extreme (~30%), but that was entirely my fault (i.e. not hedging the option, or allowing the spot order to reverse without a stop). Following the rules I set as they currently stand limited subsequent drawdowns to the point that I was able to recover to a new high water mark within a relatively short amount of time.
  • #36
  • Jun 20, 2007 8:15pm Jun 20, 2007 8:15pm
Thanks!!! I'll be trying this strategy soon.


Frank


Quoting ragingbull94mtx
Absolutely. When a few of the drawdowns occurred (in the very beginning), they were extreme (~30%), but that was entirely my fault (i.e. not hedging the option, or allowing the spot order to reverse without a stop). Following the rules I set as they currently stand limited subsequent drawdowns to the point that I was able to recover to a new high water mark within a relatively short amount of time.
  • #37
  • Edited 9:25pm Jun 20, 2007 9:06pm | Edited 9:25pm
Quoting frank99
Thanks!!! I'll be trying this strategy soon.


Frank
Sounds good! Let me know how it works out. Keep the position size small. It's tempting to take on a huge position and collect a ton of premium (that, combined with the lack of a hedge is what led to a 25-30% drawdown for me when I first started testing)... so don't do it.


UPDATE: Thursday, June 21st: The BoE meeting minutes were more hawkish than expected (vote was 5-4 for steady vs. increased rates, 7-2 expected) leading GBP/JPY to top the 246.5 level.
  • #38
  • Jun 22, 2007 6:25am Jun 22, 2007 6:25am
UPDATE: Friday, June 22nd: Quiet markets combined with the insatiable thirst for interest sends GBP/JPY to 247.8. That's 500 pips above the strike. At these levels, at put time spread looks much more attractive. More details on this later.
  • #39
  • Jun 24, 2007 5:06pm Jun 24, 2007 5:06pm
With so much talk of a carry trade reversal, this would be a good time to buy a put time spread on your favorite carry pair. Watch this space! More on this later!
  • #40
  • Jun 24, 2007 5:11pm Jun 24, 2007 5:11pm
Are you going to buy a put debit spread? Which month? How far out do you usually buy?


Frank



Quoting ragingbull94mtx
With so much talk of a carry trade reversal, this would be a good time to buy a put time spread on your favorite carry pair. Watch this space! More on this later!
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