From time to time, a question will appear in the comments section which is worthy of a response in a post. Havoc left just such a comment (I’ve boldfaced some of it for emphasis):
Questions…. I’ve been watching you trade for about 15 years, and you have made adjustments to your method over that time. Your style has similarities and differences to my own, and I’m curious as to how you honestly feel about the long-dated options-only method. I still am very impressed with your strategy of holding dozens of individual short positions (while I only short the SPX in a couple of ways). You have convinced me of the benefit in a crashing market of the added time it takes to exit all those positions, for example. How do you value the price of the options in your spreadsheet, is it the midpoint of the bid/ask? When you decide to enter, or exit a position, are you entering limit orders to prevent bad fills within these wide spreads? Most importantly, in what ways have you found this style to be better than being actually short the individual stock? I’ve actually started building a portfolio of options that expire in 1/24, and am finding peace of mind with it.
I’ll answer these by starting with the simpler ones first.
I value the options by using the midpoint. Sadly, many of my options have bid/ask spreads of about 5% to 10% (and, early in the trading day, sometimes triple-digit spreads; yes, I am serious) so it’s tremendously inefficient. I have found, however, the midpoint to be a fair valuation.
When I exit positions, I tend to use limit orders. Again, these are relatively thinly-traded, but I’ve found the majority of the time I can get a price somewhere at the midpoint. During the bullgasm on Friday, I started just bending over and grabbing my ankles, taking market orders, since I just wanted to GTFO.
I think, given a much larger account, it probably would be somewhat more profitable for me to just have raw short positions. I have deliberately chosen a small, specific account size ($100,000) for my options trading. To do the same with regular stock would probably necessitate a half million to million dollar account size.
As for the long-dated-ness………..this is honestly just a psychological salve for my poor, damaged soul. It’s kind of dumb for a couple of reasons:
- The percentage gains are wildly higher with short-dated options. I think LZ commented that my XLU idea would have thrown off a tenfold return. I’d never see that with my style. I get excited to get a 100% gain.
- I don’t need the time. I’ll buy something that has, lets say, four months left, and I’m out of the position, at most, in a couple or three weeks. I haven’t “wasted” too much in burned-up theta by buying time that I never used, but again, it forces me to have a small quantity of options, which waters down my possible percentage gains.
The bottom line is that it’s just a way for me to rest easy at night. Doing the kind of thing the /wsb crowd does (0-DTE options, or something close to that) is just gambling, pure and simple. What I’m trying to do is create a means to enjoy the leverage of options while still in the conservative “investing” frame of mind.
There’s nothing scientific or data-driven about it. It is merely a way for me to retain whatever filaments of sanity I have left.
