The Money Tree

Safely Generating Income in Retirement

Introduction to new DEEP OTM NP Selection Strategy

Posted by mounddweller on December 23, 2010

All,

As promised I am expanding The Money Tree blog to include trades from my new DEEP OTM NP Selection Strategy.  I have been beta testing this strategy for the past 7 months and sharing the results with a few select investing buddies.  The results of this new strategy have been nothing short of fantastic.  In the 7 months since I began beta testing this new strategy over 93% of the trades have expired OTM!  The average monthly ROIC (net of all commissions and trading losses) is 1.56% (over 19% annualized).

Here is a brief synopsis of how the strategy works.  After the close of the markets every Friday I scan the options universe looking for naked puts that meet two criteria, (1) a minimum amount of downside protection (DSP) based on the number of weeks to expiration, and (2) a Put Factor (PF) >= 2.0.  Position sizing for each of the selected naked put trades is based on the strike price.  Details on the amount of downside protection required each week and the amount of capital allocated to each trade can be found on my Trading Plan page.

My plan is to post all of the trades meeting my selection criteria after the market close on Friday of each week.  I will highlight at least one trade that I feel is most worthy of your consideration.  Note:  entering trades for all of NPs meeting my criteria may be capital intensive.

A final word of warning.  Although this strategy has proven to be very successful based on the high percentage of trades that expire OTM you may find many of the underlying companies unsuitable for investment based on your tolerance for risk.    THIS IS NOT AN INVESTMENT STRATEGY.  IT IS A SHORT-TERM TRADING STRATEGY. 

I’ll be back with another post later this holiday weekend with the selections for this coming week.

Regards,

Troy

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2 Responses to “Introduction to new DEEP OTM NP Selection Strategy”

  1. hank said

    Hey Troy,
    Sounds good.
    I have been doing something similar.
    Looking forward to all your postings.
    Hank

  2. Rich said

    Troy,

    Sounds like you have a winner plan. I’m playing around with Patrick’s express search for puts with less that 10% POA. Lots of pharmecutacal firms come up. But I’m only risking $500 or less of capitol for the shortest time frame possible. Never more than the current month.

    Rich

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