The Money Tree

Safely Generating Income in Retirement

Weekly NP Strategy

Posted by mounddweller on August 28, 2011

Fellow Traders,

Those of you who participate in Yahoo groups know that I have previously expressed an interest in trying my hand at trading weekly options.  Prior to a couple of weeks ago I had never executed any weekly option trades.  Over the past 3-4 weeks I have been gaining experience in trading these very short-lived options by selling OTM puts in what I considered to be very low risk companies like CSCO, MSFT, and INTC.

Having done that I now find myself wanting to develop a trading strategy using weekly options similar to my Deep OTM NP Strategy.  When I began posting about my Deep OTM NP Strategy I had already been behind the scenes testing it out for over 6 months.  With this new Weekly NP Strategy I’m going to give you the opportunity to ride along with me as I test it out.  So, before I proceed any further I want to make one thing very clear, THIS IS A WORK IN PROCESS!  I HAVEN’T BACK-TESTED THIS STRATEGY IN ANY WAY.  IT MAY BE A COLOSSAL FAILURE.  THUS, ANY TRADE MENTIONED MUST BE CONSIDERED PURELY SPECULATIVE.  AS ALWAYS, DO YOUR OWN DUE-DILIGENCE!

Now, with that rather loud and annoying disclaimer out of the way let me share with you what I’m considering for selection criteria as a first attempt in developing this strategy.  I’m looking at using my friend Patrick’s option screener (http://www.mtrig.com/default.aspx) to select weekly options which meet the following criteria:

(1) the strike price is at least 5% below the current trading price, and

(2) the return on invested capital (assuming it is a cash-secured put) is at least 0.5%.

That’s it.  Those are my only criteria.  From those I will look for specific trades that I feel provide the best chance for expiring OTM.  So without further delay let’s look at what running this screen produced.  Again, these are all puts that expire on Friday, September 2nd.

As you can see our screen returned quite a few selections, 77 to be exact.  That may be too many to evaluate every single week so we may have to tweek the selection criteria to whittle that down to a managable size.  However, we’ll wait a while before deciding to do that.  Once the VIX settles down the problem may take care of itself.  Lower volatility should limit the size of our potential selections.

Of the 77 selections produced by our screen 4 caught my eye.  Why did these appeal to me?  Well, 3 of the 4 potential trades are tied to stocks which have already been beaten down quite a bit.  BP, RIMM, and SU all have rather nasty looking 1-yr price charts.  All are either approaching or have recently bounced off of 52-wk lows.  So what about SLW?  Well, it is a stock that has substantial volatility and I just happen to like it’s longer term prospects so I’m willing to experiment with it a little bit.

So, let’s follow these this week and see how we do.  I may actually be brave and pick one to trade.  We’ll see what tomorrow brings first.

Best of luck in all of your other trades this week.

Regards,

Troy

 

 

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2 Responses to “Weekly NP Strategy”

  1. Jason Kerr said

    Troy – I’ve been taking advantage of the volatility on the weeklies for the last several weeks in MSFT, INTC and CSCO as well. I’ve been selling puts utilizing $10K in capital each week (whether assigned or expired unexercised in the previous week) in some combination of those three names to get anywhere between 1% and 2.5% per week. My allocation amongst the names is usually based on which one is closest to the at-the-money strike to get the highest return as i feel like all three names are very reasonably valued. If assigned, I force myself to sell a call one strike further down for the nearest monthly expiration to make it fairly likely that i get called as my goal with this trade is to supplement my income and not add additional positions to my covered call/naked put portofolio that I’m currently managing. Selling the monthly call, instead of the next weekly, gives me enough premium to cover the $1 I’m going to lose by going down one strike. I was able to sell the CSCO 9/2/11 $15P weekly on 8/25 for $.31. Ended up closing on 8/29 for $.08. Not bad for a weekend. I usually let them go to expiration, but since I basically had the entire week remaining I was planning to re-enter the position if the market dropped at all. I will see how long the volatility allows me to continue and make a decent return. I’ve got to be comfortable on the underly valuation of the equity before I trade, so not sure I will be able to join you on any of the others listed in the table above, but i will interested to see your results and may join you upon doing some more diligence. – Jason

    • mounddweller said

      Jason,

      My apologies for the delayed response. I like your strategy! So much so I may just have to give it a try. You’re so correct, you can hardly go wrong trading INTC, MSFT, and CSCO at these levels.

      Regards,
      Troy

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