Smooth Sailing With Options

I’ve been looking at and searching for the methodology of how the big money sells options since I started this, and I’ve slowly picked up some tidbits here and there.  Doug Albo (which everyone should be following on Seeking Alpha even if you don’t own any closed end funds, just because he’s good at market analysis) just came out with another column, and if you read it carefully, you’ll find that one of the Eaton Vance funds, ETY, does just what we’re doing, with two differences.

One: They have so much money they can write options every day, with expirations out a couple of weeks, and then roll them or let them expire as needed.  They also get blown out and/or go underwater, and lose money, just as we do, but they make more than they lose over time, which is also our goal.  If they get blown out or are underwater on one set of contracts, they have so many multiple contracts out with different expirations the few that are a problem are outweighed by the successes.  Again, just what we hope to do. 

Two: They only use about 50% of their holdings to sell options on, so they have the cash to roll or close a trade at a loss when they have to.  They will sell stock to raise cash when needed for that.  I tend to keep all available funds tied up in contracts because I hate to let any of my money sit and not work for me.

PS.  You may have noticed that IWM now has daily option expirations some weeks, then it’ll go back to MWF.  I found the Fed’s explanation for that and it’s mostly inscrutable, but it appears we will now have weeks with expirations every day.  That won’t make much difference to the way I trade, but it’s something to be aware of.

Happy Trading!