41. The best strategies to trade (Vanilla) Options for a free basic income accordingto the succesful results for decades of CHUCK HUGHES
A GREAT PSYCHOLOGICAL ADVANTAGE OF THE OPTIONS:
OPTIONS BEHAVE IN AN ENTIRELY MORE SMOOTH WAY THAN THE UNDERLYING SPOT INSTRUMENT MOVEMENTS, ALTHOUGH THE ELASTICITY MAY BE LARGE AND IN THE OPOSITE WAY . THIS HAS THE EFFECT THAT THE DETERIORATING PSYCHOLOGY OF THE DEMAND-SUPLY CRISESS AND PANIC MOVES IN THE SPOT MARKET ARE REFLECTED ENTERILY MORE SMOOTH AND QUANTITAVELY DIFFERENT TO THE OPTIONS INVESTOR . THUS THEY LACK THE NEGATIVE PSYCHOLOGY AND CHAOTIC TURMOIL OF THE MARKET. THIS ALLOWS THE INVESTOR FOR MORE STABLE PSYCHOLOGY AND CLEAR SIMPLE DECISIONS.
The option fair pricing theory of Black-Scholes is quite unrealistic because it is based on the hypothesis of the markets being efficient and follow a random walk and furthermore that the markets are always neutral as far as trend is concerned (trendless or driftless), that is that there is 50% probability to go up and 50% probability to go down. This gives rise to a systematic flaw: The fair price of the options is wrongly valued. When buying e.g. a call options when there is an up-trend , the options is usually under-valued, as its fair pricing is based on a trendless market. Of course the market makers, detecting themselves the trend, try to correct it by increasing the assumed volatility of the underlying in their option pricing, and decreasing it in say put options. In fact not even this is adequate as by increasing the volatility the options behaves wrongly at the changes of the underlying. It would be closer to reality to change the strike price, and make it as if more in-the-money, but strike prices are never a very fine grid, rather a coarse grid. And they cannot really increase the volatility of the underlying sufficiently, as this will increase the time value of the options, and the time value itself is exploited by other traders, that e.g. buy a vertical in-the-money debit spread, betting too in the up trend of the underlying, and they profit will be more the more is the time value of the call options. Even if in an overall portfolio of calls and puts, their selective altering of the volatility may correct a bit the wrong pricing, when isolated on a call option, at a particular strike price, the options is still quite wrongly priced relative to the detected trend. The market makers by utilizing the Black-Scholes option pricing model which is hard-coded in their software, cannot really offer a realistic fair pricing for the options during a trending market, which fact, gives systematic opportunities to exploit it. And when the options are closer to expiration, and there is a clear trend, the flaw is even larger, as the time value of the option is less , therefore the "cost of the asymmetry" also less. The asymmetry in the final value of the option is the advantage of the option trader, compared to trading the underlying asset. When trading the underlying asset, there is no asymmetry in the final value, relative to where the underlying will end at expiration. But when trading e.g. a call options on the underlying there is a clear asymmetry, by the very definition of a call option. The asymmetry in the final value of the option is the advantage of the option trader, compared to trading the underlying asset, and it is better for the option purchaser, to cost as little as possible. The time value of an option can be considered the cost of this asymmetry, when buying options.
On of the best examples is the very successful option strategies as executed by Chuck Hughes (see http://www.chuckhughes.com/ or http://www.chuckhughesonline.com/ )
The best of the strategies that Chuck Hughes is utilizing is the simplest one which is buying only call options.
A 2nd best strategy is the straddle for neutral markets
https://www.chuckhughesonline.com/
1) Vertical (debit ,in-the-money) bull spreads (e.g. buy a call at 70%-80% of the spot price as strike,and sell a call at 90%-95% price as strike, this would make the vertical spread profitable at a range of at least +-10% of underlying price changes. The theoretical values give that such a startegy is profitable only when the volatility (thus the implied vilatility in the pricing ofthe options too) is significan which means e.g. more than 25%. The profit comes from the difference of the time value of the sold-minus the bought, but also from the width of the strike-price difference of the two. Therefore it is significant to open the spread early enough so that there is significant time value to exploit. The spread may be exited when it reaches 90% of its profit potential.Such a strategy will be the appropriate if the market is rather stationary , with no significant trends, or that there s rather steady trend opposite to the side of the spread. (that simple option purchases can capture.)
Bellow is a simple excell-like table of the scenaria of risk for this Vertical, in the money Bull (debit) spread from -10% to 10% change of the underlying spot instrument at the expiration (which in the example here it was about 5 weeks (weekly options). Of course we open the spread if the prices of the options as in the table below give a signficant profit rate (e.g. 0.2MDS OR 1mds In other words 50%% 100% etc of an about monthly duration trade. ). The trigger of opening the spread was a 30% in the money expiration price (or a spot price at 130% of the lower buy call excirsize price) and an expectation of non-decrease or decrease at most 10% (or increase from 0% to 10% of the value) All increase from 0% to 10% scenaria give the same profit here 148% ) . The maximum risk for the risk management is the cost of the debit spread (if the s[ot at expiration goes lower than the lower excersize price) which should not be higher than 2%-6% of the available funds each time.
At expiration the spot value increased eventually to 5.1 thus 5% increase compared to the opening spot price 52.48. Thus it gave a profit rate of 5.97/4.03=148% (from 100 options 597$ net profit or final value ofthe spread 1000$, with initial value 403$, 1000/403=2.48 or net 148% ) , And the maximum risk of 403$ is a 6000$ account was 6.75% while in a 10000$ account was 4%) It seems that the frequence for each instrument that someone can find such profitable opportunities of "in the money bull call spreads" is high , probably more than 50% ofthe time.
https://www.youtube.com/watch?v=mxirTn0vlyY&feature=youtu.be
IT IS QUITE APPARENT THAT SINCE 5 WEEKS IS SHORT TIME PERIOD FOR SERIOUS TREND TO APPEAR AND THE STRATEGY IS PROFITABLE FOR A NEUTRAL BEHAVIOR OF +-10% CHANGE OF THE SPOT PRICE , THE STRATEGY SHOULD BE CONSIDERED AS GAINING MAINLY FROM THE TIME VALUE OF THE OPTIONS BASED MAINLY ON THE SHORT TERM STATIONARITY OF THE MARKETS AND STANDARD SHORT TERM SHIFT DUE TO THE LONG TERM TREND OF THE STOCK MARKETS. THE OPPORTUNITY EXISTS AS PROFITABLE ONLY BECAUSE THE VOLATILITY OF THE MATKET IS HIGH AND THUS THE IMPLIED VOLATILITY IN PRICING THE OPTIONS TOO.
2) THE BEST STARTEGY BETTER FROM ALL: CALL Option purchases. (E.g. at calls:The profit comes from the intrisic value if the underlying price increased, minus the time value decay of the premium that better be less than 1% of the overall value per month which means quite in-the-money.) If after purchasing e.g. a call option we reach at the desired profit, and the expiration is not very close, we may sell a call option to make a debit vertical in-the-money spread, that stabilizes the profit of the purchases call option, and gradually extracts the time value till expiration. In this way the initial time value of the purchased call option does not cost to us, instead an additional time value becomes profit. Option purchases (that is only buying options) is essentially the basic trading method for binary options too. At the current state of the art of binary options, are offered only at the money binary options not out of the money or in the money binary options. A successful method of trading binary options by purchases is described in post 44, after the gratido-minute-wise system.
https://www.youtube.com/watch?v=TY6il6iwjJM
Options purchasing compared to simple spot or underlying trading has the next optimal advantage: In spot trading it is optimal to pyramid, but this has extra transaction costs. If options are utilised then the pyramiding is automatic, from the very-definition of the option fair price, that increases or decreases the price of option, as the price of the underlying goes away or not from the strike price, exactly as in a kind of pyramiding of the underlying. But there are no transaction costs here for the automatic "pyramiding" with options.The disadvantage of time-value decay of option purchases is covered by the above advantage. Thus in over all it is more optimal to conduct a seasonal trading of the underlying, with option purchasing instead of spot trading.
Chuck Hughes video here. https://www.youtube.com/watch?v=mowEUI0INCI
https://www.youtube.com/watch?v=zTpgpvZ6Vds
Chuck Hughes started with an account of about 4,600$ and after some years made it some millions. The first 2 years made 460K $, which is 21% nonthly reinvested. And at that time weekly options were not even available in the stock exchanges!
https://www.youtube.com/watch?v=dZDk03C0zaU&t=1638s
For a technical scientific discussion which is relevant the next is a link of a published paper
by the author.
http://users.softlab.ece.ntua.gr/~kyritsis/PapersInEconomics/InsuranceOpFairPricing.doc
Other also very successful option strategies can be found in the book by Jeff Augen.
His approach is not that of Chuck Hughes (who is exploiting the systematic option risk over-pricing. through high time value of the options) but he is based on the known systematic periodicity of the stocks prices volatility at the dates of publication of the financial statements (quarterly publications) and therefore his strategy is a volatility long strategy as it is not known if the excitement or panic will follow the publication of the financial statements.
The Volatility Edge in Options Trading (text only) 1st (First) edition by J. Augen [Hardcover]
http://www.amazon.com/Volatility-Options-Trading-First-Augen/dp/B003SCFAI4/ref=sr_1_2?s=books&ie=UTF8&qid=1339515602&sr=1-2
If we want to compare the methods of J. Augen with Chuck Hughes, by far the Chuck Hughes method is better as it is based not any period demand-supply effects but on the way that the software systems define the "fair" price of options which in fact is a systematic overpricing of the volatility risk. This flaw is always there and can be exploited systematically.
A call options can be considered an insurance contract for losses from short position of the underlying. And a put option an insurance contract for losses of a long position of the underlying.
Buying and selling such insurance contracts, is business like that of an insurance company which is is selling insurance and at the same time it is purchasing reinsurance from other insurance companies. If in addition there is "flaw" of wrongly valuing the insured risk, then such business will be lucratively profitable.
Since 2005 to 2010, the Chicago Board of Options Exchange (CBOE) started introducing the weekly options that expire every Friday (and now start every previous Thursday thus allowing for rollovers). In this way the "flaw" of the time-value of the options became very little , and decreases very fast as it is close to expiration. And now there are weekly opportunities, to follow one of the many option strategies, with easily known outcome at the expiration. Theoretically at least 50 opportunities per year.
And even without any "flaw" in the option pricing, the option strategies allow to design and "insure" events that are of more than 99% probability, that they will not happen, so there is the opportunity for systematic gains. And even if this 1% probability insured event is approaching 20%-30% loss in the trade relative to its initial cost), then we can easily take action (with once per day monitoring the account) , close the combination with a rather fair loss, and "insure" the opposite event, again with 99% of not happening. In this way the weekly action is saved, to a profitable result again. In this way, in a quite easy daily protocol, even without robots, a very good income can be created, with weekly profiatble results, that can go for 5 years with 100% succesful weeks! In comparison such a situation may be almost impossible with forex trading.
There are by now quite many good online Options Brokers with , very good online platforms and zero minimum initial deposit when opening the account. It seems to me that due to the increased degrees of freedom in choosing the "event" that you want to "insure" with options, the capitalisation growth and income that can be programmed to be obtained by weekly, (plus quarterly and annual) options is by far more easier to schedule (to those that have studied sufficiently the options strategies) than the programmability of the capitalization growth that can be obtained with manual or 100% automated trading in forex. In other words with options you can schedule your profits with high probability of success, and this mainly does not depend on the stocks (in general underlying) going up or down, but on the known method of fair pricing of options, through the software systems of the market makers.
https://www.researchgate.net/publication/282943701_OPTION_PRICING_BASED_ON_THE_CONCEPT_OF_INSURANCE_MARKET_MODELS-FREE_METHODS_THAT_GIVE_AS_SPECIAL_CASE_THE_BLACK-_SCHOLES_OPTION_PRICING
1) Vertical (debit ,in-the-money) bull spreads (e.g. buy a call at 70%-80% of the spot price as strike,and sell a call at 90%-95% price as strike, this would make the vertical spread profitable at a range of at least +-10% of underlying price changes. The theoretical values give that such a startegy is profitable only when the volatility (thus the implied vilatility in the pricing ofthe options too) is significan which means e.g. more than 25%. The profit comes from the difference of the time value of the sold-minus the bought, but also from the width of the strike-price difference of the two. Therefore it is significant to open the spread early enough so that there is significant time value to exploit. The spread may be exited when it reaches 90% of its profit potential.Such a strategy will be the appropriate if the market is rather stationary , with no significant trends, or that there s rather steady trend opposite to the side of the spread. (that simple option purchases can capture.)
Bellow is a simple excell-like table of the scenaria of risk for this Vertical, in the money Bull (debit) spread from -10% to 10% change of the underlying spot instrument at the expiration (which in the example here it was about 5 weeks (weekly options). Of course we open the spread if the prices of the options as in the table below give a signficant profit rate (e.g. 0.2MDS OR 1mds In other words 50%% 100% etc of an about monthly duration trade. ). The trigger of opening the spread was a 30% in the money expiration price (or a spot price at 130% of the lower buy call excirsize price) and an expectation of non-decrease or decrease at most 10% (or increase from 0% to 10% of the value) All increase from 0% to 10% scenaria give the same profit here 148% ) . The maximum risk for the risk management is the cost of the debit spread (if the s[ot at expiration goes lower than the lower excersize price) which should not be higher than 2%-6% of the available funds each time.
At expiration the spot value increased eventually to 5.1 thus 5% increase compared to the opening spot price 52.48. Thus it gave a profit rate of 5.97/4.03=148% (from 100 options 597$ net profit or final value ofthe spread 1000$, with initial value 403$, 1000/403=2.48 or net 148% ) , And the maximum risk of 403$ is a 6000$ account was 6.75% while in a 10000$ account was 4%) It seems that the frequence for each instrument that someone can find such profitable opportunities of "in the money bull call spreads" is high , probably more than 50% ofthe time.
https://www.youtube.com/watch?v=mxirTn0vlyY&feature=youtu.be
IT IS QUITE APPARENT THAT SINCE 5 WEEKS IS SHORT TIME PERIOD FOR SERIOUS TREND TO APPEAR AND THE STRATEGY IS PROFITABLE FOR A NEUTRAL BEHAVIOR OF +-10% CHANGE OF THE SPOT PRICE , THE STRATEGY SHOULD BE CONSIDERED AS GAINING MAINLY FROM THE TIME VALUE OF THE OPTIONS BASED MAINLY ON THE SHORT TERM STATIONARITY OF THE MARKETS AND STANDARD SHORT TERM SHIFT DUE TO THE LONG TERM TREND OF THE STOCK MARKETS. THE OPPORTUNITY EXISTS AS PROFITABLE ONLY BECAUSE THE VOLATILITY OF THE MATKET IS HIGH AND THUS THE IMPLIED VOLATILITY IN PRICING THE OPTIONS TOO.
2) THE BEST STARTEGY BETTER FROM ALL: CALL Option purchases. (E.g. at calls:The profit comes from the intrisic value if the underlying price increased, minus the time value decay of the premium that better be less than 1% of the overall value per month which means quite in-the-money.) If after purchasing e.g. a call option we reach at the desired profit, and the expiration is not very close, we may sell a call option to make a debit vertical in-the-money spread, that stabilizes the profit of the purchases call option, and gradually extracts the time value till expiration. In this way the initial time value of the purchased call option does not cost to us, instead an additional time value becomes profit. Option purchases (that is only buying options) is essentially the basic trading method for binary options too. At the current state of the art of binary options, are offered only at the money binary options not out of the money or in the money binary options. A successful method of trading binary options by purchases is described in post 44, after the gratido-minute-wise system.
https://www.youtube.com/watch?v=TY6il6iwjJM
Options purchasing compared to simple spot or underlying trading has the next optimal advantage: In spot trading it is optimal to pyramid, but this has extra transaction costs. If options are utilised then the pyramiding is automatic, from the very-definition of the option fair price, that increases or decreases the price of option, as the price of the underlying goes away or not from the strike price, exactly as in a kind of pyramiding of the underlying. But there are no transaction costs here for the automatic "pyramiding" with options.The disadvantage of time-value decay of option purchases is covered by the above advantage. Thus in over all it is more optimal to conduct a seasonal trading of the underlying, with option purchasing instead of spot trading.
Chuck Hughes video here. https://www.youtube.com/watch?v=mowEUI0INCI
https://www.youtube.com/watch?v=zTpgpvZ6Vds
Chuck Hughes started with an account of about 4,600$ and after some years made it some millions. The first 2 years made 460K $, which is 21% nonthly reinvested. And at that time weekly options were not even available in the stock exchanges!
https://www.youtube.com/watch?v=dZDk03C0zaU&t=1638s
For a technical scientific discussion which is relevant the next is a link of a published paper
by the author.
http://users.softlab.ece.ntua.gr/~kyritsis/PapersInEconomics/InsuranceOpFairPricing.doc
Other also very successful option strategies can be found in the book by Jeff Augen.
His approach is not that of Chuck Hughes (who is exploiting the systematic option risk over-pricing. through high time value of the options) but he is based on the known systematic periodicity of the stocks prices volatility at the dates of publication of the financial statements (quarterly publications) and therefore his strategy is a volatility long strategy as it is not known if the excitement or panic will follow the publication of the financial statements.
The Volatility Edge in Options Trading (text only) 1st (First) edition by J. Augen [Hardcover]
http://www.amazon.com/Volatility-Options-Trading-First-Augen/dp/B003SCFAI4/ref=sr_1_2?s=books&ie=UTF8&qid=1339515602&sr=1-2
If we want to compare the methods of J. Augen with Chuck Hughes, by far the Chuck Hughes method is better as it is based not any period demand-supply effects but on the way that the software systems define the "fair" price of options which in fact is a systematic overpricing of the volatility risk. This flaw is always there and can be exploited systematically.
A call options can be considered an insurance contract for losses from short position of the underlying. And a put option an insurance contract for losses of a long position of the underlying.
Buying and selling such insurance contracts, is business like that of an insurance company which is is selling insurance and at the same time it is purchasing reinsurance from other insurance companies. If in addition there is "flaw" of wrongly valuing the insured risk, then such business will be lucratively profitable.
Since 2005 to 2010, the Chicago Board of Options Exchange (CBOE) started introducing the weekly options that expire every Friday (and now start every previous Thursday thus allowing for rollovers). In this way the "flaw" of the time-value of the options became very little , and decreases very fast as it is close to expiration. And now there are weekly opportunities, to follow one of the many option strategies, with easily known outcome at the expiration. Theoretically at least 50 opportunities per year.
And even without any "flaw" in the option pricing, the option strategies allow to design and "insure" events that are of more than 99% probability, that they will not happen, so there is the opportunity for systematic gains. And even if this 1% probability insured event is approaching 20%-30% loss in the trade relative to its initial cost), then we can easily take action (with once per day monitoring the account) , close the combination with a rather fair loss, and "insure" the opposite event, again with 99% of not happening. In this way the weekly action is saved, to a profitable result again. In this way, in a quite easy daily protocol, even without robots, a very good income can be created, with weekly profiatble results, that can go for 5 years with 100% succesful weeks! In comparison such a situation may be almost impossible with forex trading.
There are by now quite many good online Options Brokers with , very good online platforms and zero minimum initial deposit when opening the account. It seems to me that due to the increased degrees of freedom in choosing the "event" that you want to "insure" with options, the capitalisation growth and income that can be programmed to be obtained by weekly, (plus quarterly and annual) options is by far more easier to schedule (to those that have studied sufficiently the options strategies) than the programmability of the capitalization growth that can be obtained with manual or 100% automated trading in forex. In other words with options you can schedule your profits with high probability of success, and this mainly does not depend on the stocks (in general underlying) going up or down, but on the known method of fair pricing of options, through the software systems of the market makers.
https://www.researchgate.net/publication/282943701_OPTION_PRICING_BASED_ON_THE_CONCEPT_OF_INSURANCE_MARKET_MODELS-FREE_METHODS_THAT_GIVE_AS_SPECIAL_CASE_THE_BLACK-_SCHOLES_OPTION_PRICING
