selling options on S&P stock index futures? Part 2?

Question

I'm not doing it myself, I'm allocating 20% of an ira to a company (
Argus Capital Management) that does. Heard of them? or their ilk?
For a rank amateur, I have been an EXTREMELY successful predatory investor in the past (28%apr/3yrs) but it's time to take a break from stock/mutual fund trading and a flat market and see if I can get some decent returns letting other people do the thinking, as well as moving into different arenas.
I appreciate everyone's accurate and well thought out answers. I'm impressed with the quality and information you have all provided.

Answer 1

Selling options works well in a range-traded market. Your profit potential is very limited, and the risk is huge -- unlimited, unless the short option is covered by the underlying (futures contract?).

I have known several traders that have averaged about 20% per year selling covered options on stocks. Some earned more but always got wiped out when they got too aggressive.

Plus, in 2005 alone there were dozens and dozens of new covered-call funds that opened up, and they've been struggling. There has been too much money doing the same thing with bad pricing. Yet some funds (they can't get the returns of a individual) have a mandate to try and deliver 10% to 12% returns a year. When the VIX is 20%, that's fine; you are able to target those kinds of returns without a lot of exposure. But when the VIX drops in half, where it is now, you have to put on two to three times as much of the same position to target those same returns, and funds have become overleveraged and underhedged at a time when liquidity is drying up -- not a good combination.

The S&P Volatility right now is about 12%, on a steady rise through 2006, while the CBOE Volatility Index rose to 25% in June, but declined back to 12%, which mimicks the decline in the 10 yr Treasury Bond, even while short-term yields have risen steadily.

The two most mispriced assets right now are options, which are underpriced, and bonds, which are overpriced (the yield curve is inverted).

Bonds are definately not the place you want to be. The short-term treasuries are barely just OK, but you should avoid the 10-yr Treasury like the plague.

According to some, there is no such thing as a "soft landing." In any case, the aftermath of periods of low-risk premiums are usually not very good.

The problem here is that many small gains can be wiped out by one huge move in the underlying, sometimes a whole year's worth of profits, or more. The gains being minimal, do not justify the risk and huge swings and drawdowns.

I've traded the stock index futures for 15 years, but finally gave it up and switched over to Forex where there is sometimes a trend. Got tired of the huge swings and whipsaws in the stock market; don't know it anymore.

I'm doing a lot better with Forex. The account was up 41% in August, and 40% the month before. Most people can't do that in a year. Anyway, look for consistency, not huge drawdowns, and in all kinds of markets. Like I did that in the worst time of year to be trading Forex. There are no trends in those two months while most of Europe is on vacation.

Answer 2

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Answer 3

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