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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Industrials (^DJI):
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Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 07/24/2017
21,513 -66.90 -0.3%
9,428 -43.07 -0.5%
719 -6.46 -0.9%
6,411 23.06 0.4%
2,470 -2.63 -0.1%
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19.1%
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Tom's Targets    Overview: 07/14/2017
21,850 or 21,000 by 08/01/2017
9,950 or 9,400 by 08/01/2017
740 or 685 by 08/01/2017
6,450 or 6,175 by 08/01/2017
2,525 or 2,400 by 08/01/2017

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

I was reading an Active Trader magazine interview (December 2008) of Bill Greenwalt, manager of the Aspen Private Capital fund, by David Bukey and I wanted to share some of his option tips.

Greenwalt studied economics at UCLA and then started selling real estate in 1972. He founded a company that bought and managed apartment buildings. Then in 1992, he co-founded Mortgage Technology Inc, which is a mortgage brokerage, that he ran until 2006.

In the mid 90s, he began trading covered calls and eventually helped run Rainmaker Partners, which was an options program that opened in mid 2001. The Rainmaker fund ran into trouble after 9/11 when the fund sold option strangles, out of the money puts and calls on the S&P 500. In a calm market, you can clean up, but lose money if the market trends strongly in one direction (because the short options are uncovered). His head trader made a wrong call in July 2002, sending the fund down 20%. He shut down the fund and reevaluated, then started trading again in December 2002.

 

Option Trading Tips from Greenwalt

  • He revised his approach and looks for stocks that have fallen a lot, formed a base, and then climbed above the 10- and 20-day moving averages. He would buy the stock and sell a call and earned up to 90% a year. The approach worked this way.
  •  
    1. Look for the largest percentage losers.
    2. The 10-day MA must cross above the 20-day MA at least twice due to many false starts.
    3. Research the fundamentals. Keep only those stocks with little or no debt. They are the survivors.
    4. Stocks must be under $30 per share (for a better percentage return on the premium).
     
  • His current strategy is to sell option premium on out of the money puts and calls on the S&P 500 index (SPX). The strike prices are far enough out of the money that they often expire worthless, but you have to manage risk.
  •  
  • His options have an 80% to 90% probability of expiring worthless.
  •  
  • The article says, "We have learned two lessons -- limit risk and don't take directional bets." He gives an example of thinking that the S&P is going up from 1,200 to 1,300, and says you have only one way to win and three ways to lose.

    1. The index can drop resulting in a loss.
    2. The index can go nowhere and you lose.
    3. The index can rise but not enough, and not soon enough, so you lose.
    4. The index can rise enough for you to make money.

    His strategy is to do the reverse, so he makes money in three out of four ways.

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  • His options strategy is market neutral, but includes protective options -- an iron condor that includes a credit spread on either side of the market. He started using credit spreads in 2006 and now 90% of his positions are credit spreads. He warns that the iron condor "does not work well with rapid[ly] expanding movements in the underlying market."
  •  
  • For an iron condor, any type of market is fine (up, down, or sideways) provided the market does not make an extended move in one direction.
  •  
  • He prefers a medium to medium-high level of volatility, whatever that means.
  •  
  • As an example, the article discusses a hypothetical trade in the S&P 500. On Monday, Sept 15, 2008, the index traded at 1,200 and it has a 10% probability of finishing at 1,150 by Friday, Sept 19. Instead of selling a 1,150 put, he would sell the Sept 1,090 strike with a 0.1% probability of being hit by expiration. Although he could sell the 1,150 put for $6.50, the 1,090 would fetch $1.40 but with an almost certain probability, especially since the "market has dropped a lot already and there are quite a few support levels between 1,200 and 1,090." He would avoid selling calls because to get a decent premium, you'd have to have close strike prices.

-- Thomas Bulkowski

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Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Idiot box: The part of the envelope that tells a person where to place the stamp when they can't figure it out themselves.