Seeking Alpha
Short-term horizon, newsletter provider
Profile| Send Message|
( followers)  

I must confess - I didn't really make 1,456% in one week. The trade I'm referring to was the RUT calendar trade which produced 28% gain in one week. I closed it yesterday. So what is 1,456%? That's an annualized return (28%*52 weeks). Didn't I mention that? Oops, my bad.

What's wrong with calculating returns this way? Well, for starters, I didn't really make 1,456% gain, did I? Presenting the returns this way assumes that you can repeat that 28% gain week after week, for the full year. Can someone really do that? Yet some people would calculate a 3.2% return on Apple (AAPL) as 70% gain (which is the annualized return if they did the trade every 17 days for an entire year).

You should be very careful of how people calculate returns. For example, if you sold a naked put on AAPL at $10 and covered it at $1, did you really make 90%? No, because your broker required margin requirement (which is substantial for a stock like AAPL), so your real return would be probably around 5%.

Sometimes things get completely ridiculous. I had a discussion a while ago with a well known SA contributor who calculates returns this way. He is using mostly risk reversals (buying calls and financing it by selling puts or put spreads). In risk reversal, your cost is many times zero or close to zero. For example, you can buy the AAPL risk reversal for about $1, and if the stock goes up, it will be worth around $20. He would claim that he made 2000% (20/1) while in reality, his return on margin is about 10%.

Now back to the RUT trade. This trade was done using weekly options expiring in two consecutive weeks, a new program which I described in one of my previous articles. It involved selling options expiring in 2 weeks and buying options expiring in 3 weeks. Like I mentioned in the article, this new program opens some exciting new trading opportunities, and this calendar trade was one of them. I intend to place a similar trade every week, and it should be a nice complimentary to the arsenal of strategies we use at SteadyOptions.

Of course those trades are not without risks. In fact, when selling weekly options, the risk is significantly higher due to the high negative gamma. Any sharp move in the underlying price will hurt the trade. Many options gurus "forget" to mention the risks when presenting the gains from weekly options.

Since my article, CBOE added few more names to the program, Google (GOOG), Ford (F), International Business Machines (IBM) and Facebook (FB) among them. To see the current list, you can visit the CBOE website.

Source: How To Make 1,456% In 1 Week