# Trading Options, Selling Premium (Fig Leaf/PMCC)



## zac (26 May 2020)

I've a query whether anyone here trades options by selling premium, ie covered calls.

This does not seem to be popular strategy used by Australians, yet in the USA there are countless people doing it with large success.

My question here is if anyone has views on instead of using stock, using an In The Money Call option to simulate the stock position. This strategy while technically a diagonal spread however known mostly as Poor Mans Covered Call or Fig Leaf Strategy.

Ive been trading options for several years now and I quite like the PMCC/Fig leaf strategy.

So I'm wondering what people's views are?

There's a huge broadside attack on using CFDs with covered calls (and rightly so) on this site, but I'd love to get a consensus on people's thoughts on this. Personally I like how the call option part of the trade is long volatility, requires less capital, and has limited downside risk in comparison to the usual CCW strategy. 

I mention the CFD strategy as the returns in some cases can be on par with writing covered calls with CFD's. I do not advocate using CFDs however.

For disclosure, I trade these in the US market space due to liquidity and these are now a staple of mine.


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## Sharkman (28 May 2020)

i trade ASX covered calls, though not as much as i used to years ago. i've heard of this strategy, but never really considered trading it myself, and hadn't heard of it being referred to by the "Fig Leaf" moniker until now. i'm guessing you use LEAPS with a 1 yr+ expiry / 75+ delta for the bought leg, or something along those lines?

don't think it'll work all that well on the ASX, though i am somewhat uninformed having never traded this strategy myself, and i do see the merits of it in a US options context. not sure the ASX offers LEAPS, it's hard enough on the ASX getting a decent fill even 3 months out, let alone over a year. there's very little liquidity here compared to the US, most of the time you'll be facing an MM, not another trader, and you'll see spreads that look extremely ugly on the surface. despite that, they're usually ok for front month/near the money trades, i sold some ATM BHP weekly covered calls the other day at 0.80 into a spread that was something like 0.66/0.95. but from my experience they generally will make you cross more of that nasty spread the further OTM/time to expiry you go.

for Aust residents franking credits are a reason to favour holding the stock as collateral vs using a LEAPS. whilst it's collateralising your covered calls, it's also earning you divs + franking credits, which could make quite a difference if you utilise some sort of structure like a discretionary trust that allows you to operate at a low effective tax bracket. so it's making you income over time vs costing you theta. is that sufficient compensation for soaking up more capital and carrying more downside risk? for me it is, as i do trade thru a corporate trust and can claim back most of those juicy franking credits at tax time. YMMV.

i'm also reluctant to buy ITM calls or sell OTM calls because of delta skew. not saying that i won't trade them, if i think the situation calls for them then i will, but generally prefer to stick to selling ATM covered calls and ATM/OTM cash covered puts. i haven't observed the US options market closely enough to know how the skew tends to behave over there, but in my eyes delta skew is quite noticeable in Aust. even in normal times the 25'ish delta call IV normally sits several ticks below the corresponding 25'ish delta put, and in times when things are going nuts... i observed stuff like this:
https://www.aussiestockforums.com/threads/how-far-will-the-market-fall.35253/page-6#post-1061128


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## zac (29 May 2020)

Sharkman said:


> i trade ASX covered calls, though not as much as i used to years ago. i've heard of this strategy, but never really considered trading it myself, and hadn't heard of it being referred to by the "Fig Leaf" moniker until now. i'm guessing you use LEAPS with a 1 yr+ expiry / 75+ delta for the bought leg, or something along those lines?




Fig leaf refers to being partially covered, ie like a Greek statue with a leaf over the genitals but the rest exposed. I think that's the origins of the term.

As to how the strategy works, you're pretty much spot on. Depending on vol, Call option bought, underlying, strike, and delta, monthly yields of 5-15% a month are achievable. 

I only trade US options for the reasons you state why Australian ones are a hindrance. 
The lack of dividends certainly is a valid point, however, the extra yield from the strategy more than negates any lack of dividends.

To play it safe I'll trade companies that make up the Dow Jones, liquidity is a non-issue. So I'm surprised more Australians don't trade US options however I guess trading options isn't well known here.

I know in my workplace as an example there are a number of people who trade stocks (ASX) yet when I mention options it's like I'm talking another language.


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## cutz (29 May 2020)

zac said:


> I've a query whether anyone here trades options by selling premium, ie covered calls.
> 
> This does not seem to be popular strategy used by Australians, yet in the USA there are countless people doing it with large success.
> 
> ...




Hi zac, don't exactly do pure covered calls, your strategy sounds interesting, poor man's cc rings a bell, I think I heard it on Tasty Trade some time ago.

Couple of points I would like to mention assuming you're looking at delta 0.8 - 0.9 longs calls with over a year till expiry and short front month ATM calls using BHP for an example.

Downside risk is still quite considerable on that high delta call.

Unless you will be using euro options, assignment risk will be a problem.

IMO you can probably use a single option leg close to the money, where the liquidity is to achieve a similar objective


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## wayneL (29 May 2020)

If used in a mechanical systematic approach, it still underperforms long stock over the long term.

You can outperform marginally by adjusting Greeks when prudent, but a hell of a lot more activity and time... And has negative tax implications (The forgotten factor).


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## peter2 (29 May 2020)

I liked the posts because ASF can do with a lot more discussion about using options in a share portfolio. The ASX has done a poor job promoting options. Although our population may not be large enough to support a more healthy option market. Allowing CFDs was also another poor decision.


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## Sharkman (30 May 2020)

zac said:


> As to how the strategy works, you're pretty much spot on. Depending on vol, Call option bought, underlying, strike, and delta, monthly yields of 5-15% a month are achievable.
> 
> I only trade US options for the reasons you state why Australian ones are a hindrance.
> The lack of dividends certainly is a valid point, however, the extra yield from the strategy more than negates any lack of dividends.




i'm assuming you're calculating the yield by putting the cost of the bought LEAPS as the denominator, rather than the notional value of the equivalent stock position required to collateralise. otherwise 5-15% a month would be extremely difficult, a 5% premium for a 1 month covered call needs an IV of around 50, which is historically extremely high for many large caps.

you could choose to measure it that way, nothing wrong with that. but then the downside risk also has to be evaluated in the same light otherwise it's apples and oranges, and based on matching collateral value it's actually a lot riskier than collateralising with the stock.

taking a hypothetical scenario of buying the 1 year CBA $55 calls (underlying ~$64), and assuming a non-crisis environment (so IV around 12-14 which is typically where CBA tends to hover around in normal times). those LEAPS would probably cost around $10. if CBA fell to $50, the value of those bought calls will be almost completely trashed as the intrinsic is all gone, they would be barely worth a dollar. whereas the stock position would have suffered a painful, but not crippling, loss of around 20%.

ie. if you base it on equivalent collateral value, that would be 64 contracts vs 1000 shares. $64K each. sell front month ATMs at say $1 (i'll give it a 16 IV to approximate the skew), 64 contracts is $6,400 or 10% yield. if collateralising with stock you can only sell 10 contracts, $1,000 or 1.6% yield. but if the stock falls to $50, those 64 LEAPS would probably be worth less than $10K, whereas the stock is still worth $50K. so the yield is higher when collateralising with LEAPS, but so too is the risk.

if it was rebased to the equivalent exposure of the underlying ie. 10 contracts + $54K cash vs 1000 shares, LEAPS collateral does have much lower downside risk and capital requirements - but then the yield _on the short calls_ is exactly the same, and the _total yield_ will be higher for the stock collateral, since it's collecting divs and franking credits along the way. the divs themselves can essentially be ignored for comparison purposes since the projected div would normally be factored into the premium (which i didn't do above, to keep it simple), however the franking credits usually are _not _factored in_,_ so for those entitled to them, it makes a significant difference. the spare $54K cash could be invested in something else to up the yield, but that ups the downside risk too.

if it's a high vol environment like it is these days, the LEAPS do retain more value on a big fall in the underlying, but then vega crush becomes a significant risk, it's a double whammy for the strategy - the extrinsic on the LEAPS gets clobbered, and it becomes harder to recoup it selling front month calls when they're not fetching much IV.

to be clear - i'm not saying that the strategy is garbage. i clearly don't have enough experience with trading it to make any sort of judgment, given that it is pretty much unviable in the ASX. just wanted to point out that it has pros and cons (as does every strategy), and that if it's considered to be higher yielding vs the traditional covered call, then it must also be considered to carry _higher_ downside risk, not lower.


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## zac (30 May 2020)

Sharkman said:


> i'm assuming you're calculating the yield by putting the cost of the bought LEAPS as the denominator, rather than the notional value of the equivalent stock position required to collateralise. otherwise 5-15% a month would be extremely difficult, a 5% premium for a 1 month covered call needs an IV of around 50, which is historically extremely high for many large caps.




Yes that's right, ROI based on capital utilised for the call options (not the overall stock position). 
Generally, an ITM call the yield id chase is 5%, ATM 10% and OTM 15% however I probably should have clarified that the OTM call is still 5% yield from the option with 10% guideline of potential capital gain.
Thats my benchmark, sometimes works out to be more or less.
As for the bought call option (LEAP) I can go 6 mths or 18 mths. Depends on the potential yield and IV,  I do a pseudo feasibility calculation on this prior to entering a long call position.

Ive never traded them on Aussie options so I'm not sure what the difference would be, however a lack of liquidity and I imagine options arent as nicely priced with a wider spread.

I also like being long volatility on the long call which helps mitigate risk, for example when the vix spiked recently, while prices got smashed, the vol swell helped a lot on the long calls.



wayneL said:


> If used in a mechanical systematic approach, it still underperforms long stock over the long term.




I mentioned in another options post on this forum a method a wall street trader discussed on how one could simply beat the market overall with a CCW strategy. While I haven't traded it, it makes sense.
Buy the Index, ie ASX300 or S&P500 and write deep OTM calls on the index for a yield of no more than 1% per month. 
I note when the markets are bullish with low vol that it may be hard however even chasing marginal yields, 5 to 10% a year (equating to a fraction of a %/month) is a healthy return over the index.


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## zac (30 May 2020)

Sharkman said:


> if it's considered to be higher yielding vs the traditional covered call, then it must also be considered to carry _higher_ downside risk, not lower.




Actually one of the things I like about the strategy is there is less downside risk vs traditional covered call. Money management and position management is key however, but a stock position has more risk than a long call position given how far down it can go (assuming nil trade management).

The same capital that would be used to trade the stock, I would only use typically 30% of that amount, so 70% (sometimes 60%) will be sitting in cash. 
Remember Options are a leveraged product, so my ROI per trade will be good, however, ROC is more modest due to my money management and position management.


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## wayneL (30 May 2020)

zac said:


> I mentioned in another options post on this forum a method a wall street trader discussed on how one could simply beat the market overall with a CCW strategy. While I haven't traded it, it makes sense.
> Buy the Index, ie ASX300 or S&P500 and write deep OTM calls on the index for a yield of no more than 1% per month.
> I note when the markets are bullish with low vol that it may be hard however even chasing marginal yields, 5 to 10% a year (equating to a fraction of a %/month) is a healthy return over the index.




If that is true, I'm going to open a mutual fund and outperform almost everyone and be a superstar.

Not saying you can't outperform with the strategy, just that you'd have to be a bit cleverer than that sort of straightforward approach... also consider tax implications and after tax returns <- big factor almost nobody thinks about.


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## zac (30 May 2020)

wayneL said:


> If that is true, I'm going to open a mutual fund and outperform almost everyone and be a superstar.
> 
> Not saying you can't outperform with the strategy, just that you'd have to be a bit cleverer than that sort of straightforward approach... also consider tax implications and after tax returns <- big factor almost nobody thinks about.




I agree,
October through to Feb this year would have placed you at risk of your sold strike being ITM therefore losing capital gain given how bullish the market was with low vol and small premiums.
So I had my skepticism too.

Although none of these strategies are set and forget, otherwise it'd be easy. So with a calculated approach I see merit.


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## Sharkman (30 May 2020)

zac said:


> I also like being long volatility on the long call which helps mitigate risk, for example when the vix spiked recently, while prices got smashed, the vol swell helped a lot on the long calls.




helps mitigate delta risk yes. but not vega. if the LEAPS position was taken on during normal times, when IV is at or even below historical norms, then it should perform decently. but if one had to enter into a LEAPS position now, with IVs even in traditional low beta names like CBA sitting in the 30s, it's much easier for it to go pear shaped if vols drop.

i do like the premise of selling short dated ATM calls against longer dated calls, but i generally do it by using a super calendar (well, a calendar with a 3-4 month back leg, but in Aust terms that's a super calendar as there's virtually no liquidity further than that) or a diagonal going in the other direction ie. buy long dated OTM calls/sell near dated ATM calls.

i found the ASX options market was extremely conducive to the latter several weeks ago when things were in full blown panic mode. in many of the majors, weekly ATM calls were going at an 80+ IV, whereas the Jun/Jul 20-30'ish delta calls were around 40-45 IV. with that sort of delta + time skew i ended up putting on a few low volume (didn't want to take on larger positions due to the uncertainty of the crisis) spreads for small credit. once those first weeklies expired worthless, those Jun/Jul OTM calls became "on the house".

i've found that once a position reaches "on the house" status, it becomes a very powerful aid with the psychological side of trading. obviously this is highly subjective to the individual, but i find once a position becomes "on the house", i tend to trade it a lot better, as i no longer feel the pressure to "do something with it before it gets eaten away by theta" etc. so i'm not in as much of a hurry to re-establish the front leg and can wait for better entries.


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## zac (30 May 2020)

Sharkman said:


> helps mitigate delta risk yes. but not vega. if the LEAPS position was taken on during normal times, when IV is at or even below historical norms, then it should perform decently. but if one had to enter into a LEAPS position now, with IVs even in traditional low beta names like CBA sitting in the 30s, it's much easier for it to go pear shaped if vols drop




Yes indeed. Vol crush in the current environment will get you if you're not careful. LEAPS are excellent when vol is low.
I don't only do the PMCC, vertical spreads have been good, both debit and credit spreads.

I'd love to trade Australian options, however for the very reasons you state they are difficult is why I stay away from them.


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## Telamelo (19 June 2020)

zac said:


> Yes indeed. Vol crush in the current environment will get you if you're not careful. LEAPS are excellent when vol is low.
> I don't only do the PMCC, vertical spreads have been good, both debit and credit spreads.
> 
> I'd love to trade Australian options, however for the very reasons you state they are difficult is why I stay away from them.



Anyone know how we may to try to find "long dated expiry options say around 2023/24" as currently listed/trading on the ASX please.. as wouldn't mind creating a watchlist for reference etc.

Appreciate it if anyone knows of a link they could please share that shows option codes/price etc. with future expiry date.

Thanks tela


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## cutz (19 June 2020)

Telamelo said:


> Anyone know how we may to try to find "long dated expiry options say around 2023/24" as currently listed/trading on the ASX please.. as wouldn't mind creating a watchlist for reference etc.
> 
> Appreciate it if anyone knows of a link they could please share that shows option codes/price etc. with future expiry date.
> 
> Thanks tela




G'Day.

Here's a free one, just enter your parameters and hit go.   https://www.asx.com.au/asx/markets/optionPrices.do


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## Sharkman (2 July 2020)

Sharkman said:


> i found the ASX options market was extremely conducive to the latter several weeks ago when things were in full blown panic mode. in many of the majors, weekly ATM calls were going at an 80+ IV, whereas the Jun/Jul 20-30'ish delta calls were around 40-45 IV. with that sort of delta + time skew i ended up putting on a few low volume (didn't want to take on larger positions due to the uncertainty of the crisis) spreads for small credit. once those first weeklies expired worthless, those Jun/Jul OTM calls became "on the house".




looks like i'll probably have to shelve this strategy, at least for now. was good whilst it lasted, but there's virtually no skew anymore, neither delta nor tenor, reducing its effectiveness now. eg. NAB ~25d put/ATM/~25d call is roughly 33/30/28 IV for both Jul and Sep expiries.

how is everyone else interpreting this? i normally take a steep vol smirk (like what we were seeing a few months ago) as panic and fear, whereas flatter skews would seem to suggest optimism/complacency/bits of both as call side buyers emerge and people aren't so desperate to load up on OTM puts anymore. but these are unusual times, who knows whether standard thinking still applies or not.


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## wayneL (2 July 2020)

*.. but these are unusual times, who knows whether standard thinking still applies or not."

The current market is no longer a vehicle for true price Discovery, so I think your last point is probably valid.


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## Garpal Gumnut (2 July 2020)

wayneL said:


> *.. but these are unusual times, who knows whether standard thinking still applies or not."
> 
> The current market is no longer a vehicle for true price Discovery, so I think your last point is probably valid.



May I say I admire you option traders. It's difficult to read the tea leaves on the real time markets, gawd only knows what it must be like for derivatives. Quick in-out I guess. 

gg


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## Sharkman (2 July 2020)

wayneL said:


> *.. but these are unusual times, who knows whether standard thinking still applies or not."
> 
> The current market is no longer a vehicle for true price Discovery, so I think your last point is probably valid.




you're referring to central bank shenanigans i'm assuming? that was probably there before the current crisis though, and will probably be there even after this crisis is over, whenever that might be. it seems that the slightest hint of weaning us off the stimulus teat ends up causing the market to spit the dummy, then they backpedal and go ok, calm yer horses, we'll hold off on the tightening, and the cycle goes on.


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## Sharkman (2 July 2020)

Garpal Gumnut said:


> May I say I admire you option traders. It's difficult to read the tea leaves on the real time markets, gawd only knows what it must be like for derivatives. Quick in-out I guess.
> 
> gg




not that much different from trading the underlyings TBH. still have to have an opinion on where the thing is headed and the conviction to put your hard earned behind it, nothing different there. but if that opinion happens to be "nowhere in a hurry", you can actually trade that.

can be as simple or as complex as you want it to be. these days i've mainly broken it down to its simplest form - covered calls and cash covered puts. if i want to buy something at a certain price? i sell puts. if i want to sell one of my holdings at a certain price? i sell calls. that's pretty much it.

the call diagonal stuff above was a bit of a diversion from my standard operating procedure. i thought i saw an opening provided by the extreme skew during the height of the crisis and went for it (albeit with fewer contracts than normal). worked reasonably well, but i don't think that opening is there any more, so probably time to stop using that strategy now.


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## Nomis (5 July 2020)

Hey Oz options traders, 

Am back trading the ASX equities after many years trading US options and intend on trading spreads, buying ATM back month and selling OTM front month puts to capture the IV and time skew however the broker accounts (Commsec, IB, CMC) I have set up don't have IV data except IB, which doesn't show up for each strike. 

How do you guys work out IV for different strikes?

Thanks in advance


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## zac (5 July 2020)

Nomis said:


> Hey Oz options traders,
> 
> Am back trading the ASX equities after many years trading US options and intend on trading spreads,



So you have stopped with the US options to trade Aussie options?
If so, whats your rationale there??


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## Nomis (5 July 2020)

I back living in Oz and not interested in making the time difference work and more so, don't wish to lose dollars on the conversion when sending funds back. Trading ASX equities with CFDS and using options to hedge but not liking the lack of data so far.


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## cutz (5 July 2020)

Nomis said:


> Hey Oz options traders,
> 
> Am back trading the ASX equities after many years trading US options and intend on trading spreads, buying ATM back month and selling OTM front month puts to capture the IV and time skew however the broker accounts (Commsec, IB, CMC) I have set up don't have IV data except IB, which doesn't show up for each strike.
> 
> ...




Hi.

I know what you mean about Comsec, not much in the way of Option Tools, although I am impressed with their ability to generate huge commissions. 

IB has numerous methods, hovering over the price quotes will show IV.

I also find the TWS Option Trader page helpful, in the Option Chains menu check the show volatility feature, prices will be displayed in IV, if you look around there are also various charting features in which you can compare expiries, these are just a couple of examples, you need to have a good look around and work out what fits best for you.

Occasionally I also use Hoadley's Option Strategy tool to back out an IV.


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## Nomis (5 July 2020)

Thanks Cutz for the prompt reply with handy hints on IBs platform, will check it out tomorrow. I’ve just started a trial with impliedvolatility.com.au to see what they have and need to re-download Hoadleys. Had everything I needed with just my broker when trading US, so guess it’s just a matter of looking a bit harder here. Thanks again.


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## cutz (5 July 2020)

Nomis said:


> Thanks Cutz for the prompt reply with handy hints on IBs platform, will check it out tomorrow. I’ve just started a trial with impliedvolatility.com.au to see what they have and need to re-download Hoadleys. Had everything I needed with just my broker when trading US, so guess it’s just a matter of looking a bit harder here. Thanks again.




No worries mate, let us know how you go.

BTW, watch out for option commission schedules that charge a percentage of face value.


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## Nomis (6 July 2020)

Got sorted with IB TWS, has everything I was hoping to find. Thanks again cutz and you’re not wrong on the fees front, borderline criminal.. lol


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## cutz (6 July 2020)

Nomis said:


> Got sorted with IB TWS, has everything I was hoping to find. Thanks again cutz and you’re not wrong on the fees front, borderline criminal.. lol




Yeah, that's why I love IB, fixed price per contract regardless of face value.


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## zac (26 July 2020)

Sharkman said:


> to be clear - i'm not saying that the strategy is garbage. i clearly don't have enough experience with trading it to make any sort of judgment, given that it is pretty much unviable in the ASX. just wanted to point out that it has pros and cons (as does every strategy), and that if it's considered to be higher yielding vs the traditional covered call, then it must also be considered to carry _higher_ downside risk, not lower.




Since Sharkman posted this it has played on my mind. I've been trading PMCC for a while now. When I trade I have the mantra making money is easy, keeping it is hard so therefore I'm all about risk management.

The one thing I love about the PMCC is the _lower _ downside risk, not _"higher."_
On face value, this may seem incorrect and counter-intuitive, I follow Dr Alan Ellman and Nassim Taleb in their approach and wisdom for writing covered calls and risk management respectively.
With appropriate risk/money/position management the risk is far less than a traditional covered call.
Following Nassim Taleb, structuring an 'Anti-Fragile' portfolio has been my goal and to have an account that 'gains from disorder.'

By way of a simple example during the Covid Pandemic, I placed a trade on Chevron that went against me. My deep ITM long call ended up ATM so I lost around $18/per share of Intrinsic Value, however with the extra volatility (and change in delta), the Time Value component surged and I was able to sell the position with $9.50 of Time Value (per share). My hypothesis didn't change on Chevron so I kept the position by rolling down to a lower ITM strike and significantly lowered my cost basis as a result.

I hope that makes sense and I must stress strict risk/money/position management is vital for success trading this way.


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## ot1 (4 January 2021)

zac said:


> I've a query whether anyone here trades options by selling premium, ie covered calls.
> 
> This does not seem to be popular strategy used by Australians, yet in the USA there are countless people doing it with large success.
> 
> ...



Hello, regarding the fig leaf: This is when good technical & fundamental analysis is crucial! Suggest buying  2 strikes in the money 1 to 3 years out and selling weeklies or monthly’s at 1 standard deviation on ETF’s. If underlying exceeds short strike price close position if profitable, if not profitable roll to next profitable expiration date. This strategy works on puts as well. To adjust both the leap and short, let Delta & Theta be your guide. Good trading...ot1


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