This entry is part of the Premium Selling Strategy that is logged on the linked page.
On Friday we got together as a group and decided to sell some premium. I did two trades. The first trade I did on my own personal account, and a later trade I did with the group on the paper account.
Pre-market hours during European hours the ES market was down for the most part.
I ended up selling premium during pre-market hours; ES Put April 2011 1110 for 2.70 per contract. I scaled in step by step and kept at a 25% allocation. Normally I prefer to sell premium the week of expiry for the next cycle. However, Friday seemed like a good to step as I was concerned that the market might move up again.
Later on during the day I decided to get the group together and talk about how I sold premium. But instead of getting the group to follow my trade I recreated the trade with ideas from the group. In particular I decided to get group input on where the S&P will be a month from now. Following is the snapshot of the different answers of where the S&P would be.
What is interesting is the 100 point difference in opinions of where the S&P will end up. Using simple statistics I decided to choose the average which was 1225 to sell premium.
The next step was to determine how many contracts and how much return I wanted to make. Since this is the first scale in I decided to scale in the total number of naked contracts that I wanted to carry.
In the paper account I have a total available monies of about 243,000 USD. My current used margin was 29,000. With each ES contract having a notional value of 64,000 I could at a maximum carry 4 contracts (256,000 notional value). At some point later on I will include the drawdown calculations.
Selling 4 contracts of the ES at 1225 at 12.50 netted a grand total of 2,500 USD with about 15,000 of margin used. Seizing the moment I also sold two spreads (sell 1225, buy 1175) for a net 5.72 per contract or 575.00 USD for two contracts. Thus the net scale in was 3,075.00 USD or a a current net monthly gain of approximately 1%. However, I am only currently using a grand total of 48,000 USD of margin.
This trade cost me about 19,000 USD of margin. If you apply the net returns against the margin used you have a monthly return of 16%. I mentioned this form of return because I have over 200,000 of margin left that I can use for other trades.