Featured Trade – Gold Forums Milk The Cow Strategy Questions from a User on Stock Selection


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    • #1556

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      Hi Serge,

      I read with great interest two articles of yours on the “Milking the Cow” strategy, one from November 2013 and the other from June 2020. I have been looking for a place to apply my sidelined cash (currently suffering in a low-interest FDIC bank account) in the hopes of better returns. I think I have a good grasp of the proposal and am interested to try it, however, I had some comments and questions. I hope you don’t mind that I emailed you rather than posting on Seeking Alpha. If you prefer that I post to the site instead to keep the community discussion active, please let me know and I will post there. Otherwise, I thought the direct email format is easier and allows more candid discussion versus a public forum.

      Currently I am just getting started on a wheel strategy with a few test stocks but the cow milking strategy looks like it may be safer.

      First, regarding the underlying security, XSP is at first an attractive choice since it has European style assignment and favorable 60/40 capital gains tax treatment. However, I checked the volumes just now and they are a fraction of SPY. For example, Jul31 weeklies 321 XSP calls had volume of 89 yesterday versus 10,100 for SPY. SPX has better volume of 698 however the contract size is 10x the size which makes it unattractive for my portfolio size at least. So I think SPY (or IWM or QQQ) are the best choices balancing option cost and volume. (Speaking of underlying choice, I think from reading your post you are long-term bearish on SPY as am I, not sure if that makes a difference, but I am more bullish on IWM so maybe it would be the better choice.)

      Regarding PDT concerns, I think to employ this strategy one needs at least an account size of $25,000 for IWM and probably $40,000 for SPY/QQQ so probably not a concern?

      On underlying equities, do you think index ETFs are the only suitable candidates or an individual stock with high IV (such as GE) would work? I like GE because it has high volume, low price, and is trading near the bottom of its 52-week range, and also is a popular “meme” stock with Robinhood and other retail traders (it frequently is on the list of top most held stocks for those customers). INTC is another stock with high volume and high volatility that is trading near the bottom of its 52-week range.

      Next, sorry if I missed it, but doesn’t the IV trend of the options impact the analysis? We need high IV% on the short weekly strangles and low IV% on the long leap “milk cow” strangles? In looking at SPY, it is the opposite unfortunately: Jul’31 IV = 21.9% versus 32.2% for Jan’2021. GE does have the desirable trend of Jul’31 IV = 81% versus 70% for Jan’2021.

      I think you covered it, but when you write your strangles, they are zero-width (e.g., 321 put/call). I saw a comment about using 30 delta strangles, it is cheaper of course, but I wonder your thoughts on whether the width matters? And does the width of the short and long strangles have to match?

      Thank you kindly for your excellent contributions to Seeking Alpha and I look forward to discussing the points above should you have time. If you don’t have time or interest to discuss, I understand completely and wish you the best of luck with your trading in this crazy kangaroo market!

    • #1557

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      I’ll do my best to answer your questions. I don’t have all the answers. This is a strategy I have worked out for myself, rather than learning from a theory or a mentor, so every day brings new insights.

      I actually would prefer to answer via the forum, in the future, since this can also benefit other people who have similar questions.

      Addressing your numbered points:

      1) You can deploy this on smaller accounts. You sometimes need to trade every day, in order to optimize results by maintaining the fulcrum of your straddles (or strangles) centered on the current market price. That should not trigger buying and selling of the same option on the same day. The only problem emerges if the stock moves a lot intraday, causing you to want to close a sold position to establish a new one. Only way around that is to sell a new set of calls and puts (essentially doubling up) without buying back the original ones, then wait til next day to close original ones. However, that can bring up margin problems, potentially. .

      Each situation is unique. But one approach might be to buy a week longer straddle at your existing (misaligned) strike prices, to achieve a kind of delta neutralization and minimize margin requirements.(week + 1) . Then go ahead and sell your new weekly straddle or strangle. You’ll close the week+1 the next day, when it does not impact your day trade count.

      I took a quick look at XSP. I find the bid-ask spreads too wide. You’d suffer a lot of slippage whenever you roll the options.

      2) Yeah GE should work fine. When picking stocks (or ETF’S) you want to have 1) low spreads on bid/ask 2) high ratio of weekly / leaps 3) many option time frames to choose from (I usually stay away from stocks with no weeklies).

      As a strangle GE is paying you around $0.50 , which you can hedge long term at the same strike for about $3.69. 52 x 0.50 = $26.00 vs $3.69

      And you are correct : It’s best if your long term LEAPS are at low volatility when you put this on. But if you pay attention to the ratio, and it is ample enough, you’ll be fine.

      3) ” And does the width of the short and long strangles have to match?” I don’t think so. The width of the long term straddle has more to do with your comfort about the stock.
      Let’s say you decide to do this on NIO , the Chinese version of TSLA. A high flying stock, but that could go to zero overnight, potentially. (I don’t trust Chinese regulators and Chinese
      compliance, so a scandal can come out of nowhere). I would probably want to hold the PUT side of the LEAP closer to the market price.

      4) Is selling strangles at say , delta 30, better than straddles? I’ve been trying to answer this for a while. Reading up as much as I can on any real backtesting of this to see what that reveals.
      I’ve tried both, and made money with both. What I suspect – but this is not proven – is that selling straddles causes a lot more trading (and therefore friction) but ultimately brings in more revenue.

      I suspect that the answer may vary based on the following:
      When picking stocks, what I try to do is look at a weekly Average True Range. Then I look at the premium generated from the weeklies. If I can find that historically, even better (though that can be more difficult). I want to make sure the averages are in my favor. The straddle has to generate a lot more than the weekly ATR. If that’s not the case, then I look at what delta values are needed to sell at the outer limits of that ATR. If doing that still produces an attractive return, then that would probably be the better way to go. Make sense?

      I wish you the best in your investments.


    • #2511

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      [Admin note: I posted the above question for others to beneift from my response. I teft the user’s name anonymous. Please post questions to forum rather than email.]

      Response to
      1) Not necessarily. Each situation depends on prices of options at different strikes. However, longer dated long positions will almost always be “closer to market price” than shorted shorter term options.

      2) “So how much further out of the money should the short options be than the long options?” Again, there is not set rule. It depends on the price of those options. You want to sell as high premium as you can while paying as little as you can for bought protective inner strikes.
      You cannot easily create “hard” rules. Graph it out or caculate it manually with different combinbations.

      3) Nope. No need. The bought options offer you the protection you need. Most options are not called until the day of the expiration. The exception is if before the earnings date there ia a revelation of critical information, which reduces uncertainty. This simply means that the short options will have already lost their inflated value and are unlikely to drop much more, although they will lose value to time effects. I explain that in the original article.

      4) No I do not consider price trend. This could reverse anyways based on earnings surprise/disappointment.

      5) volume and open interest will affect bid/ask spreads. So focus on the b/a spread and you should be fine. It is more important for the long options than the short ones, as you’ll want to exit those positions after your shorter term strikes expire.

      6) Don’t have a good suggestion for free iv historic charts. I use my Interactive Brokers accounts, which offer great charts, but you’ll need to open an account with them, which is free. I think there’s a 1k minimum account size. Advantage then is you can use virtual money to place trades, which is the safest way to get your toes in the water.

      Very shortly I’ll start posting these kinds of plays on Jolts Market and you can follow along if you wish. I’ll probably charge around $10 per Jolts Recipe, at first.

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