Selling Premium

Darren Miller, @attitrade

Darren is proving that all shrinks look like Phil Pearlman. With respect to trading, Darren loves to share ideas, keeps things honest, and adores options. No fear.


I have been actively trading since finishing graduate school in 2002. I currently manage the model portfolio at 6040 Financial and serve as the director of education. My strategy focuses on selling option premium in the broad-based indexes and options on futures (Section 1256 contracts). Typically there is about a 3 percent premium built into options when comparing the statistical volatility of the S&P 500 (SPX) versus the market expectation of the next 30-day range (volatility) of the S&P 500 (the VIX). This difference can fluctuate, but in general the implied volatility is higher than the realized volatility.

I trade Section 1256 contracts because of the 60/40 tax rule, which increases returns based on favorable tax treatment. For example, assuming a tax rate of 35 percent, the taxes on a $10,000 capital gain would be $3,500. Using the 60/40 rule, 60 percent of the capital gain ($6,000) would be taxed at 15 percent and 40 percent of the capital gain ($4,000) would be taxed at 35 percent. That works out to a $900 tax for the long-term gain and a $1,400 for the short-term gain, which totals $2,300. If the gains were taxed 100 percent as short-term gains, then I'd be looking at $3,500. The overall tax rate for this example of the 60/40 rule ...

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