Michael Mullaney began trading stocks in 1991 and while he had success taking advantage of stock splits and the IPO mania of the go-go 1990s, it wasn’t until he developed an option writing strategy in 1999 that he found his niche.
Mullaney worked as a partner at accounting firm KPMG until 1990 when he became vice president of the tax department of insurance group Legal & General America Inc. In addition to his work and trading Mullaney coached his daughter’s high school and Amateur Athletic Union
basketball teams. His passion for coaching led him to write a book on coaching girls basketball. In 2005 he moved from Maryland to Jacksonville, Fla., and registered as a commodity trading advisor to trade his discretionary option writing strategy.
Mullaney saw the benefit of option writing early in his trading but was weary of
the volatility of individual equities so he began writing options on the S&P 500
“You have seen what Enron and WorldCom did, you have seen what Google does and [the Chicago Mercantile Exchange] does by going up above $400, they can be extremely volatile, what you get when you sell options on a broad based index like the S&P 500 is a certain element
of safety that is not there [with] individual stocks,” Mullaney says.
Option writing has been the ideal strategy throughout the last seven years because of shrinking volatility. “If the market goes up, as long as it goes up in a controlled steady manner you make money. If it goes down in a controlled steady manner you make money. If it goes sideways you make money. So the odds are on your side.”
While Mullaney is cautious of the volatility and realizes the market will not always be as friendly to option writers as it has been the last seven years, he says depressed volatility levels can last for several more years and as long as he has strong risk management, the inevitable spike in volatility won’t wipe him out.
Mullaney writes naked options and will roll those option positions further out when strikes get too close for comfort. He uses the VIX (volatility index) as a measure. He takes advantage of the tendency of volatility to rise in declining markets and fall in rising markets. “When premium goes up so do the calls, proportionately. When the market goes down, [I] sell puts and calls, and when it does whipsaw the calls don’t increase in value [that] much but the puts do collapse,” Mullaney says.
While depressed volatility has helped option writers it also means they must sell options closer to at-the-money than they did several years ago to receive the same premium. Because near term options are not nearly as profitable as they used to be, Mullaney has had to adjust his strategy. “On the put side instead of going out 30 days, I now go out 60 days and in some cases 90 days. On the call side because of the way the skew works, I may go out 60 to 90 days. Typically the call side will be a longer time frame than the put side to be further away from the money for that extra protection,” he says. For example, in February he was selling March puts and June calls.
The adjustment was a reaction to current volatility. “I don’t want to be so close to the [market] that I am taking too much risk. Volatility is only one component of pricing; when volatility goes down, time is still the same. The further out months have not changed as dramatically as the near term months in terms of attractiveness,” Mullaney says. He cautions you can’t go too far out because you can get whacked on both sides. “That is why I keep it within the intermediate term. I am always trying to find the sweet spot in terms of volatility.”
Mullaney has managed to hit that sweet spot, earning 252% in five years of proprietary trading. That five-year proprietary track record, 29% annually, has been adjusted downward to account for fees and commissions for his advisor, Mullaney Investment Management.
Mullaney is in the process of writing a book on his strategy and hopes it will be as popular as his other book, The Complete Guide to Girls Basketball. That book has been touted by coaches at many of the most prestigious collegiate women’s basketball programs as the definitive “how to” book on coaching girls basketball. If his trading continues to produce the returns it has throughout the last five years, his new book may be used as a “how to” manual for option writers.