11 cases a Put seller should know

E

earth_imperator

Code: 
11 cases a Put seller should know:

Case  Stock   IV   Premium     Result     Remarks
 1      *      *      -          +        premium fall is good
 2      -      -      c         (+)       stock fall is bad, but IV fall is good
 3      *      *      +          -        premium rise is bad
 4      -      0      c          -        stock fall is bad
 5      -      +      c          -        stock fall & IV rise: WORST CASE
 6      0      -      c          +        IV fall is good
 7      0      0      c          0        no change
 8      0      +      c          -        IV rise is bad
 9      +      -      c          +        stock rise & IV fall: BEST CASE
10      +      0      c         (+)       stock rise is good
11      +      +      c          -        stock rise is good, but IV rise is bad

Legend:
  - means down or fall
  + means up or rise
  0 means no change
  c means Premium calculated using computed stock price and IV, otherwise premium is taken verbatim as - or +
  * irrelevant / unused

Example interpretation:
  Let's assume "-" stands say for -25% change, and "+" stands for +25% change.
  Then case 6 is to interpret as follows:
    Stock stays the same and IV falls 25%, then the net result is good ("+")

The table was created by simulating a Covered Put (aka Cash-Secured Put) in a Cash Account.
CostBasis = abs(-Strike + Premium)

Created 2022-07-15-Fr by earth_imperator @ elitetrader.com (c)
 
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Does "IV" here refer to that of the underlying, or of the sold strike? Spot/IV are usually inversely correlated, so case 2 and case 11 don't make any sense.

Also, the entire price path from entry to exit is what matters - not some second-by-second change. If the latter is all that interests you, just stare at the P&L [1]; no need for any tables.

The primary driver of put selling is theta (just as its primary risk is gamma.) Those are really the keys to understanding it.

[1] Just in case the irony doesn't come across: this a capital-letter Bad Idea that turns rational trading into an emotional rollercoaster.
 
@BlueWaterSailor, IV always belongs to the options, here for the strike.
For the underlying usually HV is taken ("historical volatility"), but here not used.

This is intended as a What-If-As-Next scenario.
For example: what if today stock rises and IV of the option rises? This is the case 11 in the table.
 
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earth_imperator said:
@BlueWaterSailor, IV always belongs to the options, here for the strike.
For the underlying usually HV is taken ("historical volatility"), but here not used.
More...

Um... no. The underlying also has an IV - it's usually referred to as "IV rank", and it is not the same thing as HV. There's also IV% - also calculated for the entire underlying, and not the strike.
 
Agree with BWS that theta is important (and gamma, especially as you get close to expiration). Also, the delta of the put when you sell is important. You always want the premium to ultimately fall, but there are many variables involved that effect it.
 
earth_imperator said:
This is intended as a What-If-As-Next scenario.
For example: what if today stock rises and IV of the option rises? This is the case 11 in the table.
More...

OK, let's say the stock rose and the IV did as well (extremely unlikely, as I've mentioned above.) What will you do, and why? What point would there be to reacting to daily fluctuations? Are you treating them as a predictor of where the price/premium is supposed to end up?

I've written a lot of puts and covered calls and managed these trades through every aspect of their life cycles, and I just can't see the use of what you posted. Again, it seems to be a case of "P&L watching" instead of having a plan of what to do when you hit specific metrics.

(This is all aside from the fact that put writing is a strategy for a rising, or at least sideways, market - and is a poor fit for what's going on these days.)
 
@BlueWaterSailor, it's just a general, timeless, market mood independent (ie. "market neutral"), basic learning aid for the Put seller, on the way to mastering the option Greeks...

It can answer questions like these:
what if I enter this Short Put position now and tomorrow the stock rises?
what if I enter this Short Put position now and tomorrow the IV rises?
what if I enter this Short Put position now and tomorrow the Premium rises?
...
and any combinations of these 3 criteria of StockPrice, OptionIV, OptionPremium as well with the cases of "up", "down", "nochange" for each of them.
There are in total even 3^3=27 combinations possible (3 for Stock/IV/Premium and 3 for -/0/+), but luckily 16 of them being just dupes, leaving the shown 11 cases remain.
 
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earth_imperator said:
@BlueWaterSailor, it's just a general, timeless, market mood independent (ie. "market neutral"), basic learning aid for the Put seller, on the way to mastering the option Greeks...

It can answer questions like these:
what if I enter this Short Put position now and tomorrow the stock rises?
what if I enter this Short Put position now and tomorrow the IV rises?
what if I enter this Short Put position now and tomorrow the Premium rises?
...
and any combinations of these 3 criteria of StockPrice, OptionIV, OptionPremium as well with the cases of "up", "down", "nochange" for each of them.
There are in total even 3^3=27 combinations possible (3 for Stock/IV/Premium and 3 for -/0/+), but luckily 16 of them being just dupes, leaving the shown 11 cases remain.
More...

So it all adds up to "things could change in several ways." Seriously? :rolleyes:

There's no "learning aid" here - because it offers no plan of action, draws no conclusions, answers no questions, and gives no useful information. Not for nothin'... it reminds me of a kid's crayon drawing of the "mommy, look at what I learned in school today!" sort. And while I don't want to discourage anyone from learning, this is really, really not the way to go about it.

Along the same lines: there are also no steps "on the way to mastering the option greeks"; that's a basic prerequisite to working with options. Just hit the books and learn them. All the basic education you need is available in lots of places - OptionAlpha, Udemy, CBOE - and it's either free or low cost.

Or... you could just fool yourself by pretending that you understand something about them, dive in head first based on some sort of "learning aid", and wreck your account. Up to you.
 
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