Am I overlooking the risk?

Don Bright · Mar 23, 2012

Quote from Free Thinker:

yes i understand but a front month ge 18 put get you a whopping 6 cents right now. i guess its better than cd rates.
i wouldnt do it. with one press release ge could be down a lot more than that. i only sell premium against indexes or etfs like iwm. i dont want to take specific stock risk for 6 cents.

We can only wish that we got GE at a price where the dividend yield was 6% or higher? Right? Trading GE is similar to wider based ETF's in that it is so diversified.

But, as I said, research many stocks, we usually find about 20 or 30 that fit this criteria, and 95% or so have the puts go out worthless. As I said, just making sure that stupid money keeps on working.

All the best,

Don

nmsandwich · Mar 23, 2012

Hi, Don - I trade a dividend strategy, and this could be an interesting way to enter those that are borderline for me, or generate income if not. I would be interested in knowing your criteria. I'm guessing threshold levels for p/b and premium/dividend/strike? Also, sizing based on volatility?

Thanks
Nate

Don Bright · Mar 23, 2012

Quote from nmsandwich:

Hi, Don - I trade a dividend strategy, and this could be an interesting way to enter those that are borderline for me, or generate income if not. I would be interested in knowing your criteria. I'm guessing threshold levels for p/b and premium/dividend/strike? Also, sizing based on volatility?

Thanks
Nate

Sure, use P/B levels as an initial sort, then carry it out a bit further. Send me an email or PM, and I'll try to give you a link for our basic stock analysis spreadsheet.

Don

dragonman · Mar 23, 2012

Quote from trader0303:

I always have the cash in my account to cover the need to either buy the underlying stock, or short the stock. And, of course there is overnight gap risk which I'm exposed to, but am I missing anything else?

Another issue you may consider is that by going long or short the stock your margin requirements will be increased substantially, so that it may materially reduce the return on your capital.

dragonman · Mar 23, 2012

Quote from Don Bright:

Sure, use P/B levels as an initial sort, then carry it out a bit further. Send me an email or PM, and I'll try to give you a link for our basic stock analysis spreadsheet.

Don

What are P/B levels? (I assume you don't refer to price to book value ratio)

Don Bright · Mar 23, 2012

Quote from dragonman:

What are P/B levels? (I assume you don't refer to price to book value ratio)

Just simple price to book value. Much like a car. Blue book is $35,000, you don't want to pay $70,000 for it, right?

Then compare the P/B with others in the sector, pick the best one, if you get assigned stock, perhaps sell one of the others to create correlated pair (do other research first of course).

Don

magicz · Mar 23, 2012

Quote from trader0303:

Well the one I just opened is with CLF. I sold calls at $75, and puts at $65. Stock is at $70. So, pretty far out of the money.

are you trading weeklies? or the regular monthlies?

The weeklies might not be so bad but you're dealing with a 2+ beta stock here. Sell a spread instead it'll limit your lost on black swan events.

sonoma · Mar 23, 2012

Quote from trader0303:

I'm new to trading options, and I've been doing a strategy for the past few months that's given me some success. I don't see much risk, and it seem like it's "too easy", which is why I think I'm overlooking something.

You've gotten good advice about where to look for your risk. But if you modify slightly what you're doing, you'll end up doing what all short premium traders do, day-in and day-out. Although your position size may be different than my assumption, I'm guessing you're flipping deltas when you add your long/short underlying. Try adjusting trade size to avoid the overhedging, unless you've now got a strong reason to abandon your assumption that the underlying is going to trade in a range. You'll likely have to layer other strangles on top of your position, particularly distant from expiry, but your basic approach isn't all that bad. It just needs some tweaking. And yes, things can go wrong. Painfully wrong. But if that's the case, then your assumption about boundaries was wrong. Don't be averse to buying some cheap wings at some point.

quatron · Mar 27, 2012

How about closing out your trade when it's out of the range and putting a new adjusted one? You will save on costs on trading the underlying and keep your margin low. Try the same with iron condor instead of a strangle to reduce gap risk.

babutime · Mar 27, 2012

I wouldn't randomly go out and sell premium without asking "why am I doing this?"

Sure, the answer you give yourself may be wrong but you'll be surprised at how difficult it might be to even come up with an answer that fairly thorough.

When IV is high and you can estimate that it'll revert to norms soon- collect premiums.

If time to exp is only a few days and theta is very high- that's a good time to collect premium too.