Am I overlooking the risk?

Don Bright · Mar 23, 2012

Let me suggest something, without being too technical or anything (not that you guys can't handle complex ideas or anything, just something simple my brother and I do every quarter or so, in many stocks).

Search for stocks that you thing are "fairly priced" now, based on fundamentals. Two ways to go, one with no dividend to be concerned with, one way for dividend stocks only.

Dividend stocks: You find a few stocks that would pay a great dividend return if only you could buy them cheaper, maybe $5.00 or more cheaper. If you sell that same strike price put, the worse thing that happens is that you are "put" the stock at that much lower price. Nice return, nice dividend. If you don't get put the stock, you made 100% of the put premium. This is so simple, and yet very few do it.

Non Dividend stocks: Do the same homework, but this time find the stock that might be "paired off" against it, if you were to be put the stock, again at that much lower price. If you do get the stock, pair off for high percentage play. If not, you make 100% of the Premium. [

Tell me what you think. Don't tell my brother I told you, LOL.

Don

edit: If you want help with which fundamentals to look for, let me know, I'll share our criteria. Or is it "criterion" LOL

trader0303 · Mar 23, 2012

Quote from Don Bright:

do the same homework, but this time find the stock that might be "paired off" against it, if you were to be put the stock, again at that much lower price. If you do get the stock, pair off for high percentage play. If not, you make 100% of the Premium

Don, what do you mean find the stock that's "paired off"?

Don Bright · Mar 23, 2012

Quote from trader0303:

Don, what do you mean find the stock that's "paired off"?

Basic pairs trading. For example HD and LOW. Or CCL and RCL. So many pairs. You trade them based on seeing how the pair trades.

For example. If the price difference between A and B stock ranges from $1.00 to $5.00 (one being say $28, the other $29 = $1.00 up to $32 and $37 respectively, their pair range is $1.00 - $5.00). They move and down in this range, while remaining pretty safe from overall market movements, so overnights are no big risk. Market goes down 200 points, so what, they will likely move in a similar fashion.

You start selling the pair at $4.00 or so, hoping for a pull back, if it goes to $5.00, you may sell another layer. Trade in and out for about 40 cents when you can (10% of that range approx).

Pairs trading can be very lucrative for those with tight risk tolerances. The more pairs, the more flattening of the overall risk curve.

Don

trader0303 · Mar 23, 2012

Thanks for the replies everyone....looks like my trade that I've been doing will be profitable 90% of the time, but one large news event will wipe out my profits and more. I have a lot to learn.

Free Thinker · Mar 23, 2012

Quote from Don Bright:

Tell me what you think. Don't tell my brother I told you, LOL.

hi don long time no talk. i sell a lot of puts also but with the vol as low as it is you are not going to get much premium to compensate for the risk selling $5 out of the money. pennies.

Don Bright · Mar 23, 2012

Quote from Free Thinker:

hi don long time no talk. i sell a lot of puts also but with the vol as low as it is you are not going to get much premium to compensate for the risk selling $5 out of the money. pennies.

Hi FT, yeah, when you have the low vol, the likelihood of the stock moving too far against you is lower too.

The dividend or pair trade as described above pretty much takes care of all this. If you "wish" you could by GE 10% lower, well, sell the put, collect the dividend etc. If you don't get put the stock, well, just collect whatever premium is available. More fun with higher vol, but you have to keep the money working, or else it gets lazy and just sits around, LOL.

Don

noob_trad3r · Mar 23, 2012

I stick to SPY. Why expose yourself to single stock risk. Diamond Foods is a good example. RIMM also etc..

Don Bright · Mar 23, 2012

Quote from trader0303:

Thanks for the replies everyone....looks like my trade that I've been doing will be profitable 90% of the time, but one large news event will wipe out my profits and more. I have a lot to learn.

At least you're starting out with the correct method of collecting theta, time decay, instead of paying for it and watching it depreciate every day, like a new car.

Don

Don Bright · Mar 23, 2012

Quote from noob_trad3r:

I stick to SPY. Why expose yourself to single stock risk. Diamond Foods is a good example. RIMM also etc..

Not a bad plan overall. We just prefer to not take simple direction risk when we can capitalize on being put dividend stocks. Of course, we do a lot of SPY options as well.

Don

Free Thinker · Mar 23, 2012

Quote from Don Bright:

Hi FT, yeah, when you have the low vol, the likelihood of the stock moving too far against you is lower too.

The dividend or pair trade as described above pretty much takes care of all this. If you "wish" you could by GE 10% lower, well, sell the put, collect the dividend etc. If you don't get put the stock, well, just collect whatever premium is available. More fun with higher vol, but you have to keep the money working, or else it gets lazy and just sits around, LOL.

Don

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.