Quote from cactiman:
It should have read, "But if I sold PUT SPREADS further out of the money over shorter periods of time, I'd probably only get credits of .25 per spread, and if there was a drawdown before those earlier expiration dates, I'd lose 75% of my total account value!
What's the solution?"
I don't trade Credit Spreads unless I get a 2/1 Risk/Reward ratio or better (this trade got a 1.33/1 ratio), and that's much harder to achieve since the $VIX has fallen.
Even before the $VIX fell back, one had to add quite a bit of time to get such a ratio. Thus the need for 6-7 month out expiration dates on the GLD >>>
I suggest you change your investment criteria.
You are overly focused on risk/reward ratio, when you should be more focused on other criteria.
Selling a spread 6 - 7 months out, with a mere 3% otm safety cushion, on a stock you can not possibly afford to buy, in an attempt to earn a super high annualized % return, on a trade with a low probability of being successful....
While GLD does have reasonable tech support in the area of your strike, so that's a positive criteria,.... but I'm not just talking about GLD. I'm refering to your overall strategy in general.
If you set a more realistic annualized % return, you would be able to select strikes more otm, and thus have a higher probability of having a successful trade. Wasn't it you that said you wanted to earn about 13% return per month per trade???
And if you selected lower priced stocks and strikes, you could at least consider buying them for a period of time, instead of being forced to close for a loss.
<<< As to naked puts, I've always heard you shouldn't sell them unless you are prepared to buy the underlying stock. >>>
You can close a naked put any time you want. Buying is merely a choice. However, if you are closing a deteriorating stock, you may wish it were a spread. And if you are put the stock, you can sell it any time you want. Yes you will sell it for a partial loss, but at least you don't risk being wiped out if all your stocks dropped, as with credit spreads.
It's one thing if this or that stock drops. In which case you may want to be in a spread with it's smaller dollar loss.
But if all your stocks drop, isn't it better to own the depressed stocks than to be wiped out via a spread strategy?
<<< The Naked Puts are used as a way to "get paid to wait" for the price to fall to a level you're willing to pay for the underlying. >>>
You make it sound like that's a bad thing.
It's a good thing. Even if you don't plan to buy the stocks, it's a nice way to pick a price you want to invest in. It's no different than with spreads.
<<< I don't want to buy Stock or ETFs right now, and don't want to deal with the large margins required for Naked Puts either, so it's not an issue for me at this time. >>>
The larger margin requirement is actually the reason I like naked puts over spreads. The smaller margin requirement of spreads, is the reason the average spread traders over leverage their accounts to insane levels of 10 times their account value.
So the question is, would you rather deal with the restrictive issue of a higher margin requirement,... or would rather deal with the potential issues of actually being on higher margin?
It should have read, "But if I sold PUT SPREADS further out of the money over shorter periods of time, I'd probably only get credits of .25 per spread, and if there was a drawdown before those earlier expiration dates, I'd lose 75% of my total account value!
What's the solution?"
I don't trade Credit Spreads unless I get a 2/1 Risk/Reward ratio or better (this trade got a 1.33/1 ratio), and that's much harder to achieve since the $VIX has fallen.
Even before the $VIX fell back, one had to add quite a bit of time to get such a ratio. Thus the need for 6-7 month out expiration dates on the GLD >>>
I suggest you change your investment criteria.
You are overly focused on risk/reward ratio, when you should be more focused on other criteria.
Selling a spread 6 - 7 months out, with a mere 3% otm safety cushion, on a stock you can not possibly afford to buy, in an attempt to earn a super high annualized % return, on a trade with a low probability of being successful....
While GLD does have reasonable tech support in the area of your strike, so that's a positive criteria,.... but I'm not just talking about GLD. I'm refering to your overall strategy in general.
If you set a more realistic annualized % return, you would be able to select strikes more otm, and thus have a higher probability of having a successful trade. Wasn't it you that said you wanted to earn about 13% return per month per trade???
And if you selected lower priced stocks and strikes, you could at least consider buying them for a period of time, instead of being forced to close for a loss.
<<< As to naked puts, I've always heard you shouldn't sell them unless you are prepared to buy the underlying stock. >>>
You can close a naked put any time you want. Buying is merely a choice. However, if you are closing a deteriorating stock, you may wish it were a spread. And if you are put the stock, you can sell it any time you want. Yes you will sell it for a partial loss, but at least you don't risk being wiped out if all your stocks dropped, as with credit spreads.
It's one thing if this or that stock drops. In which case you may want to be in a spread with it's smaller dollar loss.
But if all your stocks drop, isn't it better to own the depressed stocks than to be wiped out via a spread strategy?
<<< The Naked Puts are used as a way to "get paid to wait" for the price to fall to a level you're willing to pay for the underlying. >>>
You make it sound like that's a bad thing.
It's a good thing. Even if you don't plan to buy the stocks, it's a nice way to pick a price you want to invest in. It's no different than with spreads.
<<< I don't want to buy Stock or ETFs right now, and don't want to deal with the large margins required for Naked Puts either, so it's not an issue for me at this time. >>>
The larger margin requirement is actually the reason I like naked puts over spreads. The smaller margin requirement of spreads, is the reason the average spread traders over leverage their accounts to insane levels of 10 times their account value.
So the question is, would you rather deal with the restrictive issue of a higher margin requirement,... or would rather deal with the potential issues of actually being on higher margin?
