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Closing naked put positions
- Thread starter LAtrojan
- Start date
One other consideration: if the puts become worthless enough, sometimes you cannot close them--no one will buy them from you. Then if there is a sudden reversal, you could get a surprise. So it's best to get out of them when they have performed reasonably well and you're ready to move on. I set a buy limit at 25-30% of the original premium. So maybe I don't get the best fill on the way out, but that's okay, I've made money, I'm safe, and I don't have to hang around with my computer, who is lousy company.
And, agree with above--selling the June puts is not a bad idea, either. You don't want to sell all the month's puts at the same time, anyway.
And, agree with above--selling the June puts is not a bad idea, either. You don't want to sell all the month's puts at the same time, anyway.
I think that you have things a little mixed up. Since he sold the puts to open, when they're worth 10-15 cts he's looking to buy them to close. That means the other side is selling them.Quote from drcha:
One other consideration: if the puts become worthless enough, sometimes you cannot close them--no one will buy them from you. Then if there is a sudden reversal, you could get a surprise.
Near the end, you may not like the price because of a wide spread or high IV but you can always close the position. That's what market makers are for.
A lot depends on your definition of OTM.
Does that mean your deals are 10 - 15% or closer to 30% OTM?
If 10 - 15%, that could be risky over a volatile remaining 10 trading days.
It also depends on the industry you are invested in.
If it's a "defensive" type industry like PG, JNJ, CL, ect.... I'd be more likely to wait it out the next 10 days.
If a more volatile sector, those things can drop quite a bit really fast.
Are earnings coming due over the remaining 10 days?
That could be risky.
Are you being honest about not minding having to buy stuff, or are you rationalizing about a potential deal going bad?
If your true goal is to trade premium and not stocks, then let the last $0.05 - $0.10 go.
If you are only going to buy stuff because you have to, then holding is too risky.
I'd also evaluate how concentrated I am in a particular stock or sector.
If I'm overly concentrated, that's risky, and I'd lean more to closing early.
You mentioned your stocks are "quality" companies.
My definition of a quality company is one without excessive debt, good cash flow, somewhat predictable earnings, less than 12% of shares being shorted, they have a history of paying their bills in a reasonably timely manner, inventories and receivables are trending in the right direction, ect.....
If your companies are defensive, quality, deep OTM, earnings are not pending, and you don't mind buying the occasional company, then why piss away good money, just to get into something that may not be as defensive, or deep OTM?
My point being, I would not treat all stocks a-like.
Some deals I'd close early and some I wouldn't.
For $0.05 I'm more likely to close early. If I'm leaving $0.15 behind, that calls for analysis of the deal.
Make your decisons via analysis. Not some predetermined formula.
Put_Master
Does that mean your deals are 10 - 15% or closer to 30% OTM?
If 10 - 15%, that could be risky over a volatile remaining 10 trading days.
It also depends on the industry you are invested in.
If it's a "defensive" type industry like PG, JNJ, CL, ect.... I'd be more likely to wait it out the next 10 days.
If a more volatile sector, those things can drop quite a bit really fast.
Are earnings coming due over the remaining 10 days?
That could be risky.
Are you being honest about not minding having to buy stuff, or are you rationalizing about a potential deal going bad?
If your true goal is to trade premium and not stocks, then let the last $0.05 - $0.10 go.
If you are only going to buy stuff because you have to, then holding is too risky.
I'd also evaluate how concentrated I am in a particular stock or sector.
If I'm overly concentrated, that's risky, and I'd lean more to closing early.
You mentioned your stocks are "quality" companies.
My definition of a quality company is one without excessive debt, good cash flow, somewhat predictable earnings, less than 12% of shares being shorted, they have a history of paying their bills in a reasonably timely manner, inventories and receivables are trending in the right direction, ect.....
If your companies are defensive, quality, deep OTM, earnings are not pending, and you don't mind buying the occasional company, then why piss away good money, just to get into something that may not be as defensive, or deep OTM?
My point being, I would not treat all stocks a-like.
Some deals I'd close early and some I wouldn't.
For $0.05 I'm more likely to close early. If I'm leaving $0.15 behind, that calls for analysis of the deal.
Make your decisons via analysis. Not some predetermined formula.
Put_Master
I agree with Phil (optioncoach) and Mark on this one.
Here's my take on your position. It looks like that you are writing options for about a dollar of premium for about one month away, so I assume you write a round just after the expiration day and are looking for a four week holding. If that is the case, you are obtaining about $0.25 per week on average[and I know it is not an exact linear decline, but stay with my line of thinking for a moment]. If you have 0.15 left and two weeks to go, you will get about 0.075 each for those two weeks, and tie up a fair bit of margin to get that.
So...here's what I suggest.
Buy the options back at a nice profit and write the round for the next month a bit early. You'll receive a fatter premium for the longer period, but then you might easily receive say $1.25 or so for 6 weeks without taking on more risk than you had at the start of the month. This is still noticeably more than $0.15 for the last two weeks.
Practically speaking, as well, if the market continues to rise, you could be gaining more from the decline in the put values as well with the June put scenario. If you continue to hold the May puts, the most you can make in the next two weeks is 0.15, and you theoretically could lose a lot more (not likely, perhaps, but possible). If the underlying were to rise 15% over the next two weeks, chances are you could easily see the June puts written at $1.25 decline to $0.65, which is a nice $0.60 gain. In both cases, you have risk from a stock price decline, but in one case you can make 4X as much in the same period of time.
Of course, the probability of success is currently higher for the May puts, but with options, you always make tradeoffs-- risk for reward.
Here's my take on your position. It looks like that you are writing options for about a dollar of premium for about one month away, so I assume you write a round just after the expiration day and are looking for a four week holding. If that is the case, you are obtaining about $0.25 per week on average[and I know it is not an exact linear decline, but stay with my line of thinking for a moment]. If you have 0.15 left and two weeks to go, you will get about 0.075 each for those two weeks, and tie up a fair bit of margin to get that.
So...here's what I suggest.
Buy the options back at a nice profit and write the round for the next month a bit early. You'll receive a fatter premium for the longer period, but then you might easily receive say $1.25 or so for 6 weeks without taking on more risk than you had at the start of the month. This is still noticeably more than $0.15 for the last two weeks.
Practically speaking, as well, if the market continues to rise, you could be gaining more from the decline in the put values as well with the June put scenario. If you continue to hold the May puts, the most you can make in the next two weeks is 0.15, and you theoretically could lose a lot more (not likely, perhaps, but possible). If the underlying were to rise 15% over the next two weeks, chances are you could easily see the June puts written at $1.25 decline to $0.65, which is a nice $0.60 gain. In both cases, you have risk from a stock price decline, but in one case you can make 4X as much in the same period of time.
Of course, the probability of success is currently higher for the May puts, but with options, you always make tradeoffs-- risk for reward.
I'm curious to know how many deals are done each month, and the average number of contracts.
I'd like to get a sense of how much money is being spent on extra commissions each year, and how many $0.15 premiums are being returned with those extra commissions, to close down all deals,...
regardless of how far OTM, regardless of how defensive the company is, regardless of the potential benefits of possibly owning a truely quality company at a fantastic price, regardless of whether the company pays a nice dividend, ect.....
I just don't like the idea of treating all stocks the same.... unless your goal is to NEVER own a stock and only trade premium.
I think each stock should be evaluated based on its own merits.
BTW, assuming one is not on excessive potential margin or overly concentrated in one stock or sector,... if your stock is truely deep OTM and not in a volatile sector, and earnings are not pending, ect.... then you can always consider initiating the next months deal 10 trading days early.
I just don't see the rationale for treating a quality and defensive stock 10% OTM the same as one 30% OTM.
Doing lots of extra close down commissions that return $0.10 - $0.15 each, have the potential to return several thousand dollars a year.
Hence the reason I'd like to know how many trades a year are averaged and their average number of contracts.
I agree some trades should be closed early. I just question treating them all the same regardless of criteria.
Put_Master
I'd like to get a sense of how much money is being spent on extra commissions each year, and how many $0.15 premiums are being returned with those extra commissions, to close down all deals,...
regardless of how far OTM, regardless of how defensive the company is, regardless of the potential benefits of possibly owning a truely quality company at a fantastic price, regardless of whether the company pays a nice dividend, ect.....
I just don't like the idea of treating all stocks the same.... unless your goal is to NEVER own a stock and only trade premium.
I think each stock should be evaluated based on its own merits.
BTW, assuming one is not on excessive potential margin or overly concentrated in one stock or sector,... if your stock is truely deep OTM and not in a volatile sector, and earnings are not pending, ect.... then you can always consider initiating the next months deal 10 trading days early.
I just don't see the rationale for treating a quality and defensive stock 10% OTM the same as one 30% OTM.
Doing lots of extra close down commissions that return $0.10 - $0.15 each, have the potential to return several thousand dollars a year.
Hence the reason I'd like to know how many trades a year are averaged and their average number of contracts.
I agree some trades should be closed early. I just question treating them all the same regardless of criteria.
Put_Master
<<< BTW, assuming one is not on excessive potential margin or overly concentrated in one stock or sector,... >>>
Scratch the word "potential".
I was thinking of the risks of "potentially" having too many stocks put to you.
The risks of being on margin are not potential. They are quite "real",... regardless of whether cash is being taken from your account each month or not.
Put _Master
Scratch the word "potential".
I was thinking of the risks of "potentially" having too many stocks put to you.
The risks of being on margin are not potential. They are quite "real",... regardless of whether cash is being taken from your account each month or not.
Put _Master
<<< OTM = out of the money. It doesn't mean anything else. >>>
Perhaps not to you, because you suggest investors evaluate and treat stocks 3% OTM the same as a stock 30% OTM.
However, in the "context" of the discussion, I think there is a difference as to whether a deal should be closed, depending on how deep OTM it is, what sector its in, how much cash is at risk, how concentrated one is in a particular stock or sector, where is it's L-T tech support, ect....
Afterall, his question was about 10 trading days. Not months.
It seems to offend you that I suggest trading via each deals analysis, vs some preset formula that you favor.
Again, his question was about days. Not months.
Hence, sector and degree OTM is a relevant issue.
Put_Master
Perhaps not to you, because you suggest investors evaluate and treat stocks 3% OTM the same as a stock 30% OTM.
However, in the "context" of the discussion, I think there is a difference as to whether a deal should be closed, depending on how deep OTM it is, what sector its in, how much cash is at risk, how concentrated one is in a particular stock or sector, where is it's L-T tech support, ect....
Afterall, his question was about 10 trading days. Not months.
It seems to offend you that I suggest trading via each deals analysis, vs some preset formula that you favor.
Again, his question was about days. Not months.
Hence, sector and degree OTM is a relevant issue.
Put_Master
Mark, If it's our bored Monkey from Yahoo, it's irrelevant to me. Readers will soon catch on to his lack of option knowledge and run in circles routines and those who comprehend will post corrections. It has started with nitpicking over what "out of the money" means. LOL. It's really not worth wasting my time on.Quote from dagnyt:
Hey Spin: does this sound familiar?
Spin