Closing naked put positions

[gody3]

Quote from 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.....

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.

If you closed those positions and sold new options taking in $1.00 or more per contract and freeing up that margin 30 days ahead, how much more that would be? I am not going to calculate that for you but experienced traders know that is far more income than sitting there with close to no time decay chasing nickles and dimes while tying up huge chunks of margin.

As a basic option selling strategy, you buyback your sold options when the theta is less than the theta for the next period's option. It doesn't matter what the value of that option is since you have less to gain.

What you are telling me is that you don't understand money management and that you chase pennies and overlook dollars.

 

[Put_Master]

<<< If you closed those positions and sold new options taking in $1.00 or more per contract and freeing up that margin 30 days ahead, how much more that would be? >>>

His question was not about 30 days or more.
It was about 10 days or less.

Nor is the issue whether the next monthly trade took in $1.00 or more.
The next trade might be selling his naked put on a $15 stock.
In which case a mere $0.50 premium would yield an excellent 40% annualized return.



<<< I am not going to calculate that for you but experienced traders know that is far more income than sitting there with close to no time decay chasing nickles and dimes while tying up huge chunks of margin. >>>

His question was not about nickles and dimes. It was about $10 - $15 cents.
And giving up $0.15 of premium with just 10 trading days to go, is actually quite a bit of money, plus extra commissions, for such a short period of time.
And you have to remember the "context" of his question. That being, his trade was deep OTM with just 10 days to go.

It was in the "context" of his actual question, that I felt it was questionable whether it made sense to return that much money ($0.15), plus commissions, and then reinvest the cash in another trade 10 days early, which would not be as predictable and deep OTM.

If he asked about closing down a trade a month early, with only $0.05 - $0.10 remaining,... and it was only slightly or moderately OTM,... and it was in a volatile sector or industry,... and he was on a moderate amount of margin, ect.... I would have given a totally different reply.
But I chose to answer his actual question.
And part of my answer involved asking him additional questions about his stock selections, trading habits, ect.... which some here ridiculed.

I've never stated, hinted or implied that buying back a trade early is a bad idea.
I've simply stated that it depends on the circumstances of each trade.
I've bought back more naked puts early than I've let expire myself. But not on a trade 30% OTM, with quite a bit of cash remaining, and a non volatile stock, and only 10 days until expiration.

If he is doing naked puts, he's at level 3. Hence, if he sees another trade he likes, he can always consider doing the trade, while he waits for his deep OTM trade on his "quality" stocks to expire in 10 trading days.
But again,... if his question was about 30 days, and only $0.05 - $0.10, and not deep OTM, and not the quality stocks he mentioned, and was in a volatile sector, and he was on quite a bit of margin, ect.... then we'd be having a different conversation.
I attempted to answer his "actual" question. Not some generic theoretical one.

Put Master

 

[gody3]

This is lack of experience and know how on your part. When you sell a put for 10-15 cents, what is your upside? It's even worse when it's a spread as you have done many times. I mean is this more likely to go down to 0.05 or to widen to 0.90? the market is in a correction, and you are picking up pennies before a steam roller. That is a horrible risk/reward situation. Your downside is unlimited and your profits are limited to 10-15 cents. There is no time decay. professional traders close out positions when their spreads get to be 0.20 to 0.30 cents and 3 weeks left to expiration. You're an amateur!

But you have not learned anything. I think if you go back through old posts you will find that a lot of people have been recommending that you avoid taking large risks in an attempt to make small returns. It is a lesson most learned long ago.

 

[heech]

I've given this issue some serious consideration... and although I'm not convinced I know "the" answer (seems like others on this thread have already got the patent on "the" answer)... I know how I'm strongly leaning at this point.

Just by way of context: I write about 800-1000 front-month contracts each and every month on 50-70 symbols.

I've decided that the right thing to do in *most* cases is to hold until expiration. There are extreme scenarios where I might feel differently, like if you're 50% OTM with 20 days until expiration... I might want to put that money to work elsewhere. But for 90% of the positions I get into, holding to expiration is the right choice.

I realize it's only nickels and dimes on the profit side... and on the other side, we all have anecdotes of horrific reversals where a guaranteed profit turned to a loss.

But think about the numbers here from a dispassionate, probabilistic point of view. Think about the numbers by taking the *opposite* side of the trade.

What percentage of positions reverse a week before expiration, turning a 0.05 profit into a loss? Very few... if this type of reversal was likely, we'd all get into the business of buying deep OTM options 10 days before expiration and hoping for that reversal.

There are people on this thread who passionately argue you shouldn't "risk dollars to make nickels". This is classic trading psychology. There's decades of research showing that human beings are risk-averse with profits, but risk-seeking with losses. (If you're down $1k in Vegas, you're more likely to take another shot at the craps table.. then if you were *up* $1k.)

We feel *more* emotional pain from losing out on profit, than we do from losing more on a losing position.

So, I think I have to ignore the anecdotes. I know some of my positions will come back and bite me, and emotionally it will be painful... but I also firmly believe that on average, for each "could have closed" position that bites me and loses a dollar, I'll have 12 "could have closed" positions that make me another dime each.

 

[Put_Master]

<<< This is lack of experience and know how on your part. When you sell a put for 10-15 cents, what is your upside? >>>


I seem to be the only one currently addressing his actual question. I have no idea what question you are responding to, and clearly don't either.
I don't know about you, but I'd be happy to sell naked put on a quality stock, trading deep OTM, with a $0.15 premium and only 10 days remaining before expiration. I'll take a stock with a strike up to $22.50.
Please find me a stock like that!
PLEASE!

Put Master

 

[Put_Master]

<<< What percentage of positions reverse a week before expiration, turning a 0.05 profit into a loss? Very few... if this type of reversal was likely, we'd all get into the business of buying deep OTM options 10 days before expiration and hoping for that reversal. >>>

I appreciate you adding the "context" of the number of contracts you trade each month.
That is relevant, in terms of the commission cost of closing down deep OTM trades 10 days early and giving back all those $0.05.
However, he was discussing returning premiums of $0.10 - $0.15. Not mere nickels.
There are times I would recommend closing down a trade with only 10 days and $0.05 remaining..... depending on how deep OTM it was trading, how concentrated I was in the stock, what industry it was in, ect....

There really is no absolute right or wrong answer.... which is the point I was trying to make.
Plus the issue of what each of us considers deep OTM?
Hence, I don't understand why some here have turned this "discussion" into a reason to ridicule or insult others opinions.
I appreciate your civil response.

Put Master

 

[heech]

Quote from Put_Master:
That is relevant, in terms of the commission cost of closing down deep OTM trades 10 days early and giving back all those $0.05.

I'm more on your side than the other guy's side.

I don't think commission cost is as big deal for me as the ask/bid spread. The OTM options don't exactly have a lot of volume... no one will ever hit you if you sit on the ask/bid, so you're giving up 0.05-0.1 a contract right there.

 

[gody3]

Quote from Put_Master:


His question was not about nickles and dimes. It was about $10 - $15 cents. And giving up $0.15 of premium with just 10 trading days to go, is actually quite a bit of money, plus extra commissions, for such a short period of time.

The last time that you added a nickel and a dime, did you come up with something other than 15 cents? Oh wait, you just did.

1) His question was not about nickles and dimes

2) It was about $10 - $15 cents

Ummm, when is a dime (see #1) not equal to 10 cents (see #2)???
It's no wonder that you've had such a hard time with this market.

 

[gody3]

Quote from Put_Master:

That is relevant, in terms of the commission cost of closing down deep OTM trades 10 days early and giving back all those $0.05.
However, he was discussing returning premiums of $0.10 - $0.15. Not mere nickels.

yeh, I too would dismiss Mr. Heech's opinion too. After all, he only sells about 800-1000 front-month contracts each and every month. He's just a piker trader, unlike you.

 

[Put_Master]

Gody3, I really don't understand the attitute of your posts.
You seem to have a chip on your shoulder.
As for how I'm doing in the market, I'm doing just fine.
I have about 40 active put spreads expiring between May and Sept., and they are all currently OTM.
Fact is, I just received confirmation of another trade, and plan to post it on the new "Option Trading" board shortly.
The stock is TRV.

BTW, I sure hope your not who I suspect you are, from the Option and Futures board.... are you?

Put Master