collecting premium / cashing out

[JJacksET4]

I'm not going to get into the impossible argument over the "free" money of selling puts, etc. but here are some other thoughts on it or items to note:

1. If i am reading it correctly, those AAPL Nov puts now bid at $955, so even if $860 or whatever will eventually work out, the seller could have got more by timing it better. This shows the values are fluid.

2. Percentage chances don't mean much if you get destroyed one time. For example, 2% means very little if you do the trade once and it happens once. If you only have a .1% chance of dying when skydiving, but you try it once and it happens, well...

3. Percentage chances don't know the underlying, the current market, etc, etc. I would bet when Enron was at times stable at 70, 80, etc. the models showed basically 0% chance of it even falling below $50 for example. Same for Lehman, etc.

But, if a person wants to sell puts, I'm not going to be able to stop them.

JJacksET4

 

[syd697]

Quote from iceman1:

no reason to sell puts naked... there is no "comfortable" price to own any stock. I think the past 11 years have taught us that (that is, taught the smart ones of "us"). I was around trading in 2000-2001. Any comfortable prices back then to own any stock? What about 2008-2009? Any quality stalwarts worth owning. Now, if you have a money tree in the back yard then you can hold until infinity and eventually earn a profit on the comfortable stocks you sold naked puts on!

what is the counter-argument to that assertion ?

If you're never in the game, you never give yourself a chance to win. Conditions may change, making the investing landscape riskier at times (2000-2001 & 2008-2009)

The same argument can be said about buying naked stocks long as for selling put options naked. What's a comfortable level? There's risk in everything. Eventually, if you want to try to make money in the stock market, you got to jump in somewhere at some price, yes?

If you do your due diligence and get in at a level that you deem "comfortable" or "attractive", then you've done your job. Even still, a stock can go a lot lower than what you feel is a comfortable level. That's the risk you take with investing in the stock market.

My whole point with selling put options is that you're going to take a stab at owning stocks at much lower levels than where it's currently trading, and if it gets to your level, then fine, you own the stock now. If it doesn't fall to your level, then you keep the premium.

There's no more risk in selling put options than there is to buying stocks outright. Both have the risk that the stock falls to zero. As long as you don't sell more puts than you're comfortable owning the stock if you get assigned, then you've done your job.

Now, I also never said to just let your stock fall indefinitely to zero as a risk management tool. I'm all for using stops on any investment. Even if you think you're buying at a good price, it can still fall more. It sucks being wrong of course, but stops are there to get you out.

Yes, if you were investing on the long side in 2000-2001 & 2008-2009, you saw your investments fall, whether that was thru straight stock buying or put-selling assignment. Same risk for both strategies.

When is it ever a good time to invest? No one knows for sure, so you have to strike when you think the time is right. I like doing it thru put option selling. My opinion.

 

[optionnew]

Quote from syd697:

If you're never in the game, you never give yourself a chance to win. Conditions may change, making the investing landscape riskier at times (2000-2001 & 2008-2009)

The same argument can be said about buying naked stocks long as for selling put options naked. What's a comfortable level? There's risk in everything. Eventually, if you want to try to make money in the stock market, you got to jump in somewhere at some price, yes?

If you do your due diligence and get in at a level that you deem "comfortable" or "attractive", then you've done your job. Even still, a stock can go a lot lower than what you feel is a comfortable level. That's the risk you take with investing in the stock market.

My whole point with selling put options is that you're going to take a stab at owning stocks at much lower levels than where it's currently trading, and if it gets to your level, then fine, you own the stock now. If it doesn't fall to your level, then you keep the premium.

.

IMHO there are some advantages of selling naked puts versus buying the stock outright, but there is some notable disadvantages as well.
1. IV explosion. If there is ex Oct 87 crash etc & volatility goes to the roof, your loss on 1 naked put could be much greater then owning 100 of the underlying.
2. Options are less liquid. If you want to get out of your position its much more dificult with options, there is always bid/ask spread, and those spreads can get very nasty.
3. Much more room for error. No matter how carefull you are, the chances over the years you will be overleveraging or violate your margin requirments, are much greater when you sell naked puts vs owning plain vanila stock.
Does anyone know of any other disadvanages why naked puts are more risky (besides loosing out on the upside)?

 

[DontMissTheBus]

Unfortunately, no one will finance your trades at the same terms as AIG.

Not sure if you are just joking around or being willfully dense to the risk profile of your 'strategy'.

Quote from konviction:

If I can amass billions before going bankrupt, I could live happily ever after.

 

[lindq]

Quote from konviction:



Plus the author says that I should never sell puts on stocks I don't want to own long term. So either way its kind of a win-win.

I really scream every time I see this statement, because it is such a pile of B.S.

You may justify writing a put on XYZ, thinking that you wouldn't mind owning it. So 30 days from now XYZ tanks on bad news and forecasts softer earnings for the remainder of the year, and you end up holding XYZ in your now diminished account while it continues to tank.

30 days later the same thing happens to ABC. And then to ERTS. And so forth.

You think it doesn't happen? Think again.

There is a very big difference between buying a stock at the time of your choosing, versus having the market put it to you when the shit hits the fan, which it always does.

If you are a good enough directional trader to be profiting consistently selling premium, then you will do MUCH better just trading the underlying.

 

[konviction]

Quote from JJacksET4:

I'm not going to get into the impossible argument over the "free" money of selling puts, etc. but here are some other thoughts on it or items to note:

1. If i am reading it correctly, those AAPL Nov puts now bid at $955, so even if $860 or whatever will eventually work out, the seller could have got more by timing it better. This shows the values are fluid.

2. Percentage chances don't mean much if you get destroyed one time. For example, 2% means very little if you do the trade once and it happens once. If you only have a .1% chance of dying when skydiving, but you try it once and it happens, well...

3. Percentage chances don't know the underlying, the current market, etc, etc. I would bet when Enron was at times stable at 70, 80, etc. the models showed basically 0% chance of it even falling below $50 for example. Same for Lehman, etc.

But, if a person wants to sell puts, I'm not going to be able to stop them.

A man walks into a Vegas casino and puts 100 million dollars on his lucky number at the roulette table. He has a 2.6% chance of winning , but then the unthinkable happens.. his number is hit and the casino just lost big. This small percentage of a loss doesn't stop new casinos from opening.

In the markets, it looks like sellers have the house edge in their favor

 

[konviction]

Quote from syd697:

If you're never in the game, you never give yourself a chance to win. Conditions may change, making the investing landscape riskier at times (2000-2001 & 2008-2009)

The same argument can be said about buying naked stocks long as for selling put options naked. What's a comfortable level? There's risk in everything. Eventually, if you want to try to make money in the stock market, you got to jump in somewhere at some price, yes?

If you do your due diligence and get in at a level that you deem "comfortable" or "attractive", then you've done your job. Even still, a stock can go a lot lower than what you feel is a comfortable level. That's the risk you take with investing in the stock market.

My whole point with selling put options is that you're going to take a stab at owning stocks at much lower levels than where it's currently trading, and if it gets to your level, then fine, you own the stock now. If it doesn't fall to your level, then you keep the premium.

There's no more risk in selling put options than there is to buying stocks outright. Both have the risk that the stock falls to zero. As long as you don't sell more puts than you're comfortable owning the stock if you get assigned, then you've done your job.

Now, I also never said to just let your stock fall indefinitely to zero as a risk management tool. I'm all for using stops on any investment. Even if you think you're buying at a good price, it can still fall more. It sucks being wrong of course, but stops are there to get you out.

Yes, if you were investing on the long side in 2000-2001 & 2008-2009, you saw your investments fall, whether that was thru straight stock buying or put-selling assignment. Same risk for both strategies.


When is it ever a good time to invest? No one knows for sure, so you have to strike when you think the time is right. I like doing it thru put option selling. My opinion.

+1 on this post

 

[atticus]

Quote from optionnew:

IMHO there are some advantages of selling naked puts versus buying the stock outright, but there is some notable disadvantages as well.
1. IV explosion. If there is ex Oct 87 crash etc & volatility goes to the roof, your loss on 1 naked put could be much greater then owning 100 of the underlying.
2. Options are less liquid. If you want to get out of your position its much more dificult with options, there is always bid/ask spread, and those spreads can get very nasty.
3. Much more room for error. No matter how carefull you are, the chances over the years you will be overleveraging or violate your margin requirments, are much greater when you sell naked puts vs owning plain vanila stock.
Does anyone know of any other disadvanages why naked puts are more risky (besides loosing out on the upside)?

I DK on the losing trades by blaming my assistants for unauthorized access to my trading accounts. Works like a charm.

 

[newguy05]

Quote from syd697:


The main thrust of my chapter on put selling on stocks is to choose stocks that you'd be comfortable owning if the stock happens to fall down to your chosen strike, and possibly even below the strike price. Stick to quality stalwarts that you think will eventually give you upside returns.

No strategy is infallible, even put selling, and I never said that there were no risks involved. But if you don't overleverage and only stick with stocks you like, the strategy could be rewarding.

You are basically just talking about selling cash covered puts vs buying underly outright. Pro you reduce cost basis / pocket the premium if the underly drops/flat. Con if the underly gaps your upside profit is limited to the premium sold. No free lunch.

All that is fine and well and been written many times, but probably need to highlight the word *don't overleverage*. When beginners read your book if they planned to buy 100 shares of aapl for $40k, some will think they should now sell $40k worth of put option contracts which is ~6:1 leverage and disaster waiting to happen. When in reality cash covered equivalent is to sell only 1 put contract.

If you already made that very clear in the book then i dont see a problem.

 

[iceman1]

Quote from syd697:

If you're never in the game, you never give yourself a chance to win. Conditions may change, making the investing landscape riskier at times (2000-2001 & 2008-2009)

The same argument can be said about buying naked stocks long as for selling put options naked. What's a comfortable level? There's risk in everything. Eventually, if you want to try to make money in the stock market, you got to jump in somewhere at some price, yes?

If you do your due diligence and get in at a level that you deem "comfortable" or "attractive", then you've done your job. Even still, a stock can go a lot lower than what you feel is a comfortable level. That's the risk you take with investing in the stock market.

My whole point with selling put options is that you're going to take a stab at owning stocks at much lower levels than where it's currently trading, and if it gets to your level, then fine, you own the stock now. If it doesn't fall to your level, then you keep the premium.

There's no more risk in selling put options than there is to buying stocks outright. Both have the risk that the stock falls to zero. As long as you don't sell more puts than you're comfortable owning the stock if you get assigned, then you've done your job.

Now, I also never said to just let your stock fall indefinitely to zero as a risk management tool. I'm all for using stops on any investment. Even if you think you're buying at a good price, it can still fall more. It sucks being wrong of course, but stops are there to get you out.

Yes, if you were investing on the long side in 2000-2001 & 2008-2009, you saw your investments fall, whether that was thru straight stock buying or put-selling assignment. Same risk for both strategies.

When is it ever a good time to invest? No one knows for sure, so you have to strike when you think the time is right. I like doing it thru put option selling. My opinion.

maybe you don't get the point.... (although i respect your explanation)

this is not about selling premium; it's about selling naked. Why not buy a lower strike put (front month or back month) - or leg in if and when you get an opportunity to create a decent R/R.

Answer: greed coupled with a perception that selling naked puts is a "get rich scheme" and that "sellers have the edge." You don't make as much, if you consider risk, as you will maybe lose on the long option. Much easier to click on sell naked and then cross fingers.

I would like to have the OP tell us how long he has been in the markets.. and selling premium naked. It is 95% likely he just began trading options, never read a book, took a class and knows little to nothing about it. Probably knows more about his favorite sports team than selling naked puts. He can do the high school math and knows that if aapl hits 370 his puts will close at or near 35. So he is willing to accept a loss of about 13,200 for a chance to make approx 4300 ---IF--- his puts close at -0-; but subtract from that ratio if the puts close at 1.50 or at 5 (i.e. aapl pinning @ 400) - - - rather than learning a little about option risk, and reverse this ratio (3/1) by doing a strategy or creating a position with a + r/r.

I sell premium all the time. Just don't see the need, with limited and unique exceptions or circumstances, and reasonable size relative to account value and liquid assets... to sell naked.

I had to learn this the hard way. As I said: the market is the best teacher - better than any forum on ET.com

He might run the table - this time. That, as any experienced (equity or option) trader knows, is the kiss of death: Easy come, easier.

So be careful what you wish for.

(btw: I am short the 405 call and 405 put - have a positive expectancy whether AAPl hits -0- or 1000 this Friday)