Coming back to optios. Need safer trades.
- Thread starter iSeriesGuy
- Start date
Quote from stevenpaul:
I got my own trade mixed up! My apologies to you spindr0 and anyone else that read my post above. I didn't sell a call. I simply bought the underlying and a quite deep in the money put where there was very little time premium. No call was sold to finance the put. I have no idea why I remembered it that way at first. The dividend did, however, finance the time premium of the put, with money left over as profit.
No problem. At least we're getting closer to being on the same page
As for the dividend financing the time premium of the put, it's to-may-to versus to-mah-to. Same thing. Dividends are priced into the options, somewhat evenly when ATM. Because of a pending dividend, puts become more expensive. The deeper the put is ITM, the more the dividend is priced into that side versus the same strike OTM call. So you're paying more for the put that you're buying and getting a dividend in return.
OK, so to properly address your point this time around, there is a key difference between stock+DITM put and an OTM call of similar net delta in some cases. I wrote about it in the thread:
http://www.elitetrader.com/vb/showthread.php?s=&postid=2704758&highlight=post2704758
There's no money to be made from the dividend by holding an OTM call, but there is money to be made from the dividend by holding the stock and an underpriced DITM put. The underlying and DITM put hedge each other very closely, so that their respective values move in tandem for a net P/L of 0. Time premium on such DITM puts is low enough as to be compensated for completely by the dividend, with money left over as profit, yet market exposure is 0.
If the options are fairly priced, there's no difference b/t the synthetics. As mentioned above, dividends are priced in.
OK, we're on the same page now. Forget the call being sold. Howwwww-ever...
The key to the above statement is finding an undervalued below parity ITM put (where I'm stretching the meaning of parity to include the dividend). Buying the stock against that put is a way to capitalize on the hope that the put returns to fair value (or is achieved via exercise).
Suppose I saw some overvalued puts. I could sell a bunch of them naked and if an hour later the underlying was unchanged and the puts were back at fair value, I could take the profit.
That gain doesn't validate that selling naked puts is a good strategy or is safe. It just means that I took advantage of a market inefficiency.
download platform, click analyze tab then thinkback tab. I backtest manually quite a bit.
No one seems to value the data as much as me...
Quote from EliteThink:
download platform, click analyze tab then thinkback tab. I backtest manually quite a bit.
No one seems to value the data as much as me...
I use ThinkBack all the time. I thought you were referring to something else. Thanks anyway.
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Quote from spindr0:
OK, we're on the same page now. Forget the call being sold. Howwwww-ever...
The key to the above statement is finding an undervalued below parity ITM put (where I'm stretching the meaning of parity to include the dividend). Buying the stock against that put is a way to capitalize on the hope that the put returns to fair value (or is achieved via exercise).
That is the strategy exactly. I wouldn't personally be able to find undervalued puts just by nosing around for them, but a screening service with the right algorithm could possibly find and publish them.
Agreed, success in this latter strategy doesn't validate naked put selling as being good or safe. Naked put selling, however, is unrelated to married put buying, which is the former strategy. The kind of married put trade proposed by Dividendium is special, in that it takes advantage of those rare cases where the dividend is not being accurately reflected in the put's price, due, I'm guessing, to a decline in IV. A married put strategy, under these circumstances in particular, would work consistently and is free of risk as long as the dividend is not cut. Selling puts (tantamount to trading covered calls) would work only if the market didn't tank, which is a big if.
The point of my naked put example (which you grasped) is that the key to the dividenduim.com concept is finding an undervalued put and utilize a strategy to take advantage of it. Whether there's a dividend or not, it all equates to buying OTM calls (equivalence) and hoping for a miracle.
You happen to be a believer in undervalued puts being identifiable, publishable and availble. I'm not - I'm a heretic
. Retail has little to no chance of getting to the had of the line as floor traders would suck up anything that's undervalued and lock them up, most likely via conversions and reversals.FWIW, a decline in IV does not cause undervalue, at least in terms of the married put strategy we're talking about. I'm not referring to current IV versus historical but a combo that locks in a profit upon execution (your premise). In order for that to happen, the price of either the option or the underlying must move and the other doesn't keep pace, dropping below parity (in this case, negative time premium). Again, not going to happen - and if it does, arbs will snatch it.
If IV were to decline, option prices would decline. If IV went to zero, the options would trade at parity (no time premium).
Here's a link to dividendium's explanation of their put protected dividend concept as well as an example:
http://www.dividendium.com/blog/index.php/how-can-we-invest-while-avoiding-losses/
Stock: SO
Stock Price: $34.59
Annual Dividend Yield: 4.86%
Option: SOWH
Option Ask: $5.80
Option Strike: $40.00
Option Expiration: 11/21/2008
Dividends Expected By Expiration: $0.42
Minimum Profit: ($40.00 + $0.42 â $34.59 â $5.80) $0.03
Max Loss Without Dividend: ($40.00 -$34.59 â $5.80) $-0.39
Percent Gain Needed For Profit: ($40.00 / $34.59 â 1) 15.6%
Here's their $64 question: "How can we invest while avoiding losses?"
IOW, it's in the 10-15 area. So a 15 IV stock needs to move 15.6% to make money? That's a pipe dream.
Rather than all of the smoke and mirrors, one could buy the equivalent OTM 40 strike call for maybe 15 cents. Save on the slippage and commissions and have the same lottery ticket.
They should be ashamed of pumping this stuff.
PS Note that the position can make money before 40 if the UL moves up quickly (timewise) since the put's delta is less than that of the UL and declines as price increases.
http://www.dividendium.com/blog/index.php/how-can-we-invest-while-avoiding-losses/
Stock: SO
Stock Price: $34.59
Annual Dividend Yield: 4.86%
Option: SOWH
Option Ask: $5.80
Option Strike: $40.00
Option Expiration: 11/21/2008
Dividends Expected By Expiration: $0.42
Minimum Profit: ($40.00 + $0.42 â $34.59 â $5.80) $0.03
Max Loss Without Dividend: ($40.00 -$34.59 â $5.80) $-0.39
Percent Gain Needed For Profit: ($40.00 / $34.59 â 1) 15.6%
Here's their $64 question: "How can we invest while avoiding losses?"
SO is a low beta utility. That means its implied volatility is an IOU.
IOW, it's in the 10-15 area. So a 15 IV stock needs to move 15.6% to make money? That's a pipe dream.Rather than all of the smoke and mirrors, one could buy the equivalent OTM 40 strike call for maybe 15 cents. Save on the slippage and commissions and have the same lottery ticket.
They should be ashamed of pumping this stuff.
PS Note that the position can make money before 40 if the UL moves up quickly (timewise) since the put's delta is less than that of the UL and declines as price increases.