Conservative Options Strategy

Well I have shorted puts on ETF's and stocks for a number of years with IB , but am currently using MB trading and they don't allow selling of options except as a covered call so that is effecting my positioning on this particular trade.

Although the math might be the same, my thought process for each is different. My personal reason for shorting a put is that I think the underlying is going up. And although I had numerous successful trades doing that, a couple of stinkers wiped out all those earnings pretty quick. And on almost all of the successful trades, the premium I collected on the put was piddly compared to the return I would have received on a call. For me, collecting a $200 premium on a short ATM put and then seeing the corresponding $200 call finish $2000 ITM bothers me more than losing $200 on a naked call.

If I was short a 2010 50 LEAP PUT on COP and the stock dropped next week, sound risk management would probably get me stopped out with a loss. Whereas with a covered call, even though the stock is dropping in price, the short call is dropping also and I feel that would let me ride out the drop and stick to my plan on the position. I realize this may not make sense on paper, but trading is mostly mental and being able to buy back a short call at a cheaper price if the stock drops then starts to rebound, selling another call against it again if it runs up, fits my mentality.

That said, I am always open to criticism and suggestions from more successful traders if you have some.
 
Chris,you should understand that selling a naked put is essentially no different than doing the corresponding Buy write.

As a premium seller,one bad apple spoils the whole bunch.That is why you MUST be very disciplined.

You have lost me on the following

And on almost all of the successful trades, the premium I collected on the put was piddly compared to the return I would have received on a call. For me, collecting a $200 premium on a short ATM put and then seeing the corresponding $200 call finish $2000 ITM bothers me more than losing $200 on a naked call.

Compare apples to apples.We are talking about Long stock + short call vs a short put.They are the essesntially the same,and have the same risk reward..You need to understand reversals and conversions

Last but not least your COP 2010 50 leap example of the put vs the call is way off.It has nothing to do with your trading mentality.It has to do with most traders inability to admit they are WRONG and take a loss.Instaed the tendency is to take a shot by realising the gain on the short call and HOPING for a rebound. I promise you that your method of buying back the short call and "selling a call on the rally" will wipe you out..Not if...when..

You need to understand options better...

You need to develop a discipline...

You must understand the inherent risks as a premium seller







Quote from chrismontez:



Although the math might be the same, my thought process for each is different. My personal reason for shorting a put is that I think the underlying is going up. And although I had numerous successful trades doing that, a couple of stinkers wiped out all those earnings pretty quick. And on almost all of the successful trades, the premium I collected on the put was piddly compared to the return I would have received on a call. For me, collecting a $200 premium on a short ATM put and then seeing the corresponding $200 call finish $2000 ITM bothers me more than losing $200 on a naked call.

If I was short a 2010 50 LEAP PUT on COP and the stock dropped next week, sound risk management would probably get me stopped out with a loss. Whereas with a covered call, even though the stock is dropping in price, the short call is dropping also and I feel that would let me ride out the drop and stick to my plan on the position. I realize this may not make sense on paper, but trading is mostly mental and being able to buy back a short call at a cheaper price if the stock drops then starts to rebound, selling another call against it again if it runs up, fits my mentality.

That said, I am always open to criticism and suggestions from more successful traders if you have some.
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"Last but not least your COP 2010 50 leap example of the put vs the call is way off.It has nothing to do with your trading mentality.It has to do with most traders inability to admit they are WRONG and take a loss.Instaed the tendency is to take a shot by realising the gain on the short call and HOPING for a rebound. I promise you that your method of buying back the short call and "selling a call on the rally" will wipe you out..Not if...when..

The trade here is buying COP for the long haul, however I'm willing to take 20% profit on the stock if it gets called away next year. If I didn't sell the call and COP dropped 20%, I would still be long the stock. As I said before, I might trade some puts along the way down, but I like COP at this level even though I think it could trade in the $40-50 range for another year or so.

I have never shorted puts as a way to reduce the cost of buying a stock I wanted, only to collect premium

You are right that I have bought calendar spreads that I didn't get out of soon enough because I waited til the short leg expired and by then the long leg was worthless. 2998 in particular. Which is why I'm more apt now to go naked and go short/long the underlying on a short term basis if the naked option starts going against me.
 
Quote from chrismontez:

Although the math might be the same, my thought process for each is different. My personal reason for shorting a put is that I think the underlying is going up.


1) The reasosn for writing a covered call should also be that you believe the stock is going higher. Yes, I know most prefer to write the CC when they believe the stock is NOT going higher. They want to keep the stock AND keep 100% of the option premium. That is poor strategy.

2) A CC is a BULLISH position: it's long delta, it makes a profit when the stock moves higher and it loses money if the stock moves lower (by more than the premium collected). That's bullish.

If tyou write a naked put when you 'feel' that way, you should write a CC when you 'feel' that way. The positions are equivalent.

For me, collecting a $200 premium on a short ATM put and then seeing the corresponding $200 call finish $2000 ITM bothers me more than losing $200 on a naked call.

If the put you sold finishes 20 points in the money and all you have to show for it is the $200 premium from the put sale, that's a loser. You know that.

But, if you sell the call for the same $200 and it goes out worthless, you have lost the same 20 points on the stock.

You may 'feel' better about losing 20 points on the stoick than 20 points on the put - but they represent the identical loss. Identical (assuming the put and call we are discussing have the same strike and expiration).


If I was short a 2010 50 LEAP PUT on COP and the stock dropped next week, sound risk management would probably get me stopped out with a loss.

If that's true for you, why would you not stop yourself out of the CC?

Whereas with a covered call, even though the stock is dropping in price, the short call is dropping also and I feel that would let me ride out the drop and stick to my plan on the position.

The covered call premium and the put premium are essentially the same (ignoring carrying costs) and the call can only decline in price by that small amount while the stock declines even faster (at first) than the put you sold. You <i>must</i> be able to see this to trade options with any chance of success.

If you tell me that a CC is within your comfort zone and that naked puts are not, I'll accept that fact. But I will tell you that it makes no sense.

I realize this may not make sense on paper, but trading is mostly mental and being able to buy back a short call at a cheaper price if the stock drops then starts to rebound, selling another call against it again if it runs up, fits my mentality.

So be it. But it does not fit your pocketbook or long term financial well-being.

Best of luck.

Mark
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Quote from chrismontez:

The trade here is buying COP for the long haul, however I'm willing to take 20% profit on the stock if it gets called away next year.

I have never shorted puts as a way to reduce the cost of buying a stock I wanted, only to collect premium

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If COP is above 50 and is called away, you have accepted that 20% profit and own no stock.

If you sell the naked put and the stock finishes above the strike, you have THE SAME 20% PROFIT and own no stock.

And if the stock is below 50, the stock is put to you and you own the shares - just as if you held a CC position.

The results are identical: 20% profit >50. long stock <50.

Mark
 
"And if the stock is below 50, the stock is put to you and you own the shares - just as if you held a CC position."

No.
I do not have options exercised against me at expiration. When I trade options it is strictly a cash trade, I settle everything at expiration if I'm still in the position. The last thing I want is to be long hundreds of shares of a stock I thought was going to go up and then fell. In this particular instance, because IV is high, I'm willing to write a covered call on the stock position I hold hoping that IV will collapse and I can buy it back later at a lower price. I expect COP to trade below my $50 entry again in 2009.
 
"2) A CC is a BULLISH position: it's long delta, it makes a profit when the stock moves higher and it loses money if the stock moves lower (by more than the premium collected). That's bullish.

If tyou write a naked put when you 'feel' that way, you should write a CC when you 'feel' that way. The positions are equivalent."

It also makes money if the stock does little, which is what I am hoping for. If I thought COP was going to shoot up to $80 there is no way I would write a covered call on it. I'm writing it because I think COP will be range bound for awhile and I want to collect the premium on the call while the stock in that range and the short call decreases in value. If I was bullish on COP running up quickly, I would buy naked calls. In the past I might have sold naked puts, but in MY experience, the reward is not worth the risk.
 
Quote from chrismontez:

I do not have options exercised against me at expiration. When I trade options it is strictly a cash trade
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1) The term is 'assigned'

2) You are willing to BUY STOCK NOW and write covered calls.

How is that any different from writing naked puts now and BUYING STOCK LATER?

It is NOT different. The plays are identical.



If I thought COP was going to shoot up to $80 there is no way I would write a covered call on it. I'm writing it because I think COP will be range bound for awhile and I want to collect the premium on the call while the stock in that range and the short call decreases in value

1) How good is your PROVEN track record in predicting which stocks will move from 50 to 80?

How good is your PROVEN track record of knowing when a stock will be range-bound.

If you are really skilled at market direction predictions, how many millions did you make last year? Nothing less than 100 million, I assume.

2) If you would not write a CC on such a stock, would you write a NP (naked put)?

You do understand that the profit potential is exactly the same, don't you? And if the stock is range-bound, the profit from either strategy is identical. Identical.

If I think a stock is moving from 50 to 80, I'd be thrilled to write a covered call. In your example, you'd earn a 20% return in one year. Is that so bad? And you earn that return just in case your crystal ball is not perfect and the stock only rises to 52.

You are simply turning a blind eye to what is true. But, that is your right.

Mark
 
This seems to be getting off kilter. I do not write covered calls as a trading strategy. I bought COP as an investment at $49.50 because I thought it was a good buy. I sold an ATM LEAP because the high IV/ premium made it worth my while to risk having the stock called away at $50. And since I have no idea where COP will actually be a year from now the premium gives me some downside protection if I've mistimed my purchase. However, my guess is that unless oil takes a big run up or the economy takes off, COP will PROBABLY stay within it's recent low of $41 and the $64 S/R level where I used to trade off of.
I think if you step back and look at it, it's a pretty simple scenario.

Yes, IF I could sell naked puts in this account I could have sold the put and used the premium to reduce the cost of buying the stock at a later date .
 
If you can make money doing CCs (or NPs), great. But as a few people have mentioned there are better ways to use options. With far less risk.

Look into index strats (SPX, MNX, SPY, DIA, DJX, etc) or ETFs of your choice. Or emini futures options. IMHO doing enough CC/NP/Calendars, whatever, on stocks to lower risk would be much easier to trade and manage just using indexes.

It's a tough game, so however you do it Good Luck!
 
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