consistent income

[mark trader]

Thanks for the few good postings that I got from my questions, I appreciate your willingness to help and will look into the different areas/strategies suggested.

If you have nothing constructive to say, please DO NOT reply to my posting, save yourself the time and do something useful instead.

 

[xflat2186]

I think what he’s saying is that 4 % a month is pretty much a joke in terms of risk. Every basis point over the risk free rate of return has incremental risk associated with it. That’s just a simple fact not an opinion. So 12 months starting at 4% ... you do the compound interest and see where that type of return falls.

By the way there is a significant point which all the posters here have left out. Covered calls and naked puts are EXACTLY the SAME. They are options equivalent positions, again its not an opinion its an options fact.

I don’t think anyone was getting on your case, and this topic has been discussed at nausium here.

 

[El OchoCinco]

Quote from c.chugani:

I always hear this tremendous risk with naked puts and covered call strategies but lets assume one is investing long term:

wouldn't covered calls reduce the average cost per share? Isn't it a method to generate income from stocks you are willing to hold in your portfolio?

Regarding naked puts, the same thing applies. For example, if one wants to operate long term, and wants to buy a stock at 3 dollars. But said stock is currently trading at 5 dollars. Well you sell puts at 3 dollar strike and if they end ITM - well you were willing to buy the stock at that price anyways, right? On the other hand if they end OTM, you end up with a premium..

What other associated risks do these two strategies have?

If you already own a diverse portfolio of stocks then sure selling covered calls does not add any additional risk to your portfolio although it does cap profits. If you do cash secured short puts on stocks you would own anyway then you are already taking on the risk of stock ownership but slightly deferred as you are hoping to never need to be assigned, but gladly accept it if one must.

The issue is that when you initiaite new positions of naked puts or covered calls most beginners chase premiums in high vol stocks or or take on more risk than they should and end up in a hole. In other words, most newbie naked put sellers never really account for being assigned or owning the stock or even taking large losses on a gapper crapper. They usually incorrectly calculate what their real risk is versus the small premiums they collect. Most are infatuated with expiring options and "income" that they ignore the greeks and improperly manage their positions. It is this frequent occurrence we have all witness here from posters discussing naked puts that leads as all usually to the conclusion that newbies in naked puts will often blow up though there are exceptions.

 

[dream_maker]

what about selling a strangle on ES or SPX? the problem is with the adjustment when one of the wing is about to be breached.

what rolling or adjustment technique would you all use?

dm

Quote from newguy05:

1) Your statements are valid, if you have ENOUGH cash to cover a naked put trade, and your intention is to BUY the underlying anyway. Then it is a good strategy. I used it many times with good results.
a) I want to buy 1000 shares of xyz at $20
b) I sell xyz 20P at $1 premium
c) If xyz never drops to $20 at expiration, i pocket $1 and walk away.
d) if xyz drops to $20, i let it get assigned. My cost basis is now $19.
e) I then sell a covered call - 21C at $1. If xyz goes above $21 at expiration, i walk away with $2 +$1 . Else my cost basis is now $18 vs buying the stock outright at $20.

Of course above is only an EXECUTION method. You still need some edge / TA to pick the correct underlying entry and strikes to begin with. Just like if you are buying the stocks outright.

2) People get in trouble when they start to naked short highly vol stocks such as leh, solf, etc.. and take on large positions that barely meet the margin requirement. Then when the stock gaps the other direction even briefly, you are in a world of hurt.

I found writing naked call/put on the spx/es pretty good, because it's relatively stable and you can somewhat predict the movement to be at most ~5% in either direction. As oppose to above mentioned stocks, where it can gap 10-50% in a day or 2.

 

[mark trader]

Selling Puts seem to have low risk, since as soon as the trade starts getting away from you, you could close (buy to close) the position before the strike is hit and get out without getting assigned?

So, I think I am missing something, when I keep hearing the trade could "blow up"? it seems to me, it would only blow up when the short position is not closed and the trade is allow to continue to go in the opposite direction.

Am I missing something?

 

[cvds16]

what if the stock gaps down 50% ? You won't be able to cover at all.

 

[Nanook]

Quote from mark trader:

Selling Puts seem to have low risk, since as soon as the trade starts getting away from you, you could close (buy to close) the position before the strike is hit and get out without getting assigned?

So, I think I am missing something, when I keep hearing the trade could "blow up"? it seems to me, it would only blow up when the short position is not closed and the trade is allow to continue to go in the opposite direction.

Am I missing something?

Yes, it is called "gaps". Either a gap up when selling calls, or a gap down when selling puts.
How big the gap is -- no one can anticipate (re: BSC).
You/me/anyone cannot predict a "gap". The only way to "manage" a gap is after-the-fact. And it usually means the graveyard (i.e., end of your trading career).
Tip #1: Educate yourself about spreads.

 

[mark trader]

How does the spread protect you from a big gap up or down?

Lets say you sold and also bought Puts with the same month expiration.

The stock gap down and you are assigned.... the premium from the long puts most likely will not be able to cover the money required to purchase the underlying stock. So it seems you really have to want to own the stock with or without hedging?

 

[El OchoCinco]

Quote from mark trader:

Selling Puts seem to have low risk, since as soon as the trade starts getting away from you, you could close (buy to close) the position before the strike is hit and get out without getting assigned?

So, I think I am missing something, when I keep hearing the trade could "blow up"? it seems to me, it would only blow up when the short position is not closed and the trade is allow to continue to go in the opposite direction.

Am I missing something?

Well let me ask you this. When a stock drops in price, does it move nice and slow giving you plenty of time to close out before the loss gets too big or can a stock gap down leading to the $1.00 put you sold suddenly spiking to $8.00?

Using spreads you define the risk ahead of time and limit it so you can better manage your portfolio.

 

[cvds16]

Quote from mark trader:

How does the spread protect you from a big gap up or down?

Lets say you sold and also bought Puts with the same month expiration.

The stock gap down and you are assigned.... the premium from the long puts most likely will not be able to cover the money required to purchase the underlying stock. So it seems you really have to want to own the stock with or without hedging?

you exercise your long put, or, more likely, sell the long put and sell the long stock, you will still lose money, but you'll survive for another round