Covered puts anyone?

[Pekelo]

I was wondering if anyone here employs covered calls little brother, the much less known covered puts as a strategy? If so, how do you pick the stocks and what other criteria do you use?

For those who don't know, a covered call is the opposite of a CC, short selling a stock while selling puts on it. Kind of works the same (but reverse) way too. You make limited money if the stock drops or stays level, and you are protected up to the premium if the stock goes higher.

Currently AMZN's and TSLA's put premiums are giving 1%/week returns on the 42 days expiry, that is about 6-7% of the stock price.

 

[truetype]

It's the economic equivalent of selling calls.

 

[InTheMaking]

I was wondering if anyone here employs covered calls little brother, the much less known covered puts as a strategy? If so, how do you pick the stocks and what other criteria do you use?

For those who don't know, a covered call is the opposite of a CC, short selling a stock while selling puts on it. Kind of works the same (but reverse) way too. You make limited money if the stock drops or stays level, and you are protected up to the premium if the stock goes higher.

Currently AMZN's and TSLA's put premiums are giving 1%/week returns on the 42 days expiry, that is about 6-7% of the stock price.

I had a position on INTC last quarter through a covered put. Short Intel stock and financing by short puts. I believe there are better ways to hold a short position. My broker's margin calculations were not attractive for a covered put strategy.

It makes more sense to do this when we have sustained levels of high VIX. And even then, just sell credit spreads on AMZN and TSLA. Those are two stocks I'm too chicken to short

 

[Pekelo]

And even then, just sell credit spreads on AMZN and TSLA. Those are two stocks I'm too chicken to short

I have an Iron Condor on Tesla thread running since June. Well, the whole topic came up when TT posted about a HF manager who got taken by shorting AMZN, and I thought covered puts would have been better than an outright short...

 

[InTheMaking]

I have an Iron Condor on Tesla thread running since June. Well, the whole topic came up TT posted about a HF manager who got taken by shorting AMZN, and I thought covered puts would have been better than an outright short...

I've seen that thread.
I'd been selling 2 to 4-week straddles on TSLA hedged with longer dated calendars. Was doing this most of last quarter. It was fetching a premium of 15 to 20, more than my expectations of a move. Stopped doing it now. VIX is getting uneasy. I still have my calendars. Waiting for TSLA price to "settle" after earnings.

 

[ET180]

As truetype mentioned, just sell an ITM call. Unless the stock is not hard to borrow and you want to generate some cash. The ITM call will have a smaller margin impact than directly short stock in case that matters to you.

When I have stronger conviction about direction, I'll usually short a short-term expiration straddle. If I'm bullish, I'll sell it so that the put is ITM. If I'm bearish, I'll sell it so that the call is ITM. Once the strike is hit, then I'll start selling more calls or puts to offset the ITM call or put. I like the extra cushion that the straddle provides. Of course, for something that I'm really bearish on (like IYR), I'll just short ITM calls. I like starting with a small initial position, wait a while, and then add to the position once it goes in my expected direction. I'm often wrong on the direction initially (too early or too late) so the premium provided by options helps.

 

[Pekelo]

As truetype mentioned, just sell an ITM call.

Margin reqs are different and although when you are right the ROI is better, but you also get screwed more if you are wrong...

Also I don't really want to sell naked calls.

 

[viruscore1]

Try that on dividend stock and see what happens.

 

[ET180]

Margin reqs are different and although when you are right the ROI is better, but you also get screwed more if you are wrong...

Also I don't really want to sell naked calls.

Well, say you short 100 shares of XYZ vs. shorting a single ITM call. The short ITM call will lose less because the premium received will partially offset the loss. Actually, you might even still make money if you're wrong, but not wrong by much. The downside is that if you're right, you likely won't make as much as if you had shorted the stock. That's why I say shorting calls is less risky than shorting stock. The problem is when people will sell 5 calls when they would have otherwise just shorted 100 shares.

 

[prc117f]

If you want to be short buying puts is the the way. Selling covered puts just means your long stock. If you do not want to be long the stock at the (strike price - premium) Then I would advice against such a trade.

If I want to short for hedging purposes I go long puts. selling calls naked is not my thing nor shorting stock outright and being exposed to unlimited risk + the cost of carry etc..