I am long 200 shares of URI with a cost of $155.91. I sold two 21 August Covered Calls at $157.50 strike. If it is called away, I will be up $7.34 for each share. Question is: If I want to take some of the call premium I received, and buy a protective put, what would be the best way to go about selecting the most advantageous strike? Also, would I buy the same expiration as my calls, or go out longer. Any help would be appreciated.
How to select a protective put....
- Thread starter marc82much
- Start date
Not intuitive which one you "should" buy or which would be best.
Just determine how much of your $30,000 capital you're willing to risk on a stop, and buy your put there. KISS, as always.
Just determine how much of your $30,000 capital you're willing to risk on a stop, and buy your put there. KISS, as always.
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If you purchase a protective put, you effectively put a collar on your position. There is no optimum. It depends on your opinion of what happen next and your objective, you can do a no cost, a credit or a debit collar.
But always remember: There is no free lunch.
Also keep in mind that selling a covered call is identical to selling a naked put at the same strike, so your position is identical to someone who sold a naked put. Basically someone without shares could’ve sold a put at the same 157.50 strike and have the same exact return, and will end up with shares if the stock price doesn’t exceed that strike at expiration.
That's true, and that is how I got the two hundred shares. I wrote a Bull Put Spread, got $2.00, it went in the money and I did not buy it back. Just took the assignment. That was last week. Then yesterday, I wrote 2 calls at $157.50 (my original short put) and received $5.75. If it gets called away, they can have it, and I will book a nice profit.
As others have said be aware of the synthetics you may be creating by mixing stock, calls and puts. IOW long stock plus long put = a long call. If you, for example, habitually traded long stock/long put then it may be easier just to trade a call. Anyway, lots to think about.
But your consideration of "should I buy a protective put and at what strike"?... has nothing to do with that. The put is all about protecting your $30,000 capital investment.
Matt_ORATS
Sponsor
Hi Marc
I would take a look at a backtest of URI and even similar tickers and see what type of strategy you want to do. You are doing the 'Wheel' strategy that is usually not collared when the stock is assigned. I've run two backtests, one on the short term puts you are considering and another on a longer term OTM put that usually performs better in backtests and has less drag, but also offers less protection.
Here's the 14 day, 30 delta put test with a current scan of these trades:
Here's the 120 day, 20 delta put test with a current scan of these trades:
Here's the stock for comparison:
I would take a look at a backtest of URI and even similar tickers and see what type of strategy you want to do. You are doing the 'Wheel' strategy that is usually not collared when the stock is assigned. I've run two backtests, one on the short term puts you are considering and another on a longer term OTM put that usually performs better in backtests and has less drag, but also offers less protection.
Here's the 14 day, 30 delta put test with a current scan of these trades:
Here's the 120 day, 20 delta put test with a current scan of these trades:
Here's the stock for comparison:
Your best protection would be a strike near your basis. Buy enough Put Delta to match your long shares. If the 155 strike put has 50 delta, buy 4. If the stock price falls your basis will be protected. If it falls far enough your insurance will start to gain ground against the long shares because of gamma. Plus you are long volatility which may also gain value.
What is your forecast? Seems to me like you are sending mixed signals
What is your forecast? Seems to me like you are sending mixed signals
The buying strategy of protective put option is a strategy that investors can protect the price of the stock in their stock portfolio by buying a put option based on the stock. The minimum price guaranteed by the put option is equal to the strike price minus the cost of buying the option. When stock options (stock index options) are used to protect existing or expected positions, investors do not need to exercise options if the price of the stocks held changes in a favorable direction for investors.