A lot of retail traders get drawn into selling options for premium, be it calls or puts because of the high win rate. Wow, 80% winners or 90% winners. What they do not talk about is the small amount of premium you are collecting which could be just $50 or $100 per contract. In exchange for that, your capital is tied up to cover the cost of the puts. You do have to have the monies to buy those shares, if assigned. It is probably a lot harder to make a lot of monies selling options for premium. Trend is down, why would anyone want to sell put options? The time to sell put options is when the stockmarket is going up.
Is the answer right now to be.... selling puts???
- Thread starter SoyUnGanador
- Start date
A lot of retail traders get drawn into selling options for premium, be it calls or puts because of the high win rate. Wow, 80% winners or 90% winners. What they do not talk about is the small amount of premium you are collecting which could be just $50 or $100 per contract. In exchange for that, your capital is tied up to cover the cost of the puts. You do have to have the monies to buy those shares, if assigned. It is probably a lot harder to make a lot of monies selling options for premium. Trend is down, why would anyone want to sell put options? The time to sell put options is when the stockmarket is going up.
@SoyUnGanador, yes fat premiums with uncertainty.
If it goes well (underlying rises) then it's good for the Put seller.
But if underlying falls it's of course bad for the Put seller.
BUT, as @"Spooz Top 2" wrote here, even if the trade turns against you,
then you still can make a bargain by getting the stock cheaper (via option auto assignment at expiration).
So, you should sell Puts on those Stocks you would also like to own if it gets cheaper...
One can say a win-win situation, if you want...
Also a good method for stock buying: earn credit till stock falls enough to buy the stock...
But if it falls much lower than your strike then it's of course not that good... :-(
I think especially big money managers (ie. institutionals etc.) use this method.
I you want to limit a possible loss then you better should extend the trade to an options spread by also opening a cheap LongPut, giving a BullPutSpread. The net effect is: less loss b/c loss gets capped (horizontal PnL line as opposed to a diving PnL line).
Of course you'll still be assigned if the trade runs against you, but your loss is limited.
If it goes well (underlying rises) then it's good for the Put seller.
But if underlying falls it's of course bad for the Put seller.
BUT, as @"Spooz Top 2" wrote here, even if the trade turns against you,
then you still can make a bargain by getting the stock cheaper (via option auto assignment at expiration).
So, you should sell Puts on those Stocks you would also like to own if it gets cheaper...
One can say a win-win situation, if you want...
Also a good method for stock buying: earn credit till stock falls enough to buy the stock...
But if it falls much lower than your strike then it's of course not that good... :-(
I think especially big money managers (ie. institutionals etc.) use this method.
I you want to limit a possible loss then you better should extend the trade to an options spread by also opening a cheap LongPut, giving a BullPutSpread. The net effect is: less loss b/c loss gets capped (horizontal PnL line as opposed to a diving PnL line).
Of course you'll still be assigned if the trade runs against you, but your loss is limited.
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I sell cash covered puts to buy the possible future value of a security.
For example, INTC is around 25. I am willing to buy it for 22.5 by the 3rd week of Jan 2023. So I sell the 25 put for $2.50 and either keep the premium or get the stock by put expiration.
If I go a few rounds of this without getting the stock, I have collected a good number of premiums so that when I eventually get assigned the stock, my cost average on those shares will be far lower than the current price, possibly up to 30% below it.
Best to do it in a retirement account where you don't get the tax hit on the premiums collected.
For example, INTC is around 25. I am willing to buy it for 22.5 by the 3rd week of Jan 2023. So I sell the 25 put for $2.50 and either keep the premium or get the stock by put expiration.
If I go a few rounds of this without getting the stock, I have collected a good number of premiums so that when I eventually get assigned the stock, my cost average on those shares will be far lower than the current price, possibly up to 30% below it.
Best to do it in a retirement account where you don't get the tax hit on the premiums collected.
This morning's response to the CPI is just the kind of thing that could cause a put seller to take a big loss.
Those ATM puts that could have been sold for $53 an hour ago... can be repurchased for $124 right now.
There you go!
And this wasn't even an extreme event. Remember that group a couple of years ago that went "bust-plus" for selling naked calls on natgas? Went "locked limit up" for a few days so that there were no buyers... and trapped the call sellers hugely. Wiped out the entire capital of the fund.. AND had debits for each of the participants!
Even though stocks and index options are not going to go "locked limit", selling naked if done so bigly... is potentially high/catastrophic risk.
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Spreads are very different if you have a directional view. Versus naked put selling? C'mon man.
Even in an up market with a VIX below 20 and everything is super calm, who's to say you don't wake up and Putin nuked somebody? I wouldn't say the same about naked calls as the good news can only be so good in any one day. The bad news can change the world forever. You can say there's theoretically no limit to the upside and only 3500 points to the downside. I can't think of any news that could make us open limit up tomorrow and then for multiple days thereafter - but the same can't be said for the downside.
Maybe you trade the wrong options...
Remember this: at expiration the volatility (IV) does not play any role anymore, ie. it then is irrelevant, its value as well whether it's a vol skew or vol smile or whatever... ir-re-le-va-nt!
Just try it out in an options tool and convince yourself...
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