I don’t look at it this way. What often happens is that market has a sharp sell off and your put strike doesn’t seem so appealing any longer. You can buy the stock at much better price and benefit from move higher. So selling puts has opportunity costs, as it should since you are simply selling tail risk(no edge). That is where rolling may come to the rescue. If you can roll, preferably for credit, you have flexibility to “change your mind” by either lowering strike or extending time or both. You don’t have same flexibility with being long even if you waited for a pull back. I am not saying that rolling is a panacea, but that it’s a very valuable option to have, imho.
My approach to selling puts.
- Thread starter tonyf
- Start date
I don't think rolling is a free lunch as perceived by some. Most often than not, timeframe (maturity) is traded off against strike. Kicking the can down the road at best. A false compromise in my view and a forced trade for many.
As for the discussion about market timing (waiting for a pull back): 96% of institutional money returns are made from asset allocation and 4% from timing. I am not a fan of discrete events and favour allocation instead.
Sure, I think Tasty guys call it “Keeping the dream alive”
. But sitting in a stock waiting to recover is not fun. You are subject to all kind of risks, including balance sheet deterioration. A fighting chance is all I need before getting stuck with shares. I can’t say I have much practical experience with this approach, but this is my guiding principle. Happy to here from others.Sure, I think Tasty guys call it “Keeping the dream alive”
not if he has confidence the stock will recover because of his fundamental credit analysis.
most of us who sell puts do it without actually understanding the companies underlying the options so we have no idea if Microsoft is worth 200, 250, 300. But he might have a view that it shouldn’t be worth 200 (while it’s trading at 210 hypothetically)
Yes, but that is hardly an edge because as we know, market can stay irrational for a long time. Also, this assumes that Wall Street doesn’t have some inside scoop on the company/competition which presents some off-the-books risks. That is why Buffet prefers great companies at fair prices to good/so-so companies at bargain prices. Keep in mind that Wall Street can not only do the analysis(not to mention insider knowledge), but also has the ability to “pump” the stock. Retail guys can only hope that their research will be in sync with that or that it catches on social media.
Here's the thing and Tony openly admits he knows nothing about options,nor does he care to..
year of the Covid was a very unusual year with very high levels of IV and a runaway bull. His strategy,most likely selling .30 ish put wings was levered 3x to 7x ..
I agree with Tony that he's in it to win it.You cant roll highly illiquid options..So he's a buy and hold..
As one poster mentioned,compare that to the S&P return of 29% over the same period.Lever that 3x -and you have an 87 percent return.....with massive liquidity.
For shits and giggles,I ran a backtest using Orats(highly reccomened) ,selling 30 day .40 Delta puts on the Spy and rolling each month.That returned 9 percent.Levered up 3 to 7x,the return is 27 to 63 percent.Had I sold 60 day puts,the return was
12 .31 percent ,which at 5x leverage was 61.5 percent..7x was 85 percent...Food for thought..
For a better comparison,I then looked at the XLF,assuming that was Tony's sector.That returned 58 percent ,double the SPY over the same time period.Levered 2-1,you exceed Tony's return..
Interestingly,selling 60 day .35 Delta puts in XL. Only returned 12 percent. You had to lever 5x to equal buy and hold..Thanks but no thanks.
Tony clearly picked the right sector,but was he really paid enough to be short highly illiquid options ???
Gun to my head,I would go with the simple long XLF as opposed to 3x-7x short puts in highly illiquid names. Ild rather go full Neiderhoffer and sell the SPY puts .With that said,ild be curious to know if Tony's stocks outperformed the XLF.....Until then
year of the Covid was a very unusual year with very high levels of IV and a runaway bull. His strategy,most likely selling .30 ish put wings was levered 3x to 7x ..
I agree with Tony that he's in it to win it.You cant roll highly illiquid options..So he's a buy and hold..
As one poster mentioned,compare that to the S&P return of 29% over the same period.Lever that 3x -and you have an 87 percent return.....with massive liquidity.
For shits and giggles,I ran a backtest using Orats(highly reccomened) ,selling 30 day .40 Delta puts on the Spy and rolling each month.That returned 9 percent.Levered up 3 to 7x,the return is 27 to 63 percent.Had I sold 60 day puts,the return was
12 .31 percent ,which at 5x leverage was 61.5 percent..7x was 85 percent...Food for thought..
For a better comparison,I then looked at the XLF,assuming that was Tony's sector.That returned 58 percent ,double the SPY over the same time period.Levered 2-1,you exceed Tony's return..
Interestingly,selling 60 day .35 Delta puts in XL. Only returned 12 percent. You had to lever 5x to equal buy and hold..Thanks but no thanks.
Tony clearly picked the right sector,but was he really paid enough to be short highly illiquid options ???
Gun to my head,I would go with the simple long XLF as opposed to 3x-7x short puts in highly illiquid names. Ild rather go full Neiderhoffer and sell the SPY puts .With that said,ild be curious to know if Tony's stocks outperformed the XLF.....Until then
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basket of underlying returned just short of 10 per cent ytd, my book returned 23.8%
not sure what xlf is?
edit: I am a deep value investor with a fixed income background, I see options as a tool and nothing else. Their mechanics and idiosyncrasies do not interest me at all...as for leverage, it obviously does not scare me as much as others. But we seem to differ here and my approach has not been tested in a very wide and brutal sell off.
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How did your book do from 8/2020 - 5/2021?? That's when you crushed it
XLF = Finanial SPDR(sector fund)..
Please know I am playing the role of ultimate hindsight analyst..Monday morning quarterback is a great job if you can get it
XLF = Finanial SPDR(sector fund)..
Please know I am playing the role of ultimate hindsight analyst..Monday morning quarterback is a great job if you can get it
IBKR's Risk Navigator with what-if testing does a similar job. I run it once a week.