ATTENTION ATTENTION ATTENTION ATTENTION
I am going to make a concession to Put_master and say on one point he is correct.
EEK!!!!!
Put_master and I look at short puts from such different angles that we cannot agree on anything. When he kept tauting that I was 'overleveraged' by using my put spreads I simply couldn't understand what he is talking about so I started a search.
My margin requirement for a bull put spread is the difference between the strikes and thus I am covered for my maximum risk....am I not???
There is one caveat and this is where he and I differ the most.
That caveat is if I am put to my short strike.
I would need much more money to buy the stock than my margin allows for.
Here is a pretty complete discussion of this issue on this board:
http://www.elitetrader.com/vb/showthread.php?threadid=213026&perpage=6&pagenumber=1
i.e. IF I am put AND I have maxed out my money by margining bull put spreads I will not have enough money to cover the margin on the stock . Let me quote from the above thread:
"If the short put is exercised early then you would need to meet the margin requirement on holding the long stock, assuming you would actually want to continue to hold it. If you close out your position right after the exercise then you don't really need the full amount. That is, you get assigned and you don't have enough funds in the account, you get a margin call, you close out the stock position and the problem is solved."
I have never thought of this as a risk since, like most people, I never would go into closing with one end of my spread exposed. It is one of the prime directives of doing bull put spreads. I thought that was understood... but PM doesn't do spreads so it was not understood by him. Miscommunication.
Put_master does naked short puts, so the risk of being put is something he continually has to consider. I do bull put spreads (as well as a lot of other things) with the intent of never ever being put or even letting myself get into the position of being put... but if I AM put (I checked with my two brokers) my broker would immediately sell the stock and the margin problem is nill. As a matter of fact both my brokers said if I have a spread and AM put they automatically liquidate the position (even if I have the money to hold the stock) since they assume, like me, that my intent on doing the spread was NOT to hold the stock... not even for a minute.
Now if I dealt in illiquid stocks (I don't), and/or we are in the midst of a major meltdown... I could have a major problem in this direction... what if my broker can't sell the stock?? AND what if I have maxed out my account and I don't have the money to hold the stock I have been put????
Both my brokers say that is a 'remote possibility', but they both also say they would then begin to liquidate my account at market until I was even. NOT A PRETTY PICTURE. This is one way the market can explode like a bomb.
NOW:
Put_master keeps attributing to me a strategy I don't follow. He says I max out my account on bull put spread margin. I never do that. My portfolio has a good deal of counter-market holdings... in the form of treasuries, bonds, SSF's etc. Also I have a balance of bear spreads to counter the bull spreads. e.g. right now I have bear call spreads on LOW, SPLS as well as a Bull call spread on VXX and one on SH. I try to make the delta of my portfolio zero (or close to it) at all times... right now I am shooting for a slightly negative delta in anticipation of a negative Fall. e.g. when the market fell yesterday my account went up in net value. Good.
Sooo....
Put_master is right to say I shouldn't max out my account on bull put margin because I would be killed in a crash. But then this is only the first directive of adequate diversification... never max out on any holding OR strategy... you could be killed if the market goes to that holding or strategy's nightmare.
Now here is another point I will conceed to PUT_Master:
He says that my margin of safety in my being OTM is illusory because I could never afford to allow a stock to cross that OTM boundary but would have to do something before the stock reached by short strike. This is true. If my stock had a disaster and started to plunge I would not wait for it to get to my short strike but would close the spread before hand... in order to avoid all of the above from happening. So that 'safety range' is a function of how scared I am.
Hows that????
BTW: I HAVE repeatedly said my thread was trade discovery... not portfolio management. Here we are talking portfolio management, and I usually don't talk portfolio management because it is a complex subject and there is much more to consider than just this.
Let me close with this: I completely disagree with put_master's short put philosophy for one reason: In the ordinary course of events A stock that has dropped and is put to me is not one I want to hold... no matter HOW well I think I have researched the company.
