My OPTION TRADES..... part 2

[hajimow]

Quote from Put_Master:

<<< The spread is obviously a lower risk, higher yield trade compared to a naked short put. I do agree that spreads are more difficult to understand and harder to manage simply because it's two positions instead of one, and definitely should be avoided if you do not have the skills required. >>>

Dan's statement above is only true in THEORY WORLD.
THEORY WORLD is a wonderful place to visit, but a dangerous place to hang around full time, especially if you are carrying around a lot of cash. Do that, and you will eventually get mugged.
I live in REALITY WORLD. In the "real world", a trying to generate income centered around a spread strategy will get you severely injured.... or killed (wiped out).

In Dan's example, he uses my ARO $10 strike, because he knows the lower the strike, the safer the spread.
The higher the strike the more dangerous the spread.
And it doesn't make any difference what the strike gap of the spread is. The higher the strike..... the more dangerous the spread.
WHY?

I'm going to let Dan answer that question, by giving him the following example. I'm 99% sure he will NOT answer the question.
He will either disappear from this thread, or he will dance around the example and question that I'm asking him to answer. Or he will answer a question I'm not asking. Let's see which of the above he will choose:

Dan, I am giving you a $100,000 account to manage via a strategy of credit spreads. I want you to use all the money.
I want you to divide the $100,000 cash into 5 spread transactions, using $20,000 for each trade.

1.... spread 30/25.... credit $1.00
2.... spread 40/35.... credit $1.00
3.... spread 50/45.... credit $1.00
4.... spread 60/55.... credit $1.00
5.... spread 70/65.... credit $1.00

To keep things simple, assume each contract is for 2 months, and assume the credit is the same for each spread. And assume each stock has a 15% otm safety cushion.
The length of the contract, the credit, and otm safety cushion are actually all irrelevant to the question I have for Dan. I'm only lisiting those items, so Dan doesn't have an excuse not to answer the questuon.
Here is my question:

Two or three weeks later, the stocks have all dropped to $1.00 below each upper strike.
Or make believe they have all dropped a mere $0.05 below their upper strike. Your choice.
You don't want to close the trade and take a loss, so instead you decide to buy the stocks and wait for a recovery. You can sell covered calls and collect dividends while you wait.

Remember, your account value is $100,000 and you are using the entire $100,000 on the above 5 spread trades. ($20,000 each)
How much will it cost to buy each stock?
How much will it cost you if you want to buy all 5 stocks?

It's a very simple question. Lets see if Dan disappears, or if he dances around the question. Either way, I'm predicting he will NEVER answer it.

PUT_MASTER is correct. "Most of the time" Naked out of the money PUTs are safer than spreads. In spread if you are wrong, your money is wiped out but in naked PUT you get assigned and have another chance to recover your possible loss.

 

[Appleseed]

Quote from Put_Master:

<<< "HOWEVER, for the spread trader, there is no difference. Whether the drop is 2 pennies or 2 dollars, the end result is the same. A total wipe out." This is simply not so. >>>

I am refering to a drop below both your strikes.
Once the stock drops below both the spread traders strikes, the loss is 100%. A total wipe out. Makes no difference if the drop is 2 pennies or 2 dollars.
(I'm not going to quibble about some theoretical potential time remaining on the contract, that may add back a few pennies if you close the contract at that point.)
The bottom line is.... for a spread trader who does not "intend" to buy the stock, or can not afford to buy the shares because of the potential for excessive leverage,... the loss is a "wipe out" of all the money invested in the trade or trades.

The naked put seller, because he can only margin up to 2 - 3 times his account value, vs the potential for more than 10 times leverage of the spread trader,... the naked put seller can still afford to "consider" buying the stock. Then sell calls to raise cash, collect dividends, and wait for a full or partial recovery.

The issue NOT whether one should buy the stock.
The issue is whether one has the ability to CHOOSE whether to buy or not.
The leveraged naked put seller can usually choose. The leveraged spread seller is forced not to choose.
Thus, once the stock drops below both his strikes, the loss is 100% of the cash invested. Makes no difference if the drop is 2 pennies or 2 dollars.

==============================================

In all your past examples are you assuming that the naked put seller is beller funded ? ( and more savy)
thats what it sounds liketo me.
cheers
john

 

[traderlux]

put meistro,

do you have a general criteria for the stocks you select?

lux

 

[Put_Master]

Quote from Appleseed:
In all your past examples are you assuming that the naked put seller is beller funded ? ( and more savy) thats what it sounds liketo me.

When comparing different strategies, I assume they are implimented by the same individual.

 

[TskTsk]

Put_master is right. Spreads allow you to overleverage, they require more risk for the same return %, they have less theta, and if it drops below your long strike you're looking at a total loss of invested capital. A short put at X is the same as long stock at X. A short spread at XY is the same as long stock at X with stoploss Y. Exercise risk is the same accross the two strats.

 

[Put_Master]

Quote from traderlux:

put meistro,
do you have a general criteria for the stocks you select?

I have "specific criteria" I review for all stocks I'm considering for investment. Both technical and fundamental.
I try to get a general "big picture" idea of what's going on, by reviewing about 50 items.
No company is perfect. So once I get the general idea, I then have to place more or less importance on various items, in order to decide whether to risk my cash or not.

Every stock has some negatives. I just have to decide if there are too many negatives to take a chance on.
I'm often correct. But not always.

Whether it's the overall market that throws me a curve, a missed earning surprise, some negative sector related news, or some stock specific news,... if the stock drops on me, I don't want to be in a position of having to panic sell, because the stock dropped and I know nothing about the company, or it's potential for recovery.
Potential for "recovery" is what my 50 item analysis is all about.

Any stock can suffer a signifiicant drop at any time, and for any reason.
But not all stocks have the potential for "recovery" after such a drop.
If you don't know whether your company has the potential to recover, then it may be best to limit your loss via a hedge type investment and/or strategy.

For me, I found I was paying for protection I was not using, as I didn't mind owning the stocks put to me.
But then again, I invest at specific prices. (Not stories, trends, rumors, ect...)
Hence the reason I switched from bull put spreads to naked puts.
But that is certainly not without it's own risks.
So I'm not recommending one strategy over another. I'm simply saying be AWARE of the potential down side of which ever strategy you use.

Final note..... Not everyone has the time to learn how to analyze a stock. I taught myself, so it's far from perfect
And even if you do know how, not everyone has the time to actually do it for every stock under consideration for investment.
It's a time consuming and a tedious process. And the end result is hardly a guarantee of anything.
All we can do is select a strategy we are comfortable with, manage our risk, and hope for the best.

 

[Put_Master]

Quote from TskTsk:
Put_master is right. Spreads allow you to overleverage, they require more risk for the same return %, they have less theta, and if it drops below your long strike you're looking at a total loss of invested capital. A short put at X is the same as long stock at X. A short spread at XY is the same as long stock at X with stoploss Y. Exercise risk is the same accross the two strats.

However, a major advantage and/or benefit of a put spread over a naked put is,... if you are going to close a losing trade before the drop becomes excessive, and if there was a "spike in IV", the loss will be less severe with the spread.
The larger the spike in IV is,... the happier you will be that you are closing a spread and not a naked put.
But keep in mind, the wider the gap of your spread, the less your spread will help to "neutralize", the negative affect of that spike in IV.
However, you may be under less pressure to close a naked put vs a spread. Whether that is good or bad, you will only know in hindsite.

 

[TskTsk]

Quote from Put_Master:

However, a major advantage and/or benefit of a put spread over a naked put is,... if you are going to close a losing trade before the drop becomes excessive, and if there was a "spike in IV", the loss will be less severe with the spread.
The larger the spike in IV is,... the happier you will be that you are closing a spread and not a naked put.
However, the wider the gap of your spread, the less your spread will help to "neutralize", the negative affect of that spike in IV.

Greeks isn't as important as you aren't monetizing them. Also, if you need two+ spreads to make same return as 1 naked put...odds are your vega exposure is approx the same accros the strats.

 

[cdcaveman]

Quote from TskTsk:

Greeks isn't as important as you aren't monetizing them. Also, if you need two+ spreads to make same return as 1 naked put...odds are your vega exposure is approx the same accros the strats.

How are you not monitizing theta on both? And if your selling over proved vol your monitixing overpriced Vega... or you could even say your selling over priced gamma risk..

 

[TskTsk]

Quote from cdcaveman:

How are you not monitizing theta on both? And if your selling over proved vol your monitixing overpriced Vega... or you could even say your selling over priced gamma risk..

You're not continously monetizing anything. In the end you make the time value and obviously that depends on time and vol at point of sale, but that's it.