My option trades

theres a bid difference between limited your loss and buying a way otm option to cover tail risk (risk from nflx going under) and trading 5 wide stirke spreads for all the money..
IE 45/40 credit spread 10 spreads 5000 grand margin..
compared to 45/30 1 spread (with intent to go long) the 30 is there to as you have mentioned before to cover the teens if the stock goes there.. but i understand your strategy completely.. i have a client in my day to day buiness that does exactly what you do.. fundamental investor selling puts when they are expensive to gain ground and sells calls after a rally.. or sometimes right after the stock is put to him he sells calls.. its a good strategy if your smart about it.. one good beating from a stock getting cut into a 1/4 will set ya back a ways.. but thats the same if you you just owned stock like the rest of the world
 
Quote from Put_Master:


Hence my prefered strategy of mostly only investing in stocks I would not mind owning temporarily, during difficult times, at those specific prices.
I like having the CHOICE of whether to sell or buy.

A portfolio of spread type investments take that choice away.
It's great to know a max potential spread loss is predetermined and limited.
But that limit may be most of your portfolio.

What will that do to your hoped for year end % return on that $100,000 portfolio I mentioned earlier?
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I have a position size on my spreads that are much different from when i sell cash secured puts.. if i'm selling puts cash secured.. or even wide striked cash secured puts like your doing with netflix.. i keep the money ready to buy the stock.. my position size and related earnings are all related to that trade..

BUT. my risk adjusted return is wayyy better with a super wide strike spread instead of a just selling the put.. i have less value at risk per return.. your right though if your confident in the stock (like you would just out right buy it) sellling a put is just like owning a stock anyway.. but the point is.. the less volatile stocks that are solid companys get less premium anyway so wide striked put spreads don't make near as much sense as just straight selling puts.. its always on a case by case basis.. my position size on spreads even on apple almost never go over 1000 dollars.. cause that 5 percent of my account.. and i can't sell premium with just a put because i just straight up don't have the account size to play in that stock with just sold puts..

i personally believe that tail event risk is always higher then realized.. meaning that otm options can on that assumption always be underpriced..

ratio backspreads for a credit is a favorite strategy of mine.. because you make money on a tail event and you make money in small amounts for putting the trade on if you do it right.. i started always doing a risk adjusted return
its especially good if you model the probability distribution of stock based upon historic volatility and come up with a probability of expiring itm and adjust the risk adjusted return related to the probabilities of expiring worthless..
because sometimes the implied pricing of the options is alot higher then the historic vol and arbin the difference and measuring the output to imput makes sense..
 
just because the money isn't there on margin in a wide striked spread compared to a cash secured spread.. doesn't mean your not appropriately and efficiently using all your capital.. over the long run your gains will be better because your risk adjusted return is higher.. the one or two times that a stock like netflix goes into the teens or single digits will save you so much money and in turn show up in your long term profit profile of your trading strategy.. isn't the idea to risk less and make more? you can't see the one draw down that you have to make up for.. for so long as a result of not adjusting your risk return ratio..

you only have to keep 20 percent of the strike plus the credit from the put anyway on margin.. so in theory if you really wanna get nity grity you should be getting interest on the other 70 percent in the mean time while you wait untill the put expires worthless or not.. to make your capital completely efficient.. but i hear thats what professional traders have done or do..

sorry i don't mean to ramble on.. i'm clearing my thoughts as well. . i go back and forth with different stocks in this respect just like you
 
theres a big difference between limited your loss and buying a way otm option to cover tail risk (risk from nflx going under) and trading 5 wide stirke spreads for all the money..
IE 45/40 credit spread 10 spreads 5000 grand margin..
compared to 45/30 1 spread (with intent to go long) >>>

For me there is never any "intent" to go long. I just want the "choice" to do so,... based on the "reason" the stock is dropping.
If you have used all your funds in a spread type strategy, then you have pretty much eliminated all choice from at least 2/3 of your spread portfolio. Your only choice is to close at least 2/3 of your positions for a loss. And that's even if you were willing to be on super max margin.
Pure spread traders need to think about what even a moderately severe drop over a short period of time, would do to the value of their account, if you closed just 2/3 of your trades, with the stock trading between your strikes.... let alone under them.

Whether you risk $10,000 on a 2.5, a 5 or a 10 point spread gap, the main difference is how much of the credit you get to keep up front, how much wiggle room you have before you are at max loss, and the timing of when you'd better close it.
Best to close a tight 1 point gap BEFORE it trades between your strikes. A wider gap for the same upper strike, gives you more flexibility in the timing of when to close your spread going bad.

i have a client in my day to day buiness that does exactly what you do.. fundamental investor selling puts when they are expensive... >>>

I don't try to sell puts when they are expensive. The higher the credit, the more volatile and risky the stock.
Assuming i like the companies fundamentals, my criteria is to initiate the trade when i think the stock is currently trading in an area of tech support, while at the same time i can select an OTM strike I desire, which is also at L-T tech support..., which pays the "dollar amount I desire, for an annualized % return in the 13 - 19% range.
 
Quote from Put_Master:



For me there is never any "intent" to go long. I just want the "choice" to do so,... based on the "reason" the stock is dropping.
If you have used all your funds in a spread type strategy, then you have pretty much eliminated all choice from at least 2/3 of your spread portfolio. Your only choice is to close at least 2/3 of your positions for a loss. And that's even if you were willing to be on super max margin.
Pure spread traders need to think about what even a moderately severe drop over a short period of time, would do to the value of their account, if you closed just 2/3 of your trades, with the stock trading between your strikes.... let alone under them.

Whether you risk $10,000 on a 2.5, a 5 or a 10 point spread gap, the main difference is how much of the credit you get to keep up front, how much wiggle room you have before you are at max loss, and the timing of when you'd better close it.
Best to close a tight 1 point gap BEFORE it trades between your strikes. A wider gap for the same upper strike, gives you more flexibility in the timing of when to close your spread going bad.

i have a client in my day to day buiness that does exactly what you do.. fundamental investor selling puts when they are expensive... >>>

I don't try to sell puts when they are expensive. The higher the credit, the more volatile and risky the stock.
Assuming i like the companies fundamentals, my criteria is to initiate the trade when i think the stock is currently trading in an area of tech support, while at the same time i can select an OTM strike I desire, which is also at L-T tech support..., which pays the "dollar amount I desire, for an annualized % return in the 13 - 19% range.
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i don't get you sometimes.. haha i can't tell if you are ok with getting the stock or not.. haha and i'm not disagreeing with what your saying.. for one my client as well prefers to have the puts expire worthless.. and for two professional market makers and traders manage spreads and entire books of spreads and make money by managing delta/gamma/vega risk.. i personally am looking for more then 13 to 19 percent a year.. selling puts against cash and calls against stock is a limited profit profile position.. your selling vol and exposing yourself to gamma and delta risk .. if thats what you like doing.. by all means! .. i'm only hear trying to help.. i'm not purposely trying to disagree.. i practice your strategy or some variation on it in my account on different stocks.. but on others spread trading enables me to risk tons less and get alot more out of it..

sometimes i get the feeling when your referring to spread trading.. that your talking about using the full 100 percent of the account on margin for spread trades.. or at least the amount that would have been used to secure the cash secured puts. which I DON'T DO i just diversify by strategy..
 
<<< BUT. my risk adjusted return is wayyy better with a super wide strike spread instead of a just selling the put. >>>

That is somewhat meaningless, "unless" you are selling the same number of contracts, and thus potentially buying the same number of shares of stock.

As for comparing historic IV to current, that is "somewhat" useless and meaningless.
Unless you go back in time, read the news and understand what was going on in the overall market back then, and with that particular stock, and with the sector the stock was in back then,.... then you have no "context" with which to compare then and now.
 
Quote from Put_Master:

<<< BUT. my risk adjusted return is wayyy better with a super wide strike spread instead of a just selling the put. >>>

That is somewhat meaningless, "unless" you are selling the same number of contracts, and thus potentially buying the same number of shares of stock.

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and in that strategy i would be.. that was inferred


As for comparing historic IV to current, that is "somewhat" useless and meaningless.
Unless you go back in time, read the news and understand what was going on in the overall market back then, and with that particular stock, and with the sector the stock was in back then,.... then you have no "context" with which to compare then and now. [/QUOTE]

overpriced options is what i'm getting at.. sometimes that can be decieving.. i've heard it once said.. if options are overpriced sell them.. if they are super expensive buy them..its all relative.. thats a good point.. if the implied vol your selling is expensive compared to what you know will be realized vol then your in a good position.. your right though.. there could absolutely be a skew in the history that one could be unaware of and not weight correctly.
 
<<< i can't tell if you are ok with getting the stock or not >>>

It's not my goal, but I'm ok with it until i sell it.
I prefer not to own the stock, as I prefer to always have an OTM safety cushion for the type of volatile market we are in.
But as long as I know the stocks fundamentals, financial health, and price values are all reasonable, I don't feel the urge to panic sell when a stock is put to me.
Trend tech traders tend to panic sell.... and for good reason, as they tend to invest high.


<<< i personally am looking for more then 13 to 19 percent a year.. selling puts against cash and calls against stock is a limited profit profile position.. your selling vol and exposing yourself to gamma and delta risk >>>

I'm just trying to minimize L-T downside risk.
As for my 13 - 19% annualized goal, that is on the initial put.
I generally make more on the covered calls than the initial put.
The "blend" at year end, of puts, calls and dividends, hopefully results in a higher % return than the initial 13 - 19% put goal.

<<< i'm only hear trying to help.. i'm not purposely trying to disagree >>>

I've never felt you or anyone else here was only bantering to disagree. i appreciate everyones feedback and criticism.
I learn when i read. Not when I type.


<<< sometimes i get the feeling when your referring to spread trading.. that your talking about using the full 100 percent of the account on margin for spread trades.. or at least the amount that would have been used to secure the cash secured puts. >>>

I'm talking about the risk of using 100% of the account for spread trading, vs only using the amount that would be used to buy cash secured puts.
There is no being on margin for spreads. It's all cash secured initially.
It's only when you are at risk of having to buy the stocks, that being on margin comes into play.
Hence the reason spread traders risk havng to close down 2/3 of their trades for potentially massive losses, if they use all their funds (non margined) for spreads.
The temptation to use all or most cash just sitting in the account for additional spreads, is the risk I'm refering to.
That non margined cash can suddenly turn into "impossiblle margin", if more than a few spreads are put to you.
Hence those traders lose their ability to "choose" whether to close a trade down or buy it.

I'm glad to hear you only sell the amount of spreads you could buy.
Not everyone does. Hence the benefit of a spreads initial limited loss potential, suddenly transforms from limited to massive or total for the traders account.
 
Well i have to accept ever potiential of every trade for better or worst.. selling credit spreads on your entire account is a sure fire blow up recipe.. I tried to research position size on credit spreads... and pretty much all I came to is the potential loss needs to be only 5 percent at most of your entire account. I really couldn't find anything with any significance about how to position size in spreads.... so I just use common sense.... when I started I was selling credits spreads for more than half of my account size... I knew that wasn't going to last so I stopped... I woke up one time in the middle of the night thinking that the stock had blown pass my strikes and my account blown up... It freaks me out so ever since i keep the position size small . ironically the only credit spread that blew through the strikes was one in which I only had 500 dollars on margin.

My particular probleM with selling cash secured puts on my account is that I only have 20,000 dollars.... so therefore there aren't many options to sell cash secured.. to keep my position size in a stock relatively low compared to my account size I would need to be selling 1 or 2 contracts on stocks that are less than 10 dollars... not exactly a good way to screen for stocks to own via puts
 
<<< My particular probleM with selling cash secured puts on my account is that I only have 20,000 dollars.... so therefore there aren't many options to sell cash secured.. to keep my position size in a stock relatively low compared to my account size I would need to be selling 1 or 2 contracts on stocks that are less than 10 dollars... not exactly a good way to screen for stocks to own via puts >>>

So you can see why so many traders are tempted to use all their cash for spread trades.
That temptation is the risk I'm refering to.
That $20,000 can easily be leveraged into risking $100,000 or more , if you had to buy all or even most high priced spreads. If you can't buy the spreads that dropped in value, that $20,000 account suddenly is worth $1,000 or less.
Some traders learn that the hard way, not realizing a spreads limited risk could transform into a massive or total one.

I'm not saying margin is bad. I'm on a potentially reasonably amount myself, if all my trades are put to me.
But I try to limit my risk of transforming from "potential" margin to actual margin,... via diversification of stocks, sector, expiration dates, % otm safety cushions, fundamental analysis, tech support, ect....
Time for sleep. Thanks for a good discussion.
 
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