New to options: hope you can help me with my first trade

[OTM-Options]

You make dip-buying sound bad. Buying dips is the lowest risk entry for a trend follower.

How does a trend follower benefit by selling puts? They lose out on any rallies and could end up buying at above market value, wiping out any option premiums they collect.

IMO ..... trend followers should just buy the stock directly, or buy the options.

 

[lindq]

lindq's reply about picking up pennies in front of a steam roller isn't really accurate. Selling a put is the same as deciding you're willing to own the stock. If you're not willing to own the stock then you shouldn't sell puts on it.

Here's the problem with shorting puts, which is so often ignored by those new to the strategy.

Today, you might be ready, willing and able to take on the stock, so you sell the puts for a few dollars of premie.

Cool. Easy money. Worst case, you own the stock.

But a month from now you're holding the short puts, and your much-loved-company reports bad earnings and weakness going forward, the CEO keels over, the FEDs start investigating, or the market tanks big time (yes, it does happen), and you're stuck holding shares of something (or many things) that on that date, you never would have bought under the circumstances.

But guess what, Skippy. You just bought it. It was put to you.

Watch that happen a few times in a row, or a few times at once, and you'll regret the day you got involved in that stupid strategy.

If one is prescient enough to profit consistently from selling puts, then one will be much better off just buying the stock.

 

[stevegee58]

I could see where a noob might sell too many puts to get more premium without understanding they could be wiped out.
In a small account just selling 1 put on GOOG could wipe you out if you're assigned and can't afford to buy 100 shares. (100x560=$56,000)

Put credit spreads have a much lower margin requirement. See the Conservative Option Spreads thread for examples of this.

 

[xandman]

I could see where a noob might sell too many puts to get more premium without understanding they could be wiped out.
In a small account just selling 1 put on GOOG could wipe you out if you're assigned and can't afford to buy 100 shares. (100x560=$56,000)

Put credit spreads have a much lower margin requirement. See the Conservative Option Spreads thread for examples of this.

He should be somewhat safe if he sticks with 1 ATM option per 100 shares that he can handle.

Spreads have a less obvious leveraging effect due to strike selection: width and distance from the underlying.

 

[ironchef]

Selling cash secured puts to buy the underlying stocks never quite worked for me. In most of the cases, looking back I would be better off buying the stocks to participate in the up side. In rare cases (one example: I sold put on RIG and ended up owning it, sold later at a loss) I ended up getting the stocks, they turned out to be mistakes as they usually were bad stocks to own. Yes, for those I did not get, I collected the premium but they were peanuts compared to buy and hold. I found that once I targeted a stock to buy, it was better I just bought it, or if I wanted to speculate and leverage, I would buy call options (same example, later, bought RIG calls after it went down to $14).

The challenge for me is managing a profitable trade ( same example, after RIG went up to $21, instead of taking profit I waited and it is now back down to $14).

I share this so others can comment and give us some coaching.

 

[Steven Leeds]

Suppose I want to buy AAPL (just an example, I am not really interested in buying AAPL right now) when the price hits 120

Now's your chance. AAPL is trading at 121.00 this morning in pre-market activity. Seems as though it's financials didn't quite meet expectations when Mr. Cook spoke after the market closed yesterday. As an aside when do you think you'd be interested in buying (or selling) AAPL? Right now I'm looking at Aug 15 Put credit spreads. I'm thinking 20 115/110 strikes but have to wait until 9:30AM (EDT) at which time AAPL options will begin to trade. If AAPL opens lower (it has been drifting lower all morning (was 124 at 4:00AM, now at 121) then I may reconsider and sell the AUG 15 140/145 CALL spread.

Best

 

[EnigmaMachine]

Selling cash secured puts to buy the underlying stocks never quite worked for me. In most of the cases, looking back I would be better off buying the stocks to participate in the up side. In rare cases (one example: I sold put on RIG and ended up owning it, sold later at a loss) I ended up getting the stocks, they turned out to be mistakes as they usually were bad stocks to own. Yes, for those I did not get, I collected the premium but they were peanuts compared to buy and hold. I found that once I targeted a stock to buy, it was better I just bought it, or if I wanted to speculate and leverage, I would buy call options (same example, later, bought RIG calls after it went down to $14).

The challenge for me is managing a profitable trade ( same example, after RIG went up to $21, instead of taking profit I waited and it is now back down to $14).

I share this so others can comment and give us some coaching.

Thank you so much for this reply. Finally a reply from someone who actually has experience in selling secured puts.

I decided not to get into the business of selling secured puts mainly because of how low the premiums are and also because I might not have the patience and mindset to hold a losing stock once I am forced to buy it, just like how you sold RIG at a loss.

If I had $5 million, then selling puts and calls way OTM sounds pretty good because the premiums will be significant. I could be making $50k a month (theoretically) in premiums with relatively low risk since the options are way OTM.

 

[EnigmaMachine]

Now's your chance. AAPL is trading at 121.00 this morning in pre-market activity. Seems as though it's financials didn't quite meet expectations when Mr. Cook spoke after the market closed yesterday. As an aside when do you think you'd be interested in buying (or selling) AAPL? Right now I'm looking at Aug 15 Put credit spreads. I'm thinking 20 115/110 strikes but have to wait until 9:30AM (EDT) at which time AAPL options will begin to trade. If AAPL opens lower (it has been drifting lower all morning (was 124 at 4:00AM, now at 121) then I may reconsider and sell the AUG 15 140/145 CALL spread.

Best

Yeah, at that price, the stock is looking attractive. I made a killing on GOOG and AMZN so I will probably not trade for the rest of the year. Pretty happen with that 20% gain.

 

[ironchef]

Thank you so much for this reply. Finally a reply from someone who actually has experience in selling secured puts.

I decided not to get into the business of selling secured puts mainly because of how low the premiums are and also because I might not have the patience and mindset to hold a losing stock once I am forced to buy it, just like how you sold RIG at a loss.

If I had $5 million, then selling puts and calls way OTM sounds pretty good because the premiums will be significant. I could be making $50k a month (theoretically) in premiums with relatively low risk since the options are way OTM.

Selling OTM call is actually very risky, just look at GOOGL this month and KRFT in March. I lost a bunch short OTM GOOGL and KRFT. And you are right, cash secured puts also tie up too much capitals for the modest returns.

I am new to this game, so I might not have done it correctly regarding selling calls and puts. I read all these articles and posts on how selling puts and calls were the way to go. Perhaps there are some truth to it, just that I have not figured it out yet (most of my backtest did not show selling cash secured puts or covered calls significantly out perform buy and hold).

What I ended up doing is not too different from buying stocks: Taking directional bets, just more leverages so can make or lose money faster. To date my directional bets are OK but one of these days I will probably lose my shirt. I really need to figure out the more fancy trades that do not depend on the directions of the underlying, and ways to hedge my profits, etc.

Take care.

 

[Truman Kover]

I've been selling puts for only 2 years. Each year had one blow-up that cost me a few months of profits.
:-(
I think this is what the lindq was talking about in the 7/15/15 post about picking up nickels in front of a steam roller.

A vital skill to learn is how to roll the position when the underlying stock drops and the put moves in-the-money. I need to get a lot better at this.

To learn how an experienced put seller thinks, I suggest reading articles by Teddi Knight at Fullyinformed. Teddi Knight has been selling puts profitably for decades, and writes about current trades. I suggest spending $28 for a one-month membership. The site is not a trading service. I get nothing for a referral.