Newbie Questions About Selling Put Options

Gooby said:
5. What's the difference between selling cash-secured put options and selling put options using margin if you have to have the money for buying the stock in both scenarios (in one as cash, and in the other at least in collateral)? Is the only difference an increase in gains and the fact that you can invest the collateral in other ways when using margin?
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Yes, IMO the only difference is the effect of leverage thru the use of margin.
Regarding the 2nd part of your question: I could be wrong, but I think one has to differentiate here in to oldschool (now "theory") and current practice at the brokers: as I understand it, brokers force you to use first your own money completely, and only after that gets margin used... I'm not sure if that practice is proper...
And I doubt one can use any part of a margin account as collateral. By this I mean: the moment you sell the put the same moment the necessary amount for buying the stock gets implicitly "locked", ie. you can't use it for anything else, it just has to stay there in case of exercise by the counterparty...
Of course a margin call can happen should the value of the position drop so much that you are at the very limit of your margin acct, then the broker will ask you to transfer more funds, or close some part of this or other position(s)...
 
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Gooby said:
6. Is it true that selling put options either cash-secured or with margin is largely unprofitable to your total investment capital in that you always have to have an increasing cash pile on reserve for the put option buyer?
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Hmm. indeed an interesting question.
But I think there is no other way out of this, things are as they are, and this does by no means mean unprofitable;
it just is the necessary characteristics of that put-selling strategy, which IMO is a good long term strategy, btw.

Sorry, part of my answer to this question went wrongly into Q4. I'm copying it to here and continue on that:

For example, in order to make $10,000 in selling put options, you would need approximately $1,000,000 (or $100,000?) to secure it, and once you worked your way up to making $100,000 in selling put options, you would need approximately $10,000,000 (or $1,000,000?) to secure it. The proportion of your return vs. the cash or collateral needed to cover you in case the price falls below the strike price and the buyer exercises the option. With or without margin, the more money you make from selling put options, if you reinvest all that money in selling more put options, the more money you will need to have reserved for the put option buyer in case the stock price goes below the strike price? If someone was looking to make $10,000 off of selling put options, wouldn't they need to have a very high amount of money (like $1,000,000+) “locked up” for that time being, and even more next time?

Essentially, if I was looking to invest $100,000, I could only make money on a small fraction of it with selling put options?

Am I wrong? Being completely new to understanding options in themselves, I was under the impression that you could make money based off of at least 50% of your capital or so when selling put options. I know I sound stupid, but I'm very new to this. Please tell me what's wrong or right about my understanding.
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I think here some things don't sum up. You can easily make 10% p.a. with just put selling, even more than 20% when using leverage thru margin.
Ie. 10%=10k --> means only 100k is needed (plus that for the options, maybe 2k). This is far less than from your millons and 10 millions you wrongly think would be needed.

Here is a link to a good example on how to make 22% even in just 3 months, I came up only recently:
"Selling Put Options: The Best Income Method Today" (November 19, 2014) by Chad Shoop, Editor, Pure Income
http://thesovereigninvestor.com/investment-opportunities/selling-put-options-better-income-yield/
I've verified the strategy and it seems sound to me.
The strategy is time-bound (to the above timeframe), but the concept is timeless...
 
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Gooby said:
7. How common is it to make 4, 5, or 6+ percent consistently per month from selling cash-secured put options without margin or even with margin? What's a good, typical range of expected percentage return for selling put options with margin and without margin?
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As the example I gave in #6 should show, it is possible to make at least 4% per month: one just needs to pick up the right strike(s) and timeframe(s)...
Btw, as said I learned that strategy myself only recently, currently studying and experimenting with it further; I must say so far I like the strategy ;-)
 
Gooby said:
8. What typical returns are offered up front when “shopping” for put options to sell on a stock? For example, you're deciding to sell options on XYZ stock. When looking at the list of strike prices, time spans, etc. available, what's the usual highest return a put seller can choose to get up front? (With there of course being no guarantee they will keep that.) I've read that 2% per month is “reasonable,” but I've never read about the “upper limit” percentage return commonly available (and for what time span).
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Just do this simple percent calculation:
P/L% = premium / strike * 100
the higher the result the better.
Of course also take into consideration also the timeframe and annualize it to have a common basis to make many instruments comparable to and with each other.
Usually the strike should be realistically seen "unreachable" within the life-time of the option...
ITM options make sense for this strategy of put-selling.
 
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you can get a used copy of McMillans' classic "Options as a Strategic Investment"
for like $5, delivered, on ebay

[i read that the newest expensive edition isn't that much better]

for someone learning, it's a good investment

i still look at now and then, for ideas i might have missed, or forgotten

marc
:cool:
 
marcoPolo21 said:
you can get a used copy of McMillans' classic "Options as a Strategic Investment"
for like $5, delivered, on ebay

[i read that the newest expensive edition isn't that much better]

for someone learning, it's a good investment

i still look at now and then, for ideas i might have missed, or forgotten

marc
:cool:
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Yes, true, but the OP said he is already studying the stuff academically...
 
Thank you everyone for your responses. If anyone else feels they can weigh in with their own answers or add to someone's answers, please do. The biggest thing on my mind with this subject is how much capital needs to be tied up and reserved when selling put options.
 
Gooby said:
Thank you everyone for your responses. If anyone else feels they can weigh in with their own answers or add to someone's answers, please do. The biggest thing on my mind with this subject is how much capital needs to be tied up and reserved when selling put options.
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The capital requirement is the same as when you would buy the underlying stock (plus of course the cost of the options, which in this case usually should be about 2%).
But that capital is just parked in your own account.
Here's another realistic example: http://www.investopedia.com/articles/optioninvestor/10/sell-puts-benefit-any-market.asp
 
OptionGuru said:
Re: Newbie Questions About Selling Put Options

  • Do you understand Covered Calls?
  • Covered Calls are identical to Selling Naked Puts.

:)
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Yes, but the topic was specific about cash-secured and margin-secured selling of Puts.
There are so many options strategies, I read about most of them, but up until now I only used long Calls
and long Puts only, never had dealt with selling options. Now learning the advantages options selling...
 
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