Newbie Questions About Selling Put Options

[OptionGuru]

Perhaps you are right, however both covered call and short put (naked) are classified as Unlimited Risk position according to Baird!

This Baird fellow is obviously wrong.

• Naked Calls = Unlimited Risk
• Covered Calls/Naked Puts = Limited Risk

 

[surfer25]

Re: Newbie Questions About Selling Put Options

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

I wouldn't say "identical" but close enough. I'd prefer writing naked puts if I had to choose.

 

[surfer25]

Since most people understand and can easily visualize Covered Calls the Covered Call = Selling Naked Put comparison should be mentioned in every "Selling Put" thread.

When that comparison is made people look at Naked Puts in a new light - they don't appear so risky anymore.

Or maybe they should recognize how much more risky covered calls are than they originally thought : )

...and btw, anyone who does not understand how similar the two are should put their money elsewhere (no pun intended).

 

[jtrader77]

Hi all. As you can see, I am new. Currently, I'm learning and struggling most with terminology and how things work. I've already been hitting the books on all of this; these questions are just a result of what all I've learned. I would appreciate it and be very grateful if one or more people could help me with my list of questions that I've developed while studying. I'm sure some will sound very stupid, but I apologize in advance.

1. If, when selling put options, the stock you are selling put options on, starts going below the strike price (thus, you are losing the bet), can you cancel and get out with most of your money, or are you forced to wait for the put option buyer to exercise the option and then walk away with whatever you walk away with? Essentially, can a stop loss be set for a seller when selling put options? If so, is there any punishment from the seller's broker?

2. When people use margin when selling put options, how much more are their gains than if they were cash-secured? (I know it depends, but how much can it generally add?)

3. Can a put option seller be limited by having too much capital? For example, Warren Buffett has too much money to successfully invest in small cap stocks. Does he also have too much money to successfully sell put options with? Could someone using, say, $200,0000,000 sell put options on a few stocks and get just as good of a return percentage as someone using $200,000? If there's a general approximate capital limit, about how much is it?

4. So, if I understand correctly, without margin, a put option seller must have enough money in their account to pay for 100 shares of the stock they are selling put options on, for every one put contract they sell? Someone selling options at a $149 strike price must have at least $14,900 freed up and dedicated until the end of the option comes?

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?

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?

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.

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?

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).


Thank you.

If you are a bullish on a stock and wouldn't mind owning it at a lower price, selling Puts is much better than buying the stock outright. If the stock goes up you make money on the Put. If the stock goes down, you bought the stock at a discount.

 

[botpro]

By selling options you can be like a bank or like a company who issues bonds or shares: like giving a loan to someone else and getting an immediate credit for it...
(Ok, it's not the same, just similar)
You promise the counterparty to buy in the future (at the expiration date) his stock-shares at the given strike price; this is an obligation you have to fullfil.
And for this you get an immediate credit from the counterparty.
Of course you have to fullfil your obligation of the contract --> study the details and risks of options selling.
Options selling should be used by very experienced traders only, and should be used only with big money as it usually also involves hedging to reduce the risk or even eliminate it...

 

[Cyse]

So if you sell an options contract, you're on the hook till expiration?

You can't collect the credit, then sell it the next day?

 

[OptionGuru]

So if you sell an options contract, you're on the hook till expiration?

You can't collect the credit, then sell it the next day?

You can buy it back to close the trade at anytime.

 

[ironchef]

If you are a bullish on a stock and wouldn't mind owning it at a lower price, selling Puts is much better than buying the stock outright. If the stock goes up you make money on the Put. If the stock goes down, you bought the stock at a discount.

For argument's sake, if you are really bullish you should go long on calls:

Long Call - up side is unlimited down side is limited
Short Put - up side is limited down side is unlimited

Worst part, if you short, if your judgement is wrong, you are stuck with an unwanted stock at a high price. If your judgement is correct you miss owning the stock because the price moves away from your target acquisition price. If you really want it you will pay a big premium to own it.

If you long, if your judgement is wrong, you lose some premium. If the stock is really down and you are still bullish, you can buy it at a deeper discount still. If the stock is up, and you really want it you can buy at a discount because you collect a big gain on your call equal to the appreciation of the underlying.

 

[Cyse]

You can buy it back to close the trade at anytime.

Right, sorry... Buy to CLOSE. got it.

if that's the case, then how often do put buyers exercise their right to the stock?

If I sell a put, or call... what's the chance of getting assigned.

 

[CBC]

Normally buyers only exercise on Expiry day. Simply because the options have time premium and you will be better of $$ if you sold the option instead of exercising it.

Some people early exercise for whatever reason.

I've been buying options for over 4 years and never exercised b4.