not selling puts for unstable companies

[ofinance]

i recently started selling puts and doing covered calls to collect some premium. i made a small trade with GM selling the march 2.5 Put for $1.45 in november and buying it back in early february for $0.7 making a nice $60 after fees.

this seems like a risk free small trade but if GM didn't receive the 6 billion bailout it would have filled a chapter 11 and i would have been out, thats why i wanted to start a discusion about choosing the stocks you sell put in as GM is still unstable at the moment.

here is what i will look at when deciding which companies to sell puts for in the future:

-firm must have positive EPS

-the directors of the firm must own common stocks wich is a garantee they will not file for chapter 11 as their stocks will become worthless

-assets/liabilities ratio higher than 1 which means the cash and real estate (when sold) of the firm is enough to pay back its debts in full

those are some of the details i will look at and would like to hear your comments about it, do you think there is a risk a company that has those Characteristics may still file for a chapter 11?

 

[dagnyt]

Quote from ofinance:



here is what i will look at when deciding which companies to sell puts for in the future...

There is nothing special about your plans.

Because selling uncovered puts may result in owning shares, every investor who sells puts should only do so in stocks he/she is willing to own.

Thus, this discussion applies to simple investment techniques and is not unique to trading options.

You should only be willing to sell puts when the stock is attractive to own. It's not a good strategy for 'traders'. It's for investors. And if the stock does not dip and the stock is not bought, then the put premium is the consolation prize.

Mark

 

[erol]

Because selling uncovered puts may result in owning shares, every investor who sells puts should only do so in stocks he/she is willing to own.

+1

IMO almost like having your cake and eating it too.

 

[ofinance]

Quote from dagnyt:

every investor who sells puts should only do so in stocks he/she is willing to own.

not always true as you can roll the contacts forever and never actually own the stocks, collecting premium every 3 or so months. after 2 or 3 years, you might get back the price you would pay if assigned and break even, the thing is not to do it on firms that may go bankrupt

when contrywide was bought by bank of america, all the contrywide options went to zero, i don't know if those who sold puts or calls on it made a killing

 

[JJacksET4]

Quote from ofinance:

-the directors of the firm must own common stocks wich is a garantee they will not file for chapter 11 as their stocks will become worthless

I wouldn't rely on that as a guarantee. I imagine there were plenty of shares held by directors at some firms that went Chapter 11. Honestly, I'm not an expert in this area, but I can't imagine a company would never go Chap 11 just because some directors own some common. Also, even if that were true, you would have to carefully watch the situation everyday to see if directors sold out of shares.

Also, you can have a substanial loss selling puts even if the company doesn't go under and even if their financial condition is still OK, but the market knocks the company down from say $50 to $20 - not saying it could never recover of course, but it's possible you could have a large loss then you wanted to stomach in the first place.

JJacksET4

 

[spindr0]

Quote from ofinance:

not always true as you can roll the contacts forever and never actually own the stocks, collecting premium every 3 or so months. after 2 or 3 years, you might get back the price you would pay if assigned and break even, the thing is not to do it on firms that may go bankrupt

when contrywide was bought by bank of america, all the contrywide options went to zero, i don't know if those who sold puts or calls on it made a killing

Both of those statements reflect your royal noobness.

1) Rolling will not get you even if the stock drops significantly. OTM premiums will be negligible and you'll have to write lower strikes to get any. That will lock in a loss should the stock then rise.

2) Only OTM options go to zero when a company is taken over. Those who sold CFC calls got to keep the premium... not exactly a killing. Those who sold puts before and during the drop got killed by it. For each put written they bot 100 shares of CFC which turned into 18+ shares of BAC. Yeh, that really worked out well!

 

[dagnyt]

Quote from ofinance:

not always true as you can roll the contacts forever...

Agreeing with SPIN,

You cannot roll puts forever. That's a fallacy.

But that's not the point. With so many stocks in the universe, why would you disagree with my statement that an investor should only sell puts in a stock he/she wants to own? Selling naked puts is not a viable strategy over the long term because bear markets will kill you. What is so difficult about limiting your put sales to stock you want to own?

Mark

 

[ofinance]

Quote from JJacksET4:

the market knocks the company down from say $50 to $20

i don't even look at stocks higher than $5 let alone selling puts on the them.
one must be a fool to trade anything higher than 5 bucks. FRE, FNM, AIG, LEH, Bear were at $50 few weeks before they went under while Ford was at $2 and is still around WITHOUT getting any sent from the bailout

Quote from spindr0:

Rolling will not get you even if the stock drops significantly

did you look at my GM trade? can you see a scenario where i would have lost money? i don't see any apart from Chap 11. GM was at $3.36 when i got in and at $2.53 when i got out and i was still able to get out on profit. the GM MAR 09 2.5 was OTM and it was at $1.45!

 

[spindr0]

Quote from ofinance:

did you look at my GM trade? can you see a scenario where i would have lost money? i don't see any apart from Chap 11. GM was at $3.36 when i got in and at $2.53 when i got out and i was still able to get out on profit. the GM MAR 09 2.5 was OTM and it was at $1.45!

Yes, I saw your GM trade. Selling a put in November and making $60 by early February was quite impressive. I'm going to try it too. Do you think that tropical island in the South Seas with be big enough for the two of us??

 

[ofinance]

Quote from dagnyt:

What is so difficult about limiting your put sales to stock you want to own?

because there is no stock i want to own, there is not a single stock that is higher at jan 2009 than it was at jan 2007!
all the stocks are down and they slashed their dividend so whats the point in owning any? because it will go from $2 to $60? i will not hold my breath on that.
if a stock is at $6 its overpriced