Option selling for premium

[John9999]

OK I’ll chime in on this issue. As a retail investor I must face reality that I’m not in the industry. There are thousands of professionals who are in the investing business every day of their life. There are good ones for sure. I am honest enough to admit that I will never know as much as those talented ones. Just like they would never know as much as I do in my career as a Healthcare Staffing professional.

I posted last eeek that after doing some research I have found mutual fund managers that are beating the market. They do exist.

But if I’m gonna trade I’m looking to beat the crap out of market returns. Otherwise I might as well stick my money in index funds and leave it.

 

[Kim Klaiman]

OK I’ll chime in on this issue. As a retail investor I must face reality that I’m not in the industry. There are thousands of professionals who are in the investing business every day of their life. There are good ones for sure. I am honest enough to admit that I will never know as much as those talented ones. Just like they would never know as much as I do in my career as a Healthcare Staffing professional.

I posted last eeek that after doing some research I have found mutual fund managers that are beating the market. They do exist.

But if I’m gonna trade I’m looking to beat the crap out of market returns. Otherwise I might as well stick my money in index funds and leave it.

Here is the problem:

To become a Healthcare Staffing professional, you had to study at least 3-4 years. To become a good one, you had to practice it another 3-4 years (at least). But many people expect it to be different in trading. They read those ridiculous ads "make 10%/month working 10 minutes per week" and think that trading is easy. They open a brokerage account and expect to double their money every 3 months with no effort. When they fail, they start to look whom to blame.

I wrote about expectations in Can you double your account every six months? article.

So aiming to "beat the crap out of market returns" is a good goal - just make sure you have realistic expectations about the level of time and effort required to do it.

 

[John9999]

So so true. I’ve been at that career for 9 years and I’m very good.

I posted previously about trader alert services. There are many out there. Go look at “Collective2”. Those are traders in some cases with great track records , confirmed by 3rd party. Some of those traders have been at it for 10-20 years. I do believe I can benefit from the pros.

 

[Mugono]

Regarding credit spread vs. naked puts:

In my opinion, they serve different purposes.

The main purpose of naked puts (at least for me) is buying stocks at discount.

The main purpose of credit spreads is getting some income with high probability trades while limiting the losses when the trade goes against you.

In both cases, position sizing are the key. Don't sell more puts than the number of shares you are willing to own.

Hi

You mention that the purpose of selling naked puts is to purchase stock at a discount (in contrast to selling put spreads).

I'd be grateful if you could help me understand how buying stock at a strike price above the (then) stock price is a discount...

 

[Kim Klaiman]

Hi

You mention that the purpose of selling naked puts is to purchase stock at a discount (in contrast to selling put spreads).

I'd be grateful if you could help me understand how buying stock at a strike price above the (then) stock price is a discount...

The selection of the strike is up to you and depends on your outlook for the stock.

But even if you select a strike slightly higher than the stock price, it will still have time value - and this time value is your discount.

For example: AAPL at 175. You sell June 180 puts at $12. Those puts have $7 of time value. Which means that if you are assigned the stock, it's like buying the stock at $180 less the credit you got for the puts ($12), so your effective price is $168, or $7 discount to the current price of $175.

To me, this is the only way I would buy the stock. Why would I pay a full price if I can buy at discount?

The downside of course is potentially missing bigger gains if the stock rallies. But in this case, it has to rally more than $12 in order for the stock purchase to be better than selling naked puts.

This is a tradeoff everyone needs to consider.

 

[Mugono]

The selection of the strike is up to you and depends on your outlook for the stock.

But even if you select a strike slightly higher than the stock price, it will still have time value - and this time value is your discount.

For example: AAPL at 175. You sell June 180 puts at $12. Those puts have $7 of time value. Which means that if you are assigned the stock, it's like buying the stock at $180 less the credit you got for the puts ($12), so your effective price is $168, or $7 discount to the current price of $175.

To me, this is the only way I would buy the stock. Why would I pay a full price if I can buy at discount?

The downside of course is potentially missing bigger gains if the stock rallies. But in this case, it has to rally more than $12 in order for the stock purchase to be better than selling naked puts.

This is a tradeoff everyone needs to consider.

Sure. I guess my point is the same rationale applies equally to putting on a credit spread. Was curious as to why you viewed that differently

 

[tommcginnis]

Sure. I guess my point is the same rationale applies equally to putting on a credit spread. Was curious as to why you viewed that differently

How's that? Kim's take on put-selling is long-accepted and pretty conventional. A spread in the same situation guarantees you're in the stock that you intended to buy in the first place, but at a much smaller discount of pennies versus quarters. "Ouch!" To say that in this case, the insurance strike has a role, is to imply that in the rest of your portfolio (stuff you already own), you buy insurance puts on a regular basis, and close to the market. Sorry, but that *is* the logical inference. And it puts you on the path to negative returns.

 

[Mugono]

How's that? Kim's take on put-selling is long-accepted and pretty conventional. A spread in the same situation guarantees you're in the stock that you intended to buy in the first place, but at a much smaller discount of pennies versus quarters. "Ouch!" To say that in this case, the insurance strike has a role, is to imply that in the rest of your portfolio (stuff you already own), you buy insurance puts on a regular basis, and close to the market. Sorry, but that *is* the logical inference. And it puts you on the path to negative returns."

The whole point of trading / investing is to make money. Many on here sell OTM puts for pennies on stocks 'they like to own'. That's fine; and to each their own. But frankly, this board is frequented by retail investors who are selling for theta and not vega. Theta is not an edge. The moment you sell the put you take on the risk characterics of owning the stock except your upside is limited to the premium collected. Picture that; you have all the risk of owning the stock but have capped your upside.

It imho is misleading - on a platform of retail investors - to suggest selling the put is akin to a discount to spot. You are being paid to be a bag holder / to bear risk. If assigned, the loss on the position will likely be for multiples of the time premium collected. Selling covered calls, which is what many retailers will then do, may then crystallize the loss if the stock recovers and is assigned.

If that is "convention" that might explain why the majority of retailers lose money.....

Finally, selling credit spreads does not lead you on a path to negative returns. To suggest so is, with all due respect, absurd.

 

[JackRab]

@John9999
The same question can be asked of virtually the entire financial industry. Why do top-tier hedge funds accept investor money? If the guys at Two Sigma are so smart (and they are), why don’t they just trade their own money from an unmarked building in Soho? Why go through the hassle of raising capital from investors?

Pretty simple really.... because if you get big enough... you're not going to get those 100% returns anymore. So you're likely stuck in the 20-30% as a fund... which is decent...

And the difference between a 1 bln fund and a 100 bln fund, is at those 20-30% returns... the fees of the 100 bln fund are 100x that of the 1 bln fund. So in the end, the guys that run big funds, need outside capital to make more money for themselves....

 

[Kim Klaiman]

The whole point of trading / investing is to make money. Many on here sell OTM puts for pennies on stocks 'they like to own'. That's fine; and to each their own. But frankly, this board is frequented by retail investors who are selling for theta and not vega. Theta is not an edge. The moment you sell the put you take on the risk characterics of owning the stock except your upside is limited to the premium collected. Picture that; you have all the risk of owning the stock but have capped your upside.

It imho is misleading - on a platform of retail investors - to suggest selling the put is akin to a discount to spot. You are being paid to be a bag holder / to bear risk. If assigned, the loss on the position will likely be for multiples of the time premium collected. Selling covered calls, which is what many retailers will then do, may then crystallize the loss if the stock recovers and is assigned.

If that is "convention" that might explain why the majority of retailers lose money.....

Finally, selling credit spreads does not lead you on a path to negative returns. To suggest so is, with all due respect, absurd.

Naked put selling is not the holy grail. No strategy is. But it has been proven over years that it provides better risk adjusted returns than buying the stock. This is true for indexes, and some stocks, but of course there ar exceptions.

The reason why most retail investors lose money has nothing to do with strategies they use. It is related 90% to human psychology and emotions.

• Why Retail Investors Lose Money In The Stock Market