Option selling for premium

[Kim Klaiman]

@Saltynuts The amount of risk is the distance between the strikes less the premium received. In your example (selling 85-95 call spread) if you get $1 credit, the risk is $400.

Not sure what do you mean by "didnt even use my own money". This is margin taken from your account - if the stock goes above 95, you need to cover the spread and pay debit much higher than the credit you got ($5 in worst case). It IS your money, and if you oveallocate and use too much leverage, your account is toast.

Even if selling weekly credit spreads is profitable in the long term, it is still a very risky strategy and losses can be catastrophic as you can see from those screenshots.

 

[yobo]

selling naked put options for a nickel or dime doesn’t make sense to me either but yet traders like you and me are buying to close Positions at a nickel and on the other side is someone selling to open.

These traders and market makers are not stupid and doing it out of good will. They do it to make money.

I think the better question is what there risk controls look like. I imagine they are short the stock and hence boxing out there position by selling puts?

Maybe you can offer a better explanation as to why they would take the trade?

@John9999 To me, selling options for 0.05 or 0.10 doesn't make sense. The risk is too high compared to reward. And generally speaking, I don't like to sell weekly options due to high negative theta. You might win 3-5% most of the time, but when you lose, the losses are brutal. For example: http://www.5percentperweek.com/customer/customerMain.php?section=tradePage&step=viewClosedTrades or https://manywaystotrade.com/option-scalper/ Plus I like to have some other strategies to reduce the risk and provide hedge in case the premium selling strategies move against me.

@spindr0 I heard this argument many times. "If your trading system is so good, why to sell it for few hundred bucks? Why not to keep it to yourself and and earn a zillion dollars?" Matthew Klein, CEO of Collective2.com, provided few good reasons Why To Sell A Winning System.

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?

But even if you don't buy any of those reasons, the only question you have to ask yourself: is the subscription service helpful to you? Does it help you to become a better trader? Does it help you to make money?

If the answer to those questions is yes, this is the only thing that should matter to you. Why the service is doing this is secondary.

 

[Kim Klaiman]

selling naked put options for a nickel or dime doesn’t make sense to me either but yet traders like you and me are buying to close Positions at a nickel and on the other side is someone selling to open.

These traders and market makers are not stupid and doing it out of good will. They do it to make money.

I think the better question is what there risk controls look like. I imagine they are short the stock and hence boxing out there position by selling puts?

Maybe you can offer a better explanation as to why they would take the trade?

It's not matter of stupid. Those who sell those options for the tiny premium believe they are playing a high probability game. And most of the time, they do win. In my opinion, they underestimate the risk - but they disagree.

Also as you mentioned, it might be part of a bigger position.

They could be also market makers who are obligated to create liquidity - but those are supposed to be always hedged, so this is not an issue for them.

 

[OptionsOptionsOptions]

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

IMO ..... It's best to buy the stock.

 

[Kim Klaiman]

IMO ..... It's best to buy the stock.

There is no such thing as best in options trading. Each strategy has its pros and cons. If you know how to use the naked puts strategy and don't leverage, it's a great strategy, and on average, it will outperform the stock only purchase.

 

[OptionsOptionsOptions]

There is no such thing as best in options trading. Each strategy has its pros and cons. If you know how to use the naked puts strategy and don't leverage, it's a great strategy, and on average, it will outperform the stock only purchase.

If you want to own the stock ........ buy it.
Selling puts to own stock does not make sense.

 

[tommcginnis]

If you want to own the stock ........ buy it.
Selling puts to own stock does not make sense.

Hilarious that such an uninformed opinion should be posted from an ID of "OptionsOptionsOptions". But, "whatever."

As the lawyers would say, "Asked and answered."
The thread to which you are posting has multiple posts which outline in theory, in math, and in history, just how wrong your opinion is. Kinda hard to find a way around that.

 

[yobo]

He’s actually right. I sell puts to collect premium on stocks that I think are safe to own if put to me because then I can usually flip the stock to get back to cash or I can sell a covered call to get back to cash.

But I don’t sell a put because I want to buy the stock. Of course I’d like to get a cheaper price but what if that cheaper price never comes? I’d be better off buying the stock if that is what I wanted in the first place.

Perhaps that explains his comment. No need to jump all over his post

Hilarious that such an uninformed opinion should be posted from an ID of "OptionsOptionsOptions". But, "whatever."

As the lawyers would say, "Asked and answered."
The thread to which you are posting has multiple posts which outline in theory, in math, and in history, just how wrong your opinion is. Kinda hard to find a way around that.

ght

 

[Saltynuts]

@Saltynuts The amount of risk is the distance between the strikes less the premium received. In your example (selling 85-95 call spread) if you get $1 credit, the risk is $400.

Not sure what do you mean by "didnt even use my own money". This is margin taken from your account - if the stock goes above 95, you need to cover the spread and pay debit much higher than the credit you got ($5 in worst case). It IS your money, and if you oveallocate and use too much leverage, your account is toast.

Even if selling weekly credit spreads is profitable in the long term, it is still a very risky strategy and losses can be catastrophic as you can see from those screenshots.

Thanks Kim. Understood loud and clear. I'm just getting at, how are those loss percentages (and heck, the gains) calculated in those histories you linked, that showed percentage losses in the aggregate far exceeding percentage gains, even if there were a lot more gains overall. In my example:

Stock is at 85 and i sell a call at 90 strike for 2 and buy a 95 call for .5. Worst case is that stock goes to 95 or higher. In which case I'm down 5 minus the 1.5 delta on the premium, thus down 3.5. How would this be reflected percentage wise in the loss column of those histories you linked? Do they have some underlying account value that they are using to calculate these percentages and losses? For example, they are using an account with $100 in it, so this trade would be shown as a 3.5% loss? I'm just trying to get a handle on how they are calculating their numbers. Thanks.

 

[tommcginnis]

Stock is at 85 and i sell a call at 90 strike for 2 and buy a 95 call for .5. Worst case is that stock goes to 95 or higher. In which case I'm down 5 minus the 1.5 delta on the premium, thus down 3.5. How would this be reflected percentage wise in the loss column of those histories you linked?

You are mixing position returns and portfolio returns.

20% reward-to-risk is not uncommon for a 1-week or 1-month vertical call spread.

If that position is 1% of your portfolio, then........