Please help me understand this.

[Whistlingleaf]

Quote from diaoptions:

So how would the naked put position wipe out an account, while the covered call doesn't?

You have to actually spend the money for a CC.

Because of the way margin reqs are held individual investors tend to think they have more money then they have, and they sell more puts then they should have ~

In case you guys forgot the OP is clearly a new investor and not a sophisticated investor with years of experience.

 

[Don Bright]

OK, what the heck, just for the "new people" to options. Remember, all you ever have to do is draw the results out, and Keep It Simple.

Assumptions: Stock is about $30.
$35 call is about $1.00
$25 Put is about $1.00

OK, so far?

A. We will buy stock, sell call.

B. And we will sell naked put.

We will go 3 places for this exercise.

1. Stock goes to ZERO
2. Stock doubles in price.
3. Stock stays the same.

1. Goes to Zero.
(A). Lose $30 on stock, make $1.00 on call = ($29).

(B)Put is exercised, you're "put" stock at $25 (lose $25), make $1. = ($24)
--------------------------------------------------------------------------------
2: Stock doubles to $60.

2. (A). Make $30 on stock, stock is called at $35 (minus $25 +$1 option premium received) = Net of $ $6.00

2. (B). Put goes out worthless = $1.00

Remember we're using the outside strangle, not the ATM options, which I would like you to diagram out yourselves, just for fun.

-----------------------------------------------------------------------------

3. Stock stays the same.

3. A. Zero on stock, make $1.00 on call sale.

3. B. Put goes out worthless, make $1.00 on sale.

------------------------------------------------------------------------

The $5.00 differential is of course due to the difference in strike price from the $30.00 assumption.

I just woke up, I hope I did the numbers correctly (Atticus? Anyone, LOL).

But, when you spend money to buy stock, plus carrying costs, it is worse than receiving money for sale of naked put. My only point.

If you do it at the money, should work out the same, right?

All the best,

Don

 

[shopster]

Quote from Don Bright:

The Money Show people are generally not real traders, and have no real experience. ..........

..........you're always better off just selling a naked put vs. buying the stock.

Don,

Grammatical error, you really meant to say the " the Monkey show...."

selling puts has worked for 36 years.

the 80's were a seller's paradise.
for 5 years straight, was exercised only a few times.

met one lad from chicago.
he was a dentist, sold puts / covered calls 12 x year and has not picked up the drill in over 25 years.

retired now and still selling them down the river..................

s

 

[sle]

Quote from Don Bright:
Options are so simple, and we use the "covered write = naked put" scenerio to determine if someone has a clue about options.

You are oversimplifying things, in my opinion. While the terminal payoff is the same, there is also margin treatment, tax treatment that are very different for the two. I can imagine scenarios, especially for retail traders where CC is preferable to a pure options position.


PS. Using puts and calls as long-term limit buys and limit sells is a perfect strategy, assuming that you would want to own the asset.

 

[Don Bright]

Quote from sle:

You are oversimplifying things, in my opinion. While the terminal payoff is the same, there is also margin treatment, tax treatment that are very different for the two. I can imagine scenarios, especially for retail traders where CC is preferable to a pure options position.


PS. Using puts and calls as long-term limit buys and limit sells is a perfect strategy, assuming that you would want to own the asset.

I understand that the retail traders have their own additional set of problems, but the basic premise is the same.

All the best,

Don

 

[StarDust9182]

Quote from sle:

You are oversimplifying things, in my opinion. While the terminal payoff is the same, there is also margin treatment, tax treatment that are very different for the two. I can imagine scenarios, especially for retail traders where CC is preferable to a pure options position.


PS. Using puts and calls as long-term limit buys and limit sells is a perfect strategy, assuming that you would want to own the asset.

I can't speak for US tax but in Canada the taxation treatment is identical except you have fewer commissions so slightly more profit and thus more tax. The RRSP account can do CCs but not naked. You need option permission from your broker to do them especially for naked sells on indices.

Margin is how the brokers protect against their own 10 dollar losses. Don't ever use it all up. Always have extra margin available.

I don't use hard stops but be aware that you may have to trade out of mistakes against large gaps. I do revisit them a few times a day and will pull them in some circumstances. Bad news can come in bunches, so don't overuse the strategy.

I am told that market maker option sellers have an average life span of 7 years. Think very carefully about the implications of this. It is possible to be lulled into a false sense of security. Make sure that the risk you must take is properly compensated. When a market strategy looks too easy, it's likely a trap.

Re-read the PS above from SLE carefully. I think it is golden advice used properly in moderation. (I currently hold short July SPY 125s above 3.50) I use them to enhance my returns and manage my portfolio risk but never as a single strategy.

 

[Don Bright]

I have already stated that it is 'ok' to enhance returns on existing holdings, but not to start from scratch.

There is just no argument here, I did my best to explain.

Don

 

[Nater]

Alright, thanks everyone for the answers and interesting conversation. I have another similar question:

I buy 100 shares of a stock, let's say, at $50 a share, and I feel the stock is overall a good investment and would like to keep this it. If I were to sell any out-of-the-money call, wouldn't I be in an almost win-win position? If the stock goes up to the strike price and it is exercised, then I still make money on the premium and the profit on the stock. If the option expires worthless, then I make money on the premium. Of course my profit is capped, but if the option is exercised, couldn't I just buy back the stock and repeat the process (assuming I still want to own the stock).

I still risk the stock itself falling in price and losing me money, but as far as options are concerned, would this be the case? Also, this is all assuming that the profit would out weigh any fees and commissions.

And although there may be a better way of going about doing this using puts and what-not, I did it this way for simplicity sake.

 

[Don Bright]

Quote from Nater:

Alright, thanks everyone for the answers and interesting conversation. I have another similar question:

I buy 100 shares of a stock, let's say, at $50 a share, and I feel the stock is overall a good investment and would like to keep this it. If I were to sell any out-of-the-money call, wouldn't I be in an almost win-win position? If the stock goes up to the strike price and it is exercised, then I still make money on the premium and the profit on the stock. If the option expires worthless, then I make money on the premium. Of course my profit is capped, but if the option is exercised, couldn't I just buy back the stock and repeat the process (assuming I still want to own the stock).

I still risk the stock itself falling in price and losing me money, but as far as options are concerned, would this be the case? Also, this is all assuming that the profit would out weigh any fees and commissions.

And although there may be a better way of going about doing this using puts and what-not, I did it this way for simplicity sake.

As I stated, if you already own the stock, and don't mind paying the carrying costs, then sure, sell some calls against it.

You are making the assumption that the stock/ETF, whatever, is going to go up, or maybe stay the same, allowing you to make the option premium.

What if the stock goes down $20.00? Are you a "buy and hold" type of guy (can be very costly as you know, watch the last few weeks, LOL).

Don't be fooled by "buy and hold" - if you believe the "market" returns something like 5-8% well, you've been sold a bill of goods. Replacement accounting is what it is called. Take out the bad stocks from an index, and replace with good ones. A big scam since the 1929 crash and before. The ONLY Dow Jones stock still in business is GE, right? All stocks go to zero pretty much.

All the best,

Don

 

[newwurldmn]

Quote from Don Bright:

As I stated, if you already own the stock, and don't mind paying the carrying costs, then sure, sell some calls against it.

You are making the assumption that the stock/ETF, whatever, is going to go up, or maybe stay the same, allowing you to make the option premium.

What if the stock goes down $20.00? Are you a "buy and hold" type of guy (can be very costly as you know, watch the last few weeks, LOL).

Don't be fooled by "buy and hold" - if you believe the "market" returns something like 5-8% well, you've been sold a bill of goods. Replacement accounting is what it is called. Take out the bad stocks from an index, and replace with good ones. A big scam since the 1929 crash and before. The ONLY Dow Jones stock still in business is GE, right? All stocks go to zero pretty much.

All the best,

Don

It's interesting. If you look at many large cap stocks that exist today, they generally have had good long term returns. But when I read the intelligent investor I didn't recognize any of the names. Suvivorship bias at work.