Put spreads for income?

[JSOP]

When you are wrong sell calls.

Selling calls will not adequately protect OP's existing short puts in the face of rapidly deteriorating underlying breaking through the strike of the short puts. OP's looking for ways to protect against short puts. The earned premiums from the short calls is fixed and will not increase to offset the increasing losses due to the continuing deterioration of the underlying value. The OP needs something that will increase in value when the losses on the short puts are also increasing.

To hedge against short puts, OP needs to long puts.

 

[JSOP]

Hello all,

Last year I started selling cash secured puts and I've been surprisingly successful/lucky at it. However, the last two months I've had to buy some of these puts back at a loss as the underlying(s) had dropped below my break even point before expiration. So, I've been looking for some protection when the stock drops and I'm not on top of it quickly enough. I could set a stop loss order, but I was also considering various put spreads in which I would at least make up for some of the losses on the short side with the long side. So how would this be constructed, sell and buy for the same number of contracts, or use a different ratio of sold puts to bought puts? How far apart would you like the strikes to be? What about a calendar spread, buy the back month put and sell the front month perhaps, and use the same strike or different strikes? The object is to let the whole thing expire worthless, but certainly at times I won't mind being assigned either.

Thanks!

To protect against short puts, you need to long puts. That is a must. Do not just short puts without any protection. That is very dangerous.

You need to do scenario analysis and payoff diagrams in various price scenarios of the underlying to find the combination of how many puts to buy and at which strikes and for which expiration to see how your profit/losses are impacted. Everything all depends on the price outlook of the underlying. Buying puts is like buying insurance so just with insurance irl. If you think there is a higher probability of the underlying falling, then you buy more insurance, buy more puts whereas if you think there is a less chance of the underlying falling, you might be able to ease off and buy less puts. If you think the underlying is REALLY going to fall and fall BIG, you might even want to buy more puts than shorting the puts so you end up with a net long put spread. The strikes of the options will depend on where you think the underlying will land.

 

[JSOP]

Correction: selling puts turned out to produce much worse results than the market (^SPX) in the last couple years:
^SPX 54% up, writing puts on SPX: 24% up, based on PUTW ETF:

https://finance.yahoo.com/chart/PUT...6ImNoYXJ0IiwicGFuZWxOYW1lIjoiY2hhcnQifX19fQ--

View attachment 266324

And here is the put selling index from CBOE, looking pretty similar:
View attachment 266325

Selling naked cash-secured puts will worse than the market index that the puts is written on if the year is very volatile with huge drops even if the market index was in an uptrend. Because the puts is naked so what's happening that everything that you are earning is getting wiped in one fell swoop of a huge market drop, i.e. all the pennies that you picked up when the market was going up or didn't drop below your strikes are all lost when that huge steam roller just rolled over all of the pennies. And then you have to start all over again collecting pennies.

As long as the year did not have huge drops, naked puts will only net higher gains than the market index that the puts is written on regardless whether the market trended up or down.

When you are shorting options, you are really shorting volatility. As long as the volatility is low or low enough that it didn't touch your strike by expiration, the options expire worthless and you win. Once the volatility goes up, just like any shorting, you are screwed.

 

[JSOP]

You know, I've never understood this analogy.

Why is picking pennies up in front of a steam roller bad?

I mean, really. Shouldn't it be "trying to pick up pennies in front of a speeding train"?

Steamroller is more painful when you see your hard-earned pennies getting pressed out of you dollar by dollar which is what happens.

 

[dorietrading]

When you are wrong sell calls.

And buy low delta calendars to protect the written calls.

 

[dorietrading]

I always sell low delta calls and puts, most of the time 2DTE. Last year i had 25% return on capital with a max drawdown of 11%. And yes I had naked puts during feb/march. But you have use most of your margin, buy protection when vola is low, always be on the watch and follow you own rules (which are backtested). So it's not easy...

 

[zghorner]

Ah, the old pennies in front of a steam roller strategy.

how so?

I know naked options is exactly that but with spreads you at least cap your risk (converting the steamroller into maybe just a motorcycle lol).

yes you cap profit but you tip the odds into your favor, especially running credit spreads.

not trying to argue per se but legitimately asking as a way to learn.

 

[JSOP]

how so?

I know naked options is exactly that but with spreads you at least cap your risk (converting the steamroller into maybe just a motorcycle lol).

yes you cap profit but you tip the odds into your favor, especially running credit spreads.

not trying to argue per se but legitimately asking as a way to learn.

No doing a spread is like putting brakes on steamrollers or putting spike strips on the road. It's still a steamroller and will still roll you over but it will be stopped by the long options somewhat so the loss will be reduced.

 

[Bastion_01]

spoken like a guy who doesn’t know who the sucker in the room is.

Oops, didn't mean to hurt your feelings. All the best 2021.

 

[qlai]

I know naked options is exactly that but with spreads you at least cap your risk (converting the steamroller into maybe just a motorcycle lol).

Not an expert, but in my mind there are few ways to reduce risk: hedging or position sizing+diversification. The problem with hedging is that it is expensive so you end up making even less on spreads, which in turn leads you to increase position size. But since crazy sh*t happens in the market all the time, I prefer small sizes with undefined risk than large size with “defined” risk. Either way, it’s picking up pennies in front of heavy objects.