Put Writing timing

Quote from diaoptions:


Also be cautious of some advice you get on EliteTrader, there are a few wackos here.
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Indeed there are, and they will often post stuff like this:

Quote from diaoptions:

IMPORTANT ANNOUNCEMENT

I have decided to stop posting on ET, this will be my last post. I find the quality of posts has dropped considerably in the past year to a point that ET is a waste of time. :(

Log Out.
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ETA: You tool.
 
Quote from lindq:

An excellent post. But most won't appreciate why until they've made the errors you referenced. And then it is too late.

If a new trader feels he must get involved in an option strategy - a mistake to begin with in my mind - shorting puts on equities is a bad move. Very easy to get overconfident and over leverage, leading to the possibility of severe losses when the market tanks under you.

Doing a buy/write at least helps make one aware of their total exposure.
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1)..... You are waaaaay more likely to over leverage selling credit spreads than naked puts.

2)..... While you are less likely to over leverage doing a buy/write vs selling a naked put, the main advantage of doing a buy/write, is that it allows you to select your strike and credit before initiating the trade.... just like a naked or cash secured put.
As a result, you are more likely to enter a trade with a better "break even" price, than simply buying a stock long, and eventually selling a covered call.
Having a lower BE price, means a higher "probability" of the trade being successful.

Obviously if the stock goes up before you sell a call, you will get a better price..... assuming you didn't wait to long and thus lose premium to theta.
But if you really thought that was a strong likihood of occuring, you would probably not be interested in a cc strategy to begin with.
 
Quote from Put_Master:

1)..... You are waaaaay more likely to over leverage selling credit spreads than naked puts.
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I'm worried about the above advice. Credit Spreads have LIMITED loss, while Naked Puts much greater loss potential. Could you explain how you can "over leverage selling credit spreads"?

I'm sure the OP would like some good solid advice.



:)
 
Two PhD's took a look at your question with regard to S&P index options and wrote a paper about it, complete with a specific trading strategy. I wouldn't trade the more highly leveraged versions, but the concept is interesting.
 

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Quote from diaoptions:

I'm worried about the above advice. Credit Spreads have LIMITED loss, while Naked Puts much greater loss potential. Could you explain how you can "over leverage selling credit spreads"?

I'm sure the OP would like some good solid advice.
:)
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We have already had this discussion on my 2 other threads, so no need to rehash it here a 3rd time.
I'll simply say there is a MUCH GREATER likelihood of ones account being wiped out via credit spreads than via selling naked puts, and that spread wipe out can occur from a MUCH SMALLER % drop in stock(s) value, than if they were naked.
In other words, if your stock is 5 - 10% otm and the stock drops a mere 15% - 18%, depending on your strike gap, your probably wiped out.... minus your credit, (assuming you didn't invest your credits in another spread.)

Meanwhile, that same % drop is more of an annoyance to the naked put seller than anything to freak out over. And covered calls and dividends will reduce his % of margin over time.
And the reason for it is, the average spread trader will likely be on MASSIVE leverage, while the average naked put seller is likely on manageable leverage.
(The above assumes both portfolios are using either naked put selling or spread trading as their prefered strategy for their accounts.)

Suppose instead the stock trades between his strikes instead of below both, as in the above example.
If the spread trader does not close his deteriorating spreads that he most likely can NOT afford to buy, which are trading between his strikes,... and there is some "event" that results in his brokerage firm being too busy to close his trades for him on expiration day,... if the stock opens lower on monday morning due to that "event", he may owe the company thousands of dollars. Perhaps even tens of thousands, depending on how high his strikes were.


Again, my discussion is a comparison about an investor using all his investment cash in his trading account, for either a strategy of selling credit spreads or selling naked puts on margin.
Assume a margin % in the area of 20 - 30%.
That being, on a $100,000 account you are borrowing $25,000
 
Quote from Put_Master:

We have already had this discussion on my 2 other threads, so no need to rehash it here a 3rd time.
I'll simply say there is a MUCH GREATER likelihood of ones account being wiped out via credit spreads than via selling naked puts, and that spread wipe out can occur from a MUCH SMALLER % drop in stock(s) value, than if they were naked.
In other words, if your stock is 5 - 10% otm and the stock drops a mere 15% - 18%, depending on your strike gap, your probably wiped out.... minus your credit, (assuming you didn't invest your credits in another spread.)

Meanwhile, that same % drop is more of an annoyance to the naked put seller than anything to freak out over. And covered calls and dividends will reduce his % of margin over time.
And the reason for it is, the average spread trader will likely be on MASSIVE leverage, while the average naked put seller is likely on manageable leverage.
(The above assumes both portfolios are using either naked put selling or spread trading as their prefered strategy for their accounts.)

Suppose instead the stock trades between his strikes instead of below both, as in the above example.
If the spread trader does not close his deteriorating spreads that he most likely can NOT afford to buy, which are trading between his strikes,... and there is some "event" that results in his brokerage firm being too busy to close his trades for him on expiration day,... if the stock opens lower on monday morning due to that "event", he may owe the company thousands of dollars. Perhaps even tens of thousands, depending on how high his strikes were.


Again, my discussion is a comparison about an investor using all his investment cash in his trading account, for either a strategy of selling credit spreads or selling naked puts on margin.
Assume a margin % in the area of 20 - 30%.
That being, on a $100,000 account you are borrowing $25,000
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Good explanation. Thanks :)
 
"the average spread trader will likely be on MASSIVE leverage, while the average naked put seller is likely on manageable leverage."

How do you know that? Based on what???

"...and there is some "event" that results in his brokerage firm being too busy to close his trades for him on expiration day"

Quite an assumption

"...a comparison about an investor using all his investment cash in his trading account, for either a strategy of selling credit spreads or selling naked puts on margin."

Who would do that? I use credit spreads (as well as short puts) and have a mix of bullish spreads and bearish spreads and don't devote even a major part of my cash to those, nor to any other single strategy.

http://www.investopedia.com/university/optionspreadstrategies/#axzz29RElCGpx

In other words I can confabulate a situation where someone (extremely stupid) using credit spreads would fare worse than someone using naked puts... but it is quite a confabulation.

http://en.wikipedia.org/wiki/Confabulation

Credit spreads are 'more powerful' (my wording) than naked puts in terms of % yield and carry both advantage for the wise and disadvantage for the unwise... as a result of that power. Credit spreads are demonstrably 'safer' than naked puts except in a narrow range of outcomes... which are of course unpredictable. In almost every case it can be shown that the statistical expectation for credit apreads is higher than for the equivalent short put.

http://en.wikipedia.org/wiki/Expected_value

It just takes a smidgen more brains to place and manage credit spreads than it does short puts... but not a lot.
 
Just a few replies, as I'm short on time and I'll be gone all day and evening tomorrow:

<<< "the average spread trader will likely be on MASSIVE leverage, while the average naked put seller is likely on manageable leverage."

How do you know that? Based on what??? >>>

It's common sense.
Unless the spread trader is using low strikes like the low teens or single digits, he will automatically be on massive leverage.
The higher the strike the higher the leverage.
For example, if you assume a spread trader is using strikes in the range of $35 - $55, he will be using leverage of about 10 times his account value.
Don't you think that qualifies as massive???
Use strikes like AAPL and you are probably talking about using leverage of about 30 times your account value.
That's why spreads are so dangerous. That being you can not possibly buy 90 - 95% of your spreads, so you should close them down BEFORE they trade between your strikes.
Because once the stock trades between the strikes your losses are big.
And once it's even a penny below your strikes.... you are wiped out.... minus any time premium remaining, if any.

Meanwhile, it's difficult, if not impossible, for the naked put seller to initially be on much more than about 3 times his account value selling naked puts. And only a total moron would do that, as you are in a margin call if the stock drops a few pennies.
Who opens a trade with no room to fluctuate? That's probably not even possible to do.
Thus, most margined naked put sellers, even if they are extreme risk takers, will not open trades more than 2 times their account value. And even that would be the exception. Not the rule.
While being on leverage of 10 times their account value, is more the rule than the exception for the spread trader.


<<< In almost every case it can be shown that the statistical expectation for credit spreads is higher than for the equivalent short put. >>>

Not true.
Assuming we are comparing apples to apples, then we are both using the same strike.
Thus both have the same probability of the stock not breaching the strike price.


<<< Who would do that? I use credit spreads (as well as short puts) and have a mix of bullish spreads and bearish spreads and don't devote even a major part of my cash to those, nor to any other single strategy. >>>

The discussion is not about me, you, or some guy we know.
It is about comparing the 2 strategies as a prefered investment choice.
Thus my point being,... it's one thing to initiate a spread on a particular stock, which one feels is particularly volatile, and/or has earnings pending, and/or has no tech support anywhere in site, ect....
It's another to use for ones entire portfolio.... which many traders do.
WHY?
Because they mistakenly believe their losses are limited and controlled. They don't realize the "limit" is their entire account value, and how a single bad week in the market can wipe it out..... if they don't manage their risk by closing their spreads BEFORE it touches their upper strike.
Thus the safety of their deep otm strikes are an "illusion".
As they dare not let the stock get to close to it before closing the spread.
WHY?
Because they can not consider buying 95% of their stocks due to their MASSIVE leverage.
Again, the massive leverage is probably in the area of 10 times their account value for most spread traders.
Again, I'm assuming strikes in the area of 35 - 55.
Use even higher strikes and your leverage is even higher.

Spreads sound good on paper.
That being, it has a limited losses, you know up front what your cash used is, you know your max loss potential, you know your potential gain, you know your % return, you can select your strike gap, ect....
The reality of spreads is a lot different than the paper version.
And the traders who don't plan for, or assume some market event may occur..... those are the ones who get wiped out.
Or even worse.... may end up actually owing their firms money, because they didn't close on exp friday, as they hoped to sell the stocks the following monday.
While the last issue is rare, ask your broker if it's ever happend to anyone.
That being their stocks open down big on monday, because of some "event' over the weekend.

THe main advantage to using a spread strategy vs being naked is,... when one wants to close down a deteriorating trade.
Then the naked seller will wish he were in a spread.
Thus the naked seller needs to be picky about his selection of stocks and strike prices.
He should be willing to own the stocks for a period of time, as closing down a deteriorating put when the stock is dropping and the VIX is spiking.... will be expensive.
 
<<< "the average spread trader will likely be on MASSIVE leverage, while the average naked put seller is likely on manageable leverage."

How do you know that? Based on what??? >>>

Common sense??

It not common sense... it's contrary to 'common sense' and simply points out you understand neither spreads nor 'leverage'.

One is on no 'leverage' when one opens a spread with a cash account.... and no more 'leverage' than any other strategy in a margined account.

http://www.investopedia.com/terms/l/leverage.asp

http://en.wikipedia.org/wiki/Options_spread


In a bull put spread, which is the spread that is comparable to the naked short put, buying the lower strike put mitigates risk relative to the naked short put rather than extends it... no matter what price the stock. The only possible situation where the holder would garner any
additional risk is if he:

1. maxed out his account completely on bull but spreads
2. did so on high priced stocks
3. the market went below the spread on all (or a large number ) of his spreads
4. he allowed his account to go into expiration after cashing in the lower long put.

This would be quite a combination of occurances and stupidity. Actually you would not be able to do number 4 since your broker wouldn't allow it.

In almost every case it can be shown that the statistical expectation for credit spreads is higher than for the equivalent short put.

Not true.
Assuming we are comparing apples to apples, then we are both using the same strike.
Thus both have the same probability of the stock not breaching the strike price.

Again this simply demontrates that you do not undertand the concept of expectation and refuse to read and understand the concepts involved.

In fact the calculated expectation for the short put is almost always (99%) less than the spread because the short put is open ended on the low side while the risk for the spread is capped by the long put. You should take some examples, compute the expectations and compare the spread to the short put... if you have the skill to do so.

http://en.wikipedia.org/wiki/Expected_value


It's another to use for ones entire portfolio.... which many traders do


Again, the massive leverage is probably in the area of 10 times their account value for most spread traders.

Thus, most margined naked put sellers, even if they are extreme risk takers, will not open trades more than 2 times their account value. And even that would be the exception. Not the rule.
While being on leverage of 10 times their account value, is more the rule than the exception for the spread trader


Who are these spread traders? Have you taken a survey... what are the numbers?? I would like to meet one of these extremely stupid traders.

The entire basis of your argument is: Spread traders are idiots and will take maximum advantage of the power that spread trading will give them and then exercise poor judgement in handling the spreads, while naked put traders are wise to NOT take advantage of the spread strategy and hobble themselves with the lower performance and higher risk of the naked short put because they are too stupid to handle the additional power that using spreads gives.

Rediculous.

You should reread the definition of confabulation:

http://en.wikipedia.org/wiki/Confabulation
 
<<< <<< It not common sense... it's contrary to 'common sense' and simply points out you understand neither spreads nor 'leverage'.
One is on no 'leverage' when one opens a spread with a cash account.... and no more 'leverage' than any other strategy in a margined account. >>>

Your statement above is precisely the reason so many spread traders get wiped out. That being, they have no idea of the massive amount of leverage they are on.
Like you, they think their spread account is a cash account.
That is true only in "Theory World".
in the real world, every spread trader who trades stocks priced over $10 is on leverage.
If their strikes average out to be in the 35 - 55 range, they are on leverage of about 10 times their account value.
Theory World is a wonderful fantasy world to trade in.
But it's the real world that kills spread traders .

But again, I am NOT talking about the trader who does the occasional spread on a stock he considers more risky than usual.
I'm talking about the trader who selects bull put spreads as a strategy for his portfolio.
Unless he is only using 1/4 - 1/3 of his account for spreads, and sitting in cash with the rest of his funds,..... he is on massive leverage.
I find it very unlikely most spread traders are doing that.
Instead, because they think their spread accounts are cash accounts, most will use all or most of their funds to intiaite additional spreads.

BTW, if a spread trader actually does sit in cash with 2/3 of his funds, then whatever your annualized % return is on the funds you do use for spreads,.... you should lower your year end expectations by about 2/3.
That being, if you earn 15% on each spread trade you intiate, but you are only using 1/3 of your funds, with the rest being in cash,.... then you should expect a year end annualized % return on your total account to be about 5% at year end.

I'll be gone all day and evening. So I'll read you tomorrow.
However there is a chance I may be home "briefly" later in the afternoon.

(Additional note..... I'm pleased you are no longer posting pictures of buildings.) Hope things are going well for you at your new secret posting place.
:D
 
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