Puts for Yield

B

BobJax

Hi Folks,
I usually deal in two things 1) preferreds and 2) puts.
In 2008-9 I learned about "naked puts" when I was almost forced to liquidate a great deal of my holdings to satisfy the margin calls on my "naked puts".
I mean who would ever think Microsoft would go to $16 and GE to $10? But they did.
I learned a trick that bailed me out and I didn't lose anything on my naked puts. Thank goodness.
Move on today. I am trying a strategy to sell puts for yield. Can you please tell me if there is a better way using calls or puts.
What I am doing:
1. Pick companies I really want to buy today at today's price.
2. I run a screen for Jan 2018 to find any of these companies with a strike where the yield if not exercised would give me 15% (for two year). Since I am much more conservative now I will keep the cash to purchase the stock if exercised. No leveraged deals.
3. If the stock is put to me, I get it for 15%+ less that today's price. Otherwise I make the yield, an average 7.5% annual rate.
Is there other ways to do this?
 
BobJax said:
In 2008-9 I learned about "naked puts" when I was almost forced to liquidate a great deal of my holdings to satisfy the margin calls on my "naked puts".
I mean who would ever think Microsoft would go to $16 and GE to $10? But they did.
I learned a trick that bailed me out and I didn't lose anything on my naked puts. Thank goodness.
More...



So what was your "trick" to avoid losses on the short puts when the underlying turns sharply against you?




:)
 
this is all dependent on the level of vol you sell... your selling implieds... . your taking a additional position on implied vol.... likely the market prices vol correctly and you sell the put and on average over time the number of times you make money compared to the number of losses you take will even out in a fair market... your not accounting for how your speculating on vol... playing it safe with stocks you want anyway isn't going to give you an advantage when it comes to selling premium... there isn't a direct relationship there..
 
BobJax said:
Hi Folks,
I usually deal in two things 1) preferreds and 2) puts.
In 2008-9 I learned about "naked puts" when I was almost forced to liquidate a great deal of my holdings to satisfy the margin calls on my "naked puts".
More...

I have two comments.

First, I would have thought you'd have learned your lesson from 2008, just as I learned the same lesson from 2000. There are a thousand better ways to invest than playing with short puts on equities.

Second, here is the most significant problem with your strategy. You may be willing to be put the underlying at a price you CURRENTLY like, as you explained. But is that a price you will like 6 months or a year from now if and when the company reports poor earnings, or regulatory or legal problems? Of course you wouldn't. And eventually you'll be sitting on a pile of crap stock that you never wanted, and you get the fun of trying to dig yourself out of a hole. And you went through all of this for a few pennies of premies.

Bad strategy, bad idea.

Best of luck.
 
OptionGuru said:
So what was your "trick" to avoid losses on the short puts when the underlying turns sharply against you?




:)
More...
Glad you said "your trick" because it worked for me, perhaps only me, for the dozens of naked puts I held. Would not suggest this for anyone else because it worked during a massive crash of the TOTAL market, not an individual stock crash, because the stock sucked.
What happened: I was calmly freaking out in 2008-9. Margin calls were on their way. I was talking to the broker daily. I asked when were puts typically exercised? They said anytime. Then I began to sense these puts could be traded instead of someone selling me their stocks, I hoped anyway. Sensed that many people in options were option traders not necessarily stock owners. Right or wrong it doesn't matter. But that kept me going. Finally, the broker said that the exercises most often happened more as the expiration neared.
So, I kept rolling the puts over until the next year (leaps), a couple of months or more from expiration, picking up about a grand when I rolled them over, trying to move up the strike price.
Finally the stock prices came back. GE took the longest, about 3 rollovers.
Even after that massive crash I walked away rattled but made a little money in the process.
As you can tell, this would work only for super quality companies that recover quickly from a total market crash.
That was a rare experience.
 
lindq said:
I have two comments.

First, I would have thought you'd have learned your lesson from 2008, just as I learned the same lesson from 2000. There are a thousand better ways to invest than playing with short puts on equities.

Second, here is the most significant problem with your strategy. You may be willing to be put the underlying at a price you CURRENTLY like, as you explained. But is that a price you will like 6 months or a year from now if and when the company reports poor earnings, or regulatory or legal problems? Of course you wouldn't. And eventually you'll be sitting on a pile of crap stock that you never wanted, and you get the fun of trying to dig yourself out of a hole. And you went through all of this for a few pennies of premies.

Bad strategy, bad idea.

Best of luck.
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Pretty funny answer..That's the stock game. Any stock can become crap, even Apple.
So you are saying don't buy stocks because all stocks can become crap. I know, I know, even though I am going after only the highest quality, biggest companies, that are the most profitable, things can go wrong. I get it.
Now give me 10 (or I will settle for 2) of your better ways, if you are so smart. I will be glad to follow your advice.
Yea, I remember when Amazon dropped to $8 in 00. So what. I was heavy in the market at that time too, big deal.
As you can tell I don't like reading jerky, non-helpful answers.
 
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lindq said:
I have two comments.

First, I would have thought you'd have learned your lesson from 2008, just as I learned the same lesson from 2000. There are a thousand better ways to invest than playing with short puts on equities.

Second, here is the most significant problem with your strategy. You may be willing to be put the underlying at a price you CURRENTLY like, as you explained. But is that a price you will like 6 months or a year from now if and when the company reports poor earnings, or regulatory or legal problems? Of course you wouldn't. And eventually you'll be sitting on a pile of crap stock that you never wanted, and you get the fun of trying to dig yourself out of a hole. And you went through all of this for a few pennies of premies.

Bad strategy, bad idea.

Best of luck.
More...

Selling puts/selling vol isn't inherently a bad strategy. It's an assymetric risk reward but over an economic cycle (bust to bust) you can produce alpha if you are able to identify overpriced options and manage the risks appropriately. You can never avoid blowups - but they don't have to wreck you.

Inexperienced traders think that selling options create yield. This isn't true. They create cashflow but you have to put that cashflow into a reserve account for the blow ups, exactly the way an insurance company behaves. If you live in a marked to market world or a world where you have to withdraw capital, in which every day or every month you start from zero, then it's very difficult to sell volatility as a strategy. Over the long haul, there is edge in selling vol.
 
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