Puts for Yield

[El OchoCinco]

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.

That quote alone shows some lack of understanding of options and how they function but you were pretty loaded in a very risky strategy. I cannot believe that you suddenly realized options can be traded or "began to sense it". They are listed on exchanges and bought and sold daily. If you did not know that or your broker was unaware of your lack of knowledge well I would be worried if I were him or her about his job and Series 7 license.

I find it odd that your broker would allow you to trade that heavily in short options with such little knowledge, except in the case where the puts were cash backed or your other securities in the account were worth more than the naked liability (which is limited/measurable on short puts).

Add to the fact that you basically kept rolling a naked option deep against you to buy time to avoid assignment hoping the market came back is something that many brokers would not allow unless you had plenty of cash or holdings already sitting in the account. Because if your losses were large and you could not cover the margin, the broker would be held responsible for allowing you to do something like that and putting the firm at risk for that loss (yes it is a miniscule loss for the firm if they had to cover it but they hate losing money).

Your statement "If the stock is put to me, I get it for 15%+ less that today's price. " is true but does not take into account if the stock at the time of assignment is down 30 or 40%, then you are still in a losing position and only real option is to sit on the stock and just buy and hold. Which is fine if you have all the time in the world like most buy and hold investors do.

There are many ways to use puts and calls but your only basic knowledge of how options work means you should learn more before selling short puts (even if cash secured) because all you are speaking of is the best case scenerio to justify your investment and ignoring all the risks.

 

[BobJax]

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.

Newwurldmn,
Thanks for the reply. My objective is to buy the stock. If I don't get the put exercised I keep the amount given to me when I sell the put. Rather have the stock. Again, I would rather have the stock. But a nice 15% fee will satisfy me.
Wait, minor point, I also want the stock for 20% less than it is currently selling for, that is why I am using the put strategy.
Never mind about this question, a friend just forwarded a white paper about how this strategy is used by institutions. So I got my answer. Done with this thread. Thanks.

 

[BobJax]

That quote alone shows some lack of understanding of options and how they function but you were pretty loaded in a very risky strategy. I cannot believe that you suddenly realized options can be traded or "began to sense it". They are listed on exchanges and bought and sold daily. If you did not know that or your broker was unaware of your lack of knowledge well I would be worried if I were him or her about his job and Series 7 license.

I find it odd that your broker would allow you to trade that heavily in short options with such little knowledge, except in the case where the puts were cash backed or your other securities in the account were worth more than the naked liability (which is limited/measurable on short puts).

Add to the fact that you basically kept rolling a naked option deep against you to buy time to avoid assignment hoping the market came back is something that many brokers would not allow unless you had plenty of cash or holdings already sitting in the account. Because if your losses were large and you could not cover the margin, the broker would be held responsible for allowing you to do something like that and putting the firm at risk for that loss (yes it is a miniscule loss for the firm if they had to cover it but they hate losing money).

Your statement "If the stock is put to me, I get it for 15%+ less that today's price. " is true but does not take into account if the stock at the time of assignment is down 30 or 40%, then you are still in a losing position and only real option is to sit on the stock and just buy and hold. Which is fine if you have all the time in the world like most buy and hold investors do.

There are many ways to use puts and calls but your only basic knowledge of how options work means you should learn more before selling short puts (even if cash secured) because all you are speaking of is the best case scenerio to justify your investment and ignoring all the risks.

Funny. Another smart guy who sits on a forum all day long, nothing else to do. Probably out of money. Proclaiming how stupid everyone is, yet who provides no answers. Nasty. Yep you chased me out of hear. Bye, bye.
Fortunately I found answers from another forum.

 

[newwurldmn]

Newwurldmn,
Thanks for the reply. My objective is to buy the stock. If I don't get the put exercised I keep the amount given to me when I sell the put. Rather have the stock. Again, I would rather have the stock. But a nice 15% fee will satisfy me.
Wait, minor point, I also want the stock for 20% less than it is currently selling for, that is why I am using the put strategy.
Never mind about this question, a friend just forwarded a white paper about how this strategy is used by institutions. So I got my answer. Done with this thread. Thanks.

Clearly you are an expert now.

 

[Maverick74]

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?

You realize that yield is simply the opportunity cost of the index. In other words, it equals zero.

 

[cdcaveman]

You realize that yield is simply the opportunity cost of the index. In other words, it equals zero.

like i was telling him.. if he doesn't incorporate a model for vol, in which he has edge.. he is adding risk, not reducing it..

 

[lindq]

Funny. Another smart guy who sits on a forum all day long, nothing else to do. Probably out of money. Proclaiming how stupid everyone is, yet who provides no answers. Nasty. Yep you chased me out of hear. Bye, bye.
Fortunately I found answers from another forum.

I just love these guys who post questions on ET, receive thoughtful responses, then reply with insults.

This fool is the 3rd this week to make it to my IGNORE LIST, where he'll join a select group of others who have traded their way to ignorance and poverty.

 

[El OchoCinco]

Funny. Another smart guy who sits on a forum all day long, nothing else to do. Probably out of money. Proclaiming how stupid everyone is, yet who provides no answers. Nasty. Yep you chased me out of hear. Bye, bye.
Fortunately I found answers from another forum.

Actually it was pretty good advice. If your broker suddenly realizes ("wakes up from his ignorance") that your level of experience is minimal, they could restrict your trading on options or even liquidate holdings to force the puts to be cash secured. Sounds like you are already moving to cash secured puts so no problem there.

I would think some very experienced people here in options telling you how you are investing in a product you know very little about and are a little over your head would be the best advice to prompt you to maybe stop what you are doing and focus on learning more before putting any money into a situation where you could face serious issues with your broker.

It is even riskier to be involved in a risky strategy and expect anonymous help from a forum to solve your issues. Stop trading and study the subject for a while before putting another penny at risk. Best advice anyone here will give you but you just might not realize it.

 

[newwurldmn]

Actually it was pretty good advice. If your broker suddenly realizes ("wakes up from his ignorance") that your level of experience is minimal, they could restrict your trading on options or even liquidate holdings to force the puts to be cash secured. Sounds like you are already moving to cash secured puts so no problem there.

I would think some very experienced people here in options telling you how you are investing in a product you know very little about and are a little over your head would be the best advice to prompt you to maybe stop what you are doing and focus on learning more before putting any money into a situation where you could face serious issues with your broker.

It is even riskier to be involved in a risky strategy and expect anonymous help from a forum to solve your issues. Stop trading and study the subject for a while before putting another penny at risk. Best advice anyone here will give you but you just might not realize it.

He's all set. He has a paper telling him how the pro's do it.