Safe way to sell put options?

Quote from commiebat:

This is pretty much where writing-to-own falls apart. The only times you'd end up holding the shares are the times you probably don't want them anymore, i.e. when it turns out the company is a lot worse off than you thought.
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Yes, and this is an area where the perception and reality of selling premium so often falls apart. New traders don't think carefully about the reality they may face.

The perception is - "What the hell, I'll just own the stock if it pulls back. No big deal".

The reality is often quite different. Fundamentals can change in a stock...and the market...literally overnight. So that wonderful AIG or LEH that you thought so highly of when you wrote the put, you are now holding 1,000 shares in your account - at a LOSS - wondering why the hell you took the risk for a few dollars in premium.

Selling naked puts is a stupid thing to do. If you are so good at predicting the direction of the underlying, then just buy the underlying or set a buy limit that you can remove if things change rapidly. But if you've already put your ass on the line with an open short put, the result is that you'll end up with a lot of crap in your account that may remain underwater for quite some time.

Trust the voice of experience on this one.
 
Quote from lindq:

Selling naked puts is a stupid thing to do...

Trust the voice of experience on this one.
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1) Are you deliberately missing the point on thos one?

2) Selling naked puts is a risky strategy. No disagreement.

3) Selling naked puts is a good strategy for investors (not traders) who want to accumulate stock. These are people would would place a GTC bid @ $19 for 400 shares. These investors are better off if they sell four 20 strike puts @ $1.50 than if they place that stock bid.

4) Yes, the stock can drop to 6 bucks a share.

5) Yes, the put seller would get clobbered.

6) The put seller is better off than the investor who simply placed that GTC bid.

7) Too many investors adopt the philosophy of never selling any stock at a loss. That's foolish, but that's reality.

8) If the GTC bidder changes his mind, as the stock price declines, he can dump the stock. If the put seller changes his mind, he can repurchase the option.

9) Bottom line: For those who want stock; for those would would place a bid for stock; writing an appropriate quantity of naked puts (one for each 100 shares wanted - and no more) is a sound investing idea.

Are you seriously telling people that you believe otherwise?

If you don't like selling naked puts - don't sell them. I don't sell them, but I recognize that it's a suitable strategy for some INVESTORS, not TRADERS.

Trust the voice of experience on this one. That's me. Our exuberant naysayer is right in that's it not anywhere near the best strategy. And it's risky. But so is holding stocks long - and millions of investors do just that.

If used by an investor with the right mindset and investment objectives, selling puts can be beneficial. That's all I ever said. It can be beneficial for the right investor and you believe it's wrong for everyone.

Mark
 
If you want to accumulate stocks, then just buy them.

If selling naked (or not) puts was to accumulate, what about when option is not exercized? One keeps the premium, great, but that has nothing to do with stock accumulation.

Sometimes, stocks drop for good reasons. But it's symptomatic, people want to accumulate at lower prices what they don't already own, but since the stock drop and the price is low, they don't want it anymore. And the common reaction is then to state "I'm a long term investor, it doesn't matter..."
 
Quote from MasterAtWork:

If you want to accumulate stocks, then just buy them.

If selling naked (or not) puts was to accumulate, what about when option is not exercized? One keeps the premium, great, but that has nothing to do with stock accumulation.

Sometimes, stocks drop for good reasons. But it's symptomatic, people want to accumulate at lower prices what they don't already own, but since the stock drop and the price is low, they don't want it anymore. And the common reaction is then to state "I'm a long term investor, it doesn't matter..."
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1) You don't just 'buy' stocks. You bid for them, intending to buy at your target price. When you bid via a GTC order and the stock does not hit your price, you have nothing. When you sell puts, if you don't buy stock, you earn a nice consolation prize - the put premium.

2) And if you do buy stock, then you get to buy at your price, even if the stock never trades that low.

Again, for the right investor, this strategy works. It has nothing to do with 'not wanting it anymore.' Investors are allowed to sell stocks (or repurchase puts) when that situation obtains.

Mark
 
The inconsistency is most revealing:

every flipping trade is risky, you have to manage every trade, you can lose in every trade, whether you buy or sell options, futures or stocks.

Currently, I hold XLF calls, short S&P futures, sold 40 OCT SPX 1000 puts, bot 30 SPX OCT 1050 puts, and will short crude during the next few days - futures or USO or USO options.

I manage these trades; I don't sit on my butt whining and complaining and crying if the market goes against me, I know that I can lose or win in any or all of these trades but you must be positive and enter trades with the knowledge and confidence that you can evaluate and manage the risks associated with each position. If you can't then don't trade.
 
Quote from Jahajee:

The inconsistency is most revealing:

every flipping trade is risky, you have to manage every trade, you can lose in every trade, whether you buy or sell options, futures or stocks.

Currently, I hold XLF calls, short S&P futures, sold 40 OCT SPX 1000 puts, bot 30 SPX OCT 1050 puts, and will short crude during the next few days - futures or USO or USO options.

I manage these trades; I don't sit on my butt whining and complaining and crying if the market goes against me, I know that I can lose or win in any or all of these trades but you must be positive and enter trades with the knowledge and confidence that you can evaluate and manage the risks associated with each position. If you can't then don't trade.
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JUST TO ADD:

Shorts - be extra careful now because the markets can reverse and rally 50 SPX points as soon as a bailout is announced. BE very careful holding short positions in equities, indices etc
.
 
Quote from dagnyt:

Again, for the right investor, this strategy w**ks. It has nothing to do with 'not wanting it anymore.' Investors are allowed to sell stocks (or repurchase puts) when that situation obtains.
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Mark, nobody (presumably) disputes your point. Obviously, getting a premium for doing something is better than not getting a premium for doing the same thing.

What we're discussing now is the psychology of the trade. People who buy stocks expect/hope they will go up, but it's pretty clear to even a novice that if you have 40k worth of common shares you stand to lose as much as 40k on your investment.

Naked put writers see cash come into their account, and they tell themselves "either I get to keep this cash every month, or oh well no big deal I get shares at an awesome discount". It blinds people to the risk, which is the same risk they would have had with common shares. Not seeing risk causes people to make bad decisions.

I feel like we've had this conversation before.
 
Nice to have an author of a popular options book respond. Thank you, Mark.

I intended to combine selling puts and buying and hold SPY. As many of you said, unless you are willing to hold a stock indefinitely (even if it becomes a penny stock), this is quite risky. However, it seems to me that using it in combination with an index, the only risk is that one would over pay.

Thanks to all that responded!
 
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