Safe way to sell put options?

[dagnyt]

Quote from short&naked:

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!

Selling puts in an index is also risky. I suggest you <i>consider</i> selling put spreads instead of naked puts. If you are comfortable selling naked puts, then so be it.

I know you will hate buying that OTM put for protection, but it does limit losses. I find it worth the high cost.


Mark

 

[BeatingtheSP500]

Here's my take on selling naked:

A man can drown in a pond that has an average depth of 1 foot.

 

[commiebat]

Quote from BeatingtheSP500:

A man can drown in a pond that has an average depth of 1 foot.

A man can drown in a bowl of soup.

Lesson: Always be careful, even if you don't think you're out of your depth.

 

[Boy Plunger]

Quote from rickf:

Exactly. For example, I own GE common and it's a core part of my retirement portfolio with a 20-30 year timeframe. I'd love to own more at a 'steal' at some point....but I'm also cautious in this market.

Anyway, on Wed morning this week, because of its exposure to financial messes through its capital arm, GE's, that global diversified behemoth, had an IV in the mid-80s. GE? That's quite high, so I looked at the options to see if anything looked interesting for a trade during a period of higher premiums.

GE common was at, I think, 24. I sold a load of Dec 12.50 puts -- grossly out of the money -- for 1.03 each because the premium was so darn high. Normally, those type of deep OTM puts on a slow-moving firm like GE would be much cheapter. Looked like a very good R/R for me, so I made the trade.

I closed the trade for ~ 80% gain on Friday morning once GE shot up after the bailout news broke Thurs night. I won't complain ... and if GE for some reason had fallen to 12.50 by Dec expiration, I'd still be happy to get them at that price for a long-term holding.

Would I have done this on a stock I wouldn't want to own? Probably not. And I probably could have sold a much higher strike on the puts, but again, in this market, the 12.50 strike was a rather comfortable risk-reward for me.

First, thank Jebus GE implied's are up. Second, is there a problem with selling October vols ? I like a faster burn, close to the edge, down by the water (Yes). I'm bee-bopping all over Oct (collected 1.76 for the 17.5p-closed) and still short the 22p. I hold a chunk of GE shares down here and am very glad the options have lit up as of late. However, vols did come off after the Merrill downgrade and the mkt leaned on the options but they are still juicy. Thanks for the segway to rant about my GE... Remember the German trader who was said "I"s the man" in Natenberg's book? He blew up selling dotm's.

One more thing, how the f++ck does Blodget still find work? It "felt" so good watching GE rally above 26 on the day of his negative review. He reduced GE the company to a mere hedge fund about to go bust.

Cheers,

Alex

 

[nitro]

Did anyone sell naked puts?

nitro

 

[Boy Plunger]

Yes

 

[traderlux]

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.

agree, trades must be managed and the management must be planned before the trade is opened.
trade management can range from the simple to the complex.
when looking at risk/reward of a trade, also add in "recovery", if the trade goes way against you, what kind of recovery is possible?

 

[rew]

Selling cash covered puts on stocks you really want to own at strike prices where you'd really be willing to own the stock is less dangerous than buying the stock at the current market price. Where people get in trouble is when they sell puts on margin for far more stock than they can actually afford to own or would want to own.

As an income strategy this isn't particularly lucrative because the put premiums are tiny compared to the amount of cash you need to buy the stock. But if you just want to get paid for buying stock you want to own anyway it's a sensible thing to do. In fact if you really want the stock it sometimes makes sense to sell ITM puts. You are more likely to be put to the stock and you still get it a little cheaper than its current price because of the time value of the puts. And if the stock does go up beyond the strike price you at least get to keep a hefty premium.