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Safer option strategies
- Thread starter madbrain
- Start date
Quote from madbrain:
For SPY it's quarterly. For example, the SPY $125 put for this friday closed at $1.27 . But the SPY $125 call closed at $2.04 . Quite a difference. Maybe the market just expects it to go up, even though today was a down day.
Or perhaps the SPY closed 46 cts ITM and you're mistakenly including intrinsic value in your cost comparison.
If I look at the LEAPS SPY puts and calls, the pattern gets inverted. Jan 2014 $125 call is $17.32 . But Jan 2014 $125 put is $21.60 - much more.
As mentioned in previous reply, nine 43 ct dividends b/t now and '14 exp so stock is going to drop $3.87 in 26 months. Do you now see why the puts cost so much more?
Ignoring arb positions, every option position is going to have a downside. There are an endless number of "Yeh But's" for anything you look at. The bottom line is that you should be looking for a risk graph that provides and acceptable amount of both.Quote from madbrain:
Right, it reduces risk, and also probably eliminates the return in the process, or pushes it negative ;-)
Yes, that sounds interesting, but one would have to be fairly lucky to see the market go up during the first few weeks with the writes, and then down just before the long put expires. Things can move the other way around, too.
If I buy a 1-2 month put, there are only 4-8 weeks left to make the premium back with weekly put writes.
Profit is much more likely if one doesn't buy a long put. But risk of a sudden major market slump is there. One way to protect against it is to write a way OOM put. For example writing a put at 90 cents on the dollar on SPY almost never gets assigned. I think only once over the last 4 years, in October 2008. And the shares go back above strike within the next week.
Re your put protection idea, the last thing to mention for tonight is the possibility of collaring your positions. Sell OTM calls to fund the cost of put protection (reduced cost for ATM closer to no cost for equidistant OTM strike).
Since a collar has equivalent R/R to a vertical spread, the spread would be more desirable for opening positions, the collar for existing equity positions.
Since a collar has equivalent R/R to a vertical spread, the spread would be more desirable for opening positions, the collar for existing equity positions.
If your thinking about selling options, there's a good thread somewhere on here which might make you think twice. Just search for it.
Quote from cyoungmark:
If your thinking about selling options, there's a good thread somewhere on here which might make you think twice. Just search for it.
Any hint on what that thread might be called ? Searching "selling options" in this forum returns way too many results.
What are the risks you want to point out that haven't already been talked about ?
I did the math on commissions with my strategy . This is over 1321 days for the data I input.
Optionshouse (using $8.50 + 0.15) : $1333
IB : $1847
Fidelity : $3451
Schwab : $2975
The above assumes no partial assignments. If there are a lot of them, Optionshouse costs become close to IB.
There is a total of 17 end-of-week assignments. Max number of early partial assignments with the 5 day window would be 85 . At $3.95/ETF trade it would be about $400 extra worst case. Optionshouse would still win for costs, though only by about $100.
Optionshouse (using $8.50 + 0.15) : $1333
IB : $1847
Fidelity : $3451
Schwab : $2975
The above assumes no partial assignments. If there are a lot of them, Optionshouse costs become close to IB.
There is a total of 17 end-of-week assignments. Max number of early partial assignments with the 5 day window would be 85 . At $3.95/ETF trade it would be about $400 extra worst case. Optionshouse would still win for costs, though only by about $100.
spindr0,
Thanks, that certainly explains it ! Accounting for intrinsic value, the call is really 2.04 - .46 = $1.58 . The put is $1.27, but is $0.46 out of the money.
I guess I'd like to see what happens to the weekly values the next time SPY closes on an exact dollar amount.
Thanks, that helps.
Or perhaps the SPY closed 46 cts ITM and you're mistakenly including intrinsic value in your cost comparison.
Thanks, that certainly explains it ! Accounting for intrinsic value, the call is really 2.04 - .46 = $1.58 . The put is $1.27, but is $0.46 out of the money.
I guess I'd like to see what happens to the weekly values the next time SPY closes on an exact dollar amount.
As mentioned in previous reply, nine 43 ct dividends b/t now and '14 exp so stock is going to drop $3.87 in 26 months. Do you now see why the puts cost so much more?
Thanks, that helps.
Take a look at conversions. The carry cost is the cost of holding the position and explains why calls are priced higher than puts (same month/strike).Quote from madbrain:
2) Carry cost
Not completely sure what you mean by that. You mean the cost of holding the task after assignment. If you mean margin interest, this would be all in cash account so it wouldn't apply.
Downside risk is closer to 10% at exp, less if drop is sooner. Even less iinitial position was a collar (and short calls can be rolled down to mitigate some risk).Quote from madbrain:
How would you choose which protective puts to buy ? 1 yr or 2 yr LEAPS ?
Jan 2013 $30 put is $4.25, Jan 2014 $30 put is $6.10
Jan 2013 $25 put is $2.01, Jan 2014 $25 put is $3.30
The only scenario where the math seems to work out is buy the Jan 2014 $25 put. Cost would be $3.30 . And expected dividend would be $3.50 . 20 cents/share over 2 years if shares stay around $30 which is 0.3% per year. Possibly more if T goes higher. 20% downside if it's $25 or below.
Consider cost per day for protection as part of consideration for what strike to buy:
Jan 2013 $30 put is $4.25 (99 cts)
Jan 2014 $30 put is $6.10 (77 cts)
Jan 2013 $25 put is $2.01 (47 cts)
Jan 2014 $25 put is $3.30 (29 cts)
See a pattern?