I heard there is a popular strategy to sell naked put and then, if assigned, sell covered call, if not assigned - sell put again. Let's say stock is $50 and I sell 50 strike put. After a month stock price is $45 and I am assgined long stock at 50 and position now is -$500. Next if I sell 45 strike call and the stock rises and gets called away from me at 45 I will fix a $500 loss (minus money got from put sold). But if I sell call at 50 hoping that stock will grow, there is almost no any juicy at 50 strike call and selling it is useless. Also it's possible that stock will not go up. How do you use this strategy profitably?
Selling naked puts option strategy
- Thread starter Twinsen
- Start date
When you sell a naked put, you don't mind being put the stock at the strike. So, if you don't mind being long the stock at 50, why are you in a hurry to sell the 45 call just to capture some premium? The whole idea that prompted a naked out was 'I don't mind owning it at 50 because long term prospects are good/dividends are good' whatever. If that reason is no longer valid, then just sell it at 45, collect the money and look for something else.
Yikes! You're twisting yourself up all in knots and complexity just to pick up a few pennies. And if you're short puts and the stock really tanks - which can and will happen over time - then you'll wish you never got involved in this lame strategy.
Really depends on your outlook for the stock, you can't use this strategy on every stock. This strategy will work if the stock does nothing or move a little.
When you sell the call at 50 you are not hoping that stock will grow. You are wanting the stock to stay in 45- 50 range and you can sell the call again the next month.
When you sell the call at 50 you are not hoping that stock will grow. You are wanting the stock to stay in 45- 50 range and you can sell the call again the next month.
rmorse
Sponsor
IMO, selling naked puts, based on whatever research you do, where you have an expectation that they will expire OTM and you feel the price includes the risk, is a viable strategy.
However, selling naked puts under the expectation that I'm willing to buy that stock today at that price in the future, is a terrible way to trade,unless you are a firm accumulating a large position and not a trader. I'll give you a simple example. I feel that a stock trading at 100 is a great buy at 85, 15% lower. There are many reasons why a stock drops 15%. Most of them would change your desire to buy that stock and own it 15% lower. In fact if it drops because of an issue with sales or an unforeseen event, you might feel that same stock is now a good short at that price.
I would choose another strategy. This one sounds like the risk reward is not there. HOwever this works well for a berkshire hathaway or company buying back stock. They don't care and like the discount.
However, selling naked puts under the expectation that I'm willing to buy that stock today at that price in the future, is a terrible way to trade,unless you are a firm accumulating a large position and not a trader. I'll give you a simple example. I feel that a stock trading at 100 is a great buy at 85, 15% lower. There are many reasons why a stock drops 15%. Most of them would change your desire to buy that stock and own it 15% lower. In fact if it drops because of an issue with sales or an unforeseen event, you might feel that same stock is now a good short at that price.
I would choose another strategy. This one sounds like the risk reward is not there. HOwever this works well for a berkshire hathaway or company buying back stock. They don't care and like the discount.
rmorse:
Am I hearing you say that you think selling the puts is a good strategy, but taking the stock if put is a bad idea??
What would you do if put? Sell the stock?
I think it is a matter of evaluating the stock again at the time you are put.
If I am selling puts on stock at a strike that I am willing to own the stock at doesn't that imply that I should be willing to keep the stock if put?
Unless the event that causes the stock to drop completely changes my evaluation of the stock and I am no longer 'willing to own the stock' at that price. I think it is rare that the event would be so catastrophic as to change my willingness to own and it would imply to me that puts are being sold on stock at strikes I am NOT willing to own the stock at and/or I am selling too many puts to get the income without evaluating the stock or the risk.
If the event that causes the stock to drop completely changes my evaluation of the stock and this happens with some frequency it means to me that you are selling puts on stocks at strikes you are NOT willing to own on... which is a different strategy altogether.
Am I hearing you say that you think selling the puts is a good strategy, but taking the stock if put is a bad idea??
What would you do if put? Sell the stock?
I think it is a matter of evaluating the stock again at the time you are put.
If I am selling puts on stock at a strike that I am willing to own the stock at doesn't that imply that I should be willing to keep the stock if put?
Unless the event that causes the stock to drop completely changes my evaluation of the stock and I am no longer 'willing to own the stock' at that price. I think it is rare that the event would be so catastrophic as to change my willingness to own and it would imply to me that puts are being sold on stock at strikes I am NOT willing to own the stock at and/or I am selling too many puts to get the income without evaluating the stock or the risk.
If the event that causes the stock to drop completely changes my evaluation of the stock and this happens with some frequency it means to me that you are selling puts on stocks at strikes you are NOT willing to own on... which is a different strategy altogether.
rmorse
Sponsor
oldnemesis,
To me all trading is risk reward. If I like a stock, I want to profit more than from the value of the put. And if some of those positions go against me, those losses in the short run will out way my many wins, because I'm letting my losing trades run more than my winners. If I want to buy a stock on a dip, I would prefer to enter a GTC limit order at that price. However, if I like a stock and feel that put is over-valued, and set a stop for the most I'm willing to lose on any short put, that would work better for me.
Bob
To me all trading is risk reward. If I like a stock, I want to profit more than from the value of the put. And if some of those positions go against me, those losses in the short run will out way my many wins, because I'm letting my losing trades run more than my winners. If I want to buy a stock on a dip, I would prefer to enter a GTC limit order at that price. However, if I like a stock and feel that put is over-valued, and set a stop for the most I'm willing to lose on any short put, that would work better for me.
Bob
e.g. I am looking at XLU to sell puts. Here is a 2 year plot of XLU:
http://finance.yahoo.com/echarts?s=XLU+Interactive#{"range":"2y"}
What if I sell the 2 year $38 put for $243
Yield = 243/3557 = 6.8% in 622 days or 4% annualized
Prob = 72%
Expectation = .72(243) - .01(1056) -.27(528) = 175 - 10.6 - 143 = 21.4
i.e. a viable, if somewhat anemic trade.
If I monitor the stock and cut losses intelligently, exit early when the value of the trade goes up
and/or buy lower strike puts to translate into a spread I can make an anemic trade much more profitable.
http://finance.yahoo.com/echarts?s=XLU+Interactive#{"range":"2y"}
What if I sell the 2 year $38 put for $243
Yield = 243/3557 = 6.8% in 622 days or 4% annualized
Prob = 72%
Expectation = .72(243) - .01(1056) -.27(528) = 175 - 10.6 - 143 = 21.4
i.e. a viable, if somewhat anemic trade.
If I monitor the stock and cut losses intelligently, exit early when the value of the trade goes up
and/or buy lower strike puts to translate into a spread I can make an anemic trade much more profitable.