Selling naked puts option strategy
- Thread starter Twinsen
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@rmorse
"I feel that a stock trading at 100 is a great buy at 85, 15% lower."
I think that's the problem right there. The premium available for the strategy at 15% OTM is VERY low, likely not even enough to cover the transaction costs. So it's not surprising that you don't like the strategy. But these types of strategies are far more effective closer to the money, and on already beaten down stocks with high IV.
I'm not saying the strategy is good, like I said you'd have to be willing to hold the stock for a year or more if things turn against you, but if a person is going to do this, it's best to play close to the money on high IV stocks.
"I feel that a stock trading at 100 is a great buy at 85, 15% lower."
I think that's the problem right there. The premium available for the strategy at 15% OTM is VERY low, likely not even enough to cover the transaction costs. So it's not surprising that you don't like the strategy. But these types of strategies are far more effective closer to the money, and on already beaten down stocks with high IV.
I'm not saying the strategy is good, like I said you'd have to be willing to hold the stock for a year or more if things turn against you, but if a person is going to do this, it's best to play close to the money on high IV stocks.
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rmorse
Sponsor
You quoted me giving the impression that I said that. I was referring to his strategy. I would not trade this strategy at all.
The type of the account you have will affect dramatically on your margin request.
"Margin portfolio" account in interactive brokers requires HALF of margin maintenance than "Reg margin" account.
Of Course Marg portfolio is minimum 110K deposit
I did quote you as if you said it, because you did 
"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."
That was your example, and my only point was, bad example. 15% is way too far OTM to make this strategy work. At that strike, you won't even cover transaction costs.
His example of a 50$ stock and 45 strike is a little better, but even then it's too far out. You guys should be giving examples of 3-5% out of the money on beaten down stocks trading in the upper end of their implied volatility.
Anyway, neither here nor there. I didn't quote you to start a debate on it. Just saying, 10-15% OTM strategies are complete non-starters...
"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."
That was your example, and my only point was, bad example. 15% is way too far OTM to make this strategy work. At that strike, you won't even cover transaction costs.
His example of a 50$ stock and 45 strike is a little better, but even then it's too far out. You guys should be giving examples of 3-5% out of the money on beaten down stocks trading in the upper end of their implied volatility.
Anyway, neither here nor there. I didn't quote you to start a debate on it. Just saying, 10-15% OTM strategies are complete non-starters...
I did quote you as if you said it, because you did
"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."
That was your example, and my only point was, bad example. 15% is way too far OTM to make this strategy work. At that strike, you won't even cover transaction costs.
His example of a 50$ stock and 45 strike is a little better, but even then it's too far out. You guys should be giving examples of 3-5% out of the money on beaten down stocks trading in the upper end of their implied volatility.
Anyway, neither here nor there. I didn't quote you to start a debate on it. Just saying, 10-15% OTM strategies are complete non-starters...
It was just a theoretical example but since you want to nitpick on it - are you saying that NO stocks have options with non zero bids 15percent otm? Because that would clearly be a foolish thing to say.
In fact the example I gave for XLU and a 38 Strike is almost exactly 15% OTM.
XLU yesterday closed at 44.03, 44.03 - 38 = 6.03, 6.03/44.03 = .1369 = 14%... The premium I quoted was real at the time.
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I sell puts to go long SPY I sold 209s and collected 5.30
I do it for my SPY long term portfolio. I get lower volatility and smoother returns. I was short the 209s on SPY and collected a premium of 5.31 cents when I sold them, I ended up put stock with barely any intrinsic value (Which was optimal in my book) a few days later stock hit 211 and I shorted the 215 calls.
I do sell quite a bit of contracts though and I typically have long stock, short calls and short puts and cash in the portfolios.
I like making my stock and cash work for me. It works nicely and smooths out the returns like Madoff without the ponzi.
This is why I never understood why he had to scam when you can create a pretty boring portfolio with returns without having to scam.
I do it for my SPY long term portfolio. I get lower volatility and smoother returns. I was short the 209s on SPY and collected a premium of 5.31 cents when I sold them, I ended up put stock with barely any intrinsic value (Which was optimal in my book) a few days later stock hit 211 and I shorted the 215 calls.
I do sell quite a bit of contracts though and I typically have long stock, short calls and short puts and cash in the portfolios.
I like making my stock and cash work for me. It works nicely and smooths out the returns like Madoff without the ponzi.
This is why I never understood why he had to scam when you can create a pretty boring portfolio with returns without having to scam.