Selling naked puts option strategy

[VIXTrader]

Selling 15% out of the money is like I said, picking up pennies in front of a steam roller.

While it's true that you can make your measly 4% annualized by doing this strategy, as long as stocks are staying stable it will work and you'll get that super low return you seem to want, but that does NOT include the years where you are left holding a dud stock and either have to buy it back at a loss or wait a long time for it to recover your paper losses.

4% annualized in the good times, and negative in the bad times. Those kind of returns might be able to barely out pace inflation, but that's about it. Awesome !

My fund makes 5 times that with a 2 Sharpe and 10 Ulcer, so it seems we're analyzing things from two completely different starting points.

If you're happy with 4% annualized, go for it my friend and I wish you luck. My apologies to anybody I offended by calling this strategy a non starter. It's only a non starter if you can make 5% elsewhere, which I hope is the case for most traders.

And I guess that begs the question, if you can't make 5% elsewhere, why not just buy an index fund and long-term dollar cost average? Why would you want to trade options to a 5% annualized? What the...

 

[newwurldmn]

I don't really see experienced options traders make blanket statements about absolute percentages and levels.

If an option were 10% OTM, would that qualify as picking up nickels in front of a steamroller? What about ATM? What about selling vol in general?

There are 15% OTM options at all different price points:
Jan16 HLF 15% OTM puts are >15% of strike, while Jun16 SPX 15% OTM puts are 3% of strike, while BLUE Jun15 15% OTM puts are 8% of strike.

Whose to say that selling any of these is unilaterally a bad idea (or a good one for that matter) because of their moneyness.

OP: You should look at your strategy in the context of a long only holder. Bob's posts contained the real risk of this strategy. You should ask yourself, if the stock went down x%, what would make me NOT want to hold it and if you are okay with those scenarios. Selling puts is really similar to just buying a stock except you are giving up the upside movement of the stock for some up front money.

 

[VIXTrader]

"I don't really see experienced options traders make blanket statements about absolute percentages and levels."


In most cases I'd agree with that, but in THIS case, of course 15% OTM is a blanket statement horrible, how could it not be?

- You'll get about 4% annualized when stocks go up in bull markets.
- You'll get negative returns when stocks go down in bear markets.

Are you kidding me? You can't see that as a blanket across the board failure in any and all ways of looking at it? Massively under performing in bull markets, and still feeling all but 4% of the brunt of bear markets? Sweet !


I agree with you that option traders don't tend to make generalized statements about percentages. I'm an option trader, and I don't "tend" to do that either. But in this case, quit being so damn argumentative just for the sake of arguing and admit that 4% in good years and negative in bad years is a god awful strategy and just end it already

 

[newwurldmn]

"I don't really see experienced options traders make blanket statements about absolute percentages and levels."


In most cases I'd agree with that, but in THIS case, of course 15% OTM is a blanket statement horrible, how could it not be?

- You'll get about 4% annualized when stocks go up in bull markets.
- You'll get negative returns when stocks go down in bear markets.

Are you kidding me? You can't see that as a blanket across the board failure in any and all ways of looking at it? Massively under performing in bull markets, and still feeling all but 4% of the brunt of bear markets? Sweet !


I agree with you that option traders don't tend to make generalized statements about percentages. I'm an option trader, and I don't "tend" to do that either. But in this case, quit being so damn argumentative just for the sake of arguing and admit that 4% in good years and negative in bad years is a god awful strategy and just end it already

You keep speaking about 4%, but I'm not sure where you got that figure from? Is that the number of the day on Seasame Street? I gave you three options that are 15% OTM that don't return 4%. One was less and 2 were more.

Speaking of argumentative, you took a hypothetical example and started picking on some minute part of the example rather than the real theme of his post. If he had said 13% OTM, would you have jumped on it?

 

[OTM-Options]

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?

There is a formula for that strategy.

Buy stock that is going down + Sell stock that is going up + Collect Peanuts = Money Loser

 

[VIXTrader]

@ newwurldmn

It doesn't matter one bit if you use 4%, 2%, or 7%, the end result is the same. The strategy is a complete dud !

If you're playing this strategy that far out of the money, in your best case scenario you'll make your premiums. No dividends, no capital appreciation, just your premiums which of course are dismal that far OTM. But then when you factor in all the drawdowns in bad years, the trade fees, and inflation, the end result will likely be a strategy with annualized "real" returns very close to zero.


Now people of course can choose to listen to newwurldnm and use an OTM strategy with real returns approaching zero, or they can take it from someone like me with experience running this strategy. It only works if you play it very close to the money, short term, on beaten down stocks with high IV. You have to be able to get assigned and either get into the covered calls right away, or cut the loss and move to something else. Don't get married to any particular underlying, roll with what the markets give you.

In the last 6 months alone you could have done it on Oil, then EUR/USD, then treasury's. When the markets finally get the 10% long over due correction, move into that. It's not rocket science, but it has to be traded correctly or it won't work. Far OTM is picking up pennies in front of the steam roller.



Newwurldmn I haven't read any of your other 3700+ posts so I'll give you the benefit of the doubt, but in this thread your posts SCREAM inexperienced trader...

 

[newwurldmn]

I never commented on this strategy. I took exception to your response on bob's theoretical example. And given that you haven't addressed that, I still do.

I also now take exception to your saying that i am recommending this strategy. I haven't commented on it yet. I merely commented on your assertion that 15percent otm options have no value.

I don't know how many years of experience you have but that doesn't matter. I knew floor traders who traded options for 20 years who knew less than new hires with 20 months of experience.

As for my view on this strategy - it works if you have a view on the downside distribution of a stock and the market is pricing a more pessimistic view. It's worth selling the put.

The concept of buying the stock down x percent doesn't work unconditionally as per bob's explanation.

 

[oldnemesis]

I also was only commenting on the assertion that 15% OTM options have no value and only used an example to show it not to be true. In fact it is demonstrably NOT true.

Perhaps it is true that strikes 15% OTM have no value to our friend VIX because it does not fit into VIX's trading strategy, and he wouldn't know what to do with that position.

In that case VIX SHOULD have said that short puts at that level have no value TO HIM rather then try to demonstrate they have no value to anybody.

This is, of course, the major reason this forum has a lot less value than it should. Instead of recognizing that there are many different ways to trade options, VIX, and many others, assume if you are not doing it MY way you are an idiot. Such an attitude does mark an idiot but the idiot is on the other end of the insult.

Bob mentioned that he would prefer to put in a CTC order to buy a stock at a price below the current price rather than sell short a put. I disagree with this and DO sell puts at a strike chosen by analyzing 'fundamentals' as a way to acquire a stock at a lower price point. When I do this I am almost always doing it to acquire a stock for it's dividend, or for some anticipated event in the (relatively distant) future.

Also fundamental to all of this is stock selection, which is as important or more important than any thing else.

 

[oldnemesis]

Oh yes...where did he get the 4%?

That was from my example. The 15% OTM short put would earn you 4% annualized.

I called it 'anemic' but it is higher then treasuries are offering right now.

 

[longthewings]

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?

You don't use this strategy profitably. Sorry to say. Play out your scenario and analyze at each step. You sold ATM puts and did not hedge your delta. From the get-go you should have known that the price could have easily gone against you and you would begin showing losses. Now, the stock is at $45 and you have been assigned. You now want to sell an ATM or OTM call to try and recoup your losses. Ok, good luck. All you have done now is take another short ATM-vol, directional bet (covered calls are not neutral). You've already lost on your first bet. It's over. Coming up with some nifty "adjustments" is not going to change that. Call it what it is. You lost one bet and are now coming up with a new bet to try and win back your losses. But you've made no mention of whether or not the new bet makes any sense to be making. This sounds like a bad idea that will only result in making costly adjustments and roll-outs to perpetuate an initial losing trade.