whatever works for you man.. i'm just not into no productive fighting style arguments... to many people get attracted to options from the covered call standpoint and learn a bit more about options as they lose money.. I learned a few lessons about options in this respect.. by no means do i think a buy write or put write strategy is bad.. but if your going to manage a book i wouldn't confine myself to just these strategies.. and again you become a trader..
You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
Selling out of the money puts with low risk
- Thread starter shortbleu
- Start date
whatever works for you man.. i'm just not into no productive fighting style arguments... to many people get attracted to options from the covered call standpoint and learn a bit more about options as they lose money.. I learned a few lessons about options in this respect.. by no means do i think a buy write or put write strategy is bad.. but if your going to manage a book i wouldn't confine myself to just these strategies.. and again you become a trader..
Quote from jimmyjazz:
I fully understand the P/L graphs. I disagree about your use of the phrase "unlimited downside" -- it's limited to 100% minus premiums generated over time.
I also understand the original poster doesn't want to "trade", but he was certainly talking about "trading" up until assignment.
I also think the study I linked is HIGHLY instructive in terms of historical performance of various strategies. I fully dispute the idea that naked puts and covered calls are bad mojo, "just because". I realize that conventional wisdom says upside is limited and downside is 100%, but in fact that's NOT true -- stocks SO rarely crash up and downside is LESS limited than long stock. The math proves this out. Returns are juiced and volatility is reduced.
Sorry, but I just don't buy it. Higher returns, lower volatility. Sounds good to me. Keep emotion out of it.
Huh? On a risk adjusted basis the two are not even remotely close. Selling a put for a buck with a capped upside and a 100% downside vs long stock with 100% downside and infinite upside are NOT the same thing. How do you come up with that calculation?
Quote from Maverick74:
Huh? On a risk adjusted basis the two are not even remotely close. Selling a put for a buck with a capped upside and a 100% downside vs long stock with 100% downside and infinite upside are NOT the same thing. How do you come up with that calculation?
Look, I realize I've contributed to the thread hijack, but assuming the original poster got his money's worth:
Read the study. Look at the returns along with Sharpe & Sortino ratios. What's missing?
(This doesn't even BEGIN to get into the red herring that a covered call has "100% downside". NO IT DOESN'T. You sold the call and put that money in your pocket. It's 100% downside for the stock and what, 98% for the CC? Do it again, and you're 96%? Those differences add up, especially when you consider that a stock goes to zero about, well, almost never. Certainly not the indices. Confine the argument to -30% and then imagine chipping away at that 2% at a time. Things start to change.)
Quote from jimmyjazz:
Look, I realize I've contributed to the thread hijack, but assuming the original poster got his money's worth:
Read the study. Look at the returns along with Sharpe & Sortino ratios. What's missing?
(This doesn't even BEGIN to get into the red herring that a covered call has "100% downside". NO IT DOESN'T. You sold the call and put that money in your pocket. It's 100% downside for the stock and what, 98% for the CC? Do it again, and you're 96%? Those differences add up, especially when you consider that a stock goes to zero about, well, almost never. Certainly not the indices. Confine the argument to -30% and then imagine chipping away at that 2% at a time. Things start to change.)
And what about the times the stock doubles and you only get a lousy buck? Sorry dude, your math skills are off. You have to calculate the "expected" long term return. This includes all the upside you are giving away almost for free. And since stocks historically have an upward drift, it makes it even worse. You would be better off selling juice in something that does NOT have an upward drift.
Quote from Maverick74:
And what about the times the stock doubles and you only get a lousy buck? Sorry dude, your math skills are off. You have to calculate the "expected" long term return. This includes all the upside you are giving away almost for free. And since stocks historically have an upward drift, it makes it even worse. You would be better off selling juice in something that does NOT have an upward drift.
My math skills aren't off. Statistically, the number of times a stock doubles and you get stuck with 2% are almost nil. It is more than offset by the REDUCED VOLATILITY you get by generating income. I don't care that you THINK this doesn't make sense -- the data support the conclusion.
READ. THE. STUDY.
I'm on f'ing autopilot here. Read the study. Please argue their conclusions -- they're not mine. Their work seems sound to me. By all means, point me to any rigorous study showing the opposite conclusion, because I would sure like to read it. All I see is conjecture and anecdotal evidence.
Let me give an example of selling a put to buy high quality stocks which is what the OP was asking.
Look at TSLA:
http://finance.yahoo.com/q/bc?s=TSLA&t=1y&l=off&z=l&q=l&c=
Lets say I want to buy TSLA but only if it comes back to $100. I think it is overbought at its current price, but would be willing to own it at $100. (I know TSLA doesn't pay a dividend but that doesn't matter for the demonstration)
I could put in a limit order to buy TSLA at $100, but that would tie up my money with no return.
What if, instead, I sell the Jan '14 $100 put for $380. If TSLA drops below $100 I will be put and will have obtained TSLA at my target price. If not I am earning 380/10000 = 3.8% in 144 days or 9.6% annualized on my bid money.
Is that better than putting in a limit order and waiting? I would say yes.
Each situation is different but I think this is essentially what the OP was talking about.
Look at TSLA:
http://finance.yahoo.com/q/bc?s=TSLA&t=1y&l=off&z=l&q=l&c=
Lets say I want to buy TSLA but only if it comes back to $100. I think it is overbought at its current price, but would be willing to own it at $100. (I know TSLA doesn't pay a dividend but that doesn't matter for the demonstration)
I could put in a limit order to buy TSLA at $100, but that would tie up my money with no return.
What if, instead, I sell the Jan '14 $100 put for $380. If TSLA drops below $100 I will be put and will have obtained TSLA at my target price. If not I am earning 380/10000 = 3.8% in 144 days or 9.6% annualized on my bid money.
Is that better than putting in a limit order and waiting? I would say yes.
Each situation is different but I think this is essentially what the OP was talking about.
Quote from oldnemesis:
Let me give an example of selling a put to buy high quality stocks which is what the OP was asking.
Look at TSLA:
http://finance.yahoo.com/q/bc?s=TSLA&t=1y&l=off&z=l&q=l&c=
Lets say I want to buy TSLA but only if it comes back to $100. I think it is overbought at its current price, but would be willing to own it at $100. (I know TSLA doesn't pay a dividend but that doesn't matter for the demonstration)
I could put in a limit order to buy TSLA at $100, but that would tie up my money with no return.
What if, instead, I sell the Jan '14 $100 put for $380. If TSLA drops below $100 I will be put and will have obtained TSLA at my target price. If not I am earning 380/10000 = 3.8% in 144 days or 9.6% annualized on my bid money.
Is that better than putting in a limit order and waiting? I would say yes.
Each situation is different but I think this is essentially what the OP was talking about.
The OP has demonstrated that he do not want to time stocks... he had a problem swing trading.. and picking lows in a stock is just that.. while i totally agree with you, that if that is the expression you would like to make on that particular stock it might beat out just putting a limit order in.. just as Maverick has explained the use of buying calls in the index instead of putting stops on at all.. as i have mention many other times about using butterflys as a way to express both a view on volatility and direction.. There is no one best expression to make constantly IE "Condor income strategies, buy write income strategies"... therefore i personally believe that if your going to trade options i would not limit myself to trading just buy writes..or put writes..
Quote from jimmyjazz:
Hey, I'm taking this too far. Apologies. I'm definitely not looking for a fight. I'll dig into the archives and catch up.
nothing wrong with healthy discussion.. its just that some of us have read all about buy write indexes , and are familiar with the profile of the strategies in the long term.. i've done the Covered call thing.. wrote puts.. sold credit spreads, .. on annd on.. i've read all that on the buy write indicies and such.. for the amount of time invested in what the guy is doing with his buy and hold.. the amount of time and effort that goes into managing any book of options goes exponentially up... so one would want a considerably larger return then just a buy hold strategy.. thats just imo