Selling Premium - Question to robertst - method

[traderwald]

Hi @robertSt , and others,

I was reading your thread - "Selling premium - Strategy never discussed" - and was not sure how you roll your sold put for further credit if the stock goes lower.

not sure how you would make a credit using this strategy - so wanted to clarify with some numbers / example:

Example:

Step 1 - If you sold a put on Stock "A" at strike = 99 when stock is at 100, and collect premium of ~ $1.05

Step 2- Stock goes to $95

Now your sold put is ~ $4:40 which means your trade is at P/L = -$3.35


Step 3 - You roll by closing this sold put at P/L = -$3.35 and then sell another put at strike 94 at premium = ~ $1.15

- this means your net position is -$2.20

So how can you make a credit in this scenario ?

Please let me know if I understood your method accurately / this example above matches what you describe ? or if you could you please give an example with numbers on your position that would help to understand the trade you do when selling premium

 

[ffs1001]

Hi @robertSt , and others,

I was reading your thread - "Selling premium - Strategy never discussed" - and was not sure how you roll your sold put for further credit if the stock goes lower.

Firstly, since this question relates to another thread, wouldn't it have made more sense to ask it on that particular thread, rather than starting a new one?

Secondly, to actually give you an answer, your numbers are correct, but the key to this trade is in this :

Step 1 - If you sold a put on Stock "A" at strike = 99 when stock is at 100, and collect premium of ~ $1.05

I would never sell a put for 1.05 which is just 1 point below the current price - this would give me a mere 2.05% stock move down before I start losing.
I would want to sell a 95 put for much higher premium. This cash secured put writing strategy works best on certain types of stocks, and under certain conditions of volatility. You cannot simply pick any stock and do this mechanically week after week.

 

[traderwald]

Firstly, since this question relates to another thread, wouldn't it have made more sense to ask it on that particular thread, rather than starting a new one?

Secondly, to actually give you an answer, your numbers are correct, but the key to this trade is in this :



I would never sell a put for 1.05 which is just 1 point below the current price - this would give me a mere 2.05% stock move down before I start losing.
I would want to sell a 95 put for much higher premium. This cash secured put writing strategy works best on certain types of stocks, and under certain conditions of volatility.

Thank you ffs1001,

the numbers that I have given are for example. The scenario would still be valid correct ?

If let us say you sell the 99 strike put at $5, rather than $1.05, and the stock goes to $85 then the scenario I showed in the above I showed would hold correct ? So how would you manage this since it would not be a credit as given the original thread ?

 

[ffs1001]

If let us say you sell the 99 strike put at $5, rather than $1.05, and the stock goes to $85 then the example I showed would hold correct ? So would you manage this since it would not be a credit per the original thread ?

Again, the problem is that you are selling too close to the current price. You need to give the stock some breathing space. I would prefer to sell puts at 90 (or at worst at 95).

This allows you distance to handle situations where the stock moves to 85. I had an actual trade on MOMO where I had short puts at 33, and the stock fell to around 29 temporarily. Within 3 weeks I was out at a profit by rolling.

Have a look at this journal and see how this trader is learning to manage a similar example in ROKU right now.
https://www.elitetrader.com/et/threads/bluewatersailor-trading-journey-and-journal.335295/

 

[traderwald]

Again, the problem is that you are selling too close to the current price. You need to give the stock some breathing space. I would prefer to sell puts at 90 (or at worst at 95).

This allows you distance to handle situations where the stock moves to 85. I had an actual trade on MOMO where I had short puts at 33, and the stock fell to around 29 temporarily. Within 3 weeks I was out at a profit by rolling.

Have a look at this journal and see how this trader is learning to manage a similar example in ROKU right now.
https://www.elitetrader.com/et/threads/bluewatersailor-trading-journey-and-journal.335295/

Per the original thread, the OP was selling about 1 or 2 strikes from the Stock price. So I wanted to understand the logic to this. Also, the further you go with your strike price from stock price he smaller the premium.

 

[robertSt]

Answered here:

https://www.elitetrader.com/et/thre...lta-expiration-date-do-you-like.336016/page-3