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Selling Premium - Strategy Never Discussed
- Thread starter robertSt
- Start date
You lose less when markets tank. You also win less when markets soar. If the stock rises more than the premium you received during a week, you'll have to either reduce the number of options to raise your strike or write more options at a much lower strike, reducing your exposure to further upside.
Yes, it does matter if you're in a bull or bear market when selling puts. Selling puts is generally a bullish strategy, and the risks of your puts expiring ITM rises. For your specific strategy with less than 7 DTE, maybe not so much. For a longer time horizon, you would need to somehow adjust your volatility for drift, to chose proper strikes.
Cheers, Felix
Cheers, Felix
I appreciate everyone's response.
For my purposes, I don't even think in terms of bull or bear. Stock prices fluctuate. They go up and down. I've been on plenty that went down substantially. If the more general trend is down, it does require more management than if they all just expire.
For my purposes, I don't even think in terms of bull or bear. Stock prices fluctuate. They go up and down. I've been on plenty that went down substantially. If the more general trend is down, it does require more management than if they all just expire.
Like today, 12/04/18, if you sold puts and it continues to tank, premiums will get very expensive. Not sure if you can keep rolling down if the premiums become too rich. Your losses will mount as it continues to drop. I would rather buy the put options. Bought put options on AAPL, NVDA and QQQ today and all are profitable by a decent amount. If it continues to tank say, Thursday, put sellers will be losing substantial amounts of monies! Just my opinion that the premiums you received is not worth the huge risk you are taking. In contrast, I just need a couple of these huge moves either up or down to make it worth the limited risk I am taking!
That sounds suspicious like a martingale strategy.Let's say the premium doesn't cover it. The stock has dropped so far that it's 1 point under my strike, the time value is gone. So I trade the intrinsic value for time value by rolling. I buy back my put for 1.05 and sell one strike lower for next week for 1.20. I now have my original premium plus 15 cents. I have gotten paid to lower my entry point. The stock owner is where he always was. I'm now 50 cents lower with a large premium that is about to pay off, either this week or some weeks down the road, at which point I will have an even larger premium to collect.
Smallfil, I doff my hat to you if you are able to buy options and make money. I could never do that and it would make me a nervous wreck.
I sold WLL 31 puts today when the stock was at 32.01 for a premium of 67 cents. The stock is now at 30.82. As things stand now, I could go down to a 30 strike for the following week at even credit.
I sold WLL 31 puts today when the stock was at 32.01 for a premium of 67 cents. The stock is now at 30.82. As things stand now, I could go down to a 30 strike for the following week at even credit.
Other options traders also, buy options and make monies with it! I am not even that good of a trader. I botched my call options trades, getting out with tiny profits this morning. Should have gotten out yesterday but, decided to hang on. That is on me. Bought put options and went short this time out and that made up some of the lost gains atleast! Actually, our losses are capped to the cost of the premium (worst case scenario) but, nothing prevents you from closing the position out if it does not go your way! So, one more risk management method that cuts our risk even more. Residual value of the premium bought can be used for the next trade. Oh, I sleep fine. My risk is always limited no matter what happens!
I've been selling premium for about 3 years, and I have a data sample of a couple of thousand trades. My returns so far are between 25% and 35%, but I think I can improve going forward, since I have learned a few lessons and abandoned a few strategies that were not profitable.
The conventional wisdom seems to be that premium sellers are collecting pennies in front of a steamroller, unwittingly setting themselves up for the inevitable catastrophic loss that will wipe them out. Rolling is usually dismissed as loss avoidance, but I have never seen anyone discuss the approach that I use.
First, I sell weekly puts that are cash-covered. I never use leverage. I trade volatile stocks with high IV, so that I can collect between 1% and 3% per week. I typically sell fairly close to the money, often the next lowest strike, so many of my options move into the money. How do I deal with this?
The key is that the options I trade must have enough premium so that I can roll down and out (usually one strike for one extra week) for a credit. If I can collect 10 to 30 cents additional premium, I can still have a substantial return when I'm finally low enough for the option to expire.
If the put moves far enough into the money, I won't be able to roll with a credit. But in most cases, the debit is small enough to preserve most of the original premium collected. If the stock keeps moving down, I can do this for weeks, until I am back underneath it.
Occasionally this strategy can result in being very far in the money. I have carried options that are 10 or 11 points in the money. In situations like that, it may not be possible to close the entire trade with a profit. But we all know that losses are a part of trading, right?
The probabilities of being in a trade that goes against you that much are low. I am also susceptible to a black swan event. But I have much more flexibility with options than I would with a simple stock position, where I am locked into an absolute price point. With options, I can make adjustments, trading time value for intrinsic value all the way down, so that my loss will be half that or less of a simple stock position.
Just interested to see if anyone else trades this way or has any comments.
This is basically what Karen the Supertrader does. She sells options for premiums and then if it moves against her, she rolls until the options expire worthlessly. I hope you don't hit a "rogue wave".
Good luck!
Smallfil, I doff my hat to you if you are able to buy options and make money. I could never do that and it would make me a nervous wreck.
I sold WLL 31 puts today when the stock was at 32.01 for a premium of 67 cents. The stock is now at 30.82. As things stand now, I could go down to a 30 strike for the following week at even credit.
Question: Since, your strategy is to roll down until, it works in your favor, what happens when say the stock keeps going down by huge amounts thereby forcing you to keep rolling down. Wouldn't that just compound and enlarge your losses to the point, you can no longer roll it down and have to take that very huge loss? Also, wouldn't that very large loss wipe out all your small gains from selling the premium and also, part of your capital?