Selling Premium - Strategy Never Discussed
- Thread starter robertSt
- Start date
Buying options.
You can make money buying, selling, single leg, combinations, day trade, swing trade ..... if you have knowledge.
Edward Deming: There is no substitute for knowledge.
robertSt, thank you for starting this thread. As a long-term option seller, I can see the advantages of your strategy. I'm used to selling index based options, with leverage and that has hurt me at times in the past. The cash-secured puts only stock-based system seems safer.
I have some questions, for yourself or the other contributors (eg. ironchef) :
1) Stock selection - how do you decide which stocks to trade? Is it based mainly on the volatility of the underlying, or a combination of factors?
2) Timing - how do you decide when to sell the puts? It is mechanical, week-in-week-out, or a more discretionary (like just after the stock has already fallen significantly, resulting in higher volatility)
3) Earnings - I assume you avoid trading when earnings are coming in the near future. But how do you deal with a situation when you are forced to roll an existing position for a few weeks and earnings are around the corner?
I have some questions, for yourself or the other contributors (eg. ironchef) :
1) Stock selection - how do you decide which stocks to trade? Is it based mainly on the volatility of the underlying, or a combination of factors?
2) Timing - how do you decide when to sell the puts? It is mechanical, week-in-week-out, or a more discretionary (like just after the stock has already fallen significantly, resulting in higher volatility)
3) Earnings - I assume you avoid trading when earnings are coming in the near future. But how do you deal with a situation when you are forced to roll an existing position for a few weeks and earnings are around the corner?
Sorry I can' t read all the posts, but I tried the selling premium thing (Tasty Trade). They had me sold on the idea that premium decay is a statistical probability and all I had to do was manage my positions so I did not get too far ITM or over-leveraged.
"Trade small, trade often" is their mantra.
I started out with almost all Iron Condors, because they offered me a dozen positions, but kept my buying power at 60% plus (no leverage). I had been under the impression that almost any good stock that does not move too much will eventually become decently profitable (30% to 50%).
It just never worked out for me. I woke up every morning (and being on the West Coast does not help at all - 6:30 am) and found myself down huge on something almost every day.
Their strategy says to open at about 45 days out and manage at about 21 days out. That is the spot where the premium declines fastest, but the gamma does not come in and punch you in the eyes. I could not stand to wait for the premium to sell off.
So, they have position analyzer where you can take your option legs (strategy) for any trade and test it forward (dates), plus up or down (price). Most positions did NOT pan out unless you wait almost two weeks, AND you also have to be lucky enough that your underlying does not move much at all.
Anyway - now after having lost too much I am only using my options account to trade stocks, I generally only buy puts or calls (I never sell them anymore) - all I want is positions in companies I like, with no bottomless downside.
OP - here is the thing. If you are selling premium in the last 3 days DTE you are actually selling GAMMA - not just premium. GAMMA is the amount of change a tick gives you for every tick in the underlyings' implied volatility. As you get very close to expiration, GAMMA gets very high and premium disappears quickly.
All of us have seen this - and I believe your strategy works. I just don't think you fully understand it. When Gamma is high you can have calls in a stock going higher, but your calls are still going down in value (or puts in a stock going lower, and you still lose money). This is GAMMA eating up your premium.
I can envision selling premium in stocks close to Expiration and collecting tons of GAMMA in a short time, but it really only works when you are on the right side of the trade. If you are on the wrong side - you will be lucky to break even.
Best of luck to you, though. You are not wrong or crazy, but probably taking more risk than you realize. Pick your stocks and only trade when the trend is with you - that's my advice.
"Trade small, trade often" is their mantra.
I started out with almost all Iron Condors, because they offered me a dozen positions, but kept my buying power at 60% plus (no leverage). I had been under the impression that almost any good stock that does not move too much will eventually become decently profitable (30% to 50%).
It just never worked out for me. I woke up every morning (and being on the West Coast does not help at all - 6:30 am) and found myself down huge on something almost every day.
Their strategy says to open at about 45 days out and manage at about 21 days out. That is the spot where the premium declines fastest, but the gamma does not come in and punch you in the eyes. I could not stand to wait for the premium to sell off.
So, they have position analyzer where you can take your option legs (strategy) for any trade and test it forward (dates), plus up or down (price). Most positions did NOT pan out unless you wait almost two weeks, AND you also have to be lucky enough that your underlying does not move much at all.
Anyway - now after having lost too much I am only using my options account to trade stocks, I generally only buy puts or calls (I never sell them anymore) - all I want is positions in companies I like, with no bottomless downside.
OP - here is the thing. If you are selling premium in the last 3 days DTE you are actually selling GAMMA - not just premium. GAMMA is the amount of change a tick gives you for every tick in the underlyings' implied volatility. As you get very close to expiration, GAMMA gets very high and premium disappears quickly.
All of us have seen this - and I believe your strategy works. I just don't think you fully understand it. When Gamma is high you can have calls in a stock going higher, but your calls are still going down in value (or puts in a stock going lower, and you still lose money). This is GAMMA eating up your premium.
I can envision selling premium in stocks close to Expiration and collecting tons of GAMMA in a short time, but it really only works when you are on the right side of the trade. If you are on the wrong side - you will be lucky to break even.
Best of luck to you, though. You are not wrong or crazy, but probably taking more risk than you realize. Pick your stocks and only trade when the trend is with you - that's my advice.
Very wise words. It's all about risk adjusted returns!
"many of you are at pains to imagine situations where I might lose some money. "
??? It's pretty obvious where.
The problem appears to be that you don't think in terms of opportunity cost of the transaction. You see it only as premium in, and that makes it better no matter where it goes compared to no premium received. You don't think about things like the market crapping out, all your short puts are in the money, and you are now long all these assets you say that you really want to own at those levels. You are long out the ass down here. Then the market rallies. Back to where it was and even higher. All those assets you felt you owned at those levels, you see now that you never owned and were unable to buy them because you were handcuffed down there thinking they were going to be put to you. You would have made a killing had you bought down there. Instead you received a dollar on the extrinsic value that you sold. And to make it feel worse, you think to yourself (I hope) that those puts you sold for a dollar were at one time were worth 12, so you accepted -12 risk/loss to make +1. But all's good. You won. Onto the next trade.
??? It's pretty obvious where.
The problem appears to be that you don't think in terms of opportunity cost of the transaction. You see it only as premium in, and that makes it better no matter where it goes compared to no premium received. You don't think about things like the market crapping out, all your short puts are in the money, and you are now long all these assets you say that you really want to own at those levels. You are long out the ass down here. Then the market rallies. Back to where it was and even higher. All those assets you felt you owned at those levels, you see now that you never owned and were unable to buy them because you were handcuffed down there thinking they were going to be put to you. You would have made a killing had you bought down there. Instead you received a dollar on the extrinsic value that you sold. And to make it feel worse, you think to yourself (I hope) that those puts you sold for a dollar were at one time were worth 12, so you accepted -12 risk/loss to make +1. But all's good. You won. Onto the next trade.
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"If you are selling premium in the last 3 days DTE you are actually selling GAMMA - not just premium. GAMMA is the amount of change a tick gives you for every tick in the underlyings' implied volatility. As you get very close to expiration, GAMMA gets very high and premium disappears quickly."
With 3 days to expiration I wouldn't even use a model. The math just goes kablooey, a model is worthless.
With 3 days to expiration I wouldn't even use a model. The math just goes kablooey, a model is worthless.
I came to the same conclusion after selling premium mechanically for 6 months. Nowadays I buy, mostly. I do sell when the situation is right.
1. I only trade options on stocks I own long term. @Handle123 was the one pointed me to this. He said it best: Dance options around your stocks. So, these are stocks I know inside out ....
2. I don't sell/buy mechanically.
Hi ffs1001,
These are good questions, the sort of questions I expected when I started the thread.
1) Stock Selection - I'm not concerned with volatility per se, only the percentage of premium available to me. I want to collect at least 1%, or 40 cents on a $40 stock. I know I'm not going to keep that much on average, so I like to look for situations that offer around 2%. These will be harder and harder to find as the week progresses.
In most situations, this amount of premium will only be available on stocks with high IV. If you pick one with higher current IV than historical IV, you might collect a good premium with the expectation that the stock will return to its HV, speeding the decay to your advantage.
It's probably best, at least until you are very comfortable, to trade liquid stocks with daily volumes of several million shares. This keeps the bid/ask spread narrow. Many weeklies only allow order prices in 5 cent increments, it's probably best to avoid those also.
I have a basket of stocks that meet these requirements and I watch their price behavior every day. Jesse Livermore stressed the importance of what the tape was telling him in making his trading decisions. I interpret that to mean price action and volume, and I think you can often get a "feel" for how something might move based on what you've learned about its past behavior.
2) Timing - For me, timing is more art than science. I'm much more comfortable selling puts after a pullback, or if not a pullback then near the bottom of the short term range. Other approaches may work as well. I usually take a few positions early in the week, while keeping some powder dry for opportunities later in the week. It is surprising how many opportunities are available on Wednesday or Thursday, even sometimes on Friday.
3) When I have to carry through earnings, I accept the additional premium along with the additional risk. It's not unusual to get a 3% premium or even more. But if it tanks, you either have to wait longer to realize your gain or take the loss and move on.
These are good questions, the sort of questions I expected when I started the thread.
1) Stock Selection - I'm not concerned with volatility per se, only the percentage of premium available to me. I want to collect at least 1%, or 40 cents on a $40 stock. I know I'm not going to keep that much on average, so I like to look for situations that offer around 2%. These will be harder and harder to find as the week progresses.
In most situations, this amount of premium will only be available on stocks with high IV. If you pick one with higher current IV than historical IV, you might collect a good premium with the expectation that the stock will return to its HV, speeding the decay to your advantage.
It's probably best, at least until you are very comfortable, to trade liquid stocks with daily volumes of several million shares. This keeps the bid/ask spread narrow. Many weeklies only allow order prices in 5 cent increments, it's probably best to avoid those also.
I have a basket of stocks that meet these requirements and I watch their price behavior every day. Jesse Livermore stressed the importance of what the tape was telling him in making his trading decisions. I interpret that to mean price action and volume, and I think you can often get a "feel" for how something might move based on what you've learned about its past behavior.
2) Timing - For me, timing is more art than science. I'm much more comfortable selling puts after a pullback, or if not a pullback then near the bottom of the short term range. Other approaches may work as well. I usually take a few positions early in the week, while keeping some powder dry for opportunities later in the week. It is surprising how many opportunities are available on Wednesday or Thursday, even sometimes on Friday.
3) When I have to carry through earnings, I accept the additional premium along with the additional risk. It's not unusual to get a 3% premium or even more. But if it tanks, you either have to wait longer to realize your gain or take the loss and move on.