Selling Premium - Strategy Never Discussed

[ffs1001]

In the interests of keeping this thread active, I'd like to mention that I starting dipping my toes in this strategy. (Disclaimer - around 20 years ago, I started my options trading by doing covered calls, and this strategy is technically similar).

On Wed 10th, I sold MOMO 33 puts (expiry 19-Jul) for around 0.35. These were doing fine till this Wed, the stock fell to 32.3 at one point. My short puts were ITM, but there were no alarm bells ringing as I could have rolled out to another week, and moved the strike lower to 32.5 for a small credit. Come today and the stock has rallied up to around 35.21 and I have sold a fresh 34.50 strike put expiring 26-Jul for a premium of 0.45.

Would love to hear about other people trades.

 

[R123]

Did well for a few years selling naked premium, works well in a docile or bull markets. Let a real black swan event hit you and you will suddenly see problems that are unbelievable and never anticipated in any risk planning scenario.

That penny spread jumps to 75 cents or more in a high volatility spike, or the price disappears to reappear at a shocking price. Then an emergency notice from your broker or the exchange that margin has been temporarily raised due to "abnormal" high volatility, and expect those panic early assignments.

These things sound like pure fantasy till you experience them, but then it might be to late. If you think your broker will defend you, understand no one in high volatility will force a market maker to make a market, everybody is seeking cover for their own survival. Using stops will offer little protection but will makes you a target for an absurd fill.

Newbie premium selling trolls can load up criticism to this post, but who cares , they will not be here after the next real "black swan".

Selling naked puts, you better like the stock A LOT for a long time. If your cash covered and this is your true conviction, then okay. Just have your eyes wide open.

 

[ffs1001]

These things sound like pure fantasy till you experience them, but then it might be to late.

I've experienced them. More than once in fact. Dot com bust in 2000, Aug '11, Aug '15, Brexit in June '16, Dec '18 collapse. Been there, got the scars. I'm fully aware and afraid of leverage, the black-swan, the high margin, the 1-penny spread multiplying exponentially etc. Hence the cash-secured puts. No leverage, no margin. Of course, this doesn't mean no risk. But managed risk.
And small allocations. Combined with lots of other diversified trading (eg. commodities, currencies, treasuries, futures etc). Diversification and keep trading levels small are the way to go.

 

[AAAintheBeltway]

And small allocations. Combined with lots of other diversified trading (eg. commodities, currencies, treasuries, futures etc). Diversification and keep trading levels small are the way to go.

Smart advice. I occasionally sell puts around earnings when the vol's are pumped, but only on stocks I don't mind being assigned and I never use leverage. At one time I was a more active premium and vertical seller but if you are not using tons of leverage, you are better off trading the underlying and if you do use leverage, you are an accident waiting to happen.

 

[drmark27]

Newbie premium selling trolls can load up criticism to this post, but who cares , they will not be here after the next real "black swan".

Tremendous line right there.

 

[Pkay]

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!

Do you mind expanding a little on your strategy? Do you buy ITM options and how far out? Also, how do you select and underlying to trade? Thanks.

 

[Pkay]

premium selling is great until it isn't. i woudl use it for very shrot term trades like 3 days.. I lost 300K selling options in 3 days!! I had built it up over 3 years. I was 90 % of the open intereest in the us dollar in 1999 sold calls 119-122 in the pit.. guy from teh gold pit had to come over to get me out since no one traded the us dollar options then but me.. he made a killing.. 300K everything i lost .. that week. here were on the phone.. hi.. hey how are you .. im good.. well it looks like you need to get out huh.. I said look.. we know tht so go easy on me and jsut be fair as you can and not a greedy bastard or I will another 100 after you buy them at a much higher price.. he got the picture. still he due to the market rules he had to yell a bid offer.. i said ok.. buy em.. he said.. sorry no takers.. so we went higher still.. 3 rounds of that and I said.. cancel the order.. he said hold.. on.. YOU MY FRIEND ARE FILLED. DO NOT SELL RISK PREMIUM.. buy cheap options like 10 20 or 5 bucks and swing for the fences.. sometime you hit and they go to 400 or 500 each.. look at the svxy options in February . i amde a lot of it back with that trade alone. Good luck. if you do not listen and you sell premium then make sure if you NEVBER wait another day to get out.. just get out if you are losing and you are short options.

Are you buying cheap options that are OTM? If so, how do you determine which underlying is due a big move and what sort of TA do you apply? Or do you just buy them and hippie hope for the best? Ie treat them like a lottery ticket?

 

[REDP1800]

its never known but its not lottery either. you need a catalyst..earnings news and a technical level..when these are working together it can bring serious coin. biotech is usually a great sector for this.

 

[Hilcrest_trader]

I've recently subscribed to elitetrader and I've just read this thread. I am very much a newbie Options Trader. After ~ 18mths I categorise myself as consciously incompetent.

We are fairly restricted in Australia. We can trade options with a local broker on the local market and pay ~ USD17 per leg. The liquidity is low on the ASX and the underlying prices are also low - our largest bank trades for around USD54. I've chosen IB and to trade Options on the US market. In our winter the NYSE closes at 6am our time. (Our summer is better when the NYSE closes at 8am our time).

The main theme of this Thread is called the Wheel Strategy on r/options. I've been trading the Wheel for just over six months. I like this strategy:

• It's easy to understand and to manage.
• It can be classified as a system (someone referred to Deming in a previous post).
• Apart from unforeseen catastrophes in the market, the risk is easy to determine and manage. If a company like MSFT went belly-up the world economy would be wrecked so I don't worry about a stock going to zero.
• The Wheel strategy is well documented.
• So far I'm doing OK.

I don't trade on margin. I trade CSPs and CCs - mostly. Sometimes I get carried away watching TastyTrade and I will try a complex trade but I find them more difficult to manage.

I'm now working on becoming Consciously Competent so I'm building a Trading Journal using Filemaker Pro (I'm a Mac user) and the IB API. At the moment I'm concerned about being over-exposed so I need to bring that under control.

An aspect that is not often mentioned is becoming competent in 'your' trading platform. For example, there are still many aspects of the IB platform that I don't use/know about/understand.

Finally, are there any other 'systematic' approaches to option trading that are worth looking into?

 

[Jeff1228]

In regards to relationships (on a very basic level), lets say implied vol on the S&P 500 is 1 for 1 correlated with the Nasdaq implied vol. All of a sudden, there is quite a big spread between the two implied vols. What you could do is sell the expensive implied vol and buy the cheap implied vol and wait until the spread goes back to normal levels, you have just made a statistical (not pure) arbitrage.

If you sell expensive premium, you want to look to offset your risk by buying cheaper vol somewhere else, or hedge with the underlying.

Great example, but could you pls elaborate more on "buying cheaper vol somewhere else, or hedge with the underlying" as the divergence between SPY and QQQ won't happen quite often, will they? Thanks