Selling Premiums On Stocks

[tyrant]

Quote from Profitaker:


[/b]I’ve never had an option exercised against me. I won't deny an element of luck there, but I won’t be short an American option with a delta more than 0.80, neither will I be short Calls over ex-div day.

[/B]

Why do you say you will not be short Calls over ex-div day? Don't stocks go down by the amount of dvidend after ex, and shouldn't that be good if you are short calls? Sorry, I am really a novice.

Even if you sell further OTM, there are definitely bound to be times when your short strike is breached and the stock might be assigned to you unless you roll them further out. Do you usually roll them out or close them to avoid exercised against? If yes, what are the disadvantages of holding some quality stocks at lower prices?

When you say sell naked premium, that means you mostly sell strangles on certain stocks? Or maybe just either the calls or puts depending on your reading of stocks direction?

Thanks.

 

[wayneL]

Quote from tyrant:

So after taking into consideration such circumstances when selling at 10% and later realizing a much higher volatility, can you still say they are chronically overvalued?

Depends with what rigidity one applies to the term "chronically overvalued". I'm sure one could make a case against this.

Everyone is smarter in retrospect, but ultimately a trader must make a volatility projection and decide in advance whether the risk is worth the reward.

I must admit that at 8-9-10% vols (on say the SP500), I would worry that about realized vols spiking well past that.

Quote from tyrant:

How about stock options, are they also chonically overvalued, or are they undervalued?

Well there are several thousnad of them, which stock and which period?

As above, one must make a vol projection and make a judgement. Get it right and you win, get it wrong and it could cost.

Cheers

 

[gbos]

Quote from Profitaker:

Any chance you could post it up in Excel format ?

Sure no problem

 

[wayneL]

Quote from tyrant:

The argument here is not whether one should sell naked or bounded, but whether it is better to sell in index or stock options.

Was I in conversation with you on this point?

No, I was merely agreeing with a statement made by someone else. There was no argument in that.

 

[Profitaker]

Quote from tyrant:

Why do you say you will not be short Calls over ex-div day? Don't stocks go down by the amount of dvidend after ex, and shouldn't that be good if you are short calls?

Yes, stock will drop by the div amount, and calls value drop too. So, if you’re long a call option and don’t want to lose value you can a) sell the option day before ex or b) exercise it and capture the dividend. It would be very good if the option holder did nothing !!!

Quote from tyrant:

Even if you sell further OTM, there are definitely bound to be times when your short strike is breached and the stock might be assigned to you unless you roll them further out.

Yes, but providing there is some time value in the option, the holder will always do better selling the option rather than exercising it. Delta <0.80 will ensure some time value remains.

Quote from tyrant:

Do you usually roll them out or close them to avoid exercised against?

If exercise is a real risk it means the stock has gone against me, I got it wrong. To roll or close just depends on my future view of stock.

Quote from tyrant:

When you say sell naked premium, that means you mostly sell strangles on certain stocks?

Not necessarily, and I certainly don’t strive to stay delta neutral. Naked just means uncovered. Sell a “naked” call = unlimited risk.





GBOS

You are a STAR !!!

 

[tyrant]

Quote from wayneL:

Was I in conversation with you on this point?

No, I was merely agreeing with a statement made by someone else. There was no argument in that.

No argument at all. Pardon my choice of words.

 

[tyrant]

I use Interactive Brokers ( IB ) but am not resident in US. If I short a stock option and subsequently exercised against, will IB automatically deduct funds from my account and take up the stock for me.

And what if a dividend is declared on the stocks I now hold, will they be sent to my home address or is it credited into my IB account?

If I am short calls on a stock and exercised against, I should be short the underlying stock right? Is this allowed with IB? Do I have to buy back the stock within a certain time frame?

 

[tyrant]

Hi Profittaker,

I understand you do not deal in US stock options, but to your knowledge, how do you compare them with London stock options in terms of liquidity, tightness of bid/ask especially when we go further OTM?

Appreciate any other opinions from others.

Thanks

 

[Profitaker]

Quote from tyrant:

Hi Profittaker,

I understand you do not deal in US stock options, but to your knowledge, how do you compare them with London stock options in terms of liquidity, tightness of bid/ask especially when we go further OTM?

Huge market, much more liquidity, but I'm doing just fine in the UK markets and see no reason to change.

Not sure what the deal is at IB, but I'm sure someone will answer your Q's.

 

[Profitaker]

I got slightly different DOW calcs than GBOS;

All data (1900-2001)
Vol 17.2%
Skew -1.1
Kurt 36.3

1990's
Vol 14.6%
Skew -0.40
Kurt 5.2

1980's
Vol 18.4%
Skew -4.35
Kurt 100.4