Selling Puts: How to Calculate Return When Selecting Strike Price/Date? And With Margin?

[RichLyons]

Say someone is selling put options and their ONLY strategy when selecting which to trade is to see which will yield them X% over X time (disregard however stupid this may be). How do they calculate this? And how do they calculate this when using margin?

For example, a trader is selecting puts to sell and wants to make 10% in a month or 20% over two months, so they select the puts to sell with a month or two month deadline. But how do they determine which strike price to select based on their desired return percentage over this trade's time?

To make matters more complicated, say they are using margin at whatever ratio. Now how do they calculate which strike to buy?

Thank you.

 

[Ayn Rand]

I am going to tell you the truth. Your question is way out there. No one is going to take the time to try to figure out what you might be talking about

Secret - If you do not owe the underlying stock - never sell options.

I know there has been lots of ads about selling options. Do not.

If it is this complicate - Do not.

 

[FSU]

Secret - If you do not owe the underlying stock - never sell options.

I know there has been lots of ads about selling options. Do not.

If it is this complicate - Do not.

So if you own a stock, its ok to sell a call. But whatever you do, don't sell a naked put. Is that your advice?

 

[newwurldmn]

So if you own a stock, its ok to sell a call. But whatever you do, don't sell a naked put. Is that your advice?

He said if you do not “owe” the underlying.

He is saying that you should not short options unless you are short stock. So if you are short stock it’s okay to short calls and puts.

 

[Ayn Rand]

Truth - If you are asking questions keep it simple.

 

[ET180]

Shorting a single put is less risky than owning 100 shares of the stock. Why? Because if the underlying (stock) goes to zero, you'll lose your entire investment if you owned the stock. If you're short 1 put, then you'll at least keep the premium. People treat options like they are some scary monster, but they are not. Less risky than stocks in many cases (spreads, iron condors, defined risk strategies).

 

[Saltynuts]

Rich, I know exactly what you are asking. I've pondered the same thing before. I *think* the thing that by far makes the most sense to calculate a % return when you are selling something like an option where you don't have to hold the underlying is to calculate the % return based on what you could earn on the premiums annually as compared to your total account balance.

Thus, if you conclude you can sell put options with one strike price for a total premium of $2 per month, and another with a different strike price for a total premium of $3 per month, and your account balance is $100, you might run the calculation as a 24% annual return for the first one, 36% annual return for the second one, and compare with with drawdown risk, risk of total loss, etc. That's really what matters in this scenario - everything else would really just be hypothetical #s.

Hope that helps.

 

[Saltynuts]

Shorting a single put is less risky than owning 100 shares of the stock. Why? Because if the underlying (stock) goes to zero, you'll lose your entire investment if you owned the stock. If you're short 1 put, then you'll at least keep the premium. People treat options like they are some scary monster, but they are not. Less risky than stocks in many cases (spreads, iron condors, defined risk strategies).

Very nice assessment.

 

[beerntrading]

Say someone is selling put options and their ONLY strategy when selecting which to trade is to see which will yield them X% over X time (disregard however stupid this may be). How do they calculate this? And how do they calculate this when using margin?

For example, a trader is selecting puts to sell and wants to make 10% in a month or 20% over two months, so they select the puts to sell with a month or two month deadline. But how do they determine which strike price to select based on their desired return percentage over this trade's time?

To make matters more complicated, say they are using margin at whatever ratio. Now how do they calculate which strike to buy?

Thank you.

Short put = covered call. That's you're exposure and what you should calculate gains against. And theta is the off-the-shelf calculation of premium decay per day.

No one is going to take the time to try to figure out what you might be talking about

 

[lindq]

Shorting a single put is less risky than owning 100 shares of the stock.

Regrettably, the famous last words of many men lying on park benches.