Strategy: Selling Put Options: The Best Income Method?

[OptionGuru]

1. Trading Ideas
2. Paper Trading
3. Live Trading

botpro ........ You have completed Step #1. You are now ready for Step #2, which involves keeping track of a paper trade with real quotes and seeing how it progresses - this step can be completed in a few weeks. Yahoo Finance is a good place to track paper trades.

Step #3 is live trading risking only a few hundred dollars at first. You should be ready for Step #3 by the end of March at the latest.

Due to your interest in Put Selling I recommend you start with Put Credit Spreads because the margin required is much lower than Naked Put Selling.

 

[El OchoCinco]

I did a quick scan of the S&P500 stocks and found that there are much better stocks suited for this strategy,
for example PEP (Pepsi) Jul 15 Puts with strike $90 for about $1.70 premium, current stock price is $98.39 (as of EOD yesterday).

You going to jump in your Delorean and sell these puts, McFly?

 

[botpro]

The PEP posting was made on 2016-03-02-Wed at 09:15 EST, ie. 15 minutes before market open,
and used the EOD database as basis, ie. the EOD-prices of the day before.
So, no time-travel here...

And these were the quotes at 10:31AM, ie. 1h after market opening:

 

[destriero]

The PEP posting was made on 2016-03-02-Wed at 09:15 EST, ie. 15 minutes before market open,
and used the EOD database as basis, ie. the EOD-prices of the day before.
So, no time-travel here...

Umm. You stated July, 2015 puts.

The shares were down a nickel and the puts went off on the day at 1.50 mid (1.44 x 1.56)

You're going to sell a naked-put on PEP for a 4% annual yield (cash secured)? Not risk, but yield.

 

[botpro]

Umm. You stated July, 2015 puts.

The shares were down a nickel and the puts went off on the day at 1.50 mid (1.44 x 1.56)

You're going to sell a naked-put on PEP for a 4% annual yield (cash secured)? Not risk, but yield.

Hmm. from which posting have you got the Jul 2015 puts? I don't see 2015 mentioned.
It of course is meant Jul 2016 as also the "exp date about 4.5 months" indicates what is meant.

And: that analysis is based on the EOD of the day before, assume it was opened either at/before the EOD the day before at a midprice of $1.70 (IMO that was the last trade and it was between Bid-Ask), or right at market open on Wed.

I don't know how you came to your calculation result of 4%. In my calculations the $1.70 was taken as the basis,
and that makes "only" 1.88% in the 4.5 months., but thru the use of margin as described one has to multiply this by 5 giving the said 9.44% in 4.5 months, and annualized 27%.

 

[OptionGuru]

Botpro .... Based on the PEP quotes you posted I recommend this Put Credit Spread trade:

• Sell July 15, 2016 PEP 90.00 Put at $1.62
• Buy July 15, 2016 PEP 85.00 Put at $1.03
• Credit $0.59
• Maximum gain $59.00
• Maximum loss $441.00

This trade requires a much lower account balance then selling the July 15, 2016 put 90.00 naked.

 

[botpro]

Botpro .... Based on the PEP quotes you posted I recommend this Put Credit Spread trade:

• Sell July 15, 2016 PEP 90.00 Put at $1.62
• Buy July 15, 2016 PEP 85.00 Put at $1.03
• Credit $0.59
• Maximum gain $59.00
• Maximum loss $441.00

This trade requires a much lower account balance then selling the July 15, 2016 put 90.00 naked.

The credit spread, and also bull put spread (if that's a different beast than credit spread), are the next on my todo-list to study.
Hmm. I wanted to avoid any losses to the account balance (excluding the credit). Is such a loss impossible to avoid?

 

[botpro]

As already said, the design of the margin account at the brokers is sub-optimal.
If one could specify individually how much goes into a position from own money and how much from borrowed margin or loan,
then one could create wonderfully leveraged strategies, ie. then a leverage effect of say even 10x would be possible... Just dreaming of a better and just world...

A workaround would be to loan the money externally so that in broker account it is seen as own money...
Then the above said scenarios are possible, so then one can even have a leverage effect of say 10x or even more... It's all just some maths to do...

 

[destriero]

Hmm. from which posting have you got the Jul 2015 puts? I don't see 2015 mentioned.
It of course is meant Jul 2016 as also the "exp date about 4.5 months" indicates what is meant.

And: that analysis is based on the EOD of the day before, assume it was opened either at/before the EOD the day before at a midprice of $1.70 (IMO that was the last trade and it was between Bid-Ask), or right at market open on Wed.

I don't know how you came to your calculation result of 4%. In my calculations the $1.70 was taken as the basis,
and that makes "only" 1.88% in the 4.5 months., but thru the use of margin as described one has to multiply this by 5 giving the said 9.44% in 4.5 months, and annualized 27%.

Your post 107.

100-share equivalent, cash-secured, equals $9,833. Trading one contract ($145 credit) per 100-share equivalent in capital. 1.7% return to July exp. 4% annualized.

So, assume that you go the other way, and trade as many as Reg-T will allow:

85-lots per $100K. 12% return out to July. 33% annualized. This assumes (moronically-so) that you'll never receive a variation-call on your PEP short-put position, and that you can replicate the same vola figure when you roll in July.

Let's assume that you apply a 5x cushion (5x initial margin = 16 lots/$100K).

A 6% annual return for selling naked puts.

 

[destriero]

As already said, the design of the margin account at the brokers is sub-optimal.
If one could specify individually how much goes into a position from own money and how much from borrowed margin or loan,
then one could create wonderfully leveraged strategies, ie. then a leverage effect of say even 10x would be possible... Just dreaming of a better and just world...

A workaround would be to loan the money externally so that in broker account it is seen as own money...
Then the above said scenarios are possible, so then one can even have a leverage effect of say 10x or even more... It's all just some maths to do...

Great, how about applying 20% of Reg-T? (Explicitly, 5x leverage)

$145 credit for shorting the put. $240 in initial req. Short 416 contracts per $100K in capital.

PEP drops to $90 next month. Your puts are now at $4.

You have an unrealized loss of $67,000; but wait, it's realized, as they liquidated your account, at-market.