Strategy: Selling Put Options: The Best Income Method?

[ironchef]

This thread is getting silly. I post a strategy that has been successful ytd for me and over many mrkt cycles and what do I get...

A bunch of nay sayers talking smack about gamma delta market efficiency steam rollers etc.

Nothing works 100% of the time, but if you find something that works for you, keep doing it till it doesn't.

Selling Otm puts against stocks that are in a neutral to bullish trend works. Plain and simple.

We/I appreciate your posts but some chose to present opposing view points to educate folks like me, so I don't think you should get too upset. There are actually many academic papers presenting both sides and in general showed that put writing could be a profitable venture. Examples:

CBOE was selling ATM SP500 cash secured puts and did slightly better than holding SP500. If a retail trader copies the strategy, with commissions and slippages he would have done worst than holding SP500. In further analyzing their returns, I think the excess return came from them holding the cash in treasury bills and drawing interests.

As a personal note, I started trading options in 2013 selling covered calls and cash secured puts (both OTM) on long term stocks I held. After six months, I compared the outcome to just "buy and hold" the underlying. Guess what, I was profitable but did worst than just "buy and hold". Since then, I continued to trade options but moved away from purely selling covered calls and cash secured puts.

 

[yobo]

We/I appreciate your posts but some chose to present opposing view points to educate folks like me, so I don't think you should get too upset. There are actually many academic papers presenting both sides and in general showed that put writing could be a profitable venture. Examples:

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CBOE was selling ATM SP500 cash secured puts and did slightly better than holding SP500. If a retail trader copies the strategy, with commissions and slippages he would have done worst than holding SP500. In further analyzing their returns, I think the excess return came from them holding the cash in treasury bills and drawing interests.

As a personal note, I started trading options in 2013 selling covered calls and cash secured puts (both OTM) on long term stocks I held. After six months, I compared the outcome to just "buy and hold" the underlying. Guess what, I was profitable but did worst than just "buy and hold". Since then, I continued to trade options but moved away from purely selling covered calls and cash secured puts.

It doesn't work for everyone and certainly not in every market condition.

 

[sle]

Selling risk premium is a good trade when risk premium is rich (it could be skew, vol, roll down, carry - anything). If you make that analysis as a part of your strategy you're doing the right thing.

 

[ironchef]

Selling risk premium is a good trade when risk premium is rich (it could be skew, vol, roll down, carry - anything). If you make that analysis as a part of your strategy you're doing the right thing.

How do you determine if it is rich and won't get richer?

Regards,

 

[sle]

- you come up with some sort of statistical analysis.
- you can't just like you can't predict that it's fair for this event
- risk management is usually key for these types of strategies, usually in form of diversity and bet sizing

 

[Gambit]

It is great to see such a lively and fruitful discussion on options trading. I always learn a little something. Recently I began reading a book by Dr. Lars Jaeger who is a big proponent of "beta strategies". He advocates for a more hands-off style of investing and diversifying across multiple strategies. The aim is to capture diverse risk premia. So from what I understand, he would advocate a more mechanical or naive strategy of selling monthly straddles/strangles in a portfolio. Does anybody have any thoughts on this?

 

[sle]

Recently I began reading a book by Dr. Lars Jaeger who is a big proponent of "beta strategies". He advocates for a more hands-off style of investing and diversifying across multiple strategies. The aim is to capture diverse risk premia.

Well, in a crisis all correlations go to one so I am not sure it's as easy as the good doctor is saying. You can try playing the relative risk premia game (that's what I do), but it's an active and serious strategy with a lot of moving parts.

 

[JSOP]

If you can make half of it, as you say, then with margin you can at least double it!
And that's the very trick used in this strategy for achieving such a high profit, ie. the leverage effect of margin use.

A question to all:

What can go wrong with this strategy? How risky is it?

Selling puts is really like buying a stock. So any risks associated with long in a stock also applies to selling puts. So think of what can go wrong when you are owning a stock, that's how much risk you get with selling puts.

The thing with selling puts and actually with selling ALL options is that you only get a tiny fraction of the benefits when the stock is going your way but you get ALL the risk when the stock is moving against you. For selling puts, just like owning a stock, when the stock price tanks, you either get a crap stock dumped to your face via assignment and you are stuck with a s*** stock (100 shares of them in one shot) that nobody wants or you will have to take HUGE loss trying to either close to roll it forward. Either way, you are f***ed.

A perfect example: GME GameStop. It reported earnings last week and it was crap. Before the earnings, the stock was trading at $24.XX. Imagine you sold a put at $21.00 strike, a DEEP OTM Put, wouldn't you say? Look what happened? They reported crap revenue and after the earnings the price INSTANTLY dropped to $20.XX. So what happened to that Deep OTM put that you sold? well its price appreciated 100%+ to as high as 0.59 at one point from originally just costing 0.13 (because it was deep OTM. You get s*** premium when the option is OTM, deep OTM). So now you have two choices, 1) You can wait to get assigned if anybody who bought your options decided to exercise their put to dump their now crap stock to you and you will be stuck with a stock with its tanking value and if you sold even just ONE contract, you will be stuck with automatically 100 shares of them or 2) You close the options to buy it back at double the price. So assuming you used up $50K to sell the put. If you choose Choice no. 1, then you get 50K/100/21 = 23 contracts. So with 23 contracts, once you get assigned, you get 23 X 100 = 2300 shares at a strike of $21.00 With price at $20, you get an instant loss of $(20 - 21) X 2300 = $2300 and that is assuming you are getting rid of the stock right away. If you don't, the price is tanking even more everyday. Now if you take Choice no. 2, you want to close out the position instead of risking getting assigned, with an price of the put at 0.59, you suffer a loss of (0.13 - 0.59) X 2300 = $1058. Better than getting assigned but still a loss. And guess how much you got as premium when you sold it? 0.13 X23 X 100 = $299!!

So for $299 premium, you risk getting a loss of at least $1058, FIVE times the premium, is selling puts worth it? Maybe but this is the risk that you always have to keep in mind when selling options. The opposite is also true when you sell calls and the risk is even greater.

 

[JSOP]

This thread is getting silly. I post a strategy that has been successful ytd for me and over many mrkt cycles and what do I get...

A bunch of nay sayers talking smack about gamma delta market efficiency steam rollers etc.

Nothing works 100% of the time, but if you find something that works for you, keep doing it till it doesn't.

Selling Otm puts against stocks that are in a neutral to bullish trend works. Plain and simple.

Shhhhhhhh!!! IF it's working so well for you, WHY share it with the public??!!

 

[yobo]

Shhhhhhhh!!! IF it's working so well for you, WHY share it with the public??!!

Lol. You still have to be able to execute.