Strategy: Selling Put Options: The Best Income Method?

[yobo]

Today I sold my long puts to close and got a .86 cent credit for each option. WB was at 50.30 and heading north. Or basically 68% chance of expiring worthless.

Pretty good odds. My break even is 50. Three days to expiration. Max profit above 50.50.

While I took on more risk, the odds and probabilities favored closing them and taking the credit. And passing the debit onto the buyer. I ran the risk of time decay and max loss, zero if stock stays at current levels.

 

[yobo]

Well unless all hell breaks lose this afternoon, the WB trade will come to a close. In summary, here is how it all went down.

Week 1: STO 20 WB 50.50 puts for .35 cents. On Friday, at expiration it was obvious I would be put the stock so I BTO 20 WB 50.50 puts expiring in two weeks for 2.10. Basis is 52.25. I now have a married put trade on and no worries going into the weekend. At the time, the US had just bombed Syria and news was reporting US naval warships heading to North Korea.

Week 2: STO 20 WB 50.50 calls for .60 cents. They expired worthless. Cost basis now 51.65. Still have a married put trade on.

Week 3: STO 20 WB 50.50 calls for .78 cents. Cost basis is now 50.87. On Tuesday afternoon, through a look at the probabilities I decided it best to sell my long puts for an .87 cent credit. Basis is now 50.00 and I have a covered call position.

As I post this, the 50.50 calls are in the money and my stock will get called away. Total profit .50 cents or $1000. No bad for a trade that started with a 1500 dollar after the initial trade was placed.

While I am happy with the result and how I managed risk, In hind sight, when I bought the long puts I should have bought deeper in the money to reduce the extrinsic value I paid making it easier to recoup those costs by selling premium over the two weeks I had till expiration. This would have increased my profit and reduced risk Oh well. Note to self.

Anyway hope this example of turning a naked put trade into a married put and then into a collar and back to a married put and back to a collar and ending up with a covered call position was helpful to whomever may read it.

 

[ironchef]

Well unless all hell breaks lose this afternoon, the WB trade will come to a close. In summary, here is how it all went down.

Week 1: STO 20 WB 50.50 puts for .35 cents. On Friday, at expiration it was obvious I would be put the stock so I BTO 20 WB 50.50 puts expiring in two weeks for 2.10. Basis is 52.25. I now have a married put trade on and no worries going into the weekend. At the time, the US had just bombed Syria and news was reporting US naval warships heading to North Korea.

Week 2: STO 20 WB 50.50 calls for .60 cents. They expired worthless. Cost basis now 51.65. Still have a married put trade on.

Week 3: STO 20 WB 50.50 calls for .78 cents. Cost basis is now 50.87. On Tuesday afternoon, through a look at the probabilities I decided it best to sell my long puts for an .87 cent credit. Basis is now 50.00 and I have a covered call position.

As I post this, the 50.50 calls are in the money and my stock will get called away. Total profit .50 cents or $1000. No bad for a trade that started with a 1500 dollar after the initial trade was placed.

While I am happy with the result and how I managed risk, In hind sight, when I bought the long puts I should have bought deeper in the money to reduce the extrinsic value I paid making it easier to recoup those costs by selling premium over the two weeks I had till expiration. This would have increased my profit and reduced risk Oh well. Note to self.

Anyway hope this example of turning a naked put trade into a married put and then into a collar and back to a married put and back to a collar and ending up with a covered call position was helpful to whomever may read it.

Yes, quite helpful to me.

Question: Did you ever consider just buy a WB call?

 

[yobo]

Nope. I'm not trying to hit home runs. Hind sight is always 20/20 right. At the time of my initial STO 50.50 put, WB was trading at 52.70 and closed the week off at 49.75 and I was put the stock. Buying calls would have lost money. The second week, it closed at 50.16 and selling the 50.50 calls for .60 cents was a winner so buying was a losing trade again. This week buying calls would have worked as the 50.50 calls I sold for .78 cents are now worth about 2.50. So net net, I collected 1.38 (.60 + .78) in premium sold and the buyer of my calls this week collected 1.72 (2.50 - .78). The difference is .34 cents. Who could of guessed the stock would go from 50.11 on Thursday to 53 today. Not me. I'll take a less risky trade to make a little less than to take a riskier trade any day. Does this make sense? One also can not forget that during the last two weeks, the US bombed Syria and also had news reports of US naval warships off the coast of North Korea. I was positioned for the most part to expect the worst and hope for the best. When fear of geopolitics left the market this week, I was able to add risk based on the probabilities of success by converting my collar to a covered call with three days till expiration. My only regret and lessoned learned is that the long puts I bought should have been deeper in the money so I didn't have to pay so much for extrinsic value. If I had done that, the .34 cent differential in profit would have been less or my profit would have been about the same as buying calls this week.

 

[Pekelo]

Last year I sold puts on ASPS with profit. Yesterday the stock tanked 30% because another company had some court ruling against them and they are their biggest vendor. Just keep that in mind when someone says best income strategy selling puts....

 

[mushinseeker]

Good point Pekelo. Yobo... you did a good job with this trade! One thing about this strategy (ie. covered call) is the big variance of the returns coming from the shorted weekly calls. Your pnl would have varied greatly if WB to $53 week1 vs. week2 vs. week3.($-560 / $1000 / $2560)... certain option strategies is a game of inches.. or "expiration Fridays"...Congrats again...

 

[yobo]

Last year I sold puts on ASPS with profit. Yesterday the stock tanked 30% because another company had some court ruling against them and they are their biggest vendor. Just keep that in mind when someone says best income strategy selling puts....

Yup we all have those. Best way to handle that kind of risk is diversifying amongst many positions so the overall impact isn't so great. I'd be curious to know how the option market was pricing leading up to the announcement and if the options were pricing any of that volatility in.

 

[yobo]

Good point Pekelo. Yobo... you did a good job with this trade! One thing about this strategy (ie. covered call) is the big variance of the returns coming from the shorted weekly calls. Your pnl would have varied greatly if WB to $53 week1 vs. week2 vs. week3.($-560 / $1000 / $2560)... certain option strategies is a game of inches.. or "expiration Fridays"...Congrats again...

I suppose if WB had acted differently, my trades would have been different to. "Hard tellin no knowin"

 

[mushinseeker]

actually that is not a bad methodology. because after the first weekly expiration, you are essentially playing with house money. As you can tell from my signature, I try to use stocks prob distribution to implement options; I can find stocks that are neutral to slightly bullish, for something like this. I would not even hesitate to buy m3 puts to put on married put given a low IV regime since you will not have that risk hole if WB leaks slowly.

 

[MrScalper]

The best income method for selling puts can be to sell index puts, but always protect yourself with a lower strike put.

Bad habits tend to cost you a lot of money in the long run.