Strategy: Selling Put Options: The Best Income Method?

B

botpro

I searched the archive but couldn't find whether the following strategy was already discussed here:

"Selling Put Options: The Best Income Method Today" (November 19, 2014) by Chad Shoop, Editor, Pure Income
http://thesovereigninvestor.com/investment-opportunities/selling-put-options-better-income-yield/

"Collect a 22% Yield in Just Three Months With Put Options"

He makes this with the help of margin, ie. using the leverage effect of margin.

I must admit I like this long-term strategy, but have not traded the strategy myself yet as I mostly do day- and swing-trading, ie. short-term.

What do you think of that strategy?
 
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It's a great strategy for bull markets. In bear markets, not so much. I only sell naked puts if I'm prepared to buy the underlying or hedge a short position. Another time when it works out well is after a strong stock jumps. For example, I sold an OTM put on FSLR last week after it jumped on earnings. Normally, one can't get good premium on a deep out of the money option expiring later in the week, but since volatility was still high even after earnings due to such a large move, I got 80% of maximum premium one day after selling the put.
 
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ET180 said:
It's a great strategy for bull markets. In bear markets, not so much.
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Blanket statements are useless when it comes to describing option strategies.

When it comes to option trades timing has a big influence on the outcome. The holding period of option trades is usually much shorter than a "bull market" or "bear market". You could easily lose money Selling Puts in a "Bull Market" or make money Selling Puts in a "Bear Market".




:)
 
Nothing is THE BESTS INCOME METHOD.

They are all methods that can work under the right circumstance and if done properly. Anyone who pushes a method talking about 22% yield in 3 months is just a salesman fudging the numbers to make it look like a low risk, high return easy strategy. Especially when they claim use of margin.

Ask any person with a masters or Phd in finance or even an undergraduate finance major if there are high return low risk strategies....
 
You can't make those types of returns anymore because all brokers have risk parameters that make it very difficult. In 2012 yes. I had clients making 10% per month. Not likely anymore.
 
I don't know about 22% a quarter. However, I would guess you could probably make half of that, on average, selling puts or put spreads on indexes if you have a reliable technical way to determine when to go to cash in bear markets. It would not be steady income. You would have some pretty ugly quarters, some very nice ones, and several goose eggs during the quarters when you are laying fallow.
 
lawrence-lugar said:
Try it -- that's your best teacher. Real world trading. o_O
...everything else is just theoretical mumbo jumbo talk/bs.
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You better should read the linked original article, as there is this important passage in the text:
Code: 
"First off — and this is the most important thing — you only want to use the put selling strategy
with a company you actually want to own, even if you have no intention of buying them."
If someone did a fundamental and technical analysis and came to the conclusion to buy the stock,
then I would suggest to apply this very strategy instead, because sooner or later he will already own the stock.
The payoff of this strategy is higher... and in the end he still gets the same stock as he initially wanted...
IMO a brilliant strategy with a higher profit potential than with the original alternative.
 
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drcha said:
I don't know about 22% a quarter. However, I would guess you could probably make half of that, on average, selling puts or put spreads on indexes if you have a reliable technical way to determine when to go to cash in bear markets. It would not be steady income. You would have some pretty ugly quarters, some very nice ones, and several goose eggs during the quarters when you are laying fallow.
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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?
 
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OptionGuru said:
Blanket statements are useless when it comes to describing option strategies.

When it comes to option trades timing has a big influence on the outcome. The holding period of option trades is usually much shorter than a "bull market" or "bear market". You could easily lose money Selling Puts in a "Bull Market" or make money Selling Puts in a "Bear Market".

:)
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I never said anything about holding period. Since the OP did not mention a specific stock, on average, put selling works better in a bull market than bear market as there's less of a chance that the short put ends up ITM.
 
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