Strategy: Selling Put Options: The Best Income Method?

[botpro]

With short puts (and also with short calls):
volatility increase: bad for the owner
volatility decrease: good for the owner

After initiating the trade, one cannot do anything about the future volatility, so it is not of much use to think about it as it already is priced-in...
So, it is the price development which is the metric to look for... no need for any options Greeks... ;-)

And this could give new trading ideas, like shorting puts (or shorting calls) when the volatility is very high, and vice-versa...

 

[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).

says it right there...Jul 15 puts with strike $90..... we both highlighted it not sure if it was a typo or you were just not thinking clearly...

 

[El OchoCinco]

After initiating the trade, one cannot do anything about the future volatility, so it is not of much use to think about it as it already is priced-in...

Your statement is you should ignore volatility once you sell a naked put....As honest advice, volatility is very important and should be taken into account even a little when selling short options, especially if you claim you can do this strategy with no losses.

 

[botpro]

I found another good candidate for put selling:

VNTV (Vantiv Inc.) Spot=52.23 ExpDate=2016-May-20 ExpCalendarDays=~77 Strike=48 Bid=1.10 Ask=1.45
If one gets it at a premium of $1.35, then the profit potential is 14.06% in 77 days (annualized 86.58%)
when using 1 part own money and 4 parts margin or cheap loan.

Some stats:
In the past 16 quarters (no more data avail) the stock had only 2 quarters where it drop more than 10%, ie. a win-rate of 87.5%.
Current historical volatility over the last 3 months is about 32.55%.

 

[botpro]

Your statement is you should ignore volatility once you sell a naked put....As honest advice, volatility is very important and should be taken into account even a little when selling short options, especially if you claim you can do this strategy with no losses.

Regarding the importance of volatility after initating the position: I have to think some more about it,
but as said I think I can do without it, because the current market value of the option in the portfolio already tells everything, imho

The no-loss goal is not fully solved yet, trying to find a solution; without doing more trades or using a spread (ie. 2+ legs), it seems impossible :-(
Currently just relying mainly on the historical statistics, ie. the said win-rate per quarter...

 

[El OchoCinco]

You are assuming vols stay constant for the life of the option but all greeks change minute by minute, especially for options with 2 -4 months to expiration. Yesterday's vol is history and can and will change so let me help you with your search for a no-loss goal...

DOES NOT EXIST EXCEPT IN U.S. TREASURIES! That is why it is called the risk-free rate of return.

 

[botpro]

You are assuming vols stay constant for the life of the option but all greeks change minute by minute, especially for options with 2 -4 months to expiration. Yesterday's vol is history and can and will change so let me help you with your search for a no-loss goal...

No I of course do not assume a constant volatility, come on, how should that ever be possible if trades happen all the time...
I just don't see how all that baggage (vola and greeks) can be of any help.
So at what decision point can they help me after opening the short put position?
If the stock tanks, then I would just use the current market value of the option to determine if I should do an early close of the option position, ie. covering the short put.
In the opposite case, the problem case, my hands are bound, I cannot that easily close the position;
it can be done only for a few pct (about %3 or 4%) drop below the initial stock price, but then one quickly enters the loss zone,
and in that situation it doesn't make sense to close the position if there is still much time till expiration...
That's the problem, and I just wonder how the knowledge about the greeks or vola could be of any help for this. I just try to think logically about it...

DOES NOT EXIST EXCEPT IN U.S. TREASURIES! That is why it is called the risk-free rate of return.

Risk-free rate of return of -1% nowadays I guess.... ;-) [I admit I have no experience with the treasuries]

 

[destriero]

Regarding the importance of volatility after initating the position: I have to think some more about it,
but as said I think I can do without it, because the current market value of the option in the portfolio already tells everything, imho

The no-loss goal is not fully solved yet, trying to find a solution; without doing more trades or using a spread (ie. 2+ legs), it seems impossible :-(
Currently just relying mainly on the historical statistics, ie. the said win-rate per quarter...

There is no "no loss" available to you. Even rate-arbs (conversions, boxes, rolls) have rate-risk (rho). You assume, ridiculously-so, that prices are static. Why would anyone buy the 90P if there were no delta? PEP trades to 90 and you don't take a MTM loss?

 

[botpro]

There is no "no loss" available to you.

That is the problem, yes.

Even rate-arbs (conversions, boxes, rolls) have rate-risk (rho). You assume, ridiculously-so, that prices are static. Why would anyone buy the 90P if there were no delta? PEP trades to 90 and you don't take a MTM loss?

Why should I assume prices are static? That's unreal, I'm for realistic things.
Sorry, I'm not a fan of the option Greeks.
If it is important to you, fine, but don't try to impose it on me;
I have not needed them in the last 5 years or so, nor will I need them in the future, that I know for sure.

 

[destriero]

That is the problem, yes.


Why should I assume prices are static? That's unreal, I'm for realistic things.
Sorry, I'm not a fan of the option Greeks.
If it is important to you, fine, but don't try to impose it on me;
I have not needed them in the last 5 years or so, nor will I need them in the future, that I know for sure.

I don't know how to explain it to you in other terms. Delta refers to to the inst. price change. So assume that your PEP puts have a delta of fifteen. You're gamma refers to your gearing w.r.t. delta. So if your delta is fifteen, and your gamma is three, you're going to lose more than you believe. You're also short dgamma, but we won't get into that. Suffice to say, all increase until you get to the strike. IOW, something in excess of $0.15 per point ($15), per contract.

Do you think your vega (exposure to vol-line) will go UP or down if PEP shits the bed?

And what you believe is immaterial. You don't even know enough about the product to go live. I am telling you that these things don't test like delta1. There is curvature in everything.